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
      1934


For the
quarterly period ended June 30, 2010





 ̈
            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, 6th
       Floor, 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   ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes   ̈ No   ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. 
See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company" in Rule 12b-2 of the Exchange Act:





Large
      accelerated filer    ̈
              Accelerated
      filer   xNon-accelerated
      filer    ̈
              Smaller
      reporting company    ̈(Do
      not check if a smaller reporting company)





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





As of
August 2, 2010, the Registrant had one class of Common Stock ($.01 par value),
of which 59,464,977 shares were issued and outstanding.








INDEX





PagePART
      I
                          
                          FINANCIAL
      INFORMATIONItem
      1.
                          
                          Unaudited
      Financial Statements:Condensed
      Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
      (audited)
                          
                          3Condensed
      Consolidated Statements of Income
                          
                          4—
      Three and six months ended June 30, 2010 and 2009Condensed
      Consolidated Statements of Cash Flows
                          
                          5—
      Three and six months ended June 30, 2010 and 2009Notes
      to Condensed Consolidated Financial Statements
                          
                          6Item
      2.
                          
                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          
                          29Item
      3.
                          
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          
                          51Item
      4.
                          
                          Controls
      and Procedures
                          
                          53PART
      II
                          
                          OTHER
      INFORMATIONItem
      1.
                          
                          Legal
      Proceedings
                          
                          53Item
      1A.
                          
                          Risk
      Factors
                          
                          53Item
      2.
                          
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          
                          53Item
      3.
                          
                          Defaults
      Upon Senior Securities
                          
                          53Item
      4.
                          
                          (Removed
      and Reserved)
                          
                          53Item
      5.
                          
                          Other
      Information
                          
                          53Item
      6.
                          
                          Exhibits
                          
                          54Signatures
                          
                          55


2





PART 1 -
FINANCIAL INFORMATION





Item 1.
Financial Statements





AMTRUST
FINANCIAL SERVICES, INC. AND SUBSIDIARIES


Condensed
Consolidated Balance Sheets


(in
thousands, except par value)





June 30,
                    2010
                  
                  
                  December 31,
                    2009(Unaudited)ASSETSInvestments:Fixed
      maturities, available-for-sale, at market value (amortized cost
      $1,047,827; $1,080,914)
                  
                  $
                  1,063,472
                  
                  
                  $
                  1,085,362Equity
      securities, available-for-sale, at market value (cost $54,553;
      $60,639)
                  
                  
                  45,937
                  
                  
                  
                  50,355Short-term
      investments
                  
                  
                  990
                  
                  
                  
                  31,265Equity
      investment in unconsolidated subsidiaries – related party
                  
                  
                  74,359
                  
                  
                  
                  1,288Other
      investments
                  
                  
                  13,323
                  
                  
                  
                  12,746Total
      investments
                  
                  
                  1,198,081
                  
                  
                  
                  1,181,016Cash
      and cash equivalents
                  
                  
                  316,409
                  
                  
                  
                  233,810Accrued
      interest and dividends
                  
                  
                  6,326
                  
                  
                  
                  7,617Premiums
      receivable, net
                  
                  
                  654,780
                  
                  
                  
                  495,871Note
      receivable – related party
                  
                  
                  23,822
                  
                  
                  
                  23,224Reinsurance
      recoverable
                  
                  
                  360,564
                  
                  
                  
                  349,695Reinsurance
      recoverable – related party
                  
                  
                  335,973
                  
                  
                  
                  293,626Prepaid
      reinsurance premium
                  
                  
                  166,477
                  
                  
                  
                  148,425Prepaid
      reinsurance premium – related party
                  
                  
                  279,983
                  
                  
                  
                  262,128Prepaid
      expenses and other assets
                  
                  
                  97,027
                  
                  
                  
                  85,108Federal
      income tax receivable
                  
                  
                  —
                  
                  
                  
                  364Deferred
      policy acquisition costs
                  
                  
                  222,519
                  
                  
                  
                  180,179Deferred
      income taxes
                  
                  
                  —
                  
                  
                  
                  7,615Property
      and equipment, net
                  
                  
                  14,916
                  
                  
                  
                  15,858Goodwill
                  
                  
                  59,764
                  
                  
                  
                  53,156Intangible
      assets
                  
                  
                  65,941
                  
                  
                  
                  62,672$
                  3,802,582
                  
                  
                  $
                  3,400,364LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Loss
      and loss expense reserves
                  
                  $
                  1,154,615
                  
                  
                  $
                  1,091,944Unearned
      premiums
                  
                  
                  960,432
                  
                  
                  
                  871,779Ceded
      reinsurance premiums payable
                  
                  
                  144,501
                  
                  
                  
                  75,032Ceded
      reinsurance premium payable – related party
                  
                  
                  93,390
                  
                  
                  
                  86,165Reinsurance
      payable on paid losses
                  
                  
                  2,819
                  
                  
                  
                  1,238Funds
      held under reinsurance treaties
                  
                  
                  620
                  
                  
                  
                  690Securities
      sold but not yet purchased, at market
                  
                  
                  70,328
                  
                  
                  
                  16,315Securities
      sold under agreements to repurchase, at contract value
                  
                  
                  238,252
                  
                  
                  
                  172,774Accrued
      expenses and other current liabilities
                  
                  
                  165,797
                  
                  
                  
                  180,325Deferred
      tax liability
                  
                  
                  4,194
                  
                  
                  
                  —Federal
      tax payable
                  
                  
                  9,762
                  
                  
                  
                  —Derivatives
      liabilities
                  
                  
                  220
                  
                  
                  
                  1,893Note
      payable on collateral loan – related party
                  
                  
                  167,975
                  
                  
                  
                  167,975Non
      interest bearing note payable – net of unamortized discount of
      $922; $1,372
                  
                  
                  14,078
                  
                  
                  
                  21,128Term
      loan
                  
                  
                  13,333
                  
                  
                  
                  20,000Junior
      subordinated debt
                  
                  
                  123,714
                  
                  
                  
                  123,714Total
      liabilities
                  
                  
                  3,164,030
                  
                  
                  
                  2,830,972Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $.01 par value; 100,000 shares authorized, 84,280 and 84,179 issued
      in 2010 and 2009, respectively; 59,464 and 59,314 outstanding in 2010 and
      2009, respectively
                  
                  
                  843
                  
                  
                  
                  842Preferred
      stock, $.01 par value; 10,000 shares authorized
                  
                  
                  —
                  
                  
                  
                  —Additional
      paid-in capital
                  
                  
                  546,015
                  
                  
                  
                  543,977Treasury
      stock at cost; 24,816 and 24,866 shares in 2010 and 2009,
      respectively
                  
                  
                  (300,278
                  )
                  
                  
                  (300,889
                  )Accumulated
      other comprehensive loss
                  
                  
                  (11,716
                  )
                  
                  
                  (17,020
                  )Retained
      earnings
                  
                  
                  403,688
                  
                  
                  
                  342,482Total
      stockholders’ equity
                  
                  
                  638,552
                  
                  
                  
                  569,392$
                  3,802,582
                  
                  
                  $
                  3,400,364




See accompanying notes to unaudited
condensed consolidated statements.


3





AmTrust
Financial Services, Inc.


Condensed
Consolidated Statements of Income


(Unaudited)


(in
thousands, except per share data)




Three Months Ended June 30,
                                          
                                          
                                          Six Months Ended June 30,2010
                                          
                                          
                                          2009
                                          
                                          
                                          2010
                                          
                                          
                                          2009Revenues:Premium
      income:Net
      written premium
                                          
                                          $
                                          196,394
                                          
                                          
                                          $
                                          137,120
                                          
                                          
                                          $
                                          385,808
                                          
                                          
                                          $
                                          273,299Change
      in unearned premium
                                          
                                          
                                          (133
                                          )
                                          
                                          
                                          (317
                                          )
                                          
                                          
                                          (41,447
                                          )
                                          
                                          
                                          (4,073
                                          )Net
      earned premium
                                          
                                          
                                          196,261
                                          
                                          
                                          
                                          136,803
                                          
                                          
                                          
                                          344,361
                                          
                                          
                                          
                                          269,226Ceding
      commission – primarily related party
                                          
                                          
                                          32,958
                                          
                                          
                                          
                                          32,278
                                          
                                          
                                          
                                          65,206
                                          
                                          
                                          
                                          59,869Service
      and fee income
                                          
                                          
                                          6,241
                                          
                                          
                                          
                                          5,711
                                          
                                          
                                          
                                          11,539
                                          
                                          
                                          
                                          11,282Service
      and fee income – related party
                                          
                                          
                                          2,880
                                          
                                          
                                          
                                          1,896
                                          
                                          
                                          
                                          5,548
                                          
                                          
                                          
                                          3,779Net
      investment income
                                          
                                          
                                          14,686
                                          
                                          
                                          
                                          13,799
                                          
                                          
                                          
                                          28,285
                                          
                                          
                                          
                                          27,790Net
      realized loss on investments
                                          
                                          
                                          (6,544
                                          )
                                          
                                          
                                          (7,709
                                          )
                                          
                                          
                                          (4,759
                                          )
                                          
                                          
                                          (16,947
                                          )Total
      revenues
                                          
                                          
                                          246,482
                                          
                                          
                                          
                                          182,778
                                          
                                          
                                          
                                          450,180
                                          
                                          
                                          
                                          354,999Expenses:Loss
      and loss adjustment expense
                                          
                                          
                                          121,510
                                          
                                          
                                          
                                          76,585
                                          
                                          
                                          
                                          211,331
                                          
                                          
                                          
                                          151,500Acquisition
      costs and other underwriting expenses
                                          
                                          
                                          79,579
                                          
                                          
                                          
                                          64,587
                                          
                                          
                                          
                                          140,925
                                          
                                          
                                          
                                          122,741Other
                                          
                                          
                                          9,336
                                          
                                          
                                          
                                          5,774
                                          
                                          
                                          
                                          15,570
                                          
                                          
                                          
                                          10,968Total
      expenses
                                          
                                          
                                          210,425
                                          
                                          
                                          
                                          146,946
                                          
                                          
                                          
                                          367,826
                                          
                                          
                                          
                                          285,209Income
      before other income (expense), income taxes and equity in earnings (loss)
      of unconsolidated subsidiaries
                                          
                                          
                                          36,057
                                          
                                          
                                          
                                          35,832
                                          
                                          
                                          
                                          82,354
                                          
                                          
                                          
                                          69,790Other
      income (expenses):Foreign
      currency gain
                                          
                                          
                                          755
                                          
                                          
                                          
                                          611
                                          
                                          
                                          
                                          38
                                          
                                          
                                          
                                          644Interest
      expense
                                          
                                          
                                          (3,063
                                          )
                                          
                                          
                                          (4,007
                                          )
                                          
                                          
                                          (6,635
                                          )
                                          
                                          
                                          (8,178
                                          )Total
      other expenses
                                          
                                          
                                          (2,308
                                          )
                                          
                                          
                                          (3,396
                                          )
                                          
                                          
                                          (6,597
                                          )
                                          
                                          
                                          (7,534
                                          )Income
      before income taxes and equity in earnings (loss) of unconsolidated
      subsidiaries
                                          
                                          
                                          33,749
                                          
                                          
                                          
                                          32,436
                                          
                                          
                                          
                                          75,757
                                          
                                          
                                          
                                          62,256Provision
      for income taxes
                                          
                                          
                                          8,839
                                          
                                          
                                          
                                          5,448
                                          
                                          
                                          
                                          24,007
                                          
                                          
                                          
                                          10,704Income
      before equity in earnings (loss) of unconsolidated
      subsidiaries
                                          
                                          
                                          24,910
                                          
                                          
                                          
                                          26,988
                                          
                                          
                                          
                                          51,750
                                          
                                          
                                          
                                          51,552Equity
      in earnings (loss) of unconsolidated subsidiaries – related
      party
                                          
                                          
                                          5,913
                                          
                                          
                                          
                                          (217
                                          )
                                          
                                          
                                          17,773
                                          
                                          
                                          
                                          (619
                                          )Net
      Income
                                          
                                          
                                          30,823
                                          
                                          
                                          
                                          26,771
                                          
                                          
                                          
                                          69,523
                                          
                                          
                                          
                                          50,933Earnings
      per common share:Basic
      earnings per common share
                                          
                                          $
                                          0.52
                                          
                                          
                                          $
                                          0.45
                                          
                                          
                                          $
                                          1.17
                                          
                                          
                                          $
                                          0.86Diluted
      earnings per common share
                                          
                                          $
                                          0.51
                                          
                                          
                                          $
                                          0.45
                                          
                                          
                                          $
                                          1.15
                                          
                                          
                                          $
                                          0.85Dividends
      declared per common share
                                          
                                          $
                                          0.07
                                          
                                          
                                          $
                                          0.06
                                          
                                          
                                          $
                                          0.14
                                          
                                          
                                          $
                                          0.11
  Net
      realized loss on investments:Total
      other-than-temporary impairment losses
                                                        
                                                        $
                                                        (12,007
                                                        )
                                                        
                                                        $
                                                        (10,786
                                                        )
                                                        
                                                        $
                                                        (17,145
                                                        )
                                                        
                                                        $
                                                        (12,213
                                                        )Portion
      of loss recognized in other comprehensive income
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —Net
      impairment losses recognized in earnings
                                                        
                                                        
                                                        (12,007
                                                        )
                                                        
                                                        
                                                        (10,786
                                                        )
                                                        
                                                        
                                                        (17,145
                                                        )
                                                        
                                                        
                                                        (12,213
                                                        )Other
      net realized gain (loss) on investments
                                                        
                                                        
                                                        5,463
                                                        
                                                        
                                                        
                                                        3,077
                                                        
                                                        
                                                        
                                                        12,386
                                                        
                                                        
                                                        
                                                        (4,734
                                                        )Net
      realized investment loss
                                                        
                                                        $
                                                        (6,544
                                                        )
                                                        
                                                        $
                                                        (7,709
                                                        )
                                                        
                                                        $
                                                        (4,759
                                                        )
                                                        
                                                        $
                                                        (16,947
                                                        )


See
accompanying notes to unaudited condensed consolidated financial
statements.


4





AmTrust
Financial Services, Inc.


Consolidated
Statements of Cash Flows


(Unaudited)




Six Months Ended June 30,(in
      thousands)
                
                2010
                
                
                2009Cash
      flows from operating activities:Net
      income from continuing operations
                
                $
                69,523
                
                
                $
                50,933Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                
                
                7,945
                
                
                
                4,415Equity
      earnings and gain on investment in unconsolidated
    subsidiaries
                
                
                (17,773
                )
                
                
                -Realized
      loss (gain) on marketable securities
                
                
                (12,386
                )
                
                
                4,734Non-cash
      write-down of marketable securities
                
                
                17,145
                
                
                
                12,213Discount
      on notes payable
                
                
                450
                
                
                
                596Stock
      compensation expense
                
                
                1,860
                
                
                
                1,812Bad
      debt expense
                
                
                3,510
                
                
                
                1,951Foreign
      currency (gain)
                
                
                (38
                )
                
                
                (644
                )Changes
      in assets - (increase) decrease:Premium
      and notes receivable
                
                
                (162,419
                )
                
                
                33,890Reinsurance
      recoverable
                
                
                (10,869
                )
                
                
                18,004Reinsurance
      recoverable – related party
                
                
                (42,347
                )
                
                
                (44,775
                )Deferred
      policy acquisition costs, net
                
                
                (42,340
                )
                
                
                (33,516
                )Prepaid
      reinsurance premiums
                
                
                (18,052
                )
                
                
                (7,149
                )Prepaid
      reinsurance premiums – related party
                
                
                (17,855
                )
                
                
                7,659Prepaid
      expenses and other assets
                
                
                (739
                )
                
                
                9,850Deferred
      tax asset
                
                
                (4,170
                )
                
                
                27,117Changes
      in liabilities - increase (decrease):Reinsurance
      premium payable
                
                
                69,469
                
                
                
                (9,294
                )Reinsurance
      premium payable – related party
                
                
                25,011
                
                
                
                (13,283
                )Loss
      and loss expense reserve
                
                
                62,671
                
                
                
                43,587Unearned
      premiums
                
                
                88,653
                
                
                
                7,927Funds
      held under reinsurance treaties
                
                
                (70
                )
                
                
                77Accrued
      expenses and other current liabilities
                
                
                (10,896
                )
                
                
                (3,270
                )Net
      cash provided by operating activities
                
                
                6,283
                
                
                
                112,834Cash
      flows from investing activities:Net
      sales (purchases) of securities with fixed maturities
                
                
                95,734
                
                
                
                36,935Net
      (purchases) sales of equity securities
                
                
                4,502
                
                
                
                (4,615
                )Net
      sales of other investments
                
                
                (577
                )
                
                
                441Investment
      in ACAC
                
                
                (53,055
                )
                
                
                -Acquisition
      of subsidiaries, net of cash obtained
                
                
                (3,553
                )
                
                
                -Acquisition
      of renewal rights and goodwill
                
                
                -
                
                
                
                (910
                )Purchase
      of property and equipment
                
                
                (1,677
                )
                
                
                (1,833
                )Net
      cash provided by investing activities
                
                
                41,374
                
                
                
                30,018Cash
      flows from financing activities:Repurchase
      agreements, net
                
                
                65,478
                
                
                
                (53,887
                )Term
      loan payment
                
                
                (6,667
                )
                
                
                (6,666
                )Non-interest
      bearing note payment
                
                
                (7,500
                )
                
                
                (7,500
                )Repurchase
      of common stock
                
                
                -
                
                
                
                (5,492
                )Stock
      option exercise
                
                
                790
                
                
                
                95Dividends
      distributed on common stock
                
                
                (7,713
                )
                
                
                (5,970
                )Net
      cash provided by (used in) financing activities
                
                
                44,388
                
                
                
                (79,420
                )Effect
      of exchange rate changes on cash
                
                
                (9,446
                )
                
                
                2,387Net increase
      in cash and cash equivalents
                
                
                82,599
                
                
                
                65,819Cash
      and cash equivalents, beginning of the period
                
                
                233,810
                
                
                
                192,053Cash
      and cash equivalents, end of the period
                
                $
                316,409
                
                
                $
                257,872Supplemental
      Cash Flow Information:Income
      tax payments
                
                $
                7,258
                
                
                $
                9,098Interest
      payments on debt
                
                
                8,434
                
                
                
                8,296





See
accompanying notes to unaudited condensed consolidated financial
statements.


5





Notes
to Unaudited Condensed Consolidated Financial Statements


(Unaudited)


(dollars
in thousands, except share data)




1.
            Basis of
      Reporting





The accompanying unaudited interim
consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”) for interim financial
statements and with the instructions to Form 10-Q and Article 10 of Regulation
S-X and, therefore, do not include all of the information and footnotes required
by GAAP for complete financial statements. These interim statements should be
read in conjunction with the financial statements and notes thereto included in
the AmTrust Financial Services, Inc. (“AmTrust” or the “Company”) Annual Report
on Form 10-K for the year ended December 31, 2009, previously filed with the
Securities and Exchange Commission (“SEC”) on March 16, 2010. The balance sheet
at December 31, 2009 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, 2009,
included in the Company’s Form 10-K filed with the SEC.





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





2.
            Recent Accounting
      Pronouncements




With the exception of those discussed
below, there have been no recent accounting pronouncements or changes in
accounting pronouncements during the six months ended June 30, 2010, as compared
to the recent accounting pronouncements described in our Annual Report on Form
10-K for the fiscal year ended December 31, 2009, that are of significance, or
potential significance, to us.





In
January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No.
2010-06, Fair Value Measurements and Disclosures (Topic 820) - Improving
Disclosures about Fair Value Measurements (“ASU 2010-06”). This update
requires additional disclosures about fair value measurements, including
disclosure regarding the amounts of significant transfers between Level 1 and
Level 2 of the fair value hierarchy and the reasons for the transfers. For fair
value measurements using significant unobservable inputs (Level 3), a
reconciliation of the beginning and ending balances which includes gains,
losses, purchases, sales, issuances and settlements disclosed separately for the
period is required. Additionally, fair value measurement disclosures will need
disaggregation for each class of assets and liabilities. The requirements are
effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosure about purchases, sales, issuances and
settlements, which is effective for fiscal years beginning after December 15,
2010 and for interim periods within those fiscal years. The Company adopted the
guidance as of January 1, 2010 and the revised guidance did not have an impact
on its results of operations, financial position or liquidity.


6




In June 2008, the FASB issued new
guidance on determining whether instruments granted in share-based payment
transactions are participating securities. The new guidance, which is now part
of ASC 260, Earnings per
Share, clarifies that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and are to be included in the computation
of earnings per share under the two-class method. This new guidance was
effective for financial statements issued for fiscal years that began after
December 15, 2008 and required all presented prior-period earnings per share
data to be adjusted retrospectively. The Company issued participating securities
during 2010 and therefore this guidance is applicable to the Company for the
period ended June 30, 2010. The guidance did not have a material impact on the
Company’s results of operations, financial position or liquidity.





Prospective
Accounting Literature




The Emerging Issues Task Force (“EITF”)
issued EITF Issue No. 09-G,
Clarification of the Definition of Deferred Acquisition Costs (DAC) of Insurance Entitiesand intends to clarify the definition of what constitutes an acquisition
cost and the types of acquisition costs capitalized by an insurance entity. In
November 2009, the EITF reached a consensus-for-exposure that would limit the
costs an entity can include in DAC to those that are “directly related to” the
acquisition of new and renewal insurance contracts. The EITF clarified
that the direct costs only include those that result in the successful
acquisition of a policy and exclude all costs incurred for unsuccessful efforts,
along with indirect costs. The consensus-for-exposure would require that an
entity include only actual costs, not costs expected to be incurred, in
DAC.




On March 18, 2010, the EITF affirmed
the previous conclusions from the proposed consensus that indirect costs and
costs of unsuccessful activities should not be included in capitalized
acquisition costs. The EITF also agreed that advertising costs should be
capitalized only when certain requirements are met. There were further questions
on how accounting for advertising costs interacts with the DAC impairment model
and further analysis was requested. A working group was formed to assist the
staff in advising the EITF on the effective date and transition questions. They
met in May 2010 and issued a report that was discussed at an EITF meeting on
July 29, 2010. At that meeting, the EITF affirmed the previous conclusions from
the proposed consensus. This literature has the potential to significantly
impact the way insurance companies account for DAC, and therefore, could
potentially have a significant impact on results of operations. It would result
in the need to identify and recognize, as period costs, those amounts associated
with unsuccessful acquisition efforts in addition to indirect costs. Amounts
associated with successful acquisition efforts would continue to be capitalized
and charged to expense in proportion to premium revenue recognized. As an
example, under current guidance, underwriter salaries are capitalized and
amortized over the period in which the associated premium written is earned as
revenue. Under the proposed guidance, companies would be required to identify
the portion of underwriter salaries that could be attributed to unsuccessful
acquisition efforts and expense that amount in the current period. EITF Issue
No. 09-G is effective for interim and annual periods beginning on or after
December 15, 2011, with either prospective or retrospective application being
permitted. The Company is currently evaluating the guidance for its impact on
its results of operations, financial position and liquidity.


7





3.
            Investments





(a)
Available-for-Sale Securities





The original cost, estimated market
value and gross unrealized appreciation and depreciation of available-for-sale
securities as of June 30, 2010, are presented in the table below:




(Amounts
      in thousands)
                
                Original or
                  amortized cost
                
                
                Gross
                  unrealized
                  gains
                
                
                Gross
                  unrealized
                  losses
                
                
                Market
                  valuePreferred
      stock
                
                $
                5,621
                
                
                $
                —
                
                
                $
                (509
                )
                
                $
                5,112Common
      stock
                
                
                48,932
                
                
                
                3,067
                
                
                
                (11,174
                )
                
                
                40,825U.S.
      treasury securities
                
                
                32,170
                
                
                
                1,568
                
                
                
                —
                
                
                
                33,738U.S.
      government agencies
                
                
                41,506
                
                
                
                750
                
                
                
                —
                
                
                
                42,256Municipal
      bonds
                
                
                32,844
                
                
                
                1,263
                
                
                
                (2
                )
                
                
                34,105Corporate
      bonds and other bonds:Finance
                
                
                423,248
                
                
                
                9,265
                
                
                
                (21,704
                )
                
                
                410,809Industrial
                
                
                49,414
                
                
                
                2,889
                
                
                
                (698
                )
                
                
                51,605Utilities
                
                
                25,006
                
                
                
                1,210
                
                
                
                (16
                )
                
                
                26,200Commercial
      mortgage backed securities
                
                
                2,102
                
                
                
                93
                
                
                
                -
                
                
                
                2,195Residential
      mortgage backed securities:Agency
      backed
                
                
                430,619
                
                
                
                20,224
                
                
                
                -
                
                
                
                450,843Non-agency
      backed
                
                
                7,985
                
                
                
                596
                
                
                
                (9
                )
                
                
                8,572Asset-backed
      securities
                
                
                2,933
                
                
                
                216
                
                
                
                -
                
                
                
                3,149$
                1,102,380
                
                
                $
                41,141
                
                
                $
                (34,112
                )
                
                $
                1,109,409





Proceeds
from the sale of investments during the six months ended June 30, 2010 were
approximately $369,726.




(b)
Investment Income





Net investment income for the three and
six months ended June 30, 2010 and 2009 was derived from the following
sources:





Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,(Amounts
      in thousands)
                  
                  2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Fixed
      maturities
                  
                  $
                  11,666
                  
                  
                  $
                  11,582
                  
                  
                  $
                  23,370
                  
                  
                  $
                  23,464Equity
      securities
                  
                  
                  32
                  
                  
                  
                  163
                  
                  
                  
                  359
                  
                  
                  
                  351Cash
      and cash equivalents
                  
                  
                  1,910
                  
                  
                  
                  1,768
                  
                  
                  
                  2755
                  
                  
                  
                  3,572Note
      receivable - related party
                  
                  
                  1,204
                  
                  
                  
                  821
                  
                  
                  
                  2,049
                  
                  
                  
                  1,63314,812
                  
                  
                  
                  14,334
                  
                  
                  
                  28,533
                  
                  
                  
                  29,020Less:
      Investment expenses and interest expense on securities sold under
      agreement to repurchase
                  
                  
                  126
                  
                  
                  
                  535
                  
                  
                  
                  248
                  
                  
                  
                  1,230$
                  14,686
                  
                  
                  $
                  13,799
                  
                  
                  $
                  28,285
                  
                  
                  $
                  27,790


8





(c)
Other-Than-Temporary Impairment




Other-than-temporary impairment
(“OTTI”) charges of our fixed-maturities and equity securities for the three and
six months ended June 30, 2010 and 2009 are presented in the table
below:





Three Months Ended June 30,
                
                
                Six Months Ended June 30,(Amounts
      in thousands)
                
                2010
                
                
                2009
                
                
                2010
                
                
                2009Equity
      securities
                
                $
                1,467
                
                
                $
                8,761
                
                
                $
                6,605
                
                
                $
                10,188Fixed
      maturities
                
                
                10,540
                
                
                
                2,025
                
                
                
                10,540
                
                
                
                2,025$
                12,007
                
                
                $
                10,786
                
                
                $
                17,145
                
                
                $
                12,213





The table below summarizes the gross
unrealized losses of our fixed maturity and equity securities by length of time
the security has continuously been in an unrealized loss position as of June 30,
2010:




Less Than 12 Months
                      
                      
                      12 Months or More
                      
                      
                      Total(Amounts
      in  thousands)
                      
                      Fair
                        Market
                        Value
                      
                      
                      Unrealized
                        Losses
                      
                      
                      No. of
                        Positions
                        Held
                      
                      
                      Fair
                        Market
                        Value
                      
                      
                      Unrealized
                        Losses
                      
                      
                      No. of
                        Positions
                        Held
                      
                      
                      Fair
                        Market
                        Value
                      
                      
                      Unrealized
                        LossesCommon
      and preferred stock
                      
                      $
                      21,198
                      
                      
                      $
                      (9,215
                      )
                      
                      
                      23
                      
                      
                      $
                      7,696
                      
                      
                      $
                      (2,468
                      )
                      
                      
                      87
                      
                      
                      $
                      28,894
                      
                      
                      $
                      (11,683
                      )Municipal
      bonds
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      
                      
                      
                      
                      350
                      
                      
                      
                      (2
                      )
                      
                      
                      1
                      
                      
                      
                      350
                      
                      
                      
                      (2
                      )Corporate
      bonds:Finance
                      
                      
                      51,877
                      
                      
                      
                      (1,230
                      )
                      
                      
                      13
                      
                      
                      
                      172,249
                      
                      
                      
                      (20,474
                      )
                      
                      
                      38
                      
                      
                      
                      224,126
                      
                      
                      
                      (21,704
                      )Industrial
                      
                      
                      16,995
                      
                      
                      
                      (698
                      )
                      
                      
                      3
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1
                      
                      
                      
                      16,995
                      
                      
                      
                      (698
                      )Utilities
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      2,065
                      
                      
                      
                      (16
                      )
                      
                      
                      2
                      
                      
                      
                      2,065
                      
                      
                      
                      (16
                      )Residential
      mortgage backed securities:Non-agency
      backed
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      22
                      
                      
                      
                      (9
                      )
                      
                      
                      1
                      
                      
                      
                      22
                      
                      
                      
                      (9
                      )Total
      temporarily impaired
                      
                      $
                      90,070
                      
                      
                      $
                      (11,143
                      )
                      
                      
                      39
                      
                      
                      $
                      182,382
                      
                      
                      $
                      (22,969
                      )
                      
                      
                      130
                      
                      
                      $
                      272,452
                      
                      
                      $
                      (34,112
                      )





There are 169 securities at June 30,
2010 that account for the gross unrealized loss, none of which is deemed by the
Company to be OTTI. Significant factors influencing the Company’s determination
that unrealized losses were temporary included the magnitude of the unrealized
losses in relation to each security’s cost, the length of time the security’s
fair value has been below its amortized cost, the nature of the investment and
management’s intent to sell these securities and it being more likely than not
that the Company will not be required to sell these investments before
anticipated recovery of fair value to the Company’s cost basis.





(d)
Derivatives





The following table presents the
notional amounts by remaining maturity of the Company’s Interest Rate Swaps and
Credit Default Swaps as of June 30, 2010:




Remaining Life of Notional Amount(1)(Amounts in thousands)
                                      
                                      One Year
                                      
                                      
                                      Two Through
                                        Five Years
                                      
                                      
                                      Six Through
                                        Ten Years
                                      
                                      
                                      After Ten
                                        Years
                                      
                                      
                                      TotalInterest
      rate swaps
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      13,333
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      13,333Credit
      default swaps
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2,000$
                                      —
                                      
                                      
                                      $
                                      15,333
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      15,333





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


9


(e)
Other




Securities sold but not yet purchased
represent obligations of the Company to deliver the specified security at the
contracted price and, thereby, create a liability to purchase the security in
the market at prevailing prices. The Company’s liability for securities to be
delivered is measured at their fair value and as of June 30, 20010 was
$69,288 for fixed maturity securities, which consisted of
U.S. treasuries and corporate bonds, and $1,040 for equity securities.
These transactions result in off-balance sheet risk, as the Company’s ultimate
cost to satisfy the delivery of securities sold but not yet purchased, may
exceed the amount reflected at June 30, 2010. Subject to certain limitations,
all securities owned, to the extent required to cover the Company’s obligations
to sell or repledge the securities to others, are pledged to the clearing
broker.





The Company enters into repurchase
agreements. The agreements are accounted for as collateralized borrowing
transactions and are recorded at contract amounts. The Company receives cash or
securities, that it invests or holds in short term or fixed income securities.
As of June 30, 2010, there were $238,252 principal amount outstanding at
interest rates between .30% and .35% per annum. Interest expense associated with
these repurchase agreements for the three months ended June 30, 2010 and 2009
was $125 and $535, respectively, of which $136 was accrued as of June 30, 2010.
Interest expense associated with the repurchase agreements for the six months
ended June 30, 2010 and 2009 was $248 and $1,230, respectively. The Company has
approximately $241,847 of collateral pledged in support of these
agreements.





4.
            Fair Value of Financial
      Instruments




The following table presents the level
within the fair value hierarchy at which the Company’s financial assets and
financial liabilities are measured on a recurring basis as of June 30,
2010:




(Amounts in thousands)
                
                Total
                
                
                Level 1
                
                
                Level 2
                
                
                Level 3Assets:U.S.
      treasury securities
                
                $
                33,738
                
                
                $
                33,738
                
                
                $
                -
                
                
                $
                -U.S.
      government agencies
                
                
                42,256
                
                
                
                -
                
                
                
                42,256
                
                
                
                -Municipal
      bonds
                
                
                34,105
                
                
                
                -
                
                
                
                34,105
                
                
                
                -Corporate
      bonds and other bonds:Finance
                
                
                410,809
                
                
                
                -
                
                
                
                410,809
                
                
                
                -Industrial
                
                
                51,605
                
                
                
                -
                
                
                
                51,605
                
                
                
                -Utilities
                
                
                26,200
                
                
                
                -
                
                
                
                26,200
                
                
                
                -Commercial
      mortgage backed securities
                
                
                2,195
                
                
                
                -
                
                
                
                2,195
                
                
                
                -Residential
      mortgage backed securities:Agency
      backed
                
                
                450,843
                
                
                
                -
                
                
                
                450,843
                
                
                
                -Non-agency
      backed
                
                
                8,572
                
                
                
                -
                
                
                
                8,572
                
                
                
                -Asset-backed
      securities
                
                
                3,149
                
                
                
                -
                
                
                
                3,149
                
                
                
                -Equity
      securities
                
                
                45,937
                
                
                
                45,937
                
                
                
                -
                
                
                
                -Short
      term investment
                
                
                990
                
                
                
                990Other
      investments
                
                
                13,323
                
                
                
                -
                
                
                
                -
                
                
                
                13,323$
                1,123,722
                
                
                $
                80,665
                
                
                $
                1,029,734
                
                
                $
                13,323Liabilities:Equity
      securities sold but not yet purchased, market
                
                $
                1,040
                
                
                $
                1,040
                
                
                $
                -
                
                
                $
                -Fixed
      maturity securities sold but not yet purchased, market
                
                
                69,288
                
                
                
                52,328
                
                
                
                16,960
                
                
                
                -Securities
      sold under agreements to repurchase, at contract value
                
                
                238,252
                
                
                
                -
                
                
                
                238,252
                
                
                
                -Derivatives
                
                
                220
                
                
                
                -
                
                
                
                -
                
                
                
                220$
                308,800
                
                
                $
                53,368
                
                
                $
                255,212
                
                
                $
                220





The Company classifies its financial
assets and liabilities in the fair value hierarchy based on the lowest level
input that is significant to the fair value measurement. This classification
requires judgment in assessing the market and pricing methodologies for a
particular security. The fair value hierarchy includes the following three
levels:


10





Level 1 –
Valuations are based on unadjusted quoted market prices in active markets for
identical financial assets or liabilities;





Level 2 –
Valuations of financial assets and liabilities are based on prices obtained from
third party pricing services, dealer quotations of the bid price using
observable inputs, or through consensus pricing of a pricing service;
and





Level 3 –
Valuations are based on unobservable inputs for assets and liabilities where
there is little or no market activity. Management’s assumptions are used in
internal valuation pricing models to determine the fair value of financial
assets or liabilities.





For additional discussion regarding
techniques used to value the Company’s investment portfolio, refer to Note 2.
“Significant Accounting Policies” in Item 8. “Financial Statements and
Supplementary Data” in its 2009 Form 10-K.





The following table provides a summary
of changes in fair value of the Company’s Level 3 financial assets for the three
and six months ended June 30, 2010 and 2009:




(Amounts
      in thousands)
                    
                    Assets
                    
                    
                    Liabilities
                    
                    
                    TotalBeginning
      balance as of April 1, 2010
                    
                    $
                    14,019
                    
                    
                    $
                    (353
                    )
                    
                    $
                    13,666Total
      net gains (losses) included in:Net
      income
                    
                    
                    -
                    
                    
                    
                    133
                    
                    
                    
                    133Other
      comprehensive loss
                    
                    
                    (685
                    )
                    
                    
                    -
                    
                    
                    
                    (685
                    )Purchases
      and issuances
                    
                    
                    108
                    
                    
                    
                    -
                    
                    
                    
                    108Sales
      and settlements
                    
                    
                    (119
                    )
                    
                    
                    -
                    
                    
                    
                    (119
                    )Net
      transfers into (out of) Level 3
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Ending
      balance as of June 30, 2010
                    
                    $
                    13,323
                    
                    
                    $
                    (220
                    )
                    
                    $
                    13,103





(Amounts
      in thousands)
                    
                    Assets
                    
                    
                    Liabilities
                    
                    
                    TotalBeginning
      balance as of January 1, 2010
                    
                    $
                    12,746
                    
                    
                    $
                    (1,893
                    )
                    
                    $
                    10,853Total
      net gains (losses) included in:Net
      income
                    
                    
                    277
                    
                    
                    
                    133
                    
                    
                    
                    410Other
      comprehensive loss
                    
                    
                    296
                    
                    
                    
                    -
                    
                    
                    
                    296Purchases
      and issuances
                    
                    
                    123
                    
                    
                    
                    -
                    
                    
                    
                    123Sales
      and settlements
                    
                    
                    (119
                    )
                    
                    
                    1,540
                    
                    
                    
                    1,421Net
      transfers into (out of) Level 3
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Ending
      balance as of June 30, 2010
                    
                    $
                    13,323
                    
                    
                    $
                    (220
                    )
                    
                    $
                    13,103


11





(Amounts
      in thousands)
                    
                    Assets
                    
                    
                    Liabilities
                    
                    
                    TotalBeginning
      balance as of April 1, 2009
                    
                    $
                    19,145
                    
                    
                    $
                    (982
                    )
                    
                    $
                    18,163Total
      net gains (losses) included in:Net
      income
                    
                    
                    15
                    
                    
                    
                    (139
                    )
                    
                    
                    (124
                    )Other
      comprehensive loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Purchases
      and issuances
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Sales
      and settlements
                    
                    
                    (403
                    )
                    
                    
                    (1,199
                    )
                    
                    
                    (1,602
                    )Net
      transfers into (out of) Level 3
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Ending
      balance as of June 30, 2009
                    
                    $
                    18,757
                    
                    
                    $
                    (2,320
                    )
                    
                    $
                    16,437





(Amounts
      in thousands)
                    
                    Assets
                    
                    
                    Liabilities
                    
                    
                    TotalBeginning
      balance as of January 1, 2009
                    
                    $
                    21,352
                    
                    
                    $
                    (1,439
                    )
                    
                    $
                    19,913Total
      net gains (losses) included in:Net
      income
                    
                    
                    (39
                    )
                    
                    
                    (123
                    )
                    
                    
                    (162
                    )Other
      comprehensive loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Purchases
      and issuances
                    
                    
                    138
                    
                    
                    
                    
                    
                    
                    
                    138Sales
      and settlements
                    
                    
                    (2,694
                    )
                    
                    
                    (758
                    )
                    
                    
                    (3,452
                    )Net
      transfers into (out of) Level 3
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Ending
      balance as of June 30, 2009
                    
                    $
                    18,757
                    
                    
                    $
                    (2,320
                    )
                    
                    $
                    16,437





The Company had no transfers between
levels during the three and six months ended June 30, 2010 and
2009.




The Company uses the following methods
and assumptions in estimating its fair value disclosures for financial
instruments:





•
            Equity and
      Fixed Income Investments:Fair value disclosures for these
      investments are disclosed above in this note. The carrying values of cash,
      short term investments and investment income accrued approximate their
      fair values;





•
            Premiums
      Receivable:The
      carrying values reported in the accompanying balance sheets for these
      financial instruments approximate their fair values due to the short term
      nature of the asset; and





•
            Subordinated
      Debentures and Debt:The carrying values reported in the accompanying balance sheets for these
      financial instruments approximate fair value. Fair value was estimated
      using projected cash flows, discounted at rates currently being offered
      for similar notes.




5.
            Debt





Junior
Subordinated Debt





The Company has established four
special purpose trusts for the purpose of issuing trust preferred securities.
The proceeds from such issuances, together with the proceeds of the related
issuances of common securities of the trusts, were invested by the trusts in
junior subordinated debentures issued by the Company. In accordance with FASB
ASC 810-10-25, the Company does not consolidate such special purpose trusts, as
the Company is not considered to be the primary beneficiary. The equity
investment, totaling $3,714 as of June 30, 2010 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 debentures contain
covenants that restrict declaration of dividends on the Company’s common stock
under certain circumstances, including default of payment. The Company incurred
$2,605 of placement fees in connection with these issuances which is being
amortized over thirty years.


12





The table below summarizes the
Company’s trust preferred securities as of June 30, 2010:





AggregateLiquidation
                    
                    
                    Aggregate
                    
                    
                    
                    
                    
                    
                    PerAmount of
                    
                    
                    Liquidation
                    
                    
                    Aggregate
                    
                    
                    
                    Annum(Amounts in thousands)
                    
                    Trust
                    
                    
                    Amount of
                    
                    
                    Principal
                    
                    Stated
                    
                    InterestPreferred
                    
                    
                    Common
                    
                    
                    Amount
                    
                    Maturity
                    
                    Rate ofName of Trust
                    
                    Securities
                    
                    
                    Securities
                    
                    
                    of Notes
                    
                    of Notes
                    
                    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 LIBOR plus 3.40% after the tenth anniversary in
      2015.


(2)
            The interest rate will change to
      LIBOR plus 3.30% after the fifth anniversary in
    2011.


(3)
            The interest rate will change to
      LIBOR plus 3.00% after the fifth anniversary in
    2012.





The Company recorded $2,552 of interest
expense for the three months ended June 30, 2010 and 2009 and $5,104 of interest
expense for the six months ended June 30, 2010 and 2009, respectively, related
to these trust preferred securities.





Term
Loan




On June 3, 2008, the Company entered
into a term loan with JP Morgan Chase Bank, N.A. in the aggregate amount of
$40,000. The term of the loan is for a period of three years and requires
quarterly principal payments of $3,333, which began on September 3, 2008 and end
on June 3, 2011. As of June 30, 2010, the principal balance was $13,333. The
loan carries a variable interest rate and is based on a Eurodollar rate plus an
applicable margin. The Eurodollar rate is a periodic fixed rate equal to the
London Interbank Offered Rate (“LIBOR”) plus a margin rate, which is 185 basis
points. As of June 30, 2010 the interest rate was 2.1%. The Company recorded
$211 and $385 of interest expense for the three months ended June 30, 2010 and
2009, respectively, and $463 and $842 of interest expense for the six months
ended June 30, 2010 and 2009, respectively. The Company can prepay any amount
without penalty upon prior notice. The term loan contains affirmative and
negative covenants, including limitations on additional debt, limitations on
investments and acquisitions outside the Company’s normal course of business.
The loan requires the Company to maintain a debt to capital ratio of 0.35 to 1
or less. The Company incurred financing fees of $52 related to the
agreement.




On June 4, 2008, the Company entered
into a fixed rate interest swap agreement with a total notional amount of
$40,000 to convert the term loan from a variable to a fixed rate. Under this
agreement, the Company pays a fixed rate of 3.47% plus a margin of 185 basis
points, or 5.32%, and receives a variable rate in return based on LIBOR plus a
margin rate, which is 185 basis points. The variable rate is reset every three
months, at which time the interest is settled and is recognized as adjustments
to interest expense. The
Company recorded interest expense of $33 and $164 for the three months ended
June 30, 2010 and 2009, respectively, and $65 and $439 for the six months ended
June 30, 2010 and 2009 related to this agreement.





Promissory
Note




In connection with the stock and asset
purchase agreement with a subsidiary of Unitrin, Inc. (“Unitrin”), the Company,
on June 1, 2008, issued a promissory note to Unitrin in the amount of $30,000.
The note is non-interest bearing and requires four annual principal payments of
$7,500. The first two were paid in 2009 and 2010, respectively, and the
remaining principal payments are due on June 1, 2011 and 2012. Upon entering
into the promissory note, the Company calculated imputed interest of $3,155
based on interest rates available to the Company, which was 4.5%. Accordingly,
the note’s carrying balance was adjusted to $26,845 at the acquisition. The note
is required to be paid in full, immediately, under certain circumstances
including a default of payment or change of control of the Company. The Company
included $210 and $283 of amortized discount on the note in its results of
operations for the three months ended June 30, 2010 and 2000, respectively and
$450 and $596 for the six months ended June 30, 2010 and 2009, respectively. The
note’s carrying value at June 30, 2010 was $14,078.


13





Line of Credit




On June 30, 2010, the Company extended
the term of its unsecured $30,000 line of credit with JP Morgan Chase, N.A. to
June 30, 2011. The line is used for collateral for letters of credit. Interest
payments are required to be paid monthly on any unpaid principal and bears
interest at a rate of LIBOR plus 150 basis points. As of June 30, 2010, there
was no outstanding balance on the line of credit. At June 30, 2010, the Company
had outstanding letters of credit in place for $25,495 that reduced the
availability on the line of credit to $4,505.





Maturities
of Debt




Maturities of the Company’s debt
subsequent to June 30, 2010 are as follows:





(Amounts
      in thousands)
                                              
                                              2010
                                              
                                              
                                              2011
                                              
                                              
                                              2012
                                              
                                              
                                              2013
                                              
                                              
                                              2014
                                              
                                              
                                              ThereafterJunior
      subordinated debt
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              123,714Term
      loan
                                              
                                              
                                              6,666
                                              
                                              
                                              
                                              6,667
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Promissory
      note
                                              
                                              
                                              —
                                              
                                              
                                              
                                              6,716
                                              
                                              
                                              
                                              7,362
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Total
                                              
                                              $
                                              6,666
                                              
                                              
                                              $
                                              13,383
                                              
                                              
                                              $
                                              7,362
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              123,714





6.
            Acquisition
      Costs and Other Underwriting
Expenses




The following table summarizes the
components of acquisition costs and other underwriting expenses for the three
and six months ended June 30, 2010 and 2009:





Three Months Ended June 30,
                
                
                Six Months Ended June 30,(Amounts
      in thousands)
                
                2010
                
                
                2009
                
                
                2010
                
                
                2009Policy
      acquisition expenses
                
                $
                50,122
                
                
                $
                34,776
                
                
                $
                75,413
                
                
                $
                64,024Salaries
      and benefits
                
                
                23,062
                
                
                
                20,660
                
                
                
                48,415
                
                
                
                39,941Other
      insurance general and administrative expense
                
                
                6,395
                
                
                
                9,151
                
                
                
                17,097
                
                
                
                18,776$
                79,579
                
                
                $
                64,587
                
                
                $
                140,925
                
                
                $
                122,741


14





7.
            Earnings Per
      Share





Effective January 1, 2009 the Company
adopted ASC subtopic 260-10, Determining Whether Instruments
Granted in Share-Based Payments Transactions Are Participating
Securities. ASC 260-10 provides that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents, whether
paid or unpaid, are participating securities and are to be included in the
computation of earnings per share under the two-class method. The Company’s
unvested restricted shares contain rights to receive nonforfeitable dividends
and are participating securities, requiring the two-class method of computing
earnings per share. The prior period earnings per share data was not required to
be retrospectively adjusted as all participating securities were issued in
2010.





The following is a summary of the
elements used in calculating basic and diluted earnings per share for the three
and six months ended June 30, 2010 and 2009:





Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,(Amounts
      in thousands except per share)
                  
                  2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Basic
      earnings per share:Net
      income
                  
                  $
                  30,823
                  
                  
                  $
                  26,771
                  
                  
                  $
                  69,523
                  
                  
                  $
                  50,933Less:
      Net income allocated to participating securities
                  
                  
                  26
                  
                  
                  
                  -
                  
                  
                  
                  32
                  
                  
                  
                  -Net
      income allocated to common shareholders
                  
                  $
                  30,797
                  
                  
                  $
                  26,771
                  
                  
                  $
                  69,491
                  
                  
                  $
                  50,933Weighted
      average shares outstanding – basic
                  
                  
                  59,486
                  
                  
                  
                  59,338
                  
                  
                  
                  59,412
                  
                  
                  
                  59,551Less:
      Weighted average participating shares outstanding
                  
                  
                  50
                  
                  
                  
                  -
                  
                  
                  
                  27
                  
                  
                  
                  -Weighted
      average common shares outstanding – basic
                  
                  
                  59,436
                  
                  
                  
                  59,338
                  
                  
                  
                  59,385
                  
                  
                  
                  59,551Net
      income per common share - basic
                  
                  $
                  0.52
                  
                  
                  $
                  0.45
                  
                  
                  $
                  1.17
                  
                  
                  $
                  0.86Diluted
      earnings per share:Net
      income
                  
                  $
                  30,823
                  
                  
                  $
                  26,771
                  
                  
                  $
                  69,523
                  
                  
                  $
                  50,933Less:
      Net income allocated to participating securities
                  
                  
                  26
                  
                  
                  
                  -
                  
                  
                  
                  32
                  
                  
                  
                  -Net
      income allocated to common shareholders
                  
                  $
                  30,797
                  
                  
                  $
                  26,771
                  
                  
                  $
                  69,491
                  
                  
                  $
                  50,933Weighted
      average common shares outstanding – basic
                  
                  
                  59,436
                  
                  
                  
                  59,338
                  
                  
                  
                  59,385
                  
                  
                  
                  59,551Plus:
      Dilutive effect of stock options, other
                  
                  
                  920
                  
                  
                  
                  397
                  
                  
                  
                  887
                  
                  
                  
                  312Weighted
      average common shares outstanding – dilutive
                  
                  
                  60,356
                  
                  
                  
                  59,735
                  
                  
                  
                  60,272
                  
                  
                  
                  59,863Net
      income per common share - diluted
                  
                  $
                  0.51
                  
                  
                  $
                  0.45
                  
                  
                  $
                  1.15
                  
                  
                  $
                  0.85





As of June 30, 2010, there were
approximately 500 of anti-dilutive securities excluded from diluted earnings per
share.




8.
            Share Based
      Compensation





During the three months ended June 30,
2010, the Company adopted the 2010 Omnibus Incentive Plan (the “Plan”), which
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 Plan authorizes up to an aggregate of 6,045,511 shares of
Company stock for awards of options to purchase shares of the Company’s common
stock, restricted stock, restricted stock units (“RSU”) or appreciation rights.
Shares used may be either newly issued shares or treasury shares or both. The
aggregate number of shares of common stock for which awards may be issued may
not exceed 6,045,511 shares, subject to the authority of the Company’s board of
directors to adjust this amount in the event of a consolidation, reorganization,
stock dividend, stock split, recapitalization or similar transaction affecting
the Company’s common stock. All remaining unissued shares related to the
Company’s previously existing 2005 and Equity and Incentive Plan were absorbed
into the Plan. As of June 30, 2010, approximately 5,930,000 shares of Company
common stock remained available for grants under the Plan.


15





The Company recognizes compensation
expense under FASB ASC 718-10-25 for its share-based payments based on the fair
value of the awards. The Company grants stock options at prices equal to the
closing stock price of the Company’s stock on the dates the options are granted.
The options have a term of ten years from the date of grant and vest primarily
in equal annual installments over the four-year period following the date of
grant for employee options. Employees have three months after the employment
relationship ends to exercise all vested options. 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.





The following schedule shows all
options granted, exercised and expired under the Plan for the six months
ended June 30, 2010 and 2009:





2010
                
                2009(Amounts
      in thousands except per share)
                Number of
                  Shares
                
                Amount per
                  Share
                
                Number of
                  Shares
                
                Amount per
                  ShareOutstanding
      beginning of period
                
                
                4,168
                
                
                $
                7.00-15.02
                
                
                
                3,728
                
                
                $
                7.00-15.02Granted
                
                
                141
                
                
                
                12.82-14.25
                
                
                
                423
                
                
                
                8.99-11.40Exercised
                
                
                (101
                )
                
                
                7.50
                
                
                
                (13
                )
                
                
                7.50Cancelled
      or terminated
                
                
                (32
                )
                
                
                7.50-14.55
                
                
                
                (86
                )
                
                
                7.50-14.55Outstanding
      end of period
                
                
                4,176
                
                
                $
                7.00-15.02
                
                
                
                4,052
                
                
                $
                7.00-15.02




The weighted average grant date fair
value of options granted during the six months ended June 30, 2010 and 2009 was
$3.66 and $2.94, respectively.





During the first six months of 2010,
the Company issued 50,000 shares of restricted stock with a market value of
approximately $700. The Board has set a four year vesting period for the
outstanding restricted shares. The fair value of each restricted share grant is
equal to the market price of the Company’s common stock at the date of grant.
Expense relating to restricted shares is amortized ratably over the vesting
period. The Company recorded compensation expense of approximately $49 related
to this grant during the three months ended June 30, 2010.





During the first six months of 2010,
the Company issued approximately 90,000 RSUs with a market value of
approximately $1,250. The Board has set a four year vesting period for RSUs. The
fair value of each RSU is equal to the market price of the Company’s common
stock at the date of grant. Expense relating to the RSU grant is amortized
ratably over the vesting period. The Company recorded compensation expense of
approximately $39 related to RSU grants during the three months ended June 30,
2010.





Compensation expense for all
share-based payments under ASC 718-10-30 was approximately $1,035 and $1,141 for
the three months ended June 30, 2010 and 2009, respectively and $1,860 and
$1,812 for the six months ended June 30, 2010 and 2009,
respectively.





As of June 30, 2010 there was
approximately $5,000 of total unrecognized compensation cost related to
non-vested share-based compensation arrangements.


16





9.
            Comprehensive
      Income





The following table summarizes the
components of comprehensive income:





Three Months Ended June 30,
                      
                      
                      Six Months Ended June 30,(Amounts
      in thousands)
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Net
      income
                      
                      $
                      30,823
                      
                      
                      $
                      26,771
                      
                      
                      $
                      69,523
                      
                      
                      $
                      50,933Unrealized
      holding gain (loss)
                      
                      
                      1,999
                      
                      
                      
                      46,960
                      
                      
                      
                      14,151
                      
                      
                      
                      40,404Foreign
      currency translation
                      
                      
                      (3,300
                      )
                      
                      
                      3,963
                      
                      
                      
                      (8,847
                      )
                      
                      
                      3,123Comprehensive
      income
                      
                      $
                      29,522
                      
                      
                      $
                      77,694
                      
                      
                      $
                      74,827
                      
                      
                      
                      94,460





10.
            Income
    Taxes





Income tax expense for the three months
ended June 30, 2010 and 2009 was $8,839 and $5,448, respectively, and $24,007
and $10,704 for the six months ended June 30, 2010 and 2009, respectively. The
following table reconciles the Company’s statutory federal income tax rate to
its effective tax rate.




Three Months Ended June 30,
                                    
                                    
                                    Six Months Ended June 30,(Amounts
      in thousands)
                                    
                                    2010
                                    
                                    
                                    2009
                                    
                                    
                                    2010
                                    
                                    
                                    2009Income
      before provision for income taxes, equity in earnings of unconsolidated
      subsidiaries
                                    
                                    $
                                    33,749
                                    
                                    
                                    $
                                    32,436
                                    
                                    
                                    $
                                    75,757
                                    
                                    
                                    $
                                    62,256Equity
      in earnings (loss) of unconsolidated subsidiaries
                                    
                                    
                                    5,913
                                    
                                    
                                    
                                    (217
                                    )
                                    
                                    
                                    17,773
                                    
                                    
                                    
                                    (619
                                    )$
                                    39,662
                                    
                                    
                                    $
                                    32,219
                                    
                                    
                                    $
                                    93,530
                                    
                                    
                                    $
                                    61,637Income
      taxes at statutory rates
                                    
                                    $
                                    13,882
                                    
                                    
                                    $
                                    11,277
                                    
                                    
                                    $
                                    32,736
                                    
                                    
                                    $
                                    21,573Effect
      of income not subject to U.S. taxation
                                    
                                    
                                    (5,724
                                    )
                                    
                                    
                                    (4,675
                                    )
                                    
                                    
                                    (8,969
                                    )
                                    
                                    
                                    (9,888
                                    )Other,
      net
                                    
                                    
                                    681
                                    
                                    
                                    
                                    (1,154
                                    )
                                    
                                    
                                    240
                                    
                                    
                                    
                                    (981
                                    )Provision
      for income taxes as shown on the Condensed Consolidated Statements of
      Income
                                    
                                    $
                                    8,839
                                    
                                    
                                    $
                                    5,448
                                    
                                    
                                    $
                                    24,007
                                    
                                    
                                    $
                                    10,704GAAP
      effective tax rate
                                    
                                    
                                    22.3
                                    %
                                    
                                    
                                    16.9
                                    %
                                    
                                    
                                    25.7
                                    %
                                    
                                    
                                    17.4
                                    %





The Company’s management believes that
it will realize the benefits of its deferred tax asset and, accordingly, no
valuation allowance has been recorded for the periods presented. The Company
does not provide for income taxes on the unremitted earnings of foreign
subsidiaries where, in management’s opinion, such earnings have been
indefinitely reinvested. It is not practical to determine the amount of
unrecognized deferred tax liabilities for temporary differences related to these
investments.





The Company’s major taxing
jurisdictions include the U.S. (federal and state), the United Kingdom and
Ireland. The years subject to potential audit vary depending on the tax
jurisdiction. Generally, the Company’s statute of limitation is open for tax
years ended December 31, 2005 and forward. As permitted by FASB ASC 740-10, the
Company 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 June 30,
2010, the Company has approximately $1,559 of accrued interest and penalties
related to unrecognized tax benefits in accordance with FASB ASC
740-10.




During 2007, the Company, while
performing a review of the income tax return filed with the Internal Revenue
Service (“IRS”) for calendar year ending December 31, 2006, determined an issue
existed per FASB ASC 740-10 guidelines concerning its position related to
accrued market discount. The Company reverses accrued market discount income
recognized for book purposes when calculating taxable income. The reversal
results from the accrued market discount income recognized by the insurance
subsidiaries for bonds and other investments. The Company inadvertently reversed
the amount related to commercial paper investments on the 2006 income tax
return. The Company has estimated the potential liability to be approximately
$980 (including $163 for penalties and interest) and has reflected this
position, per FASB ASC 740-10 guidelines, in the consolidated financial
statements.


17





11.
            Related Party
      Transactions





Reinsurance
Agreement — Maiden





Maiden Holdings, Ltd. (“Maiden”) is a
publicly-held Bermuda insurance holding company (Nasdaq: MHLD) formed by Michael
Karfunkel, George Karfunkel and Barry Zyskind, the principal shareholders, and,
respectively, the chairman of the board of directors, a director, and the chief
executive officer and director of the Company. As of June 30, 2010, assuming
full exercise of outstanding warrants, Michael Karfunkel owns or controls
approximately 15.0% of the issued and outstanding capital stock of Maiden,
George Karfunkel owns or controls approximately 10.5% of the issued and
outstanding capital stock of Maiden and Mr. Zyskind owns or controls
approximately 5.9% of the issued and outstanding stock of Maiden. Mr. Zyskind
serves as the non-executive chairman of the board of Maiden’s board of
directors. 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 a master agreement, as amended, by which the
Company’s Bermuda affiliate, AmTrust International Insurance, Ltd. (“AII”) and
Maiden Insurance entered into a quota share reinsurance agreement (the “Maiden
Quota Share”), as amended, by which AII retrocedes to Maiden Insurance an amount
equal to 40% of the premium written by AmTrust’s U.S., Irish and U.K. insurance
companies (the “AmTrust Ceding Insurers”), net of the cost of unaffiliated
insuring reinsurance (and in the case of AmTrust’s U.K. insurance subsidiary
AmTrust Europe, Ltd. (formerly IGI Insurance Company, Ltd.), net of commissions)
and 40% of losses with respect to the Company's current lines of business,
excluding personal lines reinsurance business, certain specialty property and
casualty lines written in our Specialty Risk and Extended Warranty segment,
which Maiden Insurance was offered but declined to reinsure, and risks for which
the AmTrust Ceding Insurers’ net retention exceeds $5,000, which Maiden has not
expressly agreed to assume (“Covered Business”). Effective January 1, 2010,
Maiden agreed to assume its proportionate share of AmTrust’s workers’
compensation exposure, and will share the benefit of the 2010 excess reinsurance
protection.




AmTrust also has agreed to cause AII,
subject to regulatory requirements, to reinsure any insurance company that
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
Maiden Quota Share, as amended, further provides that AII receives a ceding
commission of 31% of ceded written premiums with respect to Covered Business,
except retail commercial package business, for which the ceding commission is
34.375%. The Maiden Quota Share, which had an initial term of three years, has
been renewed for a successive three year term effective July 1, 2010 and will
automatically renew for successive three year terms, 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 following is the effect on the
Company’s balance sheet as of June 30, 2010 and December 31, 2009 and the
results of operations for the three and six months ended June 30, 2010 and 2009
related to the Maiden Quota Share agreement:




(Amounts
      in thousands)
                      
                      As of June 30, 2010
                      
                      
                      As of December 31, 2009Assets
      and liabilities:Reinsurance
      recoverable
                      
                      $
                      335,973
                      
                      
                      
                      293,626Prepaid
      reinsurance premium
                      
                      
                      279,983
                      
                      
                      
                      262,128Ceded
      reinsurance premiums payable
                      
                      
                      (93,390
                      )
                      
                      
                      (86,165
                      )Note
      payable
                      
                      
                      (167,975
                      )
                      
                      
                      (167,975
                      )


18





Three Months Ended June 30,
                
                
                Six Months Ended June 30,(Amounts
      in thousands)
                
                2010
                
                
                2009
                
                
                2010
                
                
                2009Results
      of operations:Premium
      written - ceded
                
                $
                (112,465
                )
                
                $
                (90,079
                )
                
                $
                (226,557
                )
                
                $
                (177,559
                )Change
      in unearned premium - ceded
                
                
                6,166
                
                
                
                2,218
                
                
                
                17,855
                
                
                
                (4,753
                )Earned
      premium - ceded
                
                $
                (106,299
                )
                
                $
                (87,861
                )
                
                $
                (208,702
                )
                
                $
                (182,312
                )Ceding
      commission on premium written
                
                $
                36,124
                
                
                $
                27,570
                
                
                $
                71,104
                
                
                $
                55,123Ceding
      commission – deferred
                
                
                2,925
                
                
                
                3,960
                
                
                
                5,898
                
                
                
                3,525Ceding
      commission - earned
                
                $
                33,199
                
                
                $
                31,530
                
                
                $
                65,206
                
                
                $
                58,648Incurred
      loss and loss adjustment expense - ceded
                
                $
                64,274
                
                
                $
                66,908
                
                
                $
                135,446
                
                
                $
                138,113Interest
      expense
                
                
                25
                
                
                
                554
                
                
                
                507
                
                
                
                1,124





The Maiden Quota Share 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. In order to secure its proportional
share of AII’s obligation to the AmTrust Ceding Insurers domiciled in the U.S.,
AII currently holds a collateral loan with Maiden Insurance in the amount of
$167,975. Effective December 1, 2008, AII and Maiden Insurance entered into a
Reinsurer Trust Assets Collateral agreement whereby Maiden Insurance is required
to provide AII the assets required to secure Maiden’s proportional share of the
Company’s obligations to its U.S. subsidiaries. The amount of this collateral as
of June 30, 2010 was $297,557. Maiden retains ownership of $297,557, which is
deposited in reinsurance trust accounts.




Reinsurance
Brokerage Agreement




Effective July 1, 2007, AmTrust,
through a subsidiary, entered into a reinsurance brokerage agreement with
Maiden. Pursuant to the brokerage agreement, AmTrust provides brokerage services
relating to the Reinsurance Agreement for a fee equal to 1.25% of reinsured
premium. The brokerage fee is payable in consideration of AII Reinsurance Broker
Ltd.’s brokerage services. The Company recorded $1,375 and $1,096 of brokerage
commission during the three months ended June 30, 2010 and 2009, respectively
and $2,885 and $2,229 during the six months ended June 30, 2010 and 2009,
respectively.




Asset
Management Agreement




Effective July 1, 2007, AmTrust,
through a subsidiary, entered into an asset management agreement with Maiden,
pursuant to which it provides investment management services to Maiden. Pursuant
to the asset management agreement, AmTrust earned an annual fee equal to 0.35%
per annum of average invested assets plus all costs incurred. Effective April 1,
2008, the investment management services fee was reduced to 0.20% per annum and
was further reduced to 0.15% per annum once the average invested assets exceed
$1,000,000. As a result of this agreement, the Company recorded approximately
$662 and $618 of investment management fees for the three months ended June 30,
2010 and 2009, respectively, and $1,341 and $1,215 for the six months ended June
30, 2010 and 2009, respectively.





Services
Agreement





AmTrust, through its subsidiaries,
entered into services agreements in 2008, pursuant to which it provides certain
marketing and back office services to Maiden. Pursuant to the services
agreements, AmTrust earns a fee equal to the amount required to reimburse
AmTrust for its costs plus 8%. As a result of this agreement, the Company
recorded approximately $0 and $182 for the three months ended June 30, 2010 and
2009, respectively, and $45 and $335 for the six months ended June 30, 2010 and
2009, respectively.


19





Note
Payable — Collateral for Proportionate Share of Reinsurance
Obligation





In conjunction with the Maiden Quota
Share, AII entered into a loan agreement with Maiden Insurance during the fourth
quarter of 2007, whereby, Maiden Insurance agreed to lend to AII from time to
time the amount of the obligation of the AmTrust Ceding Insurers that AII is
obligated to secure, not to exceed an amount equal to Maiden Insurance’s
proportionate share of such obligations to such AmTrust Ceding Insurers in
accordance with the Maiden Quota Share. AII is required to deposit all proceeds
from the advances into a sub-account of each trust account that has been
established for each AmTrust Ceding Insurer. To the extent of the loans, Maiden
Insurance is discharged from providing security for its proportionate share of
the obligations as contemplated by the Maiden Quota Share. If an AmTrust Ceding
Insurer withdraws loan proceeds from the trust account for the purpose of
reimbursing such AmTrust Ceding Insurer for an ultimate net loss, the
outstanding principal balance of the loan shall be reduced by the amount of such
withdrawal. The loan agreement was amended in February 2008 to provide for
interest at a rate of LIBOR plus 90 basis points and is payable on a quarterly
basis. Each advance under the loan is secured by a promissory note. Advances
totaled $167,975 as of June 30, 2010. The Company recorded $25 and $554 of
interest expense during the three months ended June 30, 2010 and 2009,
respectively, and $507 and $1,124 during the six months ended June 30, 2010 and
2009, respectively.




Other
Reinsurance Agreements




Between January 1, 2008 and January 1,
2010, Maiden was a 45% participating reinsurer in the first layer of the
Company’s workers’ compensation excess of loss program, which provided coverage
in the amount of $9,000 per occurrence in excess of $1,000, subject to an annual
aggregate deductible of $1,250. From January 1, 2008 through June 30, 2009,
Maiden was one of two participating reinsurers in the layer and participated on
the same market terms and conditions as the other participant. Effective July 1,
2009, the other participant's participation in the layer was terminated, but
Maiden continued to assume 45% of the layer on the existing terms and conditions
through the end of the term on January 1, 2010.




As of
January 1, 2008, Maiden Insurance had a participation in a $4 million in excess
of $1 million specialty transportation program written by the Company. For
calendar year 2008, Maiden Insurance’s participation was 50% and for calendar
year 2009, Maiden Insurance’s participation was 30%. This program provided
primarily, commercial auto coverage and, to a lesser extent, general liability
coverage to private non-emergency para-transit and school bus service operators.
The participations were sourced through a reinsurance intermediary via open
market placement in which competitive bids were solicited by an independent
broker. Several other broker market reinsurers hold the other 50% participation
for 2008 and 70% participation for 2009. The agreement terminated January 1,
2010.




Leap
Tide Capital Management




In December 2006, the Company formed a
wholly-owned subsidiary now named Leap Tide Capital Management, Inc. (LTCMI).
LTCMI currently manages approximately $44,000 of the Company’s investment
portfolio. Concurrently with the formation of LTCMI, the Company formed Leap
Tide Partners, L.P. (“LTP”), a domestic partnership and Leap Tide Offshore, Ltd.
(“LTO”), a Cayman exempted company, both of which were formed for the purpose of
providing qualified third-party investors the opportunity to invest funds in
vehicles managed by LTCMI (the “Hedge Funds”). The Company also is a member of
Leap Tide Capital Management G.P., LLC (“LTGP”), which is the general partner of
LTP. LTCMI earns a management fee equal to 1% of LTP’s and LTO’s assets. LTCMI
earns an incentive fee of 20% of the cumulative profits of the LTO. LTGP earns
an incentive fee of 20% of the cumulative profits of each limited partner of
LTP, 50% of which is allocated to the Company’s membership interest. As of June
30, 2010, the current value of the invested funds in the Hedge Funds was
approximately $19,000. The majority of funds invested in the Hedge Funds were
provided by members of the Karfunkel family. The Company’s Audit Committee has
reviewed the Leap Tide transactions and determined that they were entered into
at arm’s-length. A majority of the limited partners have the right to liquidate
the limited partnership. In addition, the Company is not the managing member of
LTGP. As such, in accordance with FASB ASC 810-20-25, the Company does not
consolidate LTP. LTCMI earned fees of approximately $0 under the agreement
during the three months ended June 30, 2010 and 2009 and $77 and $0 during the
six months ended June 30, 2010 and 2009, respectively.





Lease
Agreements





In 2002, the Company entered into a
lease for approximately 9,000 square feet of office space at 59 Maiden Lane in
downtown Manhattan from 59 Maiden Lane Associates, LLC, an entity that is
wholly-owned by Michael Karfunkel and George Karfunkel. Effective January 1,
2008, the Company entered into an amended lease to increase its leased space to
14,807 square feet and extend the lease through December 31, 2017. The Audit
Committee reviewed and approved the amended lease agreement. The Company paid
approximately $160 and $159 for the lease for the three months ended June 30,
2010 and 2009, respectively and $328 and $325 for the six months ended June 30,
2010 and 2009, respectively.


20





In 2008, the Company entered into a
lease for approximately 5,000 square feet of office space in Chicago, Illinois
from 33 West Monroe Associates, LLC, an entity that is wholly-owned by Michael
Karfunkel and George Karfunkel. The Audit Committee reviewed and approved the
lease agreement. Effective May 1, 2009, the Company entered into an amended
lease to increase its leased space to 7,156 feet and extend the lease through
October 31, 2012. The Company paid approximately $78 and $50 for the lease for
the three months ended June 30, 2010 and 2009, respectively and $125 and $91 for
the six months ended June 30, 2010 and 2009, respectively.





Warrantech




In February of 2007, the Company
participated with H.I.G. Capital, a Miami-based private equity firm, in
financing H.I.G. Capital’s acquisition of Warrantech in a cash merger. The
Company contributed $3,850 for a 27% equity interest in Warrantech. Warrantech
is an independent developer, marketer and third party administrator of service
contracts and after-market warranty primarily for the motor vehicle and consumer
product industries. The Company currently insures a majority of Warrantech’s
business, which produced gross written premium of approximately $13,000 and
$20,000 during the three months ended June 30, 2010 and 2009, respectively and
$27,000 and $43,000 during the six months ended June 30, 2010 and 2009. The
Company recorded investment loss of approximately $229 and $217 from its equity
investment for the three months ended June 30, 2010 and 2009, respectively and
$1,146 and $619 for the six months ended June 30, 2010 and 2009, respectively.
As of June 30, 2010, the Company’s equity interest was approximately $143.
Additionally in 2007, the Company provided Warrantech with a $20,000 senior
secured note due January 31, 2012 (note receivable — related party). Interest on
the notes is payable monthly at a rate of 15% per annum and consisted of a cash
component at 11% per annum and 4% per annum for the issuance of additional notes
(“PIK Notes”) in a principal amount equal to the interest not paid in cash on
such date. As of June 30, 2010, the carrying value of the note receivable was
$23,822 (note receivable — related party).




Diversified





Diversified Construction Management,
LLC (“Diversified”) provided construction management and general contractor
services for a Company subsidiary in 2010 and 2009. The Company recorded a total
of $226 and $80 for the three months ended June 30, 2010 and 2009, respectively,
and $345 and $203 for the six months ended June 30, 2010 and 2009, respectively,
for its services in connection with the construction project. Robert A. Saxon,
Jr., a principal of Diversified, is the brother of Michael J. Saxon, our Chief
Operating Officer. During several prior years, Diversified provided similar
services to the Company. While the arrangements were not pre-approved by the
Audit Committee, upon subsequent review, the Audit Committee determined that the
contracts were not less favorable to the Company than similar services provided
at arms-length.




Investment
in ACAC




During the three months ended March 31,
2010, the Company completed its strategic investment in American Capital
Acquisition Corporation (“ACAC”). ACAC was formed by the Michael Karfunkel 2005
Grantor Retained Annuity Trust (the “Trust”) and the Company for the purpose of
acquiring from GMAC Insurance Holdings, Inc. (“GMACI”) and Motor Insurance
Corporation (“MIC”, together with GMACI, “GMAC”) GMAC’s U.S. consumer property
and casualty insurance business. Michael Karfunkel, individually, and the Trust,
which is controlled by Michael Karfunkel, own 100% of ACAC’s common stock
(subject to the Company’s conversion rights described below). Michael Karfunkel
is the chairman of the board of directors of the Company and the father-in-law
of Barry D. Zyskind, the chief executive officer of the Company. The ultimate
beneficiaries of the Trust include Michael Karfunkel’s children, one of whom is
married to Mr. Zyskind. In addition, Michael Karfunkel is the Chairman of the
Board of Directors of ACAC.


21





Pursuant to the Amended Stock Purchase
Agreement, ACAC issued and sold to the Company for an initial purchase price of
approximately $53,000, which was equal to 25% of the capital required by ACAC,
53,054 shares of Series A Preferred Stock, which provides for an 8% cumulative
dividend, and is non-redeemable and convertible, at the Company’s option, into
21.25% of the issued and outstanding common stock of ACAC (the “Preferred
Stock”). The Company has pre-emptive rights with respect to any future issuances
of securities by ACAC and the Company’s conversion rights are subject to
customary anti-dilution protections. The Company has the right to appoint two
members of ACAC’s board of directors, which consists of six members. Subject to
certain limitations, the board of directors of ACAC may not take any action in
the absence of the Company’s appointees and ACAC may not take certain corporate
actions without the unanimous prior approval of its board of directors
(including the Company’s appointees). In accordance with ASC 323-10-15, Investments-Equity Method and Joint
Ventures, the Company accounts for its investment in ACAC under the
equity method. The Company recorded $6,142 and $8,469 of income during the three
and six months ended June 30, 2010 related to its equity investment in ACAC.
Additionally,
ACAC completed a portion of its purchase accounting required under ASC 805,
Business Combinations,
related to its acquisition of GMAC during the three months ended June 30, 2010.As a result, the Company recorded a gain on its investment in acquired
unconsolidated subsidiary in the after tax amount of $10,450 and is included in
the income statement in equity in earnings of unconsolidated subsidiaries. In
accordance with ASC 805, the gain was applied retrospectively to the three
months ended March 31, 2010. ACAC expects to finalize its purchase price
accounting by the end of 2010. Upon completion, the Company may be required to
adjust its investment in ACAC for additional purchase price
adjustments.





The Company, the Trust and Michael
Karfunkel, individually, each shall be required to make its or his proportional
share of the deferred payments payable by ACAC to GMAC pursuant to the GMAC
Securities Purchase Agreement, which are payable over a period of three years
from the date of the closing of the Acquisition, to the extent that ACAC is
unable to otherwise provide for such payments. The Company’s proportionate share
of such deferred payments shall not exceed $22,500.




The acquired GMAC consumer property and
casualty insurance business (the “GMAC Business”) is one of the leading writers
of automobile coverages through independent agents in the United States. The
GMAC Business had a net written premium in excess of $1,000 in 2008 that
encompassed all fifty states. Its coverages include standard/preferred auto,
RVs, non-standard auto and commercial auto. The acquisition included ten
statutory insurance companies (the “GMAC Insurers”).




In connection with the Company’s
investment:




(i)
            the Company provides ACAC and its
      affiliates information technology development services at a price of cost
      plus 20%. In addition, once a new system to be developed by the Company is
      implemented and ACAC or its affiliates begin using the system in its
      operations, the Company will be entitled to an additional fee for use of
      the systems in the amount of 1.25% of gross premiums of ACAC and its
      affiliates. The Company recorded approximately $407 and $622 of fee income
      for the three and six months ended June 30, 2010, respectively, related to
      this agreement. The terms and conditions of the above are subject to
      regulatory approval.


(ii)
            the
      Company manages the assets of ACAC and its subsidiaries for an annual fee
      equal to 0.20% of the average aggregate value of the assets under
      management for the preceding quarter if the average aggregate value for
      the preceding quarter is $1,000,000 or less and 0.15% of the average
      aggregate value of the assets under management for the preceding quarter
      if the average aggregate value for that quarter is more than $1,000,000.
      As a result of this agreement, the Company earned approximately $442 and
      $583 of investment management fees for the three and six months ended June
      30, 2010.


(iii)
            ACAC
      is providing the Company with access to its agency sales force to
      distribute the Company’s products, and ACAC will use its best efforts to
      have said agency sales team appointed as the Company’s
    agents.


(iv)
            ACAC
      will grant the Company a right of first refusal to purchase or to reinsure
      commercial auto insurance business acquired from GMAC in connection with
      the Acquisition.


22





(v)
            the
      Company, effective March 1, 2010, reinsures 10% of the net premiums of the
      GMAC Business, pursuant to a 50% quota share reinsurance agreement
      (“Personal Lines Quota Share”) with the GMAC Insurers , as cedents, and
      the Company, MK Re, Ltd., a Bermuda reinsurer which is a wholly-owned
      indirect subsidiary of the Trust, and Maiden Insurance Company, Ltd., as
      reinsurers. The Company has a 20% participation in the Personal Lines
      Quota Share, by which it receives 10% of net premiums of the personal
      lines business. The Personal Lines Quota share provides that the
      reinsurers, severally, in accordance with their participation percentages,
      shall receive 50% of the net premium of the GMAC Insurers and assume 50%
      of the related net losses. The Personal Lines Quota Share has an initial
      term of three years and shall renew automatically for successive three
      year terms unless terminated by written notice not less than nine months
      prior to the expiration of the current term. Notwithstanding the
      foregoing, the Company’s participation in the Personal Lines Quota Share
      may be terminated by the GMAC Insurers on 60 days written notice in the
      event the Company becomes insolvent, is placed into receivership, its
      financial condition is impaired by 50% of the amount of its surplus at the
      inception of the Personal Lines Quota Share or latest anniversary,
      whichever is greater, is subject to a change of control, or ceases writing
      new and renewal business. The GMAC Insurers also may terminate the
      agreement on nine months written notice following the effective date of
      initial public offering or private placement of stock by ACAC or a
      subsidiary. The Company may terminate its participation in the Personal
      Lines Quota Share on 60 days written notice in the event the GMAC
      Insurers are subject to a change of control, cease writing new and
      renewal business, effect a reduction in their net retention without the
      Company’s consent or fail to remit premium as required by the terms of the
      Personal Lines Quota Share. The Personal Lines Quota Share provides that
      the reinsurers pay a provisional ceding commission equal to 32.5% of ceded
      earned premium, net of premiums ceded by the personal lines companies for
      inuring reinsurance, subject to adjustment. The ceding commission is
      subject to adjustment to a maximum of 34.5% if the loss ratio for the
      reinsured business is 60.5% or less and a minimum of 30.5% if the loss
      ratio is 64.5% or higher. As a result of this agreement, the Company
      assumed $25,860 and $34,560 of business from the GMAC Insurers during the
      three and six months ended June 30, 2010. The terms and conditions of the
      above are subject to final regulatory approval, which is
      pending.





As a
result of these service agreements with ACAC, the Company recorded fees totaling
approximately $849 and $1,205 for the three and six months ended June 30, 2010.
In addition, in the three months ended June 30, 2010, the Company recorded an
accrued liability of approximately $2,500 for advanced fees it received from
ACAC that will be applied against future fees owed by ACAC under these service
agreements. As of June 30, 2010, the outstanding balance related to these
service fees and reimbursable costs was approximately $1,627.





12.
            Acquisitions





Risk
Services





During the three months ended June 30,
2010, the Company completed the acquisition of eight direct and indirect
subsidiaries of RS Acquisition Holdings Corp., including Risk Services, LLC and
PBOA, Inc. (collectively, “Risk Services”) for $11,100. The entities acquired
include various risk retention and captive management companies, brokering
entities and workers’ compensation servicing entities. The acquired companies
are held in a newly created entity, RS Acquisition Holdco, LLC. The Company has
a majority ownership interest (80%) in this entity. The Risk Services entities
have offices in Florida, Vermont, Nevada, Virginia and Utah, and are broadly
licensed. The results of operations for Risk Services were immaterial to the
results of operations, financial position and liquidity of the Company during
the three months ended and as of June 30, 2010.





ACHL




During the three months ended March 31,
2009, the Company, through a subsidiary, acquired all the issued and outstanding
stock of Imagine Captive Holdings Limited (“ICHL”), a Luxembourg holding
company, which owned all of the issued and outstanding stock of Imagine Re Beta
SA, Imagine Re (Luxembourg) 2007 SA and Imagine Re SA (collectively, the
“Captives”), each of which is a Luxembourg domiciled captive insurance company,
from Imagine Finance SARL (“SARL”). ICHL subsequently changed its name to
AmTrust Captive Holdings Limited (“ACHL”) and the Captives changed their names
to AmTrust Re Beta, AmTrust Re 2007 (Luxembourg) and AmTrust Re (Luxembourg),
respectively. The purchase price of ACHL was $20 which represented the capital
of ACHL. In accordance with FASB ASC 805-10, the Company recorded approximately
$12,500 of cash, $66,500 of receivables and $79,000 of loss reserves. ACHL is
included in the Company’s Specialty Risk and Extended Warranty
segment.




Additionally, the Captives had
previously entered into a stop loss agreement with Imagine Insurance Company
Limited (“Imagine”) by which Imagine agreed to cede certain losses to the
Captives. Concurrently, with the Company’s purchase of ACHL, the Company,
through AmTrust International Insurance, Ltd. (“AII”), entered into a novation
agreement by which AII assumed all of Imagine’s rights and obligations under the
stop loss agreement.


23





In October 2009, ACHL acquired all the
issued and outstanding stock of Watt Re, a Luxembourg domiciled captive
insurance company, from CREOS LUXEMBOURG S.A. (formerly CEGEDEL S.A.) and
ENOVOUS Luxembourg S.A. (formerly CEGEDEL PARTICIPATIONS S.A.). Watt Re
subsequently changed its name to AmTrust Re Gamma. The purchase price of Watt Re
was approximately $30,200. The Company recorded approximately $34,500 of cash,
intangible assets of $5,500 and a deferred tax liability of approximately
$9,800. The Company assigned a life of three years to the intangible
assets.




In December 2009, ACHL acquired all the
issued and outstanding stock of Group 4 Falck Reinsurance S.A., a Luxembourg
domiciled captive insurance company, from Group 4 Securitas (International) B.V.
Group 4 Falck Reinsurance S.A. subsequently changed its name to AmTrust Re
Omega. The purchase price of Group 4 Falck Reinsurance S.A. was approximately
$22,800. The Company recorded approximately $25,100 of cash, intangible assets
of $2,200 and a deferred tax liability of $4,500. The Company assigned a life of
three years to the intangible assets.





In May 2010, ACHL acquired all the
issued and outstanding stock of Euro International Reinsurance S.A., a
Luxembourg domiciled captive insurance company, from TALANX AG. Euro
International Reinsurance S.A. subsequently changed its name to AmTrust Re
Delta. The purchase price of Euro International Reinsurance S.A. was
approximately $58,300. The Company recorded approximately $65,700 of cash,
intangible assets of $8,600 and a deferred tax liability of $16,000. The Company
assigned a life of two years to the intangible assets.





In June 2010, AmTrust Re Beta and
AmTrust Re Gamma merged into AmTrust Re Omega and AmTrust Re 2007 (Luxembourg),
respectively, with AmTrust Re Omega and AmTrust Re 2007 (Luxembourg) continuing
as the surviving entities.




The
aforementioned ACHL transactions allow the Company to obtain the benefit of the
Captives’ capital and utilization of their existing and future loss reserves
through a series of reinsurance arrangements with a subsidiary of the
Company.





CyberComp




In September 2009, the Company acquired
from subsidiaries of Swiss Re America Holding Corp. (“Swiss Re”) access to the
distribution network of and renewal rights to CyberComp (“CyberComp”), a Swiss
Re web-based platform providing workers’ compensation insurance to the small to
medium-sized employer market. The purchase price is equal to a percentage
of gross written premium through the third anniversary of the closing of the
transaction. Upon closing, the Company made an initial payment to Swiss Re in
the amount of $3,000 which represents an advance on the purchase price and the
minimum amount payable pursuant to the purchase agreement. In accordance with
FASB ASC 805, the Company recorded a purchase price of $6,300 which consisted of
$2,800 of renewal rights, $2,300 of distribution networks, $700 of trademarks
and $500 of goodwill as part of the Small Commercial Business segment. The
intangible assets were determined to have useful lives of between two years and
15 years. The Company produced approximately $12,000 and $25,700 of gross
written premium during the three and six months ended June 30, 2010 from this
transaction.


24





13.
            Contingent
      Liabilities





The Company’s insurance subsidiaries
and other operating 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 loss expense reserves. The Company’s management believes the resolution of
those actions should not have a material adverse effect on the Company’s
financial position or results of operations.





As a result of its equity investment in
ACAC, the Company made an initial investment in ACAC in the amount of
approximately $53,000. In addition, the Company, the Trust and Michael
Karfunkel, individually, each shall be required to make its or his proportional
share of the deferred payments payable by ACAC to GMAC pursuant to the GMAC
Securities Purchase Agreement (See Note 11. Related Party Transactions), which
are payable over a period of three years from the date of the closing of the
Acquisition, to the extent that ACAC is unable to otherwise provide for such
payments. The Company’s proportionate share of such deferred payments shall not
exceed $22,500.





14.
            Segments





The Company currently operates four
business segments, Small Commercial Business; Specialty Risk and Extended
Warranty; Specialty Program (formerly known as Specialty Middle Market
Business); and Personal Lines Reinsurance. The Company formed the Personal Lines
Reinsurance Segment in connection with the quota share agreement entered into
with GMAC Insurers during the three months ended March 31, 2010. The “Corporate
& Other” segment represents fee revenue earned primarily through agreements
with Maiden and ACAC as well as the equity in earnings of unconsolidated
subsidiaries in ACAC and Warrantech. In 2009, the Company classified its
proportionate share of earnings from its investment in Warrantech in investment
income and realized gains and was allocated to the Company’s operating segments.
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 deferred acquisition cost, reinsurance recoverable, goodwill and
intangible assets 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.
Ceding commission revenue is allocated to each segment based on that segment’s
proportionate share of the Company’s overall acquisition costs. Interest expense
is allocated based on net written premium by segment. Income taxes are allocated
on a pro rata basis based on the Company’s effective tax rate. Additionally,
management reviews the performance of underwriting income in assessing the
performance of and making decisions regarding the allocation of resources to the
segments. Underwriting income excludes, primarily, service and fee revenue,
investment income and other revenues, other expenses, interest expense and
income taxes. Management believes that providing this information in this manner
is essential to providing Company’s shareholders with an understanding of the
Company’s business and operating performance. The following tables summarize
business segments for the three and six months ended June 30, 2010 and
2009.


25





(Amounts
      in thousands)
                                  
                                  Small
                                    Commercial
                                    Business
                                  
                                  
                                  Specialty Risk
                                    and Extended
                                    Warranty
                                  
                                  
                                  Specialty
                                    Program
                                  
                                  
                                  Personal
                                    Lines
                                    Reinsurance
                                  
                                  
                                  Corporate
                                    and Other
                                  
                                  
                                  TotalThree
      months ended June 30, 2010:Gross
      written premium
                                  
                                  $
                                  107,600
                                  
                                  
                                  $
                                  197,470
                                  
                                  
                                  $
                                  77,712
                                  
                                  
                                  $
                                  25,860
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  408,642Net
      written premium
                                  
                                  
                                  56,052
                                  
                                  
                                  
                                  74,216
                                  
                                  
                                  
                                  40,266
                                  
                                  
                                  
                                  25,860
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  196,394Change
      in unearned premium
                                  
                                  
                                  9,208
                                  
                                  
                                  
                                  12,371
                                  
                                  
                                  
                                  (5,205
                                  )
                                  
                                  
                                  (16,507
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (133
                                  )Net
      earned premium
                                  
                                  
                                  65,260
                                  
                                  
                                  
                                  86,587
                                  
                                  
                                  
                                  35,061
                                  
                                  
                                  
                                  9,353
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  196,261Ceding
      commission - primarily related party
                                  
                                  
                                  12,954
                                  
                                  
                                  
                                  12,927
                                  
                                  
                                  
                                  7,077
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  32,958Loss
      and loss adjustment expense
                                  
                                  
                                  (39,347
                                  )
                                  
                                  
                                  (54,064
                                  )
                                  
                                  
                                  (22,253
                                  )
                                  
                                  
                                  (5,846
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (121,510
                                  )Acquisition
      costs and other underwriting expenses
                                  
                                  
                                  (30,541
                                  )
                                  
                                  
                                  (29,338
                                  )
                                  
                                  
                                  (16,660
                                  )
                                  
                                  
                                  (3,040
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (79,579
                                  )(69,888
                                  )
                                  
                                  
                                  (83,402
                                  )
                                  
                                  
                                  (38,913
                                  )
                                  
                                  
                                  (8,886
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (201,089
                                  )Underwriting
      income
                                  
                                  
                                  8,326
                                  
                                  
                                  
                                  16,112
                                  
                                  
                                  
                                  3,225
                                  
                                  
                                  
                                  467
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  28,130Service
      and fee income
                                  
                                  
                                  2,978
                                  
                                  
                                  
                                  3,261
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  2,882
                                  
                                  
                                  
                                  9,121Investment
      income and realized gain (loss)
                                  
                                  
                                  3,096
                                  
                                  
                                  
                                  2,584
                                  
                                  
                                  
                                  1,873
                                  
                                  
                                  
                                  589
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  8,142Other
      expenses
                                  
                                  
                                  (2,933
                                  )
                                  
                                  
                                  (3,736
                                  )
                                  
                                  
                                  (1,967
                                  )
                                  
                                  
                                  (700
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (9,336
                                  )Interest
      expense
                                  
                                  
                                  (928
                                  )
                                  
                                  
                                  (1,174
                                  )
                                  
                                  
                                  (689
                                  )
                                  
                                  
                                  (272
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (3,063
                                  )Foreign
      currency loss
                                  
                                  
                                  —
                                  
                                  
                                  
                                  755
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  755Provision
      for income taxes
                                  
                                  
                                  (2,737
                                  )
                                  
                                  
                                  (4,692
                                  )
                                  
                                  
                                  (627
                                  )
                                  
                                  
                                  (23
                                  )
                                  
                                  
                                  (760
                                  )
                                  
                                  
                                  (8,839
                                  )Equity
      in earnings of unconsolidated subsidiaries – related party
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  5,913
                                  
                                  
                                  
                                  5,913Net
      income
                                  
                                  $
                                  7,802
                                  
                                  
                                  $
                                  13,110
                                  
                                  
                                  $
                                  1,815
                                  
                                  
                                  $
                                  61
                                  
                                  
                                  $
                                  8,035
                                  
                                  
                                  
                                  30,823





(Amounts in thousands)
                    
                    Small
                      Commercial
                      Business
                    
                    
                    Specialty Risk
                      and Extended
                      Warranty
                    
                    
                    Specialty
                      Program
                    
                    
                    Corporate
                      and Other
                    
                    
                    TotalThree
      months ended June 30, 2009:Gross
      written premium
                    
                    $
                    109,141
                    
                    
                    $
                    92,635
                    
                    
                    $
                    68,453
                    
                    
                    $
                    —
                    
                    
                    $
                    270,229Net
      Written Premium
                    
                    
                    54,332
                    
                    
                    
                    47,254
                    
                    
                    
                    35,534
                    
                    
                    
                    —
                    
                    
                    
                    137,120Change
      in unearned premium
                    
                    
                    7,165
                    
                    
                    
                    (3,310
                    )
                    
                    
                    (4,172
                    )
                    
                    
                    —
                    
                    
                    
                    (317)Net
      Earned Premium
                    
                    
                    61,497
                    
                    
                    
                    43,944
                    
                    
                    
                    31,362
                    
                    
                    
                    —
                    
                    
                    
                    136,803Ceding
      commission – primarily related party
                    
                    
                    17,091
                    
                    
                    
                    6,175
                    
                    
                    
                    9,012
                    
                    
                    
                    —
                    
                    
                    
                    32,278Loss
      and loss adjustment expense
                    
                    
                    (37,090
                    )
                    
                    
                    (19,525
                    )
                    
                    
                    (19,970
                    )
                    
                    
                    —
                    
                    
                    
                    (76,585
                    )Acquisition
      costs and other underwriting expenses
                    
                    
                    (34,105
                    )
                    
                    
                    (12,314
                    )
                    
                    
                    (18,168
                    )
                    
                    
                    —
                    
                    
                    
                    (64,587
                    )(71,195
                    )
                    
                    
                    (31,839
                    )
                    
                    
                    (38,138
                    )
                    
                    
                    —
                    
                    
                    
                    (141,172
                    )Underwriting
      income
                    
                    
                    7,393
                    
                    
                    
                    18,280
                    
                    
                    
                    2,236
                    
                    
                    
                    —
                    
                    
                    
                    27,909Service
      and fee income
                    
                    
                    3,207
                    
                    
                    
                    2,547
                    
                    
                    
                    —
                    
                    
                    
                    1,853
                    
                    
                    
                    7,607Investment
      income and realized gain (loss)
                    
                    
                    3,081
                    
                    
                    
                    1,722
                    
                    
                    
                    1,288
                    
                    
                    
                    —
                    
                    
                    
                    6,091Other
      expense
                    
                    
                    (2,356
                    )
                    
                    
                    (1,974
                    )
                    
                    
                    (1,444
                    )
                    
                    
                    —
                    
                    
                    
                    (5,774
                    )Interest
      expense
                    
                    
                    (1,604
                    )
                    
                    
                    (1,390
                    )
                    
                    
                    (1,013
                    )
                    
                    
                    —
                    
                    
                    
                    (4,007
                    )Foreign
      currency gain
                    
                    
                    —
                    
                    
                    
                    611
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    611Provision
      for income taxes
                    
                    
                    (1,644
                    )
                    
                    
                    (3,310
                    )
                    
                    
                    (188
                    )
                    
                    
                    (307
                    )
                    
                    
                    (5,449
                    )Equity
      in earnings of unconsolidated subsidiary – related party
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (217
                    )
                    
                    
                    (217
                    )Net
      income
                    
                    $
                    8,077
                    
                    
                    $
                    16,486
                    
                    
                    $
                    879
                    
                    
                    $
                    1,329
                    
                    
                    $
                    26,771


26





(Amounts in thousands)
                                  
                                  Small
                                    Commercial
                                    Business
                                  
                                  
                                  Specialty Risk
                                    and Extended
                                    Warranty
                                  
                                  
                                  Specialty
                                    Program
                                  
                                  
                                  Personal
                                    Lines
                                    Reinsurance
                                  
                                  
                                  Corporate
                                    and Other
                                  
                                  
                                  TotalSix
      months ended June 30, 2010:Gross
      written premium
                                  
                                  $
                                  230,302
                                  
                                  
                                  $
                                  349,644
                                  
                                  
                                  $
                                  132,367
                                  
                                  
                                  $
                                  34,560
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  746,873Net
      written premium
                                  
                                  
                                  117,490
                                  
                                  
                                  
                                  160,265
                                  
                                  
                                  
                                  73,493
                                  
                                  
                                  
                                  34,560
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  385,808Change
      in unearned premium
                                  
                                  
                                  7,374
                                  
                                  
                                  
                                  (21,914
                                  )
                                  
                                  
                                  (1,700
                                  )
                                  
                                  
                                  (25,207
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (41,447
                                  )Net
      earned premium
                                  
                                  
                                  124,864
                                  
                                  
                                  
                                  138,351
                                  
                                  
                                  
                                  71,793
                                  
                                  
                                  
                                  9,353
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  344,361Ceding
      commission - primarily related party
                                  
                                  
                                  34,180
                                  
                                  
                                  
                                  20,830
                                  
                                  
                                  
                                  10,196
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  65,206Loss
      and loss adjustment expense
                                  
                                  
                                  (74,435
                                  )
                                  
                                  
                                  (85,224
                                  )
                                  
                                  
                                  (45,826
                                  )
                                  
                                  
                                  (5,846
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (211,331
                                  )Acquisition
      costs and other underwriting expenses
                                  
                                  
                                  (64,722
                                  )
                                  
                                  
                                  (44,049
                                  )
                                  
                                  
                                  (29,114
                                  )
                                  
                                  
                                  (3,040
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (140,925
                                  )(139,157
                                  )
                                  
                                  
                                  (129,273
                                  )
                                  
                                  
                                  (74,940
                                  )
                                  
                                  
                                  8,886
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (352,256
                                  )Underwriting
      income
                                  
                                  
                                  19,887
                                  
                                  
                                  
                                  29,908
                                  
                                  
                                  
                                  7,049
                                  
                                  
                                  
                                  467
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  57,311Service
      and fee income
                                  
                                  
                                  5,552
                                  
                                  
                                  
                                  5,987
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  5,548
                                  
                                  
                                  
                                  17,087Investment
      income and realized gain (loss)
                                  
                                  
                                  9,752
                                  
                                  
                                  
                                  7,867
                                  
                                  
                                  
                                  5,102
                                  
                                  
                                  
                                  805
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  23,526Other
      expenses
                                  
                                  
                                  (5,125
                                  )
                                  
                                  
                                  (6,583
                                  )
                                  
                                  
                                  (2,983
                                  )
                                  
                                  
                                  (879
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (15,570
                                  )Interest
      expense
                                  
                                  
                                  (2,185
                                  )
                                  
                                  
                                  (2,805
                                  )
                                  
                                  
                                  (1,271
                                  )
                                  
                                  
                                  (374
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (6,635
                                  )Foreign
      currency loss
                                  
                                  
                                  —
                                  
                                  
                                  
                                  38
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  38Provision
      for income taxes
                                  
                                  
                                  (8,835
                                  )
                                  
                                  
                                  (10,905
                                  )
                                  
                                  
                                  (2,503
                                  )
                                  
                                  
                                  (6
                                  )
                                  
                                  
                                  (1,758
                                  )
                                  
                                  
                                  (24,007
                                  )Equity
      in earnings of unconsolidated subsidiaries – related party
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  17,773
                                  
                                  
                                  
                                  17,773Net
      income
                                  
                                  $
                                  19,046
                                  
                                  
                                  $
                                  23,507
                                  
                                  
                                  $
                                  5,394
                                  
                                  
                                  $
                                  13
                                  
                                  
                                  $
                                  21,563
                                  
                                  
                                  
                                  69,523





(Amounts
      in thousands)
                        
                        Small
                          Commercial
                          Business
                        
                        
                        Specialty
      Risk
                          and
      Extended
                          Warranty
                        
                        
                        Specialty
                          Program
                        
                        
                        Corporate
      and
                          Other
                        
                        
                        TotalSix
      months ended June 30, 2009:Gross
      written premium
                        
                        $
                        236,611
                        
                        
                        $
                        175,343
                        
                        
                        $
                        125,802
                        
                        
                        $
                        —
                        
                        
                        $
                        537,756Net
      Written Premium
                        
                        
                        124,791
                        
                        
                        
                        85,513
                        
                        
                        
                        62,995
                        
                        
                        
                        —
                        
                        
                        
                        273,299Change
      in unearned premium
                        
                        
                        (5,203
                        )
                        
                        
                        (894
                        )
                        
                        
                        2,024
                        
                        
                        
                        —
                        
                        
                        
                        (4,073
                        )Net
      Earned Premium
                        
                        
                        119,588
                        
                        
                        
                        84,619
                        
                        
                        
                        65,019
                        
                        
                        
                        —
                        
                        
                        
                        269,226Ceding
      commission – primarily related party
                        
                        
                        36,867
                        
                        
                        
                        12,202
                        
                        
                        
                        10,800
                        
                        
                        
                        —
                        
                        
                        
                        59,869Loss
      and loss adjustment expense
                        
                        
                        (72,484
                        )
                        
                        
                        (37,343
                        )
                        
                        
                        (41,673
                        )
                        
                        
                        —
                        
                        
                        
                        (151,500
                        )Acquisition
      costs and other underwriting expenses
                        
                        
                        (68,259
                        )
                        
                        
                        (25,017
                        )
                        
                        
                        (29,465
                        )
                        
                        
                        —
                        
                        
                        
                        (122,741
                        )(140,743
                        )
                        
                        
                        (62,360
                        )
                        
                        
                        (71,138
                        )
                        
                        
                        —
                        
                        
                        
                        (274,241
                        )Underwriting
      income
                        
                        
                        15,712
                        
                        
                        
                        34,461
                        
                        
                        
                        4,681
                        
                        
                        
                        —
                        
                        
                        
                        54,854Service
      and fee income
                        
                        
                        6,696
                        
                        
                        
                        4,685
                        
                        
                        
                        —
                        
                        
                        
                        3,680
                        
                        
                        
                        15,061Investment
      income and realized gain (loss)
                        
                        
                        5,449
                        
                        
                        
                        3,186
                        
                        
                        
                        2,208
                        
                        
                        
                        —
                        
                        
                        
                        10,843Other
      expenses
                        
                        
                        (5,017
                        )
                        
                        
                        (3,401
                        )
                        
                        
                        (2,550
                        )
                        
                        
                        —
                        
                        
                        
                        (10,968
                        )Interest
      expense
                        
                        
                        (3,741
                        )
                        
                        
                        (2,536
                        )
                        
                        
                        (1,901
                        )
                        
                        
                        —
                        
                        
                        
                        (8,178
                        )Foreign
      currency gain
                        
                        
                        —
                        
                        
                        
                        644
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        644Provision
      for income taxes
                        
                        
                        (3,284
                        )
                        
                        
                        (6,368
                        )
                        
                        
                        (419
                        )
                        
                        
                        (633
                        )
                        
                        
                        (10,704
                        )Equity
      in earnings of unconsolidated subsidiary – related party
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (619
                        )
                        
                        
                        (619
                        )Net
      income
                        
                        $
                        15,815
                        
                        
                        $
                        30,671
                        
                        
                        $
                        2,019
                        
                        
                        $
                        2,428
                        
                        
                        $
                        50,933


27





The following tables summarize business
segments as follows as of June 30, 2010 and December 31, 2009:





(Amounts in thousands)
                    
                    Small
                      Commercial
                      Business
                    
                    
                    Specialty Risk
                      and Extended
                      Warranty
                    
                    
                    Specialty
                      Program
                    
                    
                    Personal Lines
                      Reinsurance
                    
                    
                    Corporate and
                      other
                    
                    
                    TotalAs of June 30, 2010:Fixed
      assets
                    
                    $
                    4,910
                    
                    
                    $
                    6,306
                    
                    
                    $
                    2,858
                    
                    
                    $
                    842
                    
                    
                    $
                    —
                    
                    
                    $
                    14,916Goodwill
      and intangible assets
                    
                    
                    79,280
                    
                    
                    
                    31,052
                    
                    
                    
                    15,373
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    125,705Total
      assets
                    
                    
                    1,539,274
                    
                    
                    
                    1,444,575
                    
                    
                    
                    711,917
                    
                    
                    
                    106,816
                    
                    
                    
                    —
                    
                    
                    
                    3,802,582As of December 31, 2009:Fixed
      assets
                    
                    $
                    6,471
                    
                    
                    $
                    5,788
                    
                    
                    $
                    3,599
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    15,858Goodwill
      and intangible assets
                    
                    
                    80,849
                    
                    
                    
                    19,319
                    
                    
                    
                    15,660
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    115,828Total
      assets
                    
                    
                    1,582,247
                    
                    
                    
                    1,001,347
                    
                    
                    
                    816,770
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,400,364





The following table summarizes the
unconsolidated ACAC equity method investment results of operations for the three
and six months ended June 30, 2010:





(Amounts in thousands)
                  
                  Three Months Ended
                    June 30, 2010
                  
                  
                  Six Months Ended
                    June 30, 2010Gross
      written premium
                  
                  $
                  263,019
                  
                  
                  
                  367,129Net
      earned premium
                  
                  
                  195,816
                  
                  
                  
                  278,455Income
      from continuing operations
                  
                  
                  29,633
                  
                  
                  
                  39,853Net
      income
                  
                  
                  29,633
                  
                  
                  
                  89,030




28




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





The following discussion and analysis
of our financial condition and results of operations should be read in
conjunction with our condensed consolidated financial statements and related
notes included elsewhere in this Form 10-Q.





Note
on Forward-Looking Statements





This Form 10-Q contains certain
forward-looking statements within the meaning of Private Securities Litigation
Reform Act of 1995 that are intended to be covered by the safe harbors created
thereby. When we use words such as “anticipate,” “intend,” “plan,” “believe,”
“estimate,” “expect,” or similar expressions, we do so to identify
forward-looking statements. Examples of forward-looking statements include the
plans and objectives of management for future operations, including plans and
objectives relating to future growth of our business activities and availability
of funds. The forward-looking statements included herein are based on current
expectations that involve assumptions relating 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 our control.
There can be no assurance that actual developments will be those anticipated by
us. Actual results may differ materially from those projected as a result of
significant risks and uncertainties, including, but not limited to, non-receipt
of expected payments, changes in interest rates, effect of the performance of
financial markets on investment income and fair values of investments,
development of claims and the effect on loss reserves, accuracy in projecting
loss reserves, the impact of competition and pricing environments, changes in
the demand for our products, the effect of general economic conditions, adverse
state and federal legislation, regulations and regulatory investigations into
industry practices, developments relating to existing agreements, heightened
competition, changes in pricing environments, and changes in asset valuations.
Additional information about these risks and uncertainties, as well as others
that may cause actual results to differ materially from those projected, is
contained in our filings with the SEC, including our Annual Report on Form 10-K
for the period ended December 31, 2009, and our quarterly reports on Form 10-Q .
The projections and statements in this report speak only as of the date of this
report, and we undertake no obligation to update or revise any forward-looking
statement, whether as a result of new information, future developments or
otherwise, except as may be required by law.





Overview





We are 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 that we believe are predictable. We
target lines of insurance that we believe are underserved by the market
generally. We have grown by hiring teams of underwriters with expertise in our
specialty lines and acquiring companies and assets that, in each case, provide
access to distribution networks and renewal rights to established books of
specialty insurance business. We have operations in four business
segments:





·
            Small Commercial Business. We
      provide workers’ compensation, commercial package and other commercial
      insurance lines produced by wholesale agents, retail agents and brokers in
      the United States.





·
            Specialty Risk and Extended
      Warranty. We provide coverage for consumer and commercial goods and custom
      designed coverages, such as accidental damage plans and payment protection
      plans offered in connection with the sale of consumer and commercial
      goods, in the United States and Europe, and certain niche property,
      casualty and specialty liability risks in the United States and Europe,
      including general liability, employers’ liability and professional and
      medical liability.





·
            Specialty Program. 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.


29





·
            Personal Lines Reinsurance. We
      reinsure 10% of the net premiums of the GMAC Business, pursuant to the
      Personal Lines Quota Share with the GMAC Insurers. See discussion below
      related to ACAC investment.





We transact business primarily through
eleven insurance company subsidiaries:





Company
                    
                    A.M.
                      Best Rated
                    
                    Coverage Type Offered
                    
                    Coverage
                      Market
                    
                    DomiciledTechnology
      Insurance Company, Inc. (“TIC”)
                    
                    A
      (Excellent)
                    
                    Small
      commercial, middle market property & casualty, specialty risk &
      extended warranty and reinsurance for GMAC
                    
                    United
      States
                    
                    New
      HampshireRochdale
      Insurance
                      Company
      (“RIC”)
                    
                    A
      (Excellent)
                    
                    Small
      commercial, middle market property & casualty and specialty risk &
      extended warranty
                    
                    United
      States
                    
                    New
      YorkWesco
      Insurance Company (“WIC”)
                    
                    A
      (Excellent)
                    
                    Small
      commercial, middle market property & casualty and specialty risk &
      extended warranty
                    
                    United
      States
                    
                    DelawareAssociated
      Industries Insurance Company, Inc. (“AIIC”)
                    
                    Unrated
                    
                    Workers’
      compensation
                    
                    United
      States
                    
                    FloridaMilwaukee
      Casualty Insurance Company (“MCIC”)
                    
                    A
      (Excellent)
                    
                    Small
      Commercial Business
                    
                    United
      States
                    
                    WisconsinSecurity
      National Insurance Company (“SNIC”)
                    
                    A
      (Excellent)
                    
                    Small
      Commercial Business
                    
                    United
      States
                    
                    TexasAmTrust
      Insurance Company of Kansas, Inc. (“AICK”)
                    
                    A
      (Excellent)
                    
                    Small
      Commercial Business
                    
                    United
      States
                    
                    KansasAmTrust
      Lloyd’s Insurance Company of Texas (“ALICT”) (formerly Trinity Lloyd’s
      Insurance Company)
                    
                    A
      (Excellent)
                    
                    Small
      Commercial Business
                    
                    United
      States
                    
                    TexasAmTrust
      International Underwriters Limited (“AIU”)
                    
                    A
      (Excellent)
                    
                    Specialty
      Risk and Extended Warranty
                    
                    EuropeanUnion
                    
                    IrelandAmTrust
      Europe, Ltd. (“AEL”) (formerly IGI Insurance Company,
Ltd.)
                    
                    A
      (Excellent)
                    
                    Specialty
      Risk and Extended Warranty
                    
                    EuropeanUnion
                    
                    EnglandAmTrust
      International Insurance Ltd. (“AII”)
                    
                    A
      (Excellent)
                    
                    Reinsurance
      for consolidated subsidiaries
                    
                    United
      States
                      and
      European
                      Union
                    
                    Bermuda





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 summary provides further explanation of the key
measures that we use to evaluate our results:


30


Gross Written Premium. Gross
written premium represents estimated premiums from each insurance policy that we
write, including as part of an assigned risk plan, during a reporting period
based on the effective date of the individual policy. Certain policies that we
underwrite 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 Written Premium. Net
written premium is gross written premium 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 agreements.





Net Earned Premium. Net
earned premium is the earned portion of our net written premiums. 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, 2010 for an
employer with a constant payroll during the term of the policy, we would earn
half of the premiums in 2010 and the other half in 2011. 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 35 months, but range in duration from one month to 120
months.





Ceding Commission. Ceding
commission is a commission we receive from ceding gross written premium to third
party reinsurers. In connection with the Maiden Quota Share, which is our
primary source of ceding commission, the amount we receive is a blended rate
based on a contractual formula contained in the individual reinsurance
agreements, and the rate may not correlate specifically to the cost structure of
our individual segments. As such, we allocate earned ceding commissions to our
segments based on each segment’s proportionate share of total acquisition costs
and other underwriting expenses recognized during the period.




Loss and Loss Adjustment Expenses
Incurred. Loss and loss adjustment expenses (“LAE”) incurred represent
our largest expense item and, for any given reporting period, include estimates
of future claim payments, changes in those estimates from prior reporting
periods and costs associated with investigating, defending and servicing claims.
These expenses fluctuate based on the amount and types of risks we insure. We
record loss and loss adjustment expenses related to estimates of future claim
payments based on case-by-case valuations and statistical analyses. We seek to
establish all reserves at the most likely ultimate exposure based on our
historical claims experience. It is typical for our more serious bodily injury
claims to take several years to settle, and we revise our estimates as we
receive additional information about the condition of injured employees and
claimants and the costs of their medical treatment. Our ability to estimate loss
and loss adjustment expenses accurately at the time of pricing our insurance
policies is a critical factor in our profitability.





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 loss
adjustment expense incurred to net premiums earned.





Net Expense Ratio. The net
expense ratio is a measure of an insurance company's operational efficiency in
administering its business. Expressed as a percentage, this is the ratio of the
sum of acquisition costs and other underwriting expenses less ceding commission
to net premiums earned. As we allocate certain acquisition costs and other
underwriting expenses based on premium volume to our segments, net loss ratio on
a segment basis may be impacted period over period by a shift in the mix of net
written premium.





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.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income). Underwriting income is
a measure of an insurance company’s overall operating profitability before items
such as investment income, interest expense and income taxes.


31





Net Investment Income and Realized
Gains and (Losses). We invest our statutory surplus funds and the funds
supporting our insurance liabilities primarily in cash and cash equivalents,
fixed maturity and equity securities. Our net investment income includes
interest and dividends earned on our invested assets. Net realized gains and
losses on our investments are reported separately from our net investment
income. Net realized gains occur when our investment securities are sold for
more than their costs or amortized costs, as applicable. Net realized losses
occur when our investment securities are sold for less than their costs or
amortized costs, as applicable, or are written down as a result of
other-than-temporary impairment. We classify equity securities and our fixed
maturity securities as available-for-sale. Net unrealized gains (losses) on
those securities classified as available-for-sale are reported separately within
accumulated other comprehensive income on our balance sheet.





Annualized Return on Equity. Return on
equity is calculated by dividing net income 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 19.8% and 24.4% for the three months ended June 30,
2010 and 2009, respectively and 22.4% and 23.4% for the six months ended June
30, 2010 and 2009, 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 85.7% and 79.6% for the three months
ended June 30, 2010 and 2009, respectively and 83.4% and 79.6% for the six
months ended June 30, 2010 and 2009, respectively.





Critical
Accounting Policies





Our discussion and analysis of our
results of operations, financial condition and liquidity are based upon our
consolidated financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The preparation of these
financial statements requires us 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. We have 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, 2009.





Investment
in ACAC




During the three months ended March 31,
2010, we completed our strategic investment in American Capital Acquisition
Corporation (“ACAC”). We formed ACAC with Michael Karfunkel 2005 Grantor
Retained Annuity Trust (the “Trust”) for the purpose of acquiring from GMAC
Insurance Holdings, Inc. (“GMACI”) and Motor Insurance Corporation (“MIC”,
together with GMACI, “GMAC”) GMAC’s U.S. consumer property and casualty
insurance business. Michael Karfunkel, individually, and the Trust, which is
controlled by Michael Karfunkel, own 100% of ACAC’s common stock (subject to our
conversion rights described below). Michael Karfunkel isthe chairman of our
board of directors and the father-in-law of Barry D. Zyskind, our chief
executive officer. The ultimate beneficiaries of the Trust include Michael
Karfunkel’s children, one of whom is married to Mr. Zyskind. In addition,
Michael Karfunkel is the Chairman of the Board of Directors of
ACAC.




Pursuant to the Amended Stock Purchase
Agreement, ACAC issued and sold to us for an initial purchase price of $53
million, which was equal to 25% of the capital required by ACAC, 53,054 shares
of Series A Preferred Stock, which provides for an 8% cumulative dividend, and
is non-redeemable and convertible, at our option, into 21.25% of the issued and
outstanding Common Stock of ACAC (the “Preferred Stock”). We have pre-emptive
rights with respect to any future issuances of securities by ACAC and our
conversion rights are subject to customary anti-dilution protections. We have
the right to appoint two members of ACAC’s board of directors, which consists of
six members. Subject to certain limitations, the board of directors of ACAC may
not take any action in the absence of our appointees and ACAC may not take
certain corporate actions without the unanimous prior approval of its board of
directors (including our appointees). In accordance with ASC 323-10-15, Investments-Equity Method and Joint
Ventures, we account for our investment in ACAC under the equity method.
We recorded $6.1 million and $8.5 million of income during the three and six
months ended June 30, 2010 related to our equity investment in ACAC.
Additionally, ACAC completed a portion of its purchase accounting required under
ASC 805, Business
Combinations, related to its acquisition of GMAC during the three months
ended June 30, 2010. As a result, we recorded a retrospective gain on our equity
investment in ACAC of $10.4 million that is included in the income statement in
equity in earnings of unconsolidated subsidiaries. ACAC expects to finalize its
purchase price accounting by the end of 2010. Upon completion, we may be
required to adjust our investment in ACAC for additional purchase price
adjustments.


32





We, the Trust and Michael Karfunkel,
individually, each shall be required to make our, its or his proportional share
of the deferred payments payable by ACAC to GMAC pursuant to the GMAC Securities
Purchase Agreement, which are payable over a period of three years from the date
of the closing of the Acquisition, to the extent that ACAC is unable to
otherwise provide for such payments. Our proportionate share of such deferred
payments shall not exceed $22.5 million.





Results
of Operations





Consolidated
Results of Operations (Unaudited)




Three Months Ended June 30,
                    
                    
                    Six Months Ended June 30,(Amounts in thousands)
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Gross
      written premium
                    
                    $
                    408,642
                    
                    
                    $
                    270,229
                    
                    
                    $
                    746,873
                    
                    
                    $
                    537,756Net
      written premium
                    
                    $
                    196,394
                    
                    
                    $
                    137,120
                    
                    
                    $
                    385,808
                    
                    
                    $
                    273,299Change
      in unearned premium
                    
                    
                    (133
                    )
                    
                    
                    (317
                    )
                    
                    
                    (41,447
                    )
                    
                    
                    (4,073
                    )Net
      earned premium
                    
                    
                    196,261
                    
                    
                    
                    136,803
                    
                    
                    
                    344,361
                    
                    
                    
                    269,226Ceding
      commission – primarily related party
                    
                    
                    32,958
                    
                    
                    
                    32,278
                    
                    
                    
                    65,206
                    
                    
                    
                    59,869Service
      and fee income
                    
                    
                    6,241
                    
                    
                    
                    5,711
                    
                    
                    
                    11,539
                    
                    
                    
                    11,282Service
      and fee income – related parties
                    
                    
                    2,880
                    
                    
                    
                    1,896
                    
                    
                    
                    5,548
                    
                    
                    
                    3,779Net
      investment income
                    
                    
                    14,686
                    
                    
                    
                    13,799
                    
                    
                    
                    28,285
                    
                    
                    
                    27,790Net
      realized loss on investments
                    
                    
                    (6,544
                    )
                    
                    
                    (7,709
                    )
                    
                    
                    (4,759
                    )
                    
                    
                    (16,947
                    )Total
      revenues
                    
                    
                    246,482
                    
                    
                    
                    182,778
                    
                    
                    
                    450,180
                    
                    
                    
                    354,999Loss
      and loss adjustment expense
                    
                    
                    121,510
                    
                    
                    
                    76,585
                    
                    
                    
                    211,331
                    
                    
                    
                    151,500Acquisition
      costs and other underwriting expenses
                    
                    
                    79,579
                    
                    
                    
                    64,587
                    
                    
                    
                    140,925
                    
                    
                    
                    122,741Other
                    
                    
                    9,336
                    
                    
                    
                    5,774
                    
                    
                    
                    15,570
                    
                    
                    
                    10,968Total
      expenses
                    
                    
                    210,425
                    
                    
                    
                    146,946
                    
                    
                    
                    367,826
                    
                    
                    
                    285,209Income
      before other income (expense), income taxes and equity earnings (loss) of
      unconsolidated subsidiaries
                    
                    
                    36,057
                    
                    
                    
                    35,832
                    
                    
                    
                    82,354
                    
                    
                    
                    69,790Other
      income (expense):Foreign
      currency gain
                    
                    
                    755
                    
                    
                    
                    611
                    
                    
                    
                    38
                    
                    
                    
                    644Interest
      expense
                    
                    
                    (3,063
                    )
                    
                    
                    (4,007
                    )
                    
                    
                    (6,635
                    )
                    
                    
                    (8,178
                    )Total
      other expense
                    
                    
                    (2,308
                    )
                    
                    
                    (3,396
                    )
                    
                    
                    (6,597
                    )
                    
                    
                    (7,534
                    )Income
      before other income (expense), income taxes and equity earnings
      (loss) of unconsolidated subsidiaries
                    
                    
                    33,749
                    
                    
                    
                    32,436
                    
                    
                    
                    75,757
                    
                    
                    
                    62,256Provision
      for income taxes
                    
                    
                    8,839
                    
                    
                    
                    5,448
                    
                    
                    
                    24,007
                    
                    
                    
                    10,704Income
      before equity in earnings (loss) of unconsolidated
      subsidiaries
                    
                    
                    24,910
                    
                    
                    
                    26,988
                    
                    
                    
                    51,750
                    
                    
                    
                    51,552Equity
      in earnings (loss) of unconsolidated subsidiaries – related
      party
                    
                    
                    5,913
                    
                    
                    
                    (217
                    )
                    
                    
                    17,773
                    
                    
                    
                    (619
                    )Net
      income
                    
                    
                    30,823
                    
                    
                    
                    26,771
                    
                    
                    
                    69,523
                    
                    
                    
                    50,933Key
      Measures:Net
      loss ratio
                    
                    
                    61.9
                    %
                    
                    
                    56.0
                    %
                    
                    
                    61.4
                    %
                    
                    
                    56.3
                    %Net
      expense ratio
                    
                    
                    23.8
                    %
                    
                    
                    23.6
                    %
                    
                    
                    22.0
                    %
                    
                    
                    23.4
                    %Net
      combined ratio
                    
                    
                    85.7
                    %
                    
                    
                    79.6
                    %
                    
                    
                    83.4
                    %
                    
                    
                    79.6
                    %Net
      realized loss on investments:Total
      other-than-temporary impairment losses
                    
                    $
                    (12,007
                    )
                    
                    $
                    (10,786
                    )
                    
                    $
                    (17,145
                    )
                    
                    $
                    (12,213
                    )Portion
      of loss recognized in other comprehensive income
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Net
      impairment losses recognized in earnings
                    
                    
                    (12,007
                    )
                    
                    
                    (10,786
                    )
                    
                    
                    (17,145
                    )
                    
                    
                    (12,213
                    )Other
      net realized gain (loss) on investments
                    
                    
                    5,463
                    
                    
                    
                    3,077
                    
                    
                    
                    12,386
                    
                    
                    
                    (4,734
                    )Net
      realized investment loss
                    
                    $
                    (6,544
                    )
                    
                    $
                    (7,709
                    )
                    
                    $
                    (4,759
                    )
                    
                    $
                    (16,947
                    )


33





Consolidated
Result of Operations for the Three Months Ended June 30, 2010 and
2009





Gross Written Premium. Gross
written premium increased $138.3 million, or 51.2%, to $408.6 million from
$270.3 million for the three months ended June 30, 2010 and 2009, respectively.
The increase of $138.3 million was primarily attributable to growth in our
Specialty Risk and Extended Warranty segment of $108.4 million. The increase in
Specialty Risk and Extended Warranty business resulted primarily from new
program writings in the U.S. and Europe. Additionally, gross written premium
increased by $25.9 million in the three months ended June 30, 2010 from assumed
business from the GMAC Insurers.





Net Written Premium. Net
written premium increased $59.3 million, or 43.2%, to $196.4 million from $137.1
million for the three months ended June 30, 2010 and 2009, respectively. The
increase by segment was: Small Commercial Business - $1.8 million; Specialty
Risk and Extended Warranty - $27.0 million; Specialty Program - $4.6 million and
Personal Lines - $25.9 million. Net written premium increased during the three
months ended June 30, 2010 compared to the equivalent period in 2009 due to the
increase in gross written premium and higher retention of premium writings in
the three months ended June 30, 2010 compared to the same period in
2009.





Net Earned Premium. Net
earned premium increased $59.5 million, or 43.5%, to $196.3 million from $136.8
million for the three months ended June 30, 2010 and 2009. The increase by
segment, was: Small Commercial Business - $3.8 million; Specialty Risk and
Extended Warranty - $42.7 million; Specialty Program - $3.6 million and Personal
Lines - $9.4 million.





Ceding Commission. Ceding
commission represents commission earned primarily through the Maiden Quota Share
agreement with Maiden Insurance, whereby we receive a ceding commission of 31%
or 34.375%, based on the business ceded, on written premiums ceded to Maiden.
The ceding commission earned during the three months ended June 30, 2010 and
2009 was $33.0 million and $32.3 million, respectively. Ceding commission was
flat period over period, despite increased cessions to Maiden, based on an
increase in the percentage of business ceded at 31%.





Service and Fee Income. Service and fee
income increased $1.5 million, or 19.9%, to $9.1 million from $7.6 million for
the three months ended June 30, 2010 and 2009, respectively. The increase was
attributable primarily to an increase in administration fees from new warranty
business, higher asset management fees and reinsurance brokerage fees from
existing agreements with Maiden and asset management fees and IT consulting fees
through new agreements with ACAC and its affiliates, which were partially offset
by lower servicing carrier contract fees for state workers’ compensation
assigned risk plans.





Net Investment Income.Net
investment income increased $0.9 million, or 6.5%, to $14.7 million from $13.8
million for the three months ended June 30, 2010 and 2009, respectively. The
change period over period related primarily to an increase in the yields on our
fixed maturities to 4.2% from 4.1% in 2010 from 2009 resulting from a shift in
our mix of fixed maturities that reduced U.S. treasury securities and increased
corporate bonds during the second quarter of 2010.





Net Realized Gains (Losses) on
Investments. Net realized losses on investments for the three months
ended June 30, 2010 were $6.5 million, compared to net realized losses of $7.7
million for the same period in 2009. The improvement period over period related
to the continued recovery of our equity portfolio and the timing of certain
sales within our equity and fixed income portfolio. Additionally, we recorded
non-cash write-downs of $12.0 million and $10.8 million during the three months
ended June 30, 2010 and 2009, respectively, for securities that we determined to
be other-than-temporarily-impaired.


34


Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses increased $44.9 million, or
58.7%, to $121.5 million for the three months ended June 30, 2010 from $76.6
million for the three months ended June 30, 2009. Our loss ratio for the three
months ended June 30, 2010 and 2009 was 61.9% and 56.0%, respectively. The
increase in the loss ratio resulted primarily from the effect in 2009 of a
one-time $7.9 million benefit to the Specialty Risk and Extended Warranty
segment related to the 2009 acquisition of ACHL.




Acquisition Costs and Other
Underwriting Expenses; Expense Ratio. Acquisition costs and other
underwriting expenses increased $15.0 million, or 23.2%, to $79.6 million for
the three months ended June 30, 2010 from $64.6 million for the three months
ended June 30, 2009. The expense ratio, which remained flat period over period,
was 23.8% and 23.6% for the three months ended June 30, 2010 and 2009,
respectively.





Income Before Other Income
(Expense), Income Taxes and Equity Earnings of Unconsolidated
Subsidiaries. Income before other income (expense), income taxes and
equity earnings of unconsolidated subsidiaries increased $0.3 million, or 0.6%,
to $36.1 million from $35.8 million for the three months ended June 30, 2010 and
2009, respectively. The change in income from the three months ended June 30,
2009 to the same period in 2010 resulted primarily from higher net earned
premium and income from our investment portfolio offset by higher loss and loss
adjustment expense.





Interest Expense.Interest
expense for the three months ended June 30, 2010 was $3.1 million, compared to
$4.0 million for the same period in 2009. The decrease was attributable to lower
outstanding debt balances on our $40 million term loan and $30 million
promissory note.





Income Tax Expense (Benefit).Income tax expense for the three months ended June 30, 2010 was $8.8
million, which resulted in an effective tax rate of 22.3%. Income tax expense
for the three months ended June 30, 2009 was $5.4 million, which resulted in an
effective tax rate of 16.9%. The increase in our effective rate for the three
months ended June 30, 2010 resulted primarily from a one-time benefit in the
same period in 2009 related to the acquisition of ACHL in the first quarter of
2009.




Equity in Earnings of Unconsolidated
Subsidiaries - Related Party. Equity in earnings of unconsolidated
subsidiaries - related party increased by $6.1 million for the three months
ended June 30, 2010 to $5.9 million. The increase related to our equity
investment in 2010 in ACAC and our related proportionate share of equity income
in ACAC for the three months ended June 30, 2010. Additionally, we now include
our equity income (loss) from Warrantech in this line item. We previously
classified the equity earnings (loss) from Warrantech as a component of
investment income. This amount has been reclassified in all periods
presented.





Consolidated
Result of Operations for the Six Months Ended June 30, 2010 and
2009





Gross Written Premium. Gross
written premium increased $209.1 million, or 38.9%, to $746.9 million from
$537.8 million for the six months ended June 30, 2010 and 2009, respectively.
The increase of $209.1 million was primarily attributable to growth in our
Specialty Risk and Extended Warranty segment of $174.3 million. The increase in
Specialty Risk and Extended Warranty business resulted primarily from new
program writings in the U.S. and Europe. Additionally, gross written premium
increased by $34.6 million in the six months ended June 30, 2010 from assumed
business from ACAC.




Net Written Premium. Net
written premium increased $112.5 million, or 41.2%, to $385.8 million from
$273.3 million for the six months ended June 30, 2010 and 2009, respectively.
The increase (decrease), by segment, was: Small Commercial Business - $(7.3)
million; Specialty Risk and Extended Warranty - $74.8 million; Specialty Program
- $10.4 million and Personal Lines - $34.6 million. Net written premium
increased during the six months ended June 30, 2010 compared to the equivalent
period in 2009 due to the increase in gross written premium and higher retention
of premium writings in the six months ended June 30, 2010 compared to the
equivalent period in 2009.





Net Earned Premium. Net
earned premium increased $75.2 million, or 27.9%, to $344.4 million from $269.2
million for the six months ended June 30, 2010 and 2009, respectively. The
increase, by segment, was: Small Commercial Business - $5.3 million; Specialty
Risk and Extended Warranty - $53.8 million; Specialty Program - $6.7 million and
Personal Lines - $9.4 million.


35


Ceding Commission. Ceding
commission represents commission earned primarily through the Maiden Quota Share
agreement with Maiden Insurance, whereby we receive a ceding commission of 31%
or 34.375%, based on the business ceded, on written premiums ceded to Maiden.
The ceding commission earned during the six months ended June 30, 2010 and 2009
was $65.2 million and $59.9 million, respectively. Ceding commission increased
period over period as a result of increased premium writings, which were
partially offset by an increase in the percentage of business ceded at
31%.





Service and Fee Income. Service and fee
income increased $2.0 million, or 13.2%, to $17.1 million from $15.1 million for
the six months ended June 30, 2010 and 2009, respectively. The increase was
attributable primarily to an increase in administration fees from new warranty
business, higher asset management fees and reinsurance brokerage fees from
existing agreements with Maiden and asset management fees and IT consulting fees
through new agreements with ACAC and its affiliates, which were partially offset
by lower servicing carrier contract fees for state workers’ compensation
assigned risk plans.





Net Investment Income.Net
investment income increased $0.5 million, or 1.8%, to $28.3 million from $27.8
million for the six months ended June 30, 2010 and 2009, respectively. The
change period over period related primarily to a increase in the yields on our
fixed maturities to 4.1% in the six months ended June 30, 2010 from 4.0% in the
same period in 2009 resulting from a shift in our mix of fixed maturities that
reduced U.S. treasury securities and increased corporate bonds during the second
quarter of 2010.





Net Realized Gains (Losses) on
Investments. Net realized losses on investments for the six months ended
June 30, 2010 were $4.8 million, compared to net realized losses of $16.9
million for the same period in 2009. The decrease period over period related to
the continued recovery of our equity portfolio and the timing of certain sales
within our equity and fixed income portfolio. Additionally, we recorded non-cash
write-downs of $17.1 million and $12.2 million during the six months ended June
30, 2010 and 2009, respectively, for securities that we determined to be
other-than-temporarily-impaired.





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses increased $59.8 million, or
39.5%, to $211.3 million for the six months ended June 30, 2010 from $151.5
million for the six months ended June 30, 2009. Our loss ratio for the six
months ended June 30, 2010 and 2009 was 61.4% and 56.3%, respectively. The
increase in the loss ratio resulted primarily from the effect in 2009 of a
one-time $11.8 million benefit to the Specialty Risk and Extended Warranty
segment related to the 2009 acquisition of ACHL.





Acquisition Costs and Other
Underwriting Expenses; Expense Ratio. Acquisition costs and other
underwriting expenses increased $18.2 million, or 14.8%, to $140.9 million for
the six months ended June 30, 2010 from $122.7 million for the six months ended
June 30, 2009. The expense ratio decreased to 22.0% from 23.4% for the six
months ended June 30, 2010 and 2009, respectively. The decrease in the expense
ratio in 2010 resulted primarily from a decline in other underwriting expenses,
which resulted from a change in product mix.





Income Before Other Income
(Expense), Income Taxes and Equity Earnings of Unconsolidated
Subsidiaries. Income before other income (expense), income taxes and
equity earnings of unconsolidated subsidiaries increased $12.6 million, or
18.0%, to $82.4 million from $69.8 million for the six months ended June 30,
2010 and 2009, respectively. The increase related primarily to improvement in
the overall performance of our investment portfolio.





Interest Expense.Interest
expense for the six months ended June 30, 2010 was $6.6 million, compared to
$8.2 million for the same period in 2009. The decrease was attributable to lower
outstanding debt balances on our $40 million term loan and $30 million
promissory note.




Income Tax Expense
(Benefit).Income tax
expense for the six months ended June 30, 2010 was $24.0 million, which resulted
in an effective tax rate of 25.7%. Income tax expense for the six months ended
June 30, 2009 was $10.7 million, which resulted in an effective tax rate of
17.2%. The increase in our effective rate for the six months ended June 30, 2010
resulted primarily from a one-time benefit in 2009 related to the acquisition of
ACHL in the first quarter of 2009.





Equity in Earnings of Unconsolidated
Subsidiaries - Related Party. Equity in earnings of unconsolidated
subsidiaries - related parties increased by $18.4 million for the six months
ended June 30, 2010 to $17.8 million. The increase related to our equity
investment in 2010 in ACAC and our related proportionate share of equity income
in ACAC for the six months ended June 30, 2010 of $8.6 million and a
retrospective gain on investment in ACAC of $10.4 million. Additionally, we now
include our equity income (loss) from Warrantech in this line item. We
previously classified the equity earnings (loss) from Warrantech as a component
of investment income. This amount has been reclassified in all periods
presented.


36





Small Commercial Business Segment
(Unaudited)




Three Months Ended June 30,
                    
                    
                    Six Months Ended June 30,(Amounts in thousands)
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Gross
      written premium
                    
                    $
                    107,600
                    
                    
                    $
                    109,141
                    
                    
                    $
                    230,302
                    
                    
                    $
                    236,611Net
      written premium
                    
                    
                    56,052
                    
                    
                    
                    54,332
                    
                    
                    
                    117,490
                    
                    
                    
                    124,791Change
      in unearned premium
                    
                    
                    9,208
                    
                    
                    
                    7,165
                    
                    
                    
                    7,374
                    
                    
                    
                    (5,203
                    )Net
      earned premium
                    
                    
                    65,260
                    
                    
                    
                    61,497
                    
                    
                    
                    124,864
                    
                    
                    
                    119,588Ceding
      commission revenue – primarily related party
                    
                    
                    12,954
                    
                    
                    
                    17,091
                    
                    
                    
                    34,180
                    
                    
                    
                    36,867Loss
      and loss adjustment expense
                    
                    
                    39,347
                    
                    
                    
                    37,090
                    
                    
                    
                    74,435
                    
                    
                    
                    72,484Acquisition
      costs and other underwriting expenses
                    
                    
                    30,541
                    
                    
                    
                    34,105
                    
                    
                    
                    64,722
                    
                    
                    
                    68,25969,888
                    
                    
                    
                    71,195
                    
                    
                    
                    139,157
                    
                    
                    
                    140,743Net
      premiums earned less expenses included in combined ratio (Underwriting
      income)
                    
                    $
                    8,326
                    
                    
                    $
                    7,393
                    
                    
                    $
                    19,887
                    
                    
                    $
                    15,712Key
      Measures:Net
      loss ratio
                    
                    
                    60.3
                    %
                    
                    
                    60.3
                    %
                    
                    
                    59.6
                    %
                    
                    
                    60.6
                    %Net
      expense ratio
                    
                    
                    26.9
                    %
                    
                    
                    27.7
                    %
                    
                    
                    24.5
                    %
                    
                    
                    26.3
                    %Net
      combined ratio
                    
                    
                    87.2
                    %
                    
                    
                    88.0
                    %
                    
                    
                    84.1
                    %
                    
                    
                    86.9
                    %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                    
                    
                    30,541
                    
                    
                    
                    34,105
                    
                    
                    
                    64,722
                    
                    
                    
                    68,259Less:
      ceding commission revenue – primarily related party
                    
                    
                    12,954
                    
                    
                    
                    17,091
                    
                    
                    
                    34,180
                    
                    
                    
                    36,86717,587
                    
                    
                    
                    17,014
                    
                    
                    
                    30,542
                    
                    
                    
                    31,392Net
      earned premium
                    
                    
                    65,260
                    
                    
                    
                    61,497
                    
                    
                    
                    124,864
                    
                    
                    
                    119,588Net
      expense ratio
                    
                    
                    26.9
                    %
                    
                    
                    27.7
                    %
                    
                    
                    24.5
                    %
                    
                    
                    26.3
                    %





Small
Commercial Business Segment Results of Operations for the Three Months Ended
June 30, 2010 and 2009





Gross Written Premium. Gross
written premium decreased $1.5 million, or 1.4%, to $107.6 million for the three
months ended June 30, 2010 from $109.1 million for the three months ended June
30, 2009. The decrease in Small Commercial Business resulted primarily from our
continued reunderwriting of our commercial package business, a six percent
mandated rate reduction in the state of Florida’s workers’ compensation rates
and a decrease in assigned risk business. The decrease was partially offset by
additional gross written premium of $12.0 million in 2010 related to the
Cybercomp acquisition.





Net Written Premium. Net
written premium increased $1.8 million, or 3.2%, to $56.1 million for the three
months ended June 30, 2010 from $54.3 million for the three months ended June
30, 2009. The increase in net premium written resulted from a change in our
reinsurance programs by which we retain a higher percentage of our direct
premium writings as well as a decrease in assigned risk business that is ceded
100 percent to industry-mandated reinsurance pools.


37





Net Earned Premium. Net
earned premium increased $3.8 million, or 6.1%, to $65.3 million for the three
months ended June 30, 2010 from $61.5 million for the three months ended June
30, 2009. As premiums written earn ratably over a twelve month period, the
increase in net written premium resulted from higher net written premium for the
twelve months ended June 30, 2010 compared to the twelve months ended June 30,
2009.





Ceding Commission. Ceding
commission represents commission earned primarily through the Maiden Quota
Share, whereby we receive a ceding commission of 31% or 34.375%, based on the
business ceded, on written premiums ceded to Maiden. The ceding commission
earned during the three months ended June 30, 2010 and 2009 was $13.0 million
and $17.1 million, respectively. The decrease related to the allocation to this
segment of its proportionate share of our overall policy acquisition
expense.





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses increased $2.2 million, or
6.1%, to $39.3 million for the three months ended June 30, 2010 from $37.1
million for the three months ended June 30, 2009. Our loss ratio for the segment
for the three months ended June 30, 2010 and June 30, 2009 remained flat at
60.3%





Acquisition Costs and Other
Underwriting Expenses; Expense Ratio. Acquisition costs and other
underwriting expenses decreased $3.6 million, or 10.5%, to $30.5 million for the
three months ended June 30, 2010 from $34.1 million for the three months ended
June 30, 2009. The expense ratio decreased to 26.9% for the three months ended
June 30, 2010 from 27.7% for the three months ended June 30, 2009. The decrease
in expense ratio resulted primarily from a decrease in the segment’s
proportionate share of allocated salary expense during the three months ended
June 30, 2010.





Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income). Net premiums earned
less expenses included in combined ratio increased $0.9 million, or 12.6%, to
$8.3 million for the three months ended June 30, 2010 from $7.4 million for the
three months ended June 30, 2009. This increase resulted primarily from lower
acquisition costs and other underwriting expenses and ceding commission earned
during the three months ended June 30, 2010.





Small
Commercial Business Segment Results of Operations for the Six Months Ended June
30, 2010 and 2009





Gross Written Premium. Gross
written premium decreased $6.3 million, or 2.7%, to $230.3 million for the six
months ended June 30, 2010 from $236.6 million for the six months ended June 30,
2009. The decrease in Small Commercial Business resulted primarily from our
continued reunderwriting of our commercial package business, a six percent
mandated rate reduction in the state of Florida’s workers’ compensation rates
and a decrease in assigned risk business. The decrease was partially offset by
additional gross written premium of $37.6 million in the six months ended June
30, 2010 related to the Cybercomp acquisition.





Net Written Premium. Net
written premium decreased $7.3 million, or 5.9%, to $117.5 million from $124.8
million for the six months ended June 30, 2010 and 2009, respectively. The
decrease in net premium written resulted from a decrease of gross written
premium for the six months ended June 30, 2010 compared to gross written premium
for the six months ended June 30, 2009.





Net Earned Premium. Net
earned premium increased $5.3 million, or 4.4%, to $124.9 million for the six
months ended June 30, 2010 from $119.6 million for the six months ended June 30,
2009. As premiums written earn ratably over a twelve month period, the increase
in net written premium resulted from higher net written premium for the twelve
months ended June 30, 2010 compared to the twelve months ended June 30,
2009.





Ceding Commission. Ceding
commission represents commission earned primarily through the Maiden Quota
Share, whereby we receive a ceding commission of 31% or 34.375%, based on the
business ceded, on written premiums ceded to Maiden. The ceding commission
earned during the six months ended June 30, 2010 and 2009 was $34.2 million and
$36.9 million, respectively. The decrease related to the allocation to this
segment of its proportionate share of our overall policy acquisition
expense.


38





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses increased $1.9 million, or
2.7%, to $74.4 million for the six months ended June 30, 2010 from $72.5 million
for the six months ended June 30, 2009. Our loss ratio for the segment remained
flat for the six months ended June 30, 2010 and was 59.6% compared to 60.6% for
the six months ended June 30, 2009.





Acquisition Costs and Other
Underwriting Expenses; Expense Ratio. Acquisition costs and other
underwriting expenses decreased $3.6 million, or 5.2%, to $64.7 million for the
six months ended June 30, 2010 from $68.3 million for the six months ended June
30, 2009. The expense ratio decreased to 24.5% for the six months ended June 30,
2010 from 26.3% for the six months ended June 30, 2009. The decrease in expense
ratio resulted primarily from a decrease in the segment’s proportionate share of
allocated salary expense and other underwriting expenses during the six months
ended June 30, 2010.





Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income). Net premiums earned
less expenses included in combined ratio increased $4.2 million, or 26.6%, to
$19.9 million for the six months ended June 30, 2010 from $15.7 million for the
six months ended June 30, 2009. The increase resulted primarily from a decline
in policy acquisition costs and salary expense.





Specialty
Risk and Extended Warranty Segment (Unaudited)




Three Months Ended June 30,
                    
                    
                    Six Months Ended June 30,(Amounts in thousands)
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Gross
      written premium
                    
                    $
                    197,470
                    
                    
                    $
                    92,635
                    
                    
                    $
                    349,644
                    
                    
                    $
                    175,343Net
      written premium
                    
                    
                    74,216
                    
                    
                    
                    47,254
                    
                    
                    
                    160,265
                    
                    
                    
                    85,513Change
      in unearned premium
                    
                    
                    12,371
                    
                    
                    
                    (3,310
                    )
                    
                    
                    (21,914
                    )
                    
                    
                    (894
                    )Net
      premiums earned
                    
                    
                    86,587
                    
                    
                    
                    43,944
                    
                    
                    
                    138,351
                    
                    
                    
                    84,619Ceding
      commission revenue – primarily related party
                    
                    
                    12,927
                    
                    
                    
                    6,175
                    
                    
                    
                    20,830
                    
                    
                    
                    12,202Loss
      and loss adjustment expense
                    
                    
                    54,064
                    
                    
                    
                    19,525
                    
                    
                    
                    85,224
                    
                    
                    
                    37,343Acquisition
      costs and other underwriting expenses
                    
                    
                    29,338
                    
                    
                    
                    12,314
                    
                    
                    
                    44,049
                    
                    
                    
                    25,01783,402
                    
                    
                    
                    31,839
                    
                    
                    
                    129,273
                    
                    
                    
                    62,360Net
      premiums earned less expenses included in combined ratio (Underwriting
      income)
                    
                    $
                    16,112
                    
                    
                    $
                    18,280
                    
                    
                    $
                    29,908
                    
                    
                    $
                    34,461Key
      Measures:Net
      loss ratio
                    
                    
                    62.4
                    %
                    
                    
                    44.4
                    %
                    
                    
                    61.6
                    %
                    
                    
                    44.1
                    %Net
      expense ratio
                    
                    
                    19.0
                    %
                    
                    
                    14.0
                    %
                    
                    
                    16.8
                    %
                    
                    
                    15.1
                    %Net
      combined ratio
                    
                    
                    81.4
                    %
                    
                    
                    58.4
                    %
                    
                    
                    78.4
                    %
                    
                    
                    59.3
                    %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                    
                    
                    29,338
                    
                    
                    
                    12,314
                    
                    
                    
                    44,049
                    
                    
                    
                    25,017Less:
      ceding commission revenue – primarily related party
                    
                    
                    12,927
                    
                    
                    
                    6,175
                    
                    
                    
                    20,830
                    
                    
                    
                    12,20216,411
                    
                    
                    
                    6,139
                    
                    
                    
                    23,219
                    
                    
                    
                    12,815Net
      earned premium
                    
                    
                    86,587
                    
                    
                    
                    43,944
                    
                    
                    
                    138,351
                    
                    
                    
                    84,619Net
      expense ratio
                    
                    
                    19.0
                    %
                    
                    
                    14.0
                    %
                    
                    
                    16.8
                    %
                    
                    
                    15.1
                    %


39





Specialty Risk
and Extended Warranty Segment Results of Operations for the Three Months Ended
June 30, 2010 and 2009




Gross Written Premium. Gross
written premium increased $104.8 million, or 113.2%, to $197.4 million for the
three months ended June 30, 2010 from $92.6 million for the three months ended
June 30, 2009. The increase related primarily to the underwriting of new
coverage plans in the U.S. and Europe, as well as additional premiums from
growth in our European business related to general liability, employers’
liability and professional and medical liability generated by new underwriting
teams who joined us in 2009 and 2010. The segment also was affected from the
strengthening of the U.S. dollar in 2010, which negatively impacted the European
business by approximately $9 million.





Net Written Premium. Net
written premium increased $27.0 million, or 57.1%, to $74.3 million from $47.3
million for the three months ended June 30, 2010 and 2009, respectively. The
increase in net written premium resulted from an increase of gross written
premium for the six months ended June 30, 2010 compared to gross written premium
for the six months ended June 30, 2009.





Net Earned Premium. Net
earned premium increased $42.7 million, or 97.0%, to $86.6 million for the three
months ended June 30, 2010 from $43.9 million for the three months ended June
30, 2009. Because net written premium is earned over the term of the policy, the
growth in net written premium period over period resulted in an increase to net
earned premium.





Ceding Commission. Ceding
commission represents commission earned primarily through the Maiden Quota
Share, whereby we receive a ceding commission of 31% or 34.375%, based on the
business ceded, on written premiums ceded to Maiden. The ceding commission
earned during the three months ended June 30, 2010 and 2009 was $12.9 million
and $6.2 million, respectively. The increase related to the allocation to the
segment of its proportionate share of our overall policy acquisition
expense.





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses were $54.1 million and
$19.5 million for the three months ended June 30, 2010 and 2009, respectively.
Our loss ratio for the segment for the three months ended June 30, 2010
increased to 62.4% from 44.4% for the three months ended June 30, 2009. The
increase in the loss ratio resulted primarily from a one-time benefit of $7.9
million realized in 2009 related to the acquisition of ACHL in 2009. Absent the
one-time benefit, the loss ratio would have been 62.4% for the three months
ended June 30, 2009.




Acquisition Costs and Other
Underwriting Expenses; Expense Ratio. Acquisition costs and other
underwriting expenses increased $17.0 million, or 138%, to $29.3 million for the
three months ended June 30, 2010 from $12.3 million for the three months ended
June 30, 2009. The expense ratio increased to 19.0% for the three months ended
June 30, 2010 from 14.0% for the three months ended June 30, 2009. The increase
in the expense ratio resulted, primarily, from higher policy acquisition
expenses and allocated salary expense in the three months ended June 30, 2010
compared to the same period in 2009.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income). Net premiums earned
less expenses included in combined ratio decreased $2.2 million, or 11.9%, to
$16.1 million for the three months ended June 30, 2010 from $18.3 million for
the three months ended June 30, 2009. This decrease is attributable primarily to
the one-time benefit of $7.9 million realized in 2009 coupled with higher policy
acquisition expense and salary expense in 2010.





Specialty Risk
and Extended Warranty Segment Results of Operations for the Six Months Ended
June 30, 2010 and 2009





Gross Written Premium. Gross
written premium increased $174.3 million, or 99.4%, to $349.6 million for the
six months ended June 30, 2010 from $175.3 million for the six months ended June
30, 2009. The increase related primarily to the underwriting of new coverage
plans in the U.S. and Europe, as well as additional premiums from growth in our
European business related to general liability, employers’ liability and
professional and medical liability generated by new underwriting teams who
joined us in 2009 and 2010. The segment was also affected from the strengthening
of the U.S. dollar in 2010, which negatively impacted the European business by
approximately $2 million.


40




Net Written Premium. Net
written premium increased $74.8 million, or 87.4%, to $160.3 million from $85.5
million for the six months ended June 30, 2010 and 2009, respectively. The
increase in net written premium resulted from an increase of gross written
premium for the six months ended June 30, 2010 compared to gross written premium
for the six months ended June 30, 2009.





Net Earned Premium. Net
earned premium increased $53.8 million, or 63.5%, to $138.4 million for the six
months ended June 30, 2010 from $84.6 million for the six months ended June 30,
2009. Because net written premium is earned over the term of the policy, the
growth in net written premium period over period resulted in an increase to net
earned premium.





Ceding Commission. Ceding
commission represents commission earned primarily through the Maiden Quota
Share, whereby we receive a ceding commission of 31% or 34.375%, based on the
business ceded, on written premiums ceded to Maiden. The ceding commission
earned during the six months ended June 30, 2010 and 2009 was $20.8 million and
$12.2 million, respectively. The increase related to the allocation to this
segment of its proportionate share of our overall policy acquisition
expense.





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses were $85.2 million and
$37.3 million for the six months ended June 30, 2010 and 2009, respectively. Our
loss ratio for the segment for the six months ended June 30, 2010 increased to
61.6% from 44.1% for the six months ended June 30, 2009. The increase in the
loss ratio resulted primarily from a one-time benefit of $11.8 million in 2009,
which was recognized over the first half of 2009, related to the acquisition of
ACHL in 2009. Absent the one-time benefit, the loss ratio would have been 58.1%
for the six months ended June 30, 2009. The increase in the loss and loss
adjustment expense ratio in the six months ended June 30, 2009 resulted
primarily from changes in our actuarial estimates based on our loss
experience.





Acquisition Costs and Other
Underwriting Expenses; Expense Ratio. Acquisition costs and other
underwriting expenses increased $19.0 million, or 76%, to $44.0 million for the
six months ended June 30, 2010 from $25.0 million for the six months ended June
30, 2009. The expense ratio increased to 16.8% for the six months ended June 30,
2010 from 15.1% for the six months ended June 30, 2009. The increase in the
expense ratio resulted, primarily, from higher policy acquisition expenses and
allocated salary expense in the six months ended June 30, 2010 compared to the
same period in 2009.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income). Net premiums earned
less expenses included in combined ratio decreased $4.6 million, or 13.2%, to
$29.9 million for the six months ended June 30, 2010 from $34.5 million for the
six months ended June 30, 2009. This decrease is attributable primarily from a
one-time benefit of $11.8 million in 2009 related to the acquisition of
ACHL.


41





Specialty
Program Segment Results of Operations





Three Months Ended June 30,
                    
                    
                    Six Months Ended June 30,(Amounts in thousands)
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Gross
      written premium
                    
                    $
                    77,712
                    
                    
                    $
                    68,453
                    
                    
                    $
                    132,367
                    
                    
                    $
                    125,802Net
      written premium
                    
                    
                    40,266
                    
                    
                    
                    35,534
                    
                    
                    
                    73,493
                    
                    
                    
                    62,995Change
      in unearned premium
                    
                    
                    (5,205
                    )
                    
                    
                    (4,172
                    )
                    
                    
                    (1,700
                    )
                    
                    
                    2,024Net
      premiums earned
                    
                    
                    35,061
                    
                    
                    
                    31,362
                    
                    
                    
                    71,793
                    
                    
                    
                    65,019Ceding
      commission revenue – primarily related party
                    
                    
                    7,077
                    
                    
                    
                    9,012
                    
                    
                    
                    10,196
                    
                    
                    
                    10,800Loss
      and loss adjustment expense
                    
                    
                    22,253
                    
                    
                    
                    19,970
                    
                    
                    
                    45,826
                    
                    
                    
                    41,673Acquisition
      costs and other underwriting expenses
                    
                    
                    16,660
                    
                    
                    
                    18,168
                    
                    
                    
                    29,114
                    
                    
                    
                    29,46538,913
                    
                    
                    
                    38,138
                    
                    
                    
                    74,940
                    
                    
                    
                    71,138Net
      premiums earned less expenses included in combined ratio (Underwriting
      income)
                    
                    $
                    3,225
                    
                    
                    $
                    2,236
                    
                    
                    $
                    7,049
                    
                    
                    $
                    4,681Key
      Measures:Net
      loss ratio
                    
                    
                    63.5
                    %
                    
                    
                    63.7
                    %
                    
                    
                    63.8
                    %
                    
                    
                    64.1
                    %Net
      expense ratio
                    
                    
                    27.3
                    %
                    
                    
                    29.2
                    %
                    
                    
                    26.4
                    %
                    
                    
                    28.7
                    %Net
      combined ratio
                    
                    
                    90.8
                    %
                    
                    
                    92.9
                    %
                    
                    
                    90.2
                    %
                    
                    
                    92.8
                    %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                    
                    
                    16,660
                    
                    
                    
                    18,168
                    
                    
                    
                    29,114
                    
                    
                    
                    29,465Less:
      ceding commission revenue – primarily related party
                    
                    
                    7,077
                    
                    
                    
                    9,012
                    
                    
                    
                    10,196
                    
                    
                    
                    10,8009,583
                    
                    
                    
                    9,156
                    
                    
                    
                    18,918
                    
                    
                    
                    18,665Net
      earned premium
                    
                    
                    35,061
                    
                    
                    
                    31,362
                    
                    
                    
                    71,793
                    
                    
                    
                    65,019Net
      expense ratio
                    
                    
                    27.3
                    %
                    
                    
                    29.2
                    %
                    
                    
                    26.4
                    %
                    
                    
                    28.7
                    %





Specialty
Program Segment Results of Operations for the Three Months Ended June 30, 2010
and 2009





Gross Written Premium. Gross
written premium increased $9.1 million, or 13.5%, to $77.7 million for the three
months ended June 30, 2010 from $68.6 million for the three months ended June
30, 2009. The increase in Specialty Program related primarily to new programs
brought on by a team of underwriters hired during the middle of 2009, partially
offset by a decline from business we wrote on behalf of HSBC Insurance Company
of Delaware pursuant to a 100% fronting arrangement that was entered into as an
accommodation to the seller in connection with our acquisition of WIC and is now
in run-off. Additionally, the segment experienced declines in gross written
premium because of our maintenance of our pricing and administrative discipline,
which resulted in the termination of a particular program.





Net Written Premium. Net
written premium increased $4.6 million, or 13.3%, to $40.1 million for the three
months ended June 30, 2010 from $35.5 million for the three months ended June
30, 2009. The increase in net written premium resulted from an increase of gross
written premium for the three months ended June 30, 2010 compared to gross
written premium for the three months ended June 30, 2009.





Net Earned
Premium. Net earned
premium increased $3.6 million, or 11.8%, to $35.0 million for the three months
ended June 30, 2010 from $31.4 million for the three months ended June 30, 2009.
As a majority of premiums written earn ratably over a twelve month period, the
increase was a result of higher net written premium for the twelve months ended
June 30, 2010 compared to the twelve months ended June 30,
2009.


42





Ceding Commission. Ceding
commission represents commission earned primarily through the Maiden Quota
Share, whereby we receive a ceding commission of 31% or 34.375%, based on the
business ceded, on written premiums ceded to Maiden. The ceding commission
earned during the three months ended June 30, 2010 and 2009 was $7.1 million and
$9.0 million, respectively. The decrease related to the allocation to the
segment of its proportionate share of our overall policy acquisition
expense.





Loss and Loss Adjustment Expenses;
Loss Ratio.Loss and loss adjustment expenses increased $2.3 million, or
11.4%, to $22.3 million for the three months ended June 30, 2010 compared to
$20.0 million for the three months ended June 30, 2009. The loss ratio remained
flat period over period and was 63.5% and 63.7% for the three months ended June
30, 2010 and 2009, respectively.




Acquisition Costs and Other
Underwriting Expenses; Expense Ratio. Acquisition costs and other
underwriting expenses decreased $1.5 million, or 8.3%, to $16.7 million for the
three months ended June 30, 2010 from $18.2 million for the three months ended
June 30, 2009. The expense ratio decreased to 27.3% for the three months ended
June 30, 2010 from 29.2% for the three months ended June 30, 2009. The decrease
resulted primarily from lower allocated other underwriting expenses in the three
months ended June 30, 2010 compared to the same period in 2009.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income). Net premiums earned
less expenses included in combined ratio were $3.2 million and $2.2 million for
the three months ended June 30, 2010 and 2009, respectively. The increase of
$1.0 million resulted primarily from a decrease in acquisition costs and other
underwriting expenses.





Specialty
Program Segment Results of Operations for the Six Months Ended June 30, 2010 and
2009





Gross Written Premium. Gross
written premium increased $6.5 million, or 5.2%, to $132.4 million for the six
months ended June 30, 2010 from $125.9 million for the six months ended June 30,
2009. The increase in Specialty Program related primarily to new programs
brought on by a team of underwriters hired during the middle of 2009, partially,
offset by a decline from business we wrote on behalf of HSBC Insurance Company
of Delaware pursuant to a 100% fronting arrangement that was entered into as an
accommodation to the seller in connection with our acquisition of WIC and is now
in run-off. Additionally, the segment experienced declines in gross written
premium because of our maintenance of our pricing and administrative discipline,
which resulted in the termination of a particular program.





Net Written Premium. Net
written premium increased $10.4 million, or 16.7%, to $73.4 million for the six
months ended June 30, 2010 from $63.0 million for the six months ended June 30,
2009. The increase in net written premium resulted from an increase of gross
written premium for the six months ended June 30, 2010 compared to gross written
premium for the six months ended June 30, 2009.





Net Earned Premium. Net
earned premium increased $6.7 million, or 10.4%, to $71.7 million for the six
months ended June 30, 2010 from $65.0 million for the six months ended June 30,
2009. As premiums written earn ratably primarily over a twelve month period, the
increase was a result of higher net written premium for the twelve months ended
June 30, 2010 compared to the twelve months ended June 30, 2009.





Ceding Commission. Ceding
commission represents commission earned primarily through the Maiden Quota
Share, whereby we receive a ceding commission of 31% or 34.375%, based on the
business ceded, on written premiums ceded to Maiden. The ceding commission
earned during the six months ended June 30, 2010 and 2009 was $10.2 million and
$10.8 million, respectively. The decrease related to the allocation to the
segment of its proportionate share of our overall policy acquisition
expense.




Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses increased $4.1 million, or
10.0%, to $45.8 million for the six months ended June 30, 2010 compared to $41.7
million for the six months ended June 30, 2009. The loss ratio for the segment
decreased for the six months ended June 30, 2010 to 63.8% from 64.1% for the six
months ended June 30, 2009. The decrease in the loss and loss adjustment expense
ratio in the six months ended June 30, 2009 resulted primarily from lower
actuarial estimates based on actual losses.


43





Acquisition Costs and Other
Underwriting Expenses; Expense Ratio. Acquisition costs and other
underwriting expenses decreased $0.4 million, or 1.2%, to $29.1 million for the
six months ended June 30, 2010 from $29.5 million for the six months ended June
30, 2009. The expense ratio was 26.4% for the six months ended June 30, 2010
compared to 28.7% for the six months ended June 30, 2009. The decrease in the
expense ratio related primarily to a decrease in allocated other
underwriting expenses.





Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income). Net premiums earned
less expenses included in combined ratio were $7.0 million and $4.7 million for
the six months ended June 30, 2010 and 2009, respectively. The increase of $2.3
million resulted primarily from a decrease to other underwriting
expenses.





Personal
Lines Reinsurance Segment Results of Operations





Three Months Ended June 30,
                        
                        
                        Six Months Ended June 30,(Amounts in thousands)
                        
                        2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Gross
      written premium
                        
                        $
                        25,860
                        
                        
                        $
                        —
                        
                        
                        $
                        34,560
                        
                        
                        $
                        —Net
      written premium
                        
                        
                        25,860
                        
                        
                        
                        —
                        
                        
                        
                        34,560
                        
                        
                        
                        —Change
      in unearned premium
                        
                        
                        (16,507
                        )
                        
                        
                        —
                        
                        
                        
                        (25,207
                        )
                        
                        
                        —Net
      premiums earned
                        
                        
                        9,353
                        
                        
                        
                        —
                        
                        
                        
                        9,353Loss
      and loss adjustment expense
                        
                        
                        5,846
                        
                        
                        
                        —
                        
                        
                        
                        5,846
                        
                        
                        
                        —Acquisition
      costs and other underwriting expenses
                        
                        
                        3,040
                        
                        
                        
                        —
                        
                        
                        
                        3,040
                        
                        
                        
                        —8,886
                        
                        
                        
                        —
                        
                        
                        
                        8,886
                        
                        
                        
                        —Net
      premiums earned less expenses included in combined ratio (Underwriting
      income)
                        
                        $
                        467
                        
                        
                        $
                        —
                        
                        
                        $
                        467
                        
                        
                        $
                        —Key
      Measures:Net
      loss ratio
                        
                        
                        62.5
                        %
                        
                        
                        —
                        
                        
                        
                        62.5
                        %
                        
                        
                        —Net
      expense ratio
                        
                        
                        32.5
                        %
                        
                        
                        —
                        
                        
                        
                        32.5
                        %
                        
                        
                        —Net
      combined ratio
                        
                        
                        95.0
                        %
                        
                        
                        —
                        
                        
                        
                        95.0
                        %
                        
                        
                        —


We began assuming commercial auto
business from the GMAC Insurers effective March 1, 2010 pursuant to the
Personal Lines Quota Share with the
GMAC Insurers. We assumed $25.9 million and $34.6 million of premium from the
GMAC Insurers for
the three and six months ended June 30, 2010. See “Investment in ACAC” discussed
on page 32 of our Management Discussion and Analysis for further description of
this transaction.


44





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 $189
million and $144 million in the six months ended June 30, 2010 and 2009,
respectively. We expect cash flow from operations should be sufficient to meet
our anticipated claim obligations. We further expect that projected cash flow
from operations should provide us sufficient liquidity to fund our current
operations and service our debt instruments and anticipated growth for at least
the next twelve months.





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





Six Months Ended June 30,(Amounts in thousands)
                            
                            2010
                            
                            
                            2009Cash
      and cash equivalents provided by (used in):Operating
      activities
                            
                            $
                            6,283
                            
                            
                            $
                            112,834Investing
      activities
                            
                            
                            41,374
                            
                            
                            
                            30,018Financing
      activities
                            
                            
                            44,388
                            
                            
                            
                            (79,420
                            )





Net cash provided by operating
activities for the six months ended June 30, 2010 decreased compared to cash
provided by operating activities in the six months ended June 30, 2009. The
decrease resulted primarily from a greater shift in mix of business towards the
Specialty Risk and Extended Warranty segment, which generally has longer cash
collection cycles and shorter paid claim cycles than the Small Commercial
Business and Specialty Program segments.




Cash provided by investing activities
during the period represents, primarily, the net sales (sales less purchases) of
investments. For the six months ended June 30, 2010, our investing activities
related primarily to net sales of fixed securities of $96 million, net sales of
equity securities of $5 million offset, partially, by investments in ACAC and
other subsidiaries of approximately $57 million. For the six months ended June
30, 2009, our investing activities related primarily to the net sales of fixed
maturities of $37 million, net purchases of equity securities of $5 million and
capital expenditures of $2 million.





Cash provided by financing activities
for the six months ended June 30, 2010 consisted primarily of $65 million
received from entering repurchase agreements offset, partially, by $14 million
of principal payments on existing debt and $8 million of dividend payments. Cash
used in financing activities for the six months ended June 30, 2009 consisted
primarily of $54 million paid in connection with the settlement of repurchase
agreements, $14 million of principal payments on existing debt, $6 million of
dividend payments and $5 million related to stock repurchases.





Term
Loan





On June 3, 2008, we entered into a term
loan with JP Morgan Chase Bank, N.A. in the aggregate amount of $40 million. The
term of the loan is for a period of three years and requires quarterly principal
payments of $3.3 million, which began on September 3, 2008 and end on June 3,
2011. The loan carries a variable rate and is based on a Eurodollar rate plus an
applicable margin. The Eurodollar rate is a periodic fixed rate equal to the
London Interbank Offered Rate (“LIBOR”) and had a margin rate of 185 basis
points and was 2.1% as of June 30, 2010. We can prepay any amount of the loan
after the first anniversary date without penalty upon prior notice. The term
loan contains affirmative and negative covenants, including limitations on
additional debt, limitations on investments and acquisitions outside our normal
course of business. The loan requires us to maintain a debt to equity ratio of
0.35 to 1 or less. We reduced the outstanding balance on the note during the six
months ended June 30, 2010 from $20 million to $13.3 million.


45





Promissory
Note





In connection with the stock and asset
purchase agreement with a subsidiary of Unitrin, Inc. (“Unitrin”), we, on June
1, 2008, issued a promissory note to Unitrin in the amount of $30 million. The
note is non-interest bearing and requires four annual principal payments of $7.5
million. The first two were paid in 2009 and 2010, respectively, and the
remaining principal payments are due on June 1, 2011 and 2012. Upon entering
into the promissory note, we calculated imputed interest of $3.2 million based
on interest rates available to us, which was 4.5%. Accordingly, the note’s
carrying balance was adjusted to $26.8 million at the acquisition. The note is
required to be paid in full, immediately, under certain circumstances including
a default of payment or change of control of the Company. We recorded $0.5
million of interest expense during the six months ended June 30, 2010 and the
note’s carrying value at June 30, 2010 was $14.1 million.





Line
of Credit





On June 30, 2010, we extended our
unsecured line of credit with JP Morgan Chase Bank, N.A. in the aggregate amount
of $30 million to June 30, 2011. The line is used for collateral for letters of
credit. Interest payments are required to be paid monthly on any unpaid
principal at a rate of LIBOR plus 150 basis points. As of June 30, 2010 there
was no outstanding balance on the line of credit. At June 30, 2010, we had
outstanding letters of credit in place for $25.5 million that reduced the
availability on the line of credit to $4.5 million as of June 30, 2009.





Securities
Sold Under Agreements to Repurchase, at Contract Value




We enter into repurchase agreements.
The agreements are accounted for as collateralized borrowing transactions and
are recorded at contract amounts. We receive cash or securities, that we invest
in or hold in short term or fixed income securities. As of June 30, 2010, there
were $238.3 million principal amount outstanding at interest rates between 0.30%
and 0.35% per annum. Interest expense associated with these repurchase
agreements for the six months ended June 30, 2010 was $0.2 million of which $0.1
million was accrued as of June 30, 2010. We have approximately $241.8 million of
collateral pledged in support of these agreements.




Note
Payable — Collateral for Proportionate Share of Reinsurance
Obligation





In conjunction with the Reinsurance
Agreement between AII and Maiden Insurance (see Note 11. “Related Party
Transactions”), AII entered into a loan agreement with Maiden Insurance during
the fourth quarter of 2007, whereby, Maiden Insurance has loaned to AII from
time to time the amount of the obligations of the AmTrust Ceding Insurers that
AII is obligated to secure, not to exceed the amount equal to the Maiden
Insurance’s proportionate share of such obligations to such AmTrust Ceding
Insurers in accordance with the Maiden Quota Share agreement. We are required to
deposit all proceeds from the advances into a sub-account of each trust account
that has been established for each AmTrust Ceding Insurer. To the extent of the
loan, Maiden Insurance is discharged from providing security for its
proportionate share of the obligations as contemplated by the Maiden Quota
Share. If an AmTrust Ceding Insurer withdraws loan proceeds from the trust
account for the purpose of reimbursing such AmTrust Ceding Insurer for an
ultimate net loss, the outstanding principal balance of the loan shall be
reduced by the amount of such withdrawal. The loan agreement was amended in
February 2008 to provide for interest at a rate of LIBOR plus 90 basis points
and is payable on a quarterly basis. Each advance under the loan is secured by a
promissory note. Advances totaled $168.0 million as of June 30,
2010.





Reinsurance




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


46


We have coverage for our workers’
compensation line of business under excess of loss reinsurance agreements. The
agreements cover, per occurrence, losses in excess of $0.5 million through
December 31, 2004, $0.6 million effective January 1, 2005, $1.0 million
effective July 1, 2006 through July 1, 2009, $1.0 million plus 55% of $9.0
million in excess of $1.0 million effective July 1, 2009 through January 1,
2010, and $10.0 million effective January 1, 2010 up to a maximum $130 million
($50 million prior to December 1, 2003) in losses. For losses occurring on or
after January 1, 2010, we have purchased a “third and fourth event cover” that
covers losses between $5.0 million and $10.0 million per occurrence, after a
deductible equal to the first $10.0 million per annum on such losses. As the
scale of our workers’ compensation business has increased, we have also
increased the amount of risk we retain. Our reinsurance for worker’s
compensation losses caused by acts of terrorism is more limited than our
reinsurance for other types of workers’ compensation losses; our workers
compensation treaties currently provide coverage for $110 million in the
aggregate in excess of $20 million in the aggregate, per contract
year.




We have coverage for our U.S. casualty
lines of business under an excess of loss reinsurance agreement. The agreement
covers losses in excess of $2 million per occurrence (in certain cases the
retention can rise to $2.5 million) up to a maximum $30 million. We purchase
quota share reinsurance for our commercial umbrella business and also purchase
various pro-rata and excess reinsurance relating to specific insurance programs
and/or specialty lines of business.




We have excess of loss reinsurance
coverage for general liability and professional and medical liability business
written in the U.K. The agreements cover losses in excess of £1.0 million per
occurrence up to a maximum of £10.0 million. We also purchase quota share
reinsurance in our Specialty Risk and Extended Warranty segment for our European
medical liability business and we purchase various pro-rata and excess
reinsurance relating to specific foreign insurance programs and/or specialty
lines of business.




We have coverage for our U.S. property
lines of business under an excess of loss reinsurance agreement. The agreement
covers losses in excess of $2 million per location up to a maximum $20 million.
In addition, we have a property catastrophe excess of loss agreement, which
covers losses in excess of $5 million per occurrence up to a maximum $65
million.




TIC acts as servicing carrier on behalf
of the Alabama, Arkansas, Illinois, Indiana, Georgia and Kansas Workers’
Compensation Assigned Risk Plans. In its role as a servicing carrier, TIC issues
and services certain workers compensation policies issued to assigned risk
insureds. Those policies issued are subject to a 100% quota-share reinsurance
agreement offered by the National Workers Compensation Reinsurance Pool or a
state-based equivalent, which is administered by the National Council on
Compensation Insurance, Inc. (“NCCI”).




As part of the agreement to purchase
WIC from Household Insurance Group Holding Company (“Household”), we agreed to
write certain business on behalf of Household for a three-year period through
June 2009. The premium written under this arrangement is 100% reinsured by HSBC
Insurance Company of Delaware, a subsidiary of Household. The reinsurance
recoverable associated with this business is guaranteed by Household. This
business is now in run-off.




During the third quarter of 2007, we
entered into a master agreement with Maiden, as amended, by which our Bermuda
affiliate, AmTrust International Insurance, Ltd. (“AII”) and Maiden Insurance
entered into a quota share reinsurance agreement (the “Maiden Quota Share”), as
amended, by which AII retrocedes to Maiden Insurance an amount equal to 40% of
the premium written by our U.S., Irish and U.K. insurance companies (the
“AmTrust Ceding Insurers”), net of the cost of unaffiliated insuring reinsurance
(and in the case of our U.K. insurance subsidiary AEL, net of commissions) and
40% of losses with respect to our current lines of business excluding personal
lines reinsurance business, certain specialty property and casualty lines
written in our Specialty Risk and Extended Warranty segment, which Maiden
Insurance was offered but declined to reinsure, and risks for which the AmTrust
Ceding Insurers’ net retention exceeds $5,000, which Maiden has not expressly
agreed to assume (“Covered Business”). Effective January 1, 2010, Maiden agreed
to assume its proportionate share of our workers’ compensation exposure, and
will share the benefit of the 2010 reinsurance protection.





We also have agreed to cause AII,
subject to regulatory requirements, to reinsure any insurance company that
writes Covered Business in which we acquire 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.


47


The Maiden Quota Share, as amended,
further provides that AII receives a ceding commission of 31% of ceded written
premiums with respect to Covered Business, except retail commercial package
business, for which the ceding commission is 34.375%. The Maiden Quota Share,
which had an initial term of three years, has been renewed for a successive
three-year term effective July 1, 2010 and will automatically renew for
successive three year terms, 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.




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




Since January 1, 2003, we have had
variable quota share reinsurance with Munich Reinsurance Company (“Munich Re”)
for our extended warranty insurance. The scope of this reinsurance arrangement
is broad enough to cover all of our extended warranty insurance worldwide.
Currently, we do not cede to Munich Re the majority of our U.S. extended
warranty business.




Under the variable quota share
reinsurance arrangements with Munich Re, we may elect to cede from 10% to 50% of
each covered risk, subject to a limit of £0.5 million for each ceded risk that
we, at acceptance, regard as one individual risk. This means that regardless of
the amount of insured losses generated by any ceded risk, the maximum coverage
for that ceded risk under this reinsurance arrangement is £0.5 million. For the
majority of the business ceded under this reinsurance arrangement, we cede 10%
of the risk to Munich Re, but for some newer or larger risks, we cede a larger
share to Munich Re. This reinsurance is subject to a limit of £2.5 million per
occurrence of certain natural perils such as windstorms, earthquakes, floods and
storm surge. Coverage for losses arising out of acts of terrorism is excluded
from the scope of this reinsurance.




In conjunction with our strategic
investment in ACAC and ACAC’s acquisition from GMACI and MIC’s of GMAC’s U.S.
consumer property and casualty insurance business, which was completed on March
1, 2010 (the “Acquisition”), our subsidiary TIC has entered into a quota share
reinsurance agreement (the “Personal Lines Quota Share”) with the
acquired GMAC personal lines insurance companies (“GMAC Insurers”) by which
TIC assumes an amount equal to 10% of the premium written by the GMAC Insurers,
net of the cost of unaffiliated insuring reinsurance. The Personal Lines Quota
Share further provides that the GMAC Insurers receive a provisional ceding
commission of 32.5% of ceded written premiums. The provisional premium is
subject to adjustment based on results for the period March 1, 2010 through
December 31, 2010 and for each 12 month period thereafter based on the ratio of
ceded losses to ceded premium, with a maximum commission of 34.5% at loss ratios
at or below of 60.5% decreasing dollar for dollar to a minimum commission of
30.5% at a loss ratio at or above 64.5%. The Personal Lines Quota Share has an
initial term of three years, which will automatically renew for successive
three-year terms thereafter, unless either TIC or the GMAC Insurers 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
30 day’s notice or less upon the occurrence of certain early termination events,
which include a default in payment, insolvency, change in control of TIC or GMAC
Insurers, run-off, or a reduction of 50% or more of the shareholders’ equity.
The GMAC Insurers also may terminate on nine months written notice following the
effective date of an initial public offering or private placement of stock by
ACAC or a subsidiary. The Personal Lines Quota Share is subject to a premium cap
which limits the premium that can be ceded by the GMAC Insurers to TIC to $220.0
million during calendar year 2010. The premium cap increases by 10% per annum
thereafter.


48





Investment
Portfolio




Our investment portfolio, including
cash and cash equivalents, increased $26.0 million, or 1.9%, to $1,426.8 million
as of June 30, 2010 from $1,400.8 million as of December 31, 2009. Our fixed
maturity securities, gross, are classified as available-for-sale and had a fair
value of $1,063.5 million and an amortized cost of $1,047.8 million as of June
30, 2010. Our equity securities are classified as available-for-sale. These
securities are reported at fair value or $45.9 million with a cost of $54.6
million as of June 30, 2010. Securities sold but not yet purchased, which was
$70.3 million as of June 30, 2010, represent our obligation 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, which were $238.3 million as of June 30, 2010, are
accounted for as collateralized borrowing transactions and are recorded at their
contracted amounts. Our investment portfolio is summarized in the table below by
type of investment:




June 30, 2010
                                                
                                                
                                                December 31, 2009(Amounts in thousands)
                                                
                                                Carrying
                                                  Value
                                                
                                                
                                                Percentage of
                                                  Portfolio
                                                
                                                
                                                Carrying
                                                  Value
                                                
                                                
                                                Percentage of
                                                  PortfolioCash
      and cash equivalents
                                                
                                                $
                                                316,409
                                                
                                                
                                                22.2
                                                %
                                                
                                                $
                                                233,810
                                                
                                                
                                                16.7
                                                %Time
      and short-term deposits
                                                
                                                
                                                990
                                                
                                                
                                                0.1
                                                
                                                
                                                
                                                31,265
                                                
                                                
                                                2.2U.S.
      treasury securities
                                                
                                                
                                                33,738
                                                
                                                
                                                2.4
                                                
                                                
                                                
                                                124,143
                                                
                                                
                                                8.9U.S.
      government agencies
                                                
                                                
                                                42,256
                                                
                                                
                                                2.9
                                                
                                                
                                                
                                                47,424
                                                
                                                
                                                3.4Municipals
                                                
                                                
                                                34,105
                                                
                                                
                                                2.4
                                                
                                                
                                                
                                                27,268
                                                
                                                
                                                1.9Commercial
      mortgage back securities
                                                
                                                
                                                2,195
                                                
                                                
                                                0.2
                                                
                                                
                                                
                                                3,359
                                                
                                                
                                                0.2Residential
      mortgage backed securities:Agency
      backed
                                                
                                                
                                                450,843
                                                
                                                
                                                31.6
                                                
                                                
                                                
                                                481,731
                                                
                                                
                                                34.4Non-agency
      backed
                                                
                                                
                                                8,572
                                                
                                                
                                                0.6
                                                
                                                
                                                
                                                8,632
                                                
                                                
                                                0.6Asset
      backed securities
                                                
                                                
                                                3,149
                                                
                                                
                                                0.2
                                                
                                                
                                                
                                                3,619
                                                
                                                
                                                0.3Corporate
      bonds
                                                
                                                
                                                488,614
                                                
                                                
                                                34.2
                                                
                                                
                                                
                                                389,186
                                                
                                                
                                                27.8Preferred
      stocks
                                                
                                                
                                                5,112
                                                
                                                
                                                0.4
                                                
                                                
                                                
                                                5,110
                                                
                                                
                                                0.4Common
      stocks
                                                
                                                
                                                40,825
                                                
                                                
                                                2.8
                                                
                                                
                                                
                                                45,245
                                                
                                                
                                                3.2$
                                                1,426,808
                                                
                                                
                                                100.0
                                                %
                                                
                                                $
                                                1,400,792
                                                
                                                
                                                100.0
                                                %




As of June 30, 2010, the weighted
average duration of our fixed income securities was 3.3 years and had a yield of
approximately 4.0%.




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





•
            the current fair value compared
      to amortized cost;





•
            the length of time the security’s
      fair value has been below its amortized
  cost;





•
            specific credit issues related to
      the issuer such as changes in credit rating, reduction or elimination of
      dividends or non-payment of scheduled interest
      payments;





•
            whether management intends to
      sell the security and, if not, whether it is not more than likely than not
      that we will be required to sell the security before recovery of our
      amortized cost basis;





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


49





•
            the occurrence of a discrete
      credit event resulting in the issuer defaulting on a material outstanding
      obligation or the issuer seeking protection under bankruptcy laws;
      and





•
            other items, including, company
      management, media exposure, sponsors, marketing and advertising
      agreements, debt restructurings, regulatory changes, acquisitions and
      dispositions, pending litigation, distribution agreements and general
      industry trends.





Impairment of investment securities
results in a charge to operations when a market decline below cost is deemed to
be other-than-temporary. We immediately write down investments that we consider
to be impaired based on the above criteria collectively. The Committee maintains
an individual list of investments that have been in a significant unrealized
loss position in excess of 12 months for review of possible impairment. Absent
any of the above criteria, the Committee generally considers an investment to be
impaired when it has been in a significant unrealized loss position for over 24
months.





Based on
guidance in FASB ASC 320-10-65, in the event of the decline in fair value of a
debt security, a holder of that security that does not intend to sell the debt
security and for whom it is not more than likely than not that such holder will
be required to sell the debt security before recovery of its amortized cost
basis, is required to separate the decline in fair value into (a) the amount
representing the credit loss and (b) the amount related to other factors. The
amount of total decline in fair value related to the credit loss shall be
recognized in earnings as an OTTI with the amount related to other factors
recognized in accumulated other comprehensive loss net loss, net of tax. OTTI
credit losses result in a permanent reduction of the cost basis of the
underlying investment. The determination of OTTI is a subjective process, and
different judgments and assumptions could affect the timing of the loss
realization.




The impairment charges of our
fixed-maturities and equity securities recognized in earnings for the six months
ended June 30, 2010 and 2009 are presented in the table below:




(Amounts
      in thousands)
                  
                  2010
                  
                  
                  2009Equity
      securities
                  
                  $
                  6,605
                  
                  
                  $
                  10,188Fixed
      maturity securities
                  
                  
                  10,540
                  
                  
                  
                  2,025$
                  17,145
                  
                  
                  $
                  12,213





In addition to the other-than-temporary
impairment of $17.1 million recorded during the six months ended June 30, 2010,
at June 30, 2010, we had $11.7 million of gross unrealized losses related to
marketable equity securities. Our investment in marketable equity securities
consist of investments in preferred and common stock across a wide range of
sectors. We evaluated the near-term prospects for recovery of fair value in
relation to the severity and duration of the impairment and have determined in
each case that the probability of recovery is reasonable. Within our portfolio
of equity securities, 26 common stocks comprised $10 million, or 85% of the
unrealized loss. Four securities in the consumer products sector represent
approximately 3% of the total fair value and 9% of our unrealized loss. Five
securities in the financial sector represent approximately 12% of the total fair
value and 11% of our total unrealized losses and 16 common stocks in the health
care, industrial and technology sectors that have fair values of approximately
19%, 9% and 1%, respectively, and approximately 45%, 17% and 3%, respectively,
of our unrealized losses. The duration of these impairments ranges from two to
36 months. The remaining securities in a loss position are not considered
individually significant and accounted for 15% of our unrealized losses. We
believe these securities will recover and that we have the ability and intent to
hold them until recovery.





At June 30, 2010, we had $22.4 million
of gross unrealized losses related to available-for-sale fixed income
securities. Corporate bonds represent 46% of the fair value of our fixed
maturities and 99% of the total unrealized losses of our fixed maturities. We
own 144 corporate bonds in the industrial, bank and financial and other sectors,
which have a fair value of approximately 5%, 39% and 2%, respectively, and 3%,
97% and 1% of total unrealized losses, respectively, of our fixed maturities. We
believe that the unrealized losses in these securities are the result,
primarily, of general economic conditions and not the condition of the issuers,
which we believe are solvent and have the ability to meet their obligations.
Therefore, we expect that the market price for these securities should recover
within a reasonable time.


50





Item
3. Quantitative and Qualitative Disclosures About Market Risk





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





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





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





We are subject to credit risk with
respect to our third party reinsurers. Although our third party reinsurers are
obligated to reimburse us to the extent we cede risk to them, we are ultimately
liable to our policyholders on all risks that 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 that 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
brokers, 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
the “Reinsurance” Section of our Management’s Discussion and
Analysis.





Interest Rate Risk. We had
fixed maturity securities (excluding $1.0 million of time and short-term
deposits) with a fair value and a carrying value of $1,063.5 million as of June
30, 2010 that are subject to interest rate risk. Interest rate risk is the risk
that we may incur losses due to adverse changes in interest rates. Fluctuations
in interest rates have a direct impact on the market valuation of our fixed
maturity securities. We manage our exposure to interest rate risk through a
disciplined asset and liability matching and capital management process. In the
management of this risk, the characteristics of duration, credit and variability
of cash flows are critical elements. These risks are assessed regularly and
balanced within the context of our liability and capital position.




The table below summarizes the interest
rate risk associated with our fixed maturity securities by illustrating the
sensitivity of the fair value and carrying value of our fixed maturity
securities as of June 30, 2010 to selected hypothetical changes in interest
rates, and the associated impact on our stockholders’ equity. All fixed income
securities are 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 do impact the carrying value of these securities and are reported in
our shareholders’ equity as a component of other comprehensive income, net of
deferred taxes. The selected scenarios in the table below are not predictions of
future events, but rather are intended to illustrate the effect such events may
have on the fair value and carrying value of our fixed maturity securities and
on our shareholders’ equity, each as of June 30, 2010.


51





Hypothetical Change in Interest Rates
                                
                                Fair Value
                                
                                
                                Estimated
                                  Change in
                                  Fair Value
                                
                                
                                Hypothetical
                                  Percentage
                                  (Increase)
                                  Decrease in
                                  Shareholders’
                                  Equity(Amounts in thousands)200
      basis point increase
                                
                                $
                                996,451
                                
                                
                                $
                                (67,021
                                )
                                
                                
                                (6.8
                                )%100
      basis point increase
                                
                                
                                1,030,758
                                
                                
                                
                                (32,714
                                )
                                
                                
                                (3.3
                                )No
      change
                                
                                
                                1,063,472
                                
                                
                                
                                —
                                
                                
                                
                                —100
      basis point decrease
                                
                                
                                1,092,112
                                
                                
                                
                                28,640
                                
                                
                                
                                2.9200
      basis point decrease
                                
                                
                                1,113,400
                                
                                
                                
                                49,928
                                
                                
                                
                                5.1





Foreign Currency Risk. We
write insurance in the United Kingdom and certain other European Union member
countries through AIU and AEL. While the functional currency of AIU and AEL are,
respectively, the Euro and the British Pound, we write coverages that are
settled in local currencies, including, primarily, the Euro and 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 $3.1 million after tax realized
currency loss based on our outstanding foreign denominated reserves of $95.3
million at June 30, 2010.





Equity Price Risk. Equity
price risk is the risk that we may incur losses due to adverse changes in the
market prices of the equity securities we hold in our investment portfolio,
which include common stocks, non-redeemable preferred stocks and master limited
partnerships. We classify our portfolio of equity securities as
available-for-sale and carry these securities on our balance sheet at fair
value. Accordingly, adverse changes in the market prices of our equity
securities result in a decrease in the value of our total assets and a decrease
in our shareholders’ equity. As of June 30, 2010, the equity securities in our
investment portfolio had a fair value of $45.9 million, representing
approximately 3.3% of our total invested assets on that date. The table below
illustrates the impact on our equity portfolio and financial position given a
hypothetical movement in the broader equity markets. The selected scenarios in
the table below are not predictions of future events, but rather are intended to
illustrate the effect such events may have on the carrying value of our equity
portfolio and on shareholders’ equity as of June 30, 2010.





The hypothetical scenarios below assume
that our Beta is 1 when compared to the S&P 500 index.




Hypothetical Change in Interest Rates
                      
                      Fair Value
                      
                      
                      Estimated
                        Change in
                        Fair Value
                      
                      
                      Hypothetical
                        Percentage
                        (Increase)
                        Decrease in
                        Shareholders’
                        Equity(Amounts
      in thousands)5%
      increase
                      
                      $
                      48,234
                      
                      
                      $
                      2,297
                      
                      
                      
                      0.2
                      %No
      change
                      
                      
                      45,937
                      
                      
                      
                      —
                      
                      
                      
                      —5 %
      decrease
                      
                      
                      43,640
                      
                      
                      
                      (2,297
                      )
                      
                      
                      (0.2
                      )%





Off Balance Sheet Risk. We
have exposure or risk related to securities sold but not yet
purchased.


52





Item
4. Controls and Procedures





Our management, with the participation
and under the supervision of our principal executive officer and principal
financial officer, has evaluated our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) and has 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 us in the
reports we file or submit under the Exchange Act is timely recorded, processed,
summarized and reported, and accumulated and communicated to our management,
including our 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 our internal controls
over financial reporting (as defined in Exchange Act Rule 13a-15(f) and
15d-15(f)) that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.





PART II -
OTHER INFORMATION





Item
1. Legal Proceedings





On or
about April 13, 2010, the defendants in the derivative action against our
directors, certain officers and Maiden Holdings, Ltd. and Maiden Insurance
Company, Ltd. that was filed in the Supreme Court of the State of New York,
County of New York entitled “Erk Erginer, Derivatively on Behalf of Nominal
Defendant AmTrust Financial Services, Inc., Plaintiff, v. Michael Karfunkel,
George Karfunkel, Barry D. Zyskind, Donald T. DeCarlo, Abraham Gulkowitz, Isaac
M. Neuberger, Jay J. Miller, Max G. Caviet, Ronald E. Pipoly, Jr., Maiden
Holdings, Ltd., Maiden Insurance Company, Ltd., Defendants and AmTrust Financial
Services, Inc., Nominal Defendant” moved for summary judgment on the grounds
that it is undisputed that the plaintiff, who did not acquire his AmTrust shares
until after the transactions that are the subject of his complaint, does not
have standing to maintain the action. The motion is pending with the Supreme
Court of the State of New York.





Other than as described above, there
are no material changes from the legal proceedings previously reported in our
Annual Report on Form 10-K for the year ended December 31, 2009. For more
information regarding such legal matters, please refer to Item 3 of our Annual
Report on Form 10-K for the year ended December 31, 2009.





Item
1A. Risk Factors





There are no material changes to the
risk factors previously reported in our Annual Report on Form 10-K for the year
ended December 31, 2009. For more information regarding such risk factors,
please refer to Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2009.





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds





None.





Item
3. Defaults Upon Senior Securities





None.





Item
4. (Removed and Reserved)





Item
5. Other Information





None.


53





Item 6. Exhibits




Exhibit
                  Number
                
                Description10.1
                
                AmTrust
      Financial Services, Inc. 2010 Omnibus Incentive Plan (incorporated by
      reference to Appendix B to the Company’s definitive proxy statement on
      Schedule 14A filed on April 1, 2010.)10.2
                
                Form
      of Incentive Stock Option Agreement, effective May 14,
    2010.10.3
                
                Form
      of Non-qualified Stock Option Agreement for Non-Employee Directors,
      effective May 14, 2010.10.4
                
                Form
      of Restricted Stock Agreement, effective May 14, 2010.10.5
                
                Form
      of Restricted Stock Unit Agreement, effective May 14,
  2010.10.6
                
                Amendment
      No. 1 to the Stockholders Agreement, dated August 4, 2010, by and among
      the Company, ACAC, The Michael Karfunkel 2005 Grantor Retained Annuity
      Trust and Michael Karfunkel.31.1
                
                Certification
      of the Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
      for the quarter ended June 30, 2010.31.2
                
                Certification
      of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
      for the quarter ended June 30, 2010.32.1
                
                Certification
      of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, for
      the quarter ended June 30, 2010.32.2
                
                Certification
      of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, for
      the quarter ended June 30,
2010.


54





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)Date:
      August 9, 2010
              
              /s/ Barry D.
ZyskindBarry
      D. Zyskind
                President
      and Chief Executive Officer/s/ Ronald E. Pipoly,
    Jr.Ronald
      E. Pipoly, Jr.
                Chief
      Financial Officer


55