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 March 31, 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. YesxNo ̈





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 ̈Nox





As of May
1, 2010, the Registrant had one class of Common Stock ($.01 par value), of which
59,353,402 shares were issued and outstanding.





INDEX





PagePART
      I
                FINANCIAL
      INFORMATIONItem
      1.
                Unaudited
      Financial Statements:
                3Condensed
      Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009
      (audited)
                3Condensed
      Consolidated Statements of Income — Three months ended March 31, 2010 and
      2009
                4Condensed
      Consolidated Statements of Cash Flows — Three months ended March 31, 2010
      and 2009
                5Notes
      to Condensed Consolidated Financial Statements
                6Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                24Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                40Item
      4.
                Controls
      and Procedures
                42PART
      II
                OTHER
      INFORMATIONItem
      1.
                Legal
      Proceedings
                43Item
      1A.
                Risk
      Factors
                43Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                43Item
      3.
                Defaults
      Upon Senior Securities
                43Item
      4.
                (Removed
      and Reserved)
                43Item
      5.
                Other
      Information
                43Item
      6.
                Exhibits
                43Signatures
                44




2


PART 1 -
FINANCIAL INFORMATION





Item 1.
Financial Statements





AMTRUST
FINANCIAL SERVICES, INC. AND SUBSIDIARIES





Condensed
Consolidated Balance Sheets


(in
thousands, except par value)





(Amounts in Thousands)
                
                March 31,
                  2010
                
                
                December 31,
                  2009(Unaudited)ASSETSInvestments:Fixed
      maturities, available-for-sale, at market value (amortized cost
      $1,131,887; $1,080,914)
                
                $
                1,145,817
                
                
                $
                1,085,362Equity
      securities, available-for-sale, at market value (cost $55,894;
      $60,639)
                
                
                54,239
                
                
                
                50,355Short-term
      investments
                
                
                2,467
                
                
                
                31,265Equity
      investment in unconsolidated subsidiaries – related
parties
                
                
                56,213
                
                
                
                1,288Other
      investments
                
                
                14,019
                
                
                
                12,746Total
      investments
                
                
                1,272,755
                
                
                
                1,181,016Cash
      and cash equivalents
                
                
                215,442
                
                
                
                233,810Accrued
      interest and dividends
                
                
                6,263
                
                
                
                7,617Premiums
      receivable, net
                
                
                565,759
                
                
                
                495,871Note
      receivable – related party
                
                
                23,244
                
                
                
                23,224Reinsurance
      recoverable
                
                
                351,423
                
                
                
                349,695Reinsurance
      recoverable – related party
                
                
                321,145
                
                
                
                293,626Prepaid
      reinsurance premium
                
                
                141,176
                
                
                
                148,425Prepaid
      reinsurance premium – related party
                
                
                273,817
                
                
                
                262,128Prepaid
      expenses and other assets
                
                
                70,626
                
                
                
                85,108Federal
      income tax receivable
                
                
                —
                
                
                
                364Deferred
      policy acquisition costs
                
                
                207,696
                
                
                
                180,179Deferred
      income taxes
                
                
                2,611
                
                
                
                7,615Property
      and equipment, net
                
                
                15,339
                
                
                
                15,858Goodwill
                
                
                52,903
                
                
                
                53,156Intangible
      assets
                
                
                60,358
                
                
                
                62,672$
                3,580,557
                
                
                $
                3,400,364LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Loss
      and loss expense reserves
                
                $
                1,108,002
                
                
                $
                1,091,944Unearned
      premiums
                
                
                914,538
                
                
                
                871,779Ceded
      reinsurance premiums payable
                
                
                95,217
                
                
                
                75,032Ceded
      reinsurance premium payable – related party
                
                
                120,097
                
                
                
                86,165Reinsurance
      payable on paid losses
                
                
                147
                
                
                
                1,238Funds
      held under reinsurance treaties
                
                
                601
                
                
                
                690Securities
      sold but not yet purchased, at market
                
                
                17,821
                
                
                
                16,315Securities
      sold under agreements to repurchase, at contract value
                
                
                226,449
                
                
                
                172,774Accrued
      expenses and other current liabilities
                
                
                157,882
                
                
                
                180,325Federal
      tax payable
                
                
                4,868
                
                
                
                —Derivatives
      liabilities
                
                
                353
                
                
                
                1,893Note
      payable on collateral loan – related party
                
                
                167,975
                
                
                
                167,975Non
      interest bearing note payable – net of unamortized discount of
      $1,132; $1,372
                
                
                21,368
                
                
                
                21,128Term
      loan
                
                
                16,667
                
                
                
                20,000Junior
      subordinated debt
                
                
                123,714
                
                
                
                123,714Total
      liabilities
                
                
                2,975,699
                
                
                
                2,830,972Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $.01 par value; 100,000 shares authorized, 84,217 and 84,179 issued
      in 2010 and 2009, respectively; 59,352 and 59,314 outstanding in 2010 and
      2009, respectively
                
                
                842
                
                
                
                842Preferred
      stock, $.01 par value; 10,000 shares authorized
                
                
                —
                
                
                
                —Additional
      paid-in capital
                
                
                545,085
                
                
                
                543,977Treasury
      stock at cost; 24,865 and 24,866 shares in 2010 and 2009,
      respectively
                
                
                (300,889
                )
                
                
                (300,889
                )Accumulated
      other comprehensive loss
                
                
                (10,415
                )
                
                
                (17,020
                )Retained
      earnings
                
                
                370,235
                
                
                
                342,482Total
      stockholders’ equity
                
                
                604,858
                
                
                
                569,392$
                3,580,557
                
                
                $
                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 March 31,(Amounts
      in Thousands)
                
                2010
                
                
                2009Revenues:Premium
      income:Net
      written premium
                
                $
                189,414
                
                
                $
                136,179Change
      in unearned premium
                
                
                (41,314
                )
                
                
                (3,756
                )Net
      earned premium
                
                
                148,100
                
                
                
                132,423Ceding
      commission – primarily from related party
                
                
                32,248
                
                
                
                27,591Service
      and fee income
                
                
                5,300
                
                
                
                5,572Service
      and fee income – related party
                
                
                2,666
                
                
                
                1,882Net
      investment income
                
                
                13,599
                
                
                
                13,991Net
      realized gain (loss) on investments
                
                
                1,785
                
                
                
                (9,238
                )Total
      revenues
                
                
                203,698
                
                
                
                172,221Expenses:Loss
      and loss adjustment expense
                
                
                89,821
                
                
                
                74,915Acquisition
      costs and other underwriting expenses
                
                
                61,346
                
                
                
                58,154Other
                
                
                6,234
                
                
                
                5,194Total
      expenses
                
                
                157,401
                
                
                
                138,263Income
      before other income (expense), income taxes and equity in earnings (loss)
      of unconsolidated investment
                
                
                46,297
                
                
                
                33,958Other
      income (expenses):Foreign
      currency gain (loss)
                
                
                (717
                )
                
                
                33Interest
      expense
                
                
                (3,572
                )
                
                
                (4,171
                )Total
      other expenses
                
                
                (4,289
                )
                
                
                (4,138
                )Income
      before provision for income taxes and equity in earnings (loss) of
      unconsolidated investment
                
                
                42,008
                
                
                
                29,820Provision
      for income taxes
                
                
                (11,510
                )
                
                
                (5,256
                )Income
      before equity in earnings of unconsolidated investment
                
                
                30,498
                
                
                
                24,564Equity
      in earnings (loss) of unconsolidated investment – related
      parties
                
                
                1,410
                
                
                
                (402
                )Net
      income
                
                $
                31,908
                
                
                $
                24,162Earnings
      per common share:Basic
      - EPS
                
                $
                0.54
                
                
                $
                0.40Diluted
      - EPS
                
                
                0.53
                
                
                
                0.40Dividends
      declared per share
                
                $
                0.07
                
                
                $
                0.05Net
      Realized Gain (Loss) on Investments:Total
      other-than-temporary impairment losses
                
                $
                (5,138
                )
                
                $
                (1,427
                )Portion
      of loss recognized in other comprehensive income
                
                
                -
                
                
                
                -Net
      impairment losses recognized in earnings
                
                
                (5,138
                )
                
                
                (1,427
                )Other
      net realized gain (loss) on investments
                
                
                6,923
                
                
                
                (7,811
                )Net
      realized investment gain (loss)
                
                $
                1,785
                
                
                $
                (9,238
                )




See
accompanying notes to unaudited condensed consolidated financial
statements.


4


AmTrust
Financial Services, Inc.


Consolidated
Statements of Cash Flows


(Unaudited)


(in
thousands)




Three Months Ended March 31,(Amounts
      in Thousands)
                
                2010
                
                
                2009Cash
      flows from operating activities:Net
      income
                
                $
                31,908
                
                
                $
                24,162Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                
                
                3,391
                
                
                
                3,120Realized
      (gain) loss marketable securities
                
                
                (6,923
                )
                
                
                7,811Non-cash
      write-down of marketable securities
                
                
                5,138
                
                
                
                1,427Discount
      on notes payable
                
                
                240
                
                
                
                313Stock
      compensation expense
                
                
                825
                
                
                
                671Bad
      debt expense
                
                
                1,935
                
                
                
                1,005Foreign
      currency loss (gain)
                
                
                717
                
                
                
                (33
                )Changes
      in assets - (increase) decrease:Premiums
      receivable
                
                
                (71,823
                )
                
                
                28,234Reinsurance
      recoverable
                
                
                (1,728
                )
                
                
                (36,150
                )Reinsurance
      recoverable – related party
                
                
                (27,519
                )
                
                
                (23,726
                )Deferred
      policy acquisition costs, net
                
                
                (27,517
                )
                
                
                (17,911
                )Prepaid
      reinsurance premiums
                
                
                7,249
                
                
                
                (1,550
                )Prepaid
      reinsurance premiums – related party
                
                
                (11,689
                )
                
                
                9,878Prepaid
      expenses and other assets
                
                
                16,180
                
                
                
                18,984Deferred
      tax asset
                
                
                5,004
                
                
                
                (3,027
                )Changes
      in liabilities - increase (decrease):Reinsurance
      premium payable
                
                
                20,185
                
                
                
                (6,787
                )Reinsurance
      premium payable – related party
                
                
                33,932
                
                
                
                (3,611
                )Loss
      and loss expense reserve
                
                
                16,058
                
                
                
                80,342Unearned
      premiums
                
                
                42,759
                
                
                
                (5,642
                )Funds
      held under reinsurance treaties
                
                
                (89
                )
                
                
                647Accrued
      expenses and other current liabilities
                
                
                (16,258
                )
                
                
                (2,680
                )Net
      cash provided in operating activities
                
                
                21,975
                
                
                
                75,477Cash
      flows from investing activities:Net
      (purchases) sales of securities with fixed maturities
                
                
                (32,316
                )
                
                
                (46,090
                )Net
      (purchases) sales of equity securities
                
                
                3,884
                
                
                
                (1,628
                )Net
      sales (purchases) of other investments
                
                
                (356
                )
                
                
                850Equity
      investment in unconsolidated subsidiary
                
                
                (53,055
                )
                
                
                -Acquisition
      of renewal rights and goodwill
                
                
                -
                
                
                
                (2,462
                )Purchase
      of property and equipment
                
                
                (766
                )
                
                
                (2,107
                )Net
      cash (used in) provided by investing activities
                
                
                (82,609
                )
                
                
                (51,437
                )Cash
      flows from financing activities:Repurchase
      agreements, net
                
                
                53,675
                
                
                
                (36,140
                )Repayment
      of note payable
                
                
                (3,333
                )
                
                
                (3,333
                )Repurchase
      of shares
                
                
                -
                
                
                
                (5,492
                )Option
      exercise
                
                
                283
                
                
                
                -Dividends
      distributed on common stock
                
                
                (3,559
                )
                
                
                (3,005
                )Net
      cash provided by financing activities
                
                
                47,066
                
                
                
                (47,970
                )Effect
      of exchange rate changes on cash
                
                
                (4,800
                )
                
                
                (2,836
                )Net
      decrease in cash and cash equivalents
                
                
                (18,368
                )
                
                
                (26,766
                )Cash
      and cash equivalents, beginning of the period
                
                
                233,810
                
                
                
                192,053Cash
      and cash equivalents, end of the period
                
                $
                215,442
                
                
                $
                165,287Supplemental
      Cash Flow InformationIncome
      tax payments
                
                $
                423
                
                
                $
                952Interest
      payments on debt
                
                
                2,563
                
                
                
                4,428





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 three months ended March 31, 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(“ASU2010-06”).  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


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 March 31, 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
                
                
                $
                104
                
                
                $
                (487
                )
                
                $
                5,238Common
      stock
                
                
                50,273
                
                
                
                6,053
                
                
                
                (7,325
                )
                
                
                49,001U.S.
      treasury securities
                
                
                80,521
                
                
                
                488
                
                
                
                (401
                )
                
                
                80,608U.S.
      government agencies
                
                
                66,330
                
                
                
                925
                
                
                
                —
                
                
                
                67,255Municipal
      bonds
                
                
                36,049
                
                
                
                1,093
                
                
                
                (170
                )
                
                
                36,972Corporate
      bonds and other bonds:Finance
                
                
                387,700
                
                
                
                9,054
                
                
                
                (16,240
                )
                
                
                380,514Industrial
                
                
                65,760
                
                
                
                3,345
                
                
                
                (135
                )
                
                
                68,970Utilities
                
                
                30,478
                
                
                
                888
                
                
                
                (459
                )
                
                
                30,907Commercial
      mortgage backed securities
                
                
                2,254
                
                
                
                91
                
                
                
                -
                
                
                
                2,345Residential
      mortgage backed securities:Agency
      backed
                
                
                451,952
                
                
                
                14,498
                
                
                
                -
                
                
                
                466,450Non-agency
      backed
                
                
                7,916
                
                
                
                752
                
                
                
                (10
                )
                
                
                8,658Asset-backed
      securities
                
                
                2,927
                
                
                
                211
                
                
                
                -
                
                
                
                3,138$
                1,187,781
                
                
                $
                37,502
                
                
                $
                (25,227
                )
                
                $
                1,200,056






(b)
Investment Income





Net
investment income for the three months ended March 31, 2010 and 2009 was derived
from the following sources:




(Amounts
      in Thousands)
                
                2010
                
                
                2009Cash
      and short term investments
                
                $
                845
                
                
                $
                1,804Fixed
      maturities
                
                
                11,704
                
                
                
                11,882Equity
      securities
                
                
                327
                
                
                
                188Note
      receivable - related party
                
                
                845
                
                
                
                81213,721
                
                
                
                14,686Less:Investment
      expenses and interest expense on securities sold under agreement to
      repurchase
                
                
                122
                
                
                
                695$
                13,599
                
                
                $
                13,991




7


(c)
Other-Than-Temporary Impairment





Other-than-temporary
impairment (“OTTI”) charges of our fixed-maturities and equity securities for
the three months ended March 31, 2010 and 2009 are presented in the table
below:




(Amounts
      in Thousands)
                  
                  2010
                  
                  2009Equity
      securities
                  
                  $
                  5,138
                  
                  
                  $
                  1,427Fixed
      maturity securities
                  
                  
                  —
                  
                  
                  
                  —$
                  5,138
                  
                  
                  $
                  1,427




The
tables below summarize the gross unrealized losses of our fixed maturity and
equity securities as of March 31, 2010:




(Amounts in Thousands)
                  
                  Less Than 12 Months
                  
                  
                  12 Months or More
                  
                  
                  TotalFair
                    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
                  
                  $
                  6,910
                  
                  
                  $
                  (4,130
                  )
                  
                  
                  9
                  
                  
                  $
                  16,829
                  
                  
                  $
                  (3,682
                  )
                  
                  
                  99
                  
                  
                  $
                  23,739
                  
                  
                  $
                  (7,812
                  )U.S.
      treasury securities
                  
                  
                  61,388
                  
                  
                  
                  (355
                  )
                  
                  
                  19
                  
                  
                  
                  810
                  
                  
                  
                  (46
                  )
                  
                  
                  1
                  
                  
                  
                  62,198
                  
                  
                  
                  (401
                  )Municipal
      bonds
                  
                  
                  9,618
                  
                  
                  
                  (165
                  )
                  
                  
                  1
                  
                  
                  
                  347
                  
                  
                  
                  (5
                  )
                  
                  
                  1
                  
                  
                  
                  9,965
                  
                  
                  
                  (170
                  )Corporate
      bonds and other bonds:Finance
                  
                  
                  91,023
                  
                  
                  
                  (1,059
                  )
                  
                  
                  16
                  
                  
                  
                  174,248
                  
                  
                  
                  (15,181
                  )
                  
                  
                  31
                  
                  
                  
                  265,271
                  
                  
                  
                  (16,240
                  )Industrial
                  
                  
                  17,621
                  
                  
                  
                  (131
                  )
                  
                  
                  3
                  
                  
                  
                  496
                  
                  
                  
                  (4
                  )
                  
                  
                  1
                  
                  
                  
                  18,117
                  
                  
                  
                  (135
                  )Utilities
                  
                  
                  14,205
                  
                  
                  
                  (306
                  )
                  
                  
                  2
                  
                  
                  
                  1,930
                  
                  
                  
                  (153
                  )
                  
                  
                  2
                  
                  
                  
                  16,135
                  
                  
                  
                  (459
                  )Residential
      mortgage backed securities:Non-agency
      backed
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  23
                  
                  
                  
                  (10
                  )
                  
                  
                  1
                  
                  
                  
                  23
                  
                  
                  
                  (10
                  )Total
      temporarily impaired securities
                  
                  $
                  200,765
                  
                  
                  $
                  (6,146
                  )
                  
                  
                  50
                  
                  
                  $
                  194,683
                  
                  
                  $
                  (19,081
                  )
                  
                  
                  136
                  
                  
                  $
                  395,448
                  
                  
                  $
                  (25,227
                  )




There are
186 securities at March 31, 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 nature of the investment and management’s intent not to sell these
securities and it being not more likely than not that the Company will 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 March 31,
2010:





(Amounts in Thousands)
                          Remaining Life of Notional Amount(1)One Year
                          
                          Two Through
                            Five Years
                          
                          Six Through
                            Ten Years
                          
                          After Ten
                            Years
                          
                          TotalInterest
      rate swaps
                          $
                          —
                          
                          $
                          16,667
                          
                          $
                          —
                          
                          $
                          —
                          
                          $
                          16,667Credit
      default swaps
                          
                          —
                          
                          
                          2,000
                          
                          
                          —
                          
                          
                          —
                          
                          
                          2,000$
                          —
                          
                          $
                          18,667
                          
                          $
                          —
                          
                          $
                          —
                          
                          $
                          18,667





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


8




The
Company from time to time invests in a limited amount of derivatives and other
financial instruments as part of its investment portfolio to manage interest
rate changes or other exposures to a particular financial market. The Company
records changes in valuation on its derivative positions not designated as a
hedge as a component of net realized gains and losses. The Company records
changes in valuation on its hedge positions as a component of other
comprehensive income. As of March 31, 2010, the Company did not have any
derivatives designated as a hedge. Additionally, the Company records changes in
valuation on its interest rate swap related to its term loan (See “Note 5.
Debt”) as a component of interest expense.




(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 March 31, 2010 were $16,800 for corporate bonds and $1,021 and for equity
securities. These transactions result in off-balance sheet risk, as the
Company’s ultimate cost to satisfy the delivery of securities sold but not yet
purchased may exceed the amount reflected at March 31, 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 March 31, 2010, there were $226,449 principal
amount outstanding at interest rates between 0.25% and 0.30%. Interest expense
associated with these repurchase agreements for the three months ended March 31,
2010 and 2009 was $123 and $694, respectively, of which $31 was accrued as of
March 31, 2010. The Company has approximately $230,041 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 March 31, 2010:




(Amounts
      in Thousands)
                  
                  Total
                  
                  
                  Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3Assets:U.S.
      treasury securities
                  
                  $
                  80,608
                  
                  
                  $
                  80,608
                  
                  
                  $
                  -
                  
                  
                  $
                  -U.S.
      government agencies
                  
                  
                  67,255
                  
                  
                  
                  -
                  
                  
                  
                  67,255
                  
                  
                  
                  -Municipal
      bonds
                  
                  
                  36,972
                  
                  
                  
                  -
                  
                  
                  
                  36,972
                  
                  
                  
                  -Corporate
      bonds and other bonds:Finance
                  
                  
                  380,514
                  
                  
                  
                  -
                  
                  
                  
                  380,514
                  
                  
                  
                  -Industrial
                  
                  
                  68,970
                  
                  
                  
                  -
                  
                  
                  
                  68,970
                  
                  
                  
                  -Utilities
                  
                  
                  30,907
                  
                  
                  
                  -
                  
                  
                  
                  30,907
                  
                  
                  
                  -Commercial
      mortgage backed securities
                  
                  
                  2,345
                  
                  
                  
                  -
                  
                  
                  
                  2,345
                  
                  
                  
                  -Residential
      mortgage backed securities:Agency
      backed
                  
                  
                  466,450
                  
                  
                  
                  -
                  
                  
                  
                  466,450
                  
                  
                  
                  -Non-agency
      backed
                  
                  
                  8,658
                  
                  
                  
                  -
                  
                  
                  
                  8,658
                  
                  
                  
                  -Asset-backed
      securities
                  
                  
                  3,138
                  
                  
                  
                  -
                  
                  
                  
                  3,138
                  
                  
                  
                  -Equity
      securities
                  
                  
                  54,239
                  
                  
                  
                  54,239
                  
                  
                  
                  -
                  
                  
                  
                  -Other
      investments
                  
                  
                  14,019
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  14,019$
                  1,214,075
                  
                  
                  $
                  134,847
                  
                  
                  $
                  1,065,209
                  
                  
                  $
                  14,019Liabilities:Equity
      securities sold but not yet purchased, market
                  
                  $
                  1,021
                  
                  
                  $
                  1,021
                  
                  
                  $
                  -
                  
                  
                  $
                  -Corporate
      financial bonds sold but not yet purchased, market
                  
                  
                  16,800
                  
                  
                  
                  -
                  
                  
                  
                  16,800
                  
                  
                  
                  -Securities
      sold under agreements to repurchase, at contract value
                  
                  
                  226,449
                  
                  
                  
                  -
                  
                  
                  
                  226,449
                  
                  
                  
                  -Derivatives
                  
                  
                  353
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  353$
                  244,623
                  
                  
                  $
                  1,021
                  
                  
                  $
                  243,249
                  
                  
                  $
                  353




9


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:





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 months ended March 31, 2010:





(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
                  
                  
                  
                  -
                  
                  
                  
                  277Other
      comprehensive loss
                  
                  
                  981
                  
                  
                  
                  -
                  
                  
                  
                  981Purchases
      and issuances
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Sales
      and settlements
                  
                  
                  15
                  
                  
                  
                  1,540
                  
                  
                  
                  1,555Net
      transfers into (out of) Level 3
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Ending
      balance as of March 31, 2010
                  
                  $
                  14,019
                  
                  
                  $
                  (353
                  )
                  
                  $
                  13,666




The Company had no transfers between
levels during the three months ended March 31, 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;





•
            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.


10





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 December 31, 2009 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.





The table
below summarizes the Company’s trust preferred securities as of March 31,
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 anniversaryin 2011.


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




The Company recorded $2,552 of interest
expense for the three months ended March 31, 2010 and 2009,
respectively.





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 ends on June 3, 2011. As of March 31, 2010, the principal
balance was $16,667. 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 March 31, 2010 the interest rate was
2.1%. The Company recorded $252 and $457 of interest expense for the three
months ended March 31, 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 will be settled and will
be recognized as adjustments to interest expense. The Company recorded interest
expense of $32 and $275 for the three months ended March 31, 2010 and 2009,
respectively, related to this agreement.


11


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 of which was paid
in 2009, and the remaining principal payments are due on June 1, 2010, 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 $240 and $313 of amortized discount on the note in
its results of operations for the three months ended March 31, 2010 and 2009,
respectively. The note’s carrying value at March 31, 2010 and December 31, 2009
was $21,368 and $21,128, respectively.





Line
of Credit




On June
3, 2008, the Company entered into an agreement for an unsecured line of credit
with JP Morgan Chase Bank, N.A. in the aggregate amount of $25,000. The line is
used for collateral for letters of credit. On June 30, 2009, the Company amended
this agreement, whereby, the line was increased in the aggregate amount to
$30,000 and its term was extended to June 30, 2010. 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 March 31, 2010, there was no outstanding
balance on the line of credit. At March 31, 2010, the Company had outstanding
letters of credit in place for $26,287 that reduced the availability on the line
of credit to $3,713.





Maturities of
Debt




Maturities
of the Company’s debt subsequent to March 31, 2010 are as follows:




(Amounts
      in Thousands)
                  
                  2010
                  
                  2011
                  
                  2012
                  
                  2013
                  
                  2014
                  
                  ThereafterJunior
      subordinated debt
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  123,714Term
      loan
                  
                  
                  10,000
                  
                  
                  
                  6,667
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Promissory
      note
                  
                  
                  6,969
                  
                  
                  
                  7,037
                  
                  
                  
                  7,362
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  16,969
                  
                  
                  $
                  13,704
                  
                  
                  $
                  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 months ended March 31, 2010 and
2009:





(Amounts
      in Thousands)
                    
                    2010
                    
                    
                    2009Policy
      acquisition expenses
                    
                    $
                    25,291
                    
                    
                    $
                    29,248Salaries
      and benefits
                    
                    
                    25,353
                    
                    
                    
                    19,281Other
      insurance general and administrative expense
                    
                    
                    10,702
                    
                    
                    
                    9,625$
                    61,346
                    
                    
                    $
                    58,154


12





7.
            Earnings Per
      Share





The
following is a summary of the elements used in calculating basic and diluted
earnings per share for the three months ended March 31, 2010 and
2009:





(Amounts
      in Thousands Except per Share)
                  
                  2010
                  
                  
                  2009Net
      income available to common shareholders
                  
                  $
                  31,908
                  
                  
                  $
                  24,162Weighted
      average number of common shares outstanding - basic
                  
                  
                  59,333
                  
                  
                  
                  59,767Potentially
      dilutive shares:Dilutive
      shares from stock-based compensation
                  
                  
                  854
                  
                  
                  
                  233Weighted
      average number of common shares outstanding - dilutive
                  
                  
                  60,187
                  
                  
                  
                  60,000Net
      income - basic earnings per share
                  
                  $
                  0.54
                  
                  
                  $
                  0.40Net
      income – diluted earnings per share
                  
                  $
                  0.53
                  
                  
                  $
                  0.40




As of
March 31, 2010, there were approximately 400,000 anti-dilutive securities
excluded from diluted earnings per share.




8.
            Share Based
      Compensation




The
Company’s 2005 Equity and Incentive Plan (“2005 Plan”) permits the Company to
grant to officers, employees and non-employee directors of the Company incentive
compensation directly linked to the price of the Company’s stock. The Company
grants options at prices equal to the closing stock price of the Company’s stock
on the dates the options 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 aggregate number of shares of common stock for which awards may be
issued may not exceed 5,994,300 shares, and the aggregate number of shares of
common stock for which restricted stock awards may be issued may not exceed
1,998,100 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 our
common stock. As of March 31, 2010, 1,649,948 shares of Company common stock
remained available for grants under the Plan.




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 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. ASC 718-10-30
fair value valuation method resulted in share-based expense (a component of
salaries and benefits) in the amount of approximately $825 and $671 related to
stock options for the three months ended March 31, 2010 and 2009,
respectively.


13




The
following schedule shows all options granted, exercised, expired and exchanged
under the 2005 Plan for the three months ended March 31, 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
                              
                              54
                              
                              
                              12.82-14.25
                              
                              
                              85
                              
                              
                              9.65Exercised
                              
                              (38
                              )
                              
                              7.50
                              
                              
                              —
                              
                              
                              —Cancelled
      or terminated
                              
                              (10
                              )
                              
                              7.50-14.55
                              
                              
                              (8
                              )
                              
                              7.50Outstanding
      end of period
                              
                              4,174
                              
                              $
                              7.00-15.02
                              
                              
                              3,805
                              
                              $
                              7.00-15.02




The
weighted average grant date fair value of options granted during the three
months ended March 31, 2010 and 2009 was $3.79 and $4.84, respectively. As of
March 31, 2010, there was approximately $4,496 of total unrecognized
compensation cost related to non-vested share-based compensation
arrangements.





9.
            Comprehensive
      Income





The
following table summarizes the components of comprehensive income:





(Amounts
      in Thousands)
                    
                    Three Months Ended March 31,2010
                    
                    
                    2009Net
      Income
                    
                    $
                    31,908
                    
                    
                    $
                    24,162Unrealized
      holding gain (loss)
                    
                    
                    7,997
                    
                    
                    
                    (14,970
                    )Reclassification
      adjustment
                    
                    
                    4,155
                    
                    
                    
                    8,414Foreign
      currency translation
                    
                    
                    (5,547
                    )
                    
                    
                    (840
                    )Comprehensive
      Income
                    
                    $
                    38,513
                    
                    
                    $
                    16,766




10.
            Income
    Taxes





Income
tax expense for the three months ended March 31, 2010 and 2009 was $11,510 and
$5,256, respectively. The following table reconciles the Company’s statutory
federal income tax rate to its effective tax rate.





(Amounts
      in Thousands)
                    
                    Three Months Ended
                      March 31,2010
                    
                    
                    2009Income
      before provision for income taxes and equity in earnings of unconsolidated
      investment
                    
                    $
                    42,008
                    
                    
                    $
                    29,820Income
      taxes at statutory rates
                    
                    
                    14,702
                    
                    
                    
                    10,437Effect
      of income not subject to U.S. taxation
                    
                    
                    (3,244
                    )
                    
                    
                    (5,353
                    )Other,
      net
                    
                    
                    52
                    
                    
                    
                    172Provision
      for income taxes as shown on the Condensed Consolidated Statements of
      Income
                    
                    $
                    11,510
                    
                    
                    $
                    5,256GAAP
      effective tax rate
                    
                    
                    27.4
                    %
                    
                    
                    17.6
                    %




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.


14




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 March 31, 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.




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 March 31, 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 IGI, 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 Issurance 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
$10,000 net retention for workers’ compensation risks.




AmTrust
also has agreed to cause AII, subject to regulatory requirements, to reinsure
any insurance company which writes Covered Business in which AmTrust acquires a
majority interest to the extent required to enable AII to cede to Maiden
Insurance 40% of the premiums and losses related to such Covered
Business.





The
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.


15


The
following is the effect on the Company’s balance sheet as of March 31, 2010 and
December 31, 2009 and the results of operations for the three months ended March
31, 2010 and 2009 related to the Maiden Quota Share agreement:




(Amounts
      in Thousands)
                                      
                                      March 31,
      2010
                                      
                                      
                                      December 31,
      2009Assets
      and liabilities:Reinsurance
      recoverable
                                      
                                      $
                                      321,145
                                      
                                      
                                      $
                                      293,626Prepaid
      reinsurance premium
                                      
                                      
                                      273,817
                                      
                                      
                                      
                                      262,128Ceded
      reinsurance premiums payable
                                      
                                      
                                      (120,097
                                      )
                                      
                                      
                                      (86,165
                                      )Note
      payable
                                      
                                      
                                      (167,975
                                      )
                                      
                                      
                                      (167,975
                                      )






(Amounts
      in Thousands)
                                  
                                  Three Months Ended March 31,2010
                                  
                                  
                                  2009Results
      of operations:Premium
      written – ceded
                                  
                                  $
                                  (114,092
                                  )
                                  
                                  $
                                  (87,480
                                  )Change
      in unearned premium – ceded
                                  
                                  
                                  11,689
                                  
                                  
                                  
                                  (6,971
                                  )Earned
      premium – ceded
                                  
                                  $
                                  (102,403
                                  )
                                  
                                  $
                                  (94,451
                                  )Ceding
      commission on premium written
                                  
                                  $
                                  34,980
                                  
                                  
                                  $
                                  27,553Ceding
      commission – deferred
                                  
                                  
                                  (2,973
                                  )
                                  
                                  
                                  (435
                                  )Ceding
      commission – earned
                                  
                                  $
                                  32,007
                                  
                                  
                                  $
                                  27,118Incurred
      loss and loss adjustment expense – ceded
                                  
                                  $
                                  71,172
                                  
                                  
                                  $
                                  71,205Interest
      expense on collateral loan
                                  
                                  
                                  476
                                  
                                  
                                  
                                  570




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 March 31, 2010 was $241,069.  Maiden retains ownership of
$241,069 which is deposited in reinsurance trust accounts.




Reinsurance
Brokerage Agreement-Maiden




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 $1,510 and $1,133 of brokerage commission during the three months ended
March 31, 2010 and 2009, respectively.




Asset
Management Agreement-Maiden




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 earned approximately $678 and $597 of investment management fees for
the three months ended March 31, 2010 and 2009, respectively.


16


Services
Agreement-Maiden





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%. The Company recorded fee income of approximately
$45 and $153 for the three months ended March 31, 2010 and 2009, respectively,
as a result of these agreements.




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 March 31, 2010. The Company
recorded $476 and $570 of interest expense during the three months ended March
31, 2010 and 2009, respectively.




Other
Reinsurance Agreement-Maiden




Between
January 1, 2008 and January 1, 2010, Maiden was a 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.  Maiden, which
was one of two participating reinsurers in the layer, had a 45%
participation.  Maiden participated in the layer on the same
market terms and conditions as the other participant.




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 $49,000 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 March 31,
2010, the current value of the invested funds in the Hedge Funds was
approximately $21,000. 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 and did not violate the Company’s Code of Business Conduct and
Ethics. 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 approximately $77 and $0 of fees under the
agreement during the three months ended March 31, 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 which 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 $168 and $166 for the lease for the three months
ended March 31, 2010 and 2009, respectively.


17


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 which
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 whereby the Company increased its lease
space to 7,156 feet and extended the lease through October 31, 2012. The Company
paid approximately $47 and $41 for the lease for the three months ended March
31, 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 $14,000 and $23,000 during the three months
ended March 31, 2010 and 2009, respectively. The Company recorded investment
loss of approximately $917 and $402 from its equity investment in an
unconsolidated subsidiaryfor the three months ended March 31, 2010 and
2009, respectively. As of March 31, 2010, the Company’s equity interest was
approximately $371. Additionally in 2007, the Company provided Warrantech with a
$20,000 senior secured note due January 31, 2012 (note
receivable — related party). Interest on the notes is payable monthly
at a rate of 15% per annum and consisted of a cash component at 11% per annum
and 4% per annum for the issuance of additional notes (“PIK Notes”) in a
principle amount equal to the interest not paid in cash on such date. As of
March 31, 2010, the carrying value of the note receivable was $23,244 (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 $119 and $123 for the three months ended March 31, 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”). The Trust is controlled by Michael Karfunkel, 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 and Mr. Zyskind is serving as an officer of ACAC on an interim basis.




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 one member of
ACAC’s board of directors, which consists of three members. Subject to certain
limitations, the board of directors of ACAC may not take any action in theabsence of the Company’s
appointee and ACAC may not take certain corporate actions without the unanimous
prior approval of its board of directors (including the Company’s
appointee).  In accordance with ASC 323-10-15,Investments-Equity Method and Joint
Ventures, the Company will account for its investment in ACAC under the
equity method.  The Company recorded $2,327 of income during the three
months ended March 31, 2010 related to its equity investment in
ACAC.


18


During
March 2010, ACAC acquired from GMAC Insurance Holdings, Inc. (“GMACI”) and
Motors Insurance Corporation (“MIC”, together with GMACI, “GMAC”) GMAC’s U.S.
consumer property and casualty insurance business. 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.  Additionally as of March 31, 2010, ACAC has not finalized
its purchase accounting required under ASC 805, Business Combinations,
related to its acquisition of GMAC and expects to finalize it during the three
months ended June 30, 2010.  Upon completion, the Company may be
required to adjust its investment in ACAC for any purchase price adjustments
equivalent to the Company’s proportionate ownership percentage of the total
adjustment.




GMAC’s
consumer property and casualty insurance business is one of the leading writers
of automobile coverages through independent agents in the United States. It
utilizes a network of 10,500 agents in 12 core markets, as well as exclusive
relationships with 23 affinity partners. GMAC’s U.S. consumer property and
casualty insurance 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 includes ten
statutory insurance companies that write the automobile coverages for
GMAC.




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 $215 of fee income for the three months ended March 31, 2010
      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 a quarterly
      fee equal to 0.05% 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 0.0375% 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 $141 of
      investment management fees for the three months ended March 31, 2010. The
      terms and conditions of the above are subject to final regulatory
      approval, which is pending.





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





(v)
            the Company, effective March 1,
      2010, reinsures 10% of the net premiums of the GMAC personal lines
      business, pursuant to a 50% quota share reinsurance agreement (“Personal
      Lines Quota Share”) with the GMAC personal lines insurance companies, as
      cedents, and the Company, MK Re, Ltd., a Bermuda reinsurer which is a
      wholly-owned 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 personal lines insurance
      companies 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 personal lines
      insurance companies 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 personal lines insurance companies 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 personal
      lines companies 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 fails 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. We believe that the terms,
      conditions and pricing of the Personal Lines Quota Share have been
      determined by arm’s length negotiations and reflect current market terms
      and conditions. As a result of this agreement, the Company assumed $8,700
      of business from GMAC. The terms and conditions of the above are subject
      to final regulatory approval, which is
  pending.


19




ACAC has
agreed to pay all fees and expenses in connection with the transaction. As of
March 31, 2009, advances to ACAC related to fees and expenses totaled $658 and
consisted of $380 for due diligence services performed by certain AmTrust
employees and $278 for certain deal costs including consulting, legal and
regulatory filings.




As a
result of these agreements with ACAC, the Company recorded fees totaling
approximately $356 for the three months ended March 31, 2010 and a receivable of
$791 as of March 31, 2010.





12.
            Acquisitions





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.




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.




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.


20




CyberComp




In
September 2009, the Company acquired from subsidiaries of Swiss Re America
Holding Corp. (“Swiss Re”) access to the distribution network and renewal rights
to CyberComp (“CyberComp”), a Swiss Re web-based platform providing workers’
compensation insurance to the small to medium-sized employer market. CyberComp
operates in 26 states and distributes policies through a network of 13 regional
wholesale agencies and over 600 retail agents. 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 $13,700 of gross
written premium during
the three months ended March 31, 2010 from this
transaction.




13.
            Contingent
      Liabilities




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.





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


21


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
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 investments 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 as follows for the three months
ended March 31, 2010 and 2009:





(Amounts in Thousands)
                                  
                                  Small
                                    Commercial
                                    Business
                                  
                                  
                                  Specialty Risk
                                    and Extended
                                    Warranty
                                  
                                  
                                  Specialty
                                    Program
                                  
                                  
                                  Personal
                                    Lines
                                    Reinsurance
                                  
                                  
                                  Corporate
                                    and Other
                                  
                                  
                                  TotalThree
      months ended March 31, 2010:Gross
      written premium
                                  
                                  $
                                  122,702
                                  
                                  
                                  $
                                  152,174
                                  
                                  
                                  $
                                  54,655
                                  
                                  
                                  $
                                  8,700
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  338,231Net
      written premium
                                  
                                  
                                  61,438
                                  
                                  
                                  
                                  86,049
                                  
                                  
                                  
                                  33,227
                                  
                                  
                                  
                                  8,700
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  189,414Change
      in unearned premium
                                  
                                  
                                  (1,834
                                  )
                                  
                                  
                                  (34,285
                                  )
                                  
                                  
                                  3,505
                                  
                                  
                                  
                                  (8,700
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (41,314
                                  )Net
      earned premium
                                  
                                  
                                  59,604
                                  
                                  
                                  
                                  51,764
                                  
                                  
                                  
                                  36,722
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  148,100Ceding
      commission - primarily related party
                                  
                                  
                                  21,226
                                  
                                  
                                  
                                  7,903
                                  
                                  
                                  
                                  3,119
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  32,248Loss
      and loss adjustment expense
                                  
                                  
                                  (35,088
                                  )
                                  
                                  
                                  (31,160
                                  )
                                  
                                  
                                  (23,573
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (89,821
                                  )Acquisition
      costs and other underwriting expenses
                                  
                                  
                                  (34,181
                                  )
                                  
                                  
                                  (14,711
                                  )
                                  
                                  
                                  (12,454
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (61,346
                                  )(69,269
                                  )
                                  
                                  
                                  (45,871
                                  )
                                  
                                  
                                  (36,027
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (151,167
                                  )Underwriting
      income
                                  
                                  
                                  11,561
                                  
                                  
                                  
                                  13,796
                                  
                                  
                                  
                                  3,824
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  29,181Service
      and fee income
                                  
                                  
                                  2,574
                                  
                                  
                                  
                                  2,726
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  2,666
                                  
                                  
                                  
                                  7,966Investment
      income and realized gain (loss)
                                  
                                  
                                  6,656
                                  
                                  
                                  
                                  5,283
                                  
                                  
                                  
                                  3,229
                                  
                                  
                                  
                                  216
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  15,384Other
      expenses
                                  
                                  
                                  (2,192
                                  )
                                  
                                  
                                  (2,847
                                  )
                                  
                                  
                                  (1,016
                                  )
                                  
                                  
                                  (179
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (6,234
                                  )Interest
      expense
                                  
                                  
                                  (1,257
                                  )
                                  
                                  
                                  (1,631
                                  )
                                  
                                  
                                  (582
                                  )
                                  
                                  
                                  (102
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (3,572
                                  )Foreign
      currency loss
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (717
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (717
                                  )Provision
      for income taxes
                                  
                                  
                                  (4,752
                                  )
                                  
                                  
                                  (4,551
                                  )
                                  
                                  
                                  (1,495
                                  )
                                  
                                  
                                  18
                                  
                                  
                                  
                                  (730
                                  )
                                  
                                  
                                  (11,510
                                  )Equity
      in earnings of unconsolidated investment – related parties
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,410
                                  
                                  
                                  
                                  1,410Net
      income
                                  
                                  $
                                  12,590
                                  
                                  
                                  $
                                  12,059
                                  
                                  
                                  $
                                  3,960
                                  
                                  
                                  $
                                  (47
                                  )
                                  
                                  $
                                  3,346
                                  
                                  
                                  
                                  31,908




22




(Amounts in Thousands)
                    
                    Small
                      Commercial
                      Business
                    
                    
                    Specialty Risk
                      and Extended
                      Warranty
                    
                    
                    Specialty
                      Program
                    
                    
                    Corporate
                      and
                      other
                    
                    
                    TotalThree
      months ended March 31, 2009:Gross
      written premium
                    
                    $
                    127,470
                    
                    
                    $
                    82,708
                    
                    
                    $
                    57,349
                    
                    
                    $
                    —
                    
                    
                    $
                    267,527Net
      written premium
                    
                    
                    70,459
                    
                    
                    
                    38,259
                    
                    
                    
                    27,461
                    
                    
                    
                    —
                    
                    
                    
                    136,179Change
      in unearned premium
                    
                    
                    (12,368
                    )
                    
                    
                    2,416
                    
                    
                    
                    6,196
                    
                    
                    
                    —
                    
                    
                    
                    (3,756
                    )Net
      earned premium
                    
                    
                    58,091
                    
                    
                    
                    40,675
                    
                    
                    
                    33,657
                    
                    
                    
                    —
                    
                    
                    
                    132,423Ceding
      commission - primarily related party
                    
                    
                    19,776
                    
                    
                    
                    6,027
                    
                    
                    
                    1,788
                    
                    
                    
                    —
                    
                    
                    
                    27,591Loss
      and loss adjustment expense
                    
                    
                    (35,394
                    )
                    
                    
                    (17,818
                    )
                    
                    
                    (21,703
                    )
                    
                    
                    —
                    
                    
                    
                    (74,915
                    )Acquisition
      costs and other underwriting expenses
                    
                    
                    (34,154
                    )
                    
                    
                    (12,703
                    )
                    
                    
                    (11,297
                    )
                    
                    
                    —
                    
                    
                    
                    (58,154
                    )(69,548
                    )
                    
                    
                    (30,521
                    )
                    
                    
                    (33,000
                    )
                    
                    
                    —
                    
                    
                    
                    (133,069
                    )Underwriting
      income
                    
                    
                    8,319
                    
                    
                    
                    16,181
                    
                    
                    
                    2,445
                    
                    
                    
                    —
                    
                    
                    
                    26,945Service
      and fee income
                    
                    
                    3,489
                    
                    
                    
                    2,138
                    
                    
                    
                    —
                    
                    
                    
                    1,827
                    
                    
                    
                    7,454Investment
      income and realized gain (loss)
                    
                    
                    2,369
                    
                    
                    
                    1,464
                    
                    
                    
                    920
                    
                    
                    
                    —
                    
                    
                    
                    4,753Other
      expenses
                    
                    
                    (2,661
                    )
                    
                    
                    (1,427
                    )
                    
                    
                    (1,106
                    )
                    
                    
                    —
                    
                    
                    
                    (5,194
                    )Interest
      expense
                    
                    
                    (2,137
                    )
                    
                    
                    (1,146
                    )
                    
                    
                    (888
                    )
                    
                    
                    —
                    
                    
                    
                    (4,171
                    )Foreign
      currency gain
                    
                    
                    —
                    
                    
                    
                    33
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    33Provision
      for income taxes
                    
                    
                    (1,641
                    )
                    
                    
                    (3,058
                    )
                    
                    
                    (231
                    )
                    
                    
                    (326
                    )
                    
                    
                    (5,256
                    )Equity
      in loss of unconsolidated investment – related party
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (402
                    )
                    
                    
                    (402
                    )Net
      income
                    
                    $
                    7,738
                    
                    
                    $
                    14,185
                    
                    
                    $
                    1,140
                    
                    
                    $
                    1,099
                    
                    
                    $
                    24,162








The following tables summarize business
segments as follows as of March 31, 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 March 31, 2010:Fixed
      assets
                    
                    $
                    5,393
                    
                    
                    $
                    7,005
                    
                    
                    $
                    2,501
                    
                    
                    $
                    440
                    
                    
                    $
                    —
                    
                    
                    $
                    15,339Goodwill
      and intangible assets
                    
                    
                    80,089
                    
                    
                    
                    17,656
                    
                    
                    
                    15,516
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    113,261Total
      assets
                    
                    
                    1,549,492
                    
                    
                    
                    1,345,673
                    
                    
                    
                    641,272
                    
                    
                    
                    44,120
                    
                    
                    
                    —
                    
                    
                    
                    3,580,557As
      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




23


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, which 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 the Company’s
business activities and availability of funds. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions, regulatory framework, weather-related events and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. There can be no assurance
that actual developments will be those anticipated by the Company. 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 the Company’s 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 the
Company’s filings
with the SEC, including its Annual
Report on Form 10-K for the period ended December 31, 2009, and its
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 generally
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, United Kingdom and Europe, and certain
      property, casualty and specialty liability risks in the United States
      and Europe.
 
 ·
              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.
 
 ·
              Personal Lines Reinsurance. We
      reinsure 10% of the net premiums of the GMAC personal lines business,
      pursuant to a quota share reinsurance agreement (“Personal Lines Quota
      Share”) with the GMAC personal lines insurance companies. See discussion
      below related to ACAC
investment.
  24
 
 The
Company transacts business primarily through eleven insurance company
subsidiaries:
 
 Company
                  
                  A.M.
                    Best Rated
                  
                  Coverage Type Offered
                  
                  Coverage
                    Market
                  
                  DomiciledTechnology
      InsuranceCompany,
      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
                  
                  KansasTrinity
      Lloyd’s Insurance Company (“TLIC”)
                  
                  A-
      (Excellent)
                  
                  Small
      Commercial Business
                  
                  United
      States
                  
                  TexasAmTrust
      International Underwriters Limited (“AIU”)
                  
                  A-
      (Excellent)
                  
                  Specialty
      Risk and Extended Warranty
                  
                  European
                    Union
                  
                  IrelandIGI
      Insurance Company, Ltd. (“IGI”)
                  
                  A-
      (Excellent)
                  
                  Specialty
      Risk and Extended Warranty
                  
                  European
                    Union
                  
                  EnglandAmTrust
      InternationalInsurance
      Ltd. (“AII”)
                  
                  A-
      (Excellent)
                  
                  Reinsurance
      for consolidated subsidiaries
                  
                  United
      States
                    and
      European
                    Union
                  
                  Bermuda
  Insurance,
particularly workers’ compensation, is generally affected by seasonality. The
first quarter generally produces greater premiums than subsequent quarters.
Nevertheless, the impact of seasonality on our Small Commercial Business and
Specialty Program segments has not been significant. We believe that this is
because we serve many small businesses in different geographic locations. In
addition, we believe seasonality is muted by our acquisition
activity.
 
 We
evaluate our operations by monitoring key measures of growth and profitability.
We measure our growth by examining our net income, return on average equity, and
our loss, expense and combined ratios. The following summary provides further
explanation of the key measures that we use to evaluate our
results:
 
 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.
  25
 
 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, 2009 for an
employer with a constant payroll during the term of the policy, we would earn
half of the premiums in 2009 and the other half in 2010. 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.
  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.
 
 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.
  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.
  26
 
 One of
the key financial measures that we use to evaluate our operating performance is
return on average equity. Our return on annualized average equity was 21.7% and
24.9% for the three months ended March 31, 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 80.3% and 79.7% for the three months ended March 31, 2010 and 2009,
respectively.  We plan to write additional premiums without a proportional
increase in expenses and further reduce the expense component of our net
combined ratio over time.
 
 Critical
Accounting Policies
 
 The
Company’s discussion and analysis of its results of operations, financial
condition and liquidity are based upon the Company’s consolidated financial
statements, which have been prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the amounts of assets
and liabilities, revenues and expenses and disclosure of contingent assets and
liabilities as of the date of the financial statements. As more information
becomes known, these estimates and assumptions could change, which would have an
impact on actual results that may differ materially from these estimates and
judgments under different assumptions. The Company has not made any changes in
estimates or judgments that have had a significant effect on the reported
amounts as previously disclosed in our Annual Report on Form 10-K for the fiscal
period ended December 31, 2009.
 
 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”). The
Trust is controlled by Michael Karfunkel, 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.
  Pursuant
to the Amended Stock Purchase Agreement, ACAC issued and sold to the Company
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 the Company’s option, into 21.25% of the issued and outstanding
Common Stock (the “Preferred Stock”). The Company has pre-emptive rights with
respect to any future issuances of securities by ACAC and Company’s conversion
rights are subject to customary anti-dilution protections. The Company has the
right to appoint one member of ACAC’s board of directors, which consists of
three members. Subject to certain limitations, the board of directors of ACAC
may not take any action in theabsence of the Company’s
appointee and ACAC may not take certain corporate actions without the unanimous
prior approval of its board of directors (including the Company’s appointee). In
accordance with ASC 323-10-15,Investments-Equity Method and Joint Ventures, the Company will account
for its investment in ACAC under the equity method. The Company recorded $2.3
million of income during the three months ended March 31, 2010 related to its
equity investment in ACAC.
  During
March 2010, ACAC acquired from GMAC Insurance Holdings, Inc. (“GMACI”) and
Motors Insurance Corporation (“MIC”, together with GMACI, “GMAC”) GMAC’s
U.S. consumer property and casualty insurance business. 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 $22.5 million. Additionally as
of March 31, 2010, ACAC has not finalized is purchase accounting required under
ASC 805, Business
Combinations, related to its acquisition of GMAC and expects to finalize
it during the three months ended June 30, 2010. Upon completion, the Company may
be required to adjust its investment in ACAC for any purchase price adjustments
equivalent to the Company’s proportionate ownership percentage of the total
adjustment.
 
  27
 
 Results
of Operations
 
 Consolidated Results of Operations
(Unaudited)
 Three Months Ended
                        March 31,2010
                      
                      
                      2009(Amounts
      in Thousands)Gross
      written premium
                      
                      $
                      338,231
                      
                      
                      $
                      267,527Net
      written premium
                      
                      $
                      189,414
                      
                      
                      $
                      136,179Change
      in unearned premium
                      
                      
                      (41,314
                      )
                      
                      
                      (3,756
                      )Net
      earned premium
                      
                      
                      148,100
                      
                      
                      
                      132,423Ceding
      commission – primarily related party
                      
                      
                      32,248
                      
                      
                      
                      27,591Service
      and fee income
                      
                      
                      5,300
                      
                      
                      
                      5,571Service
      and fee income – related parties
                      
                      
                      2,666
                      
                      
                      
                      1,883Net
      investment income
                      
                      
                      13,599
                      
                      
                      
                      13,991Net
      realized (loss) gain on investments
                      
                      
                      1,785
                      
                      
                      
                      (9,238
                      )Total
      revenue
                      
                      
                      203,698
                      
                      
                      
                      172,221Loss
      and loss adjustment expense
                      
                      
                      89,821
                      
                      
                      
                      74,915Acquisition
      costs and other underwriting expenses
                      
                      
                      61,346
                      
                      
                      
                      58,154Other
                      
                      
                      6,234
                      
                      
                      
                      5,194157,401
                      
                      
                      
                      138,263Income
      before other income (expense), income taxes and equity earnings of
      unconsolidated investment
                      
                      
                      46,297
                      
                      
                      
                      33,958Other
      income (expense):Foreign
      currency loss
                      
                      
                      (717
                      )
                      
                      
                      33Interest
      expense
                      
                      
                      (3,572
                      )
                      
                      
                      (4,171
                      )Total
      other expense
                      
                      
                      (4,289
                      )
                      
                      
                      (4,138
                      )Income
      before other income (expense), income taxes and equity earnings of
      unconsolidated investment
                      
                      
                      42,008
                      
                      
                      
                      29,820Provision
      for income taxes
                      
                      
                      (11,510
                      )
                      
                      
                      (5,256
                      )Income
      before equity in earnings of unconsolidated investment
                      
                      
                      30,498
                      
                      
                      
                      24,564Equity
      in earnings (loss) of unconsolidated investment - related
      parties
                      
                      
                      1,410
                      
                      
                      
                      (402
                      )Net
      income
                      
                      $
                      31,908
                      
                      
                      $
                      24,162Key
      measures:Net
      loss ratio
                      
                      
                      60.6
                      %
                      
                      
                      56.6
                      %Net
      expense ratio
                      
                      
                      19.6
                      %
                      
                      
                      23.1
                      %Net
      combined ratio
                      
                      
                      80.3
                      %
                      
                      
                      79.7
                      %
 
 Consolidated
Result of Operations for the Three Months Ended March 31, 2010 and
2009
 
 Gross Written Premium.Gross
written premium increased $70.7 million, or 26.4%, to $338.2 million from $267.5
million for the three months ended March 31, 2010 and 2009, respectively. The
increase of $70.7 million was attributable to growth in our Specialty Risk
and Extended Warranty business and $8.7 million of assumed business from ACAC.
The increase was partially offset by a $4.8 million decrease in our Small
Commercial Business and a $2.7 million decrease in our Specialty Program
business. The increase in Specialty Risk and Extended Warranty
business resulted primarily from new program writings in the Company’s
European business. The decrease in Small Commercial Business primarily from
lower premium in the commercial package business as the Company maintains its
pricing discipline. The decrease in the Specialty Program segment related
primarily to a decline from business the Company wrote on behalf of HSBC
Insurance Company of Delaware pursuant to a 100% fronting arrangement which was
entered into connection with the Company’s acquisition of WIC from an HSBC
affiliate as an accommodation to HSBC and is now in run-off.
  28
  Net Written Premium. Net
written premium increased $53.2 million, or 39.1%, to $189.4 million from $136.2
million for the three months ended March 31, 2010 and 2009, respectively. The
increase (decrease) by segment was: Small Commercial Business - $(9.1) million,
Specialty Risk and Extended Warranty - $47.8 million, Specialty Program - $5.8
million and Personal Lines - $8.7 million. Net written premium increased for the
three months ended March 31, 2010 compared to the same period in 2009 due to the
increase in gross written premium in 2010 compared to 2009.
  Net Earned Premium.Net
earned premium increased $15.7 million, or 11.9%, to $148.1 million from $132.4
million for the three months ended March 31, 2010 and 2009. The increase by
segment was: Small Commercial Business - $1.5 million; Specialty Risk and
Extended Warranty - $11.1 million; and Specialty Program - $3.1
million.
 
 Ceding Commission. Ceding
commission represents commission earned primarily through the Maiden Quota
Share, whereby AmTrust receives a 31% or 34.375% ceding commission, depending on
the business ceded, on ceded written premiums to Maiden.  The ceding
commission earned during the three months ended March 31, 2010 and 2009 was
$32.2 million and $27.6 million, respectively. Ceding commission increased
period over period as a result of increased premium writings.
 
 Service and Fee Income.Service and fee
income increased $0.5 million, or 6.9%, to $8.0 million from $7.5 million for
the three months ended March 31, 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 broker fees
from existing agreements with Maiden and asset management fees and IT consulting
fees through new agreements with ACAC, partially, offset by lower servicing
carrier contract fees for state workers’ compensation assigned risk
plans.
 
 Net Investment Income.Net
investment income decreased $0.4 million, or 2.8%, to $13.6 million from $14.0
million for the three months ended March 31, 2010 and 2009, respectively. The
decline related primarily to a decrease in yields on the Company’s fixed income
securities portfolio, which were approximately 3.8% and 4.1%, respectively, for
the three months ended March 31, 2010 and 2009.
 
 Net Realized Gains (Losses) on
Investments.Net realized gains on investments for the three months ended
March 31, 2010 were $1.8 million, compared to net realized losses of $9.2
million for the same period in 2009. The increase period over period related to
the continued recovery of the Company’s equity portfolio and the timing of
certain sales within its equity and fixed income portfolio. Additionally, the
Company recorded non-cash write-downs of $5.1 million and $1.4 million during
the three months ended March 31, 2010 and 2009, respectively, for securities
that were determined to be other-than-temporarily-impaired.
 
 Loss and Loss Adjustment Expenses.  Loss and loss adjustment expenses increased $14.9 million, or
19.9%, to $89.8 million for the three months ended March 31, 2010 from $74.9
million for the three months ended March 31, 2009. The Company’s loss ratio for
the three months ended March 31, 2010 and 2009 were 60.6% and 56.6%,
respectively. The increase in the loss ratio resulted primarily from the effect
in 2009 of a one-time $5.9 million benefit to the Specialty Risk and Extended
Warranty segment related to the acquisition of ACHL.
 
 Acquisition Costs and Other
Underwriting Expenses.   Acquisition costs and other
underwriting expenses increased $3.1 million, or 5.3%, to $61.3 million for the
three months ended March 31, 2010 from $58.2 million for the three months ended
March 31, 2009. The expense ratio for the same periods decreased to 19.6% from
23.1%, respectively, and impacted all segments. The decrease in the expense
ratio resulted primarily from the increase in ceding commission received from
Maiden Insurance during the three months ended March 31, 2010, partially offset
by higher salary expense. Additionally, in 2009 the Company incurred higher
one-time policy acquisition expenses of $1.7 million related to the acquisition
of ACHL.
 
 Income Before Other Income
(Expense), Income Taxes and Equity Earnings of Unconsolidated Investment.
Income before other income (expense), income taxes and equity earnings of
unconsolidated investment increased $12.2 million, or 40.9%, to $42.0 million
from $29.8 million for the three months ended March 31, 2010 and 2009,
respectively. The change in income from 2009 to 2010 resulted primarily from
higher net earned premium and realized gains on the investment portfolio offset,
partially, by higher loss and loss adjustment expense.
 
 Interest Expense.Interest
expense for the three months ended March 31, 2010 was $3.6 million, compared to
$4.2 million for the same period in 2009.  The decrease was
attributable primarily to lower outstanding debt balances on the Company’s $40
million term loan and $30 million promissory note, as well as declines in
interest rates on the Company’s variable rate debt.
  29
 
 Income Tax Expense (Benefit)Income tax expense for three months ended March 31, 2010 was $11.5
million which resulted in an effective tax rate of 27.4%. Income tax expense for
three months ended March 31, 2009 was $5.3 million which resulted in an
effective tax rate of 17.6%. The increase in the Company’s effective rate in
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
Investments - Related Parties. Equity in earnings of unconsolidated
investments - related parties increased by $1.8 million for the three months
ended March 31, 2010 to $1.4 million. The increase related to the
Company’s
equity investment in 2010 in ACAC and its related proportionate share of equity
income in ACAC for the three months ended March 31, 2010.
Additionally, the Company now includes its equity income (loss) from Warrantech
in this line item. The Company previously classified the equity
earnings (loss) from Warrantech as a component of investment income in
2009. This amount has been reclassified in all periods
presented.
 
 Small
Commercial Business Segment (Unaudited)
  Three Months Ended
                      March 31,2010
                    
                    
                    2009(Amounts in Thousands)Gross
      written premium
                    
                    $
                    122,702
                    
                    
                    $
                    127,470Net
      written premium
                    
                    
                    61,438
                    
                    
                    
                    70,459Change
      in unearned premium
                    
                    
                    (1,834
                    )
                    
                    
                    (12,368
                    )Net
      earned premium
                    
                    
                    59,604
                    
                    
                    
                    58,091Ceding
      commission revenue
                    
                    
                    21,226
                    
                    
                    
                    19,776Loss
      and loss adjustment expense
                    
                    
                    35,088
                    
                    
                    
                    35,394Acquisition
      costs and other underwriting expenses
                    
                    
                    34,181
                    
                    
                    
                    34,15469,269
                    
                    
                    
                    69,548Net
      earned premiums less expenses included in combined ratio (Underwriting
      income)
                    
                    $
                    11,561
                    
                    
                    $
                    8,319Key
      Measures:Net
      loss ratio
                    
                    
                    58.9
                    %
                    
                    
                    60.9
                    %Net
      expense ratio
                    
                    
                    21.7
                    %
                    
                    
                    24.7
                    %Net
      combined ratio
                    
                    
                    80.6
                    %
                    
                    
                    85.7
                    %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                    
                    
                    34,181
                    
                    
                    
                    34,154Less:
      ceding commission revenue
                    
                    
                    21,226
                    
                    
                    
                    19,77612,955
                    
                    
                    
                    14,378Net
      earned premium
                    
                    
                    59,604
                    
                    
                    
                    58,091Net
      expense ratio
                    
                    
                    21.7
                    %
                    
                    
                    24.7
                    %
 
 Small
Commercial Business Segment Results of Operations for the Three Months Ended
March 31, 2010 and 2009
 
 Gross Written Premium.
  Gross written premium decreased $4.8 million, or 3.7%, to $122.7
million for the three months ended March 31, 2010 from $127.5 million for the
three months ended March 31, 2009. The decrease in Small Commercial Business
resulted primarily from the Company’s continued
reunderwriting of its commercial package businessand a six percent
mandated rate reduction in the state of Florida’s workers’ compensation
rates.  The decrease was partially offset by additional gross written
premium of $13.7 million in 2010 related to the Cybercomp acquisitionand an increase in assigned risk business.
  30
 
 Net Written Premium.
  Net written premium decreased $9.1 million, or 12.8%, to $61.4
million from $70.5 million for the three months ended March 31, 2010 and 2009,
respectively. The decrease in net premium written resulted from a decrease of
gross written premium for the three months ended March 31, 2010 compared to
gross written premium for the three months ended March 31,
2009.
 
 Net Earned Premium.
  Net earned premium increased $1.5 million, or 2.6%, to $59.6 million
for the three months ended March 31, 2010 from $58.1 million for the three
months ended March 31, 2009. As premiums written earn ratably over a twelve
month period, the increase in net premium earned resulted from higher net
premium written for the twelve months ended March 31, 2010 compared to the
twelve months ended March 31, 2009.
 
 Ceding Commission.  Ceding commission represents commission earned primarily
through the Maiden Quota Share agreement with Maiden Insurance, whereby AmTrust
receives 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 March 31, 2010 and 2009 was $21.2 million and $19.8
million, respectively. The increase related to the segment receiving its
proportionate share of the Company’s overall policy acquisition
expense.
 
 Loss and Loss Adjustment
Expenses.   Loss and loss adjustment expenses decreased $0.3
million, or 0.9%, to $35.1 million for the three months ended March 31, 2010
from $35.4 million for the three months ended March 31, 2009. The Company’s loss
ratio for the segment for the three months ended March 31, 2010 decreased to
58.9% from 60.9% for the three months ended March 31, 2009. The decrease in the
loss and loss adjustment ratio resulted primarily from the Company’s
reunderwriting of certain portions of its commercial package book of
business.
 
 Acquisition Costs and Other
Underwriting Expenses.   Acquisition Costs and Other
Underwriting Expenses was $34.2 million for the three months ended March 31,
2010 and was flat compared to the three months ended March 31, 2009. The expense
ratio decreased to 21.7% for the three months ended March 31, 2010 from 24.7%
for the three months ended March 31, 2009. The decrease in expense ratio
resulted primarily from higher ceding commission earned during the three months
ended March 31, 2010.
 
 Net Earned Premiums less Expenses
Included in Combined Ratio (Underwriting Income).   Net premiums
earned less expenses included in combined ratio increased $3.3 million, or
39.0%, to $11.6 million for the three months ended March 31, 2010 from $8.3
million for the three months ended March 31, 2009. This increase resulted
primarily from higher ceding commission earned during the three months ended
March 31, 2010.
 
 Specialty Risk and Extended Warranty
Segment (Unaudited)
  Three Months Ended March 31,2010
                      
                      
                      2009(Amounts in Thousands)Gross
      written premium
                      
                      $
                      152,174
                      
                      
                      $
                      82,708Net
      written premium
                      
                      
                      86,049
                      
                      
                      
                      38,259Change
      in unearned premium
                      
                      
                      (34,285
                      )
                      
                      
                      2,416Net
      earned premiums
                      
                      
                      51,764
                      
                      
                      
                      40,675Ceding
      commission revenue
                      
                      
                      7,903
                      
                      
                      
                      6,027Loss
      and loss adjustment expense
                      
                      
                      31,160
                      
                      
                      
                      17,818Acquisition
      costs and other underwriting expenses
                      
                      
                      14,711
                      
                      
                      
                      12,70345,871
                      
                      
                      
                      30,521Net
      earned premiums less expenses included in combined ratio (Underwriting
      income)
                      
                      $
                      13,796
                      
                      
                      $
                      16,181Key
      Measures:Net
      loss ratio
                      
                      
                      60.2
                      %
                      
                      
                      43.8
                      %Net
      expense ratio
                      
                      
                      13.2
                      %
                      
                      
                      16.4
                      %Net
      combined ratio
                      
                      
                      73.3
                      %
                      
                      
                      60.2
                      %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                      
                      
                      14,711
                      
                      
                      
                      12,703Less:
      ceding commission revenue
                      
                      
                      7,903
                      
                      
                      
                      6,0276,808
                      
                      
                      
                      6,676Net
      earned premium
                      
                      
                      51,764
                      
                      
                      
                      40,675Net
      expense ratio
                      
                      
                      13.2
                      %
                      
                      
                      16.4
                      %
  31
 
 Specialty Risk
and Extended Warranty Segment Results of Operations for the Three Months Ended
March 31, 2010 and 2009
 
 Gross Written Premium. Gross
written premium increased $69.5 million, or 84%, to $152.2 million for the three
months ended March 31, 2010 from $82.7 million for the three months ended March
31, 2009. The increase related primarily to the underwriting of new coverage
plans, as well as additional premiums from growth in the Company’s European
business. The segment also benefited from the weakening of the U.S. dollar in
2010, which positively impacted the European business by approximately $7.0
million.
 
 Net Written Premium. Net
written premium increased $47.8 million, or 124.9%, to $86.0 million from $38.2
million for the three months ended March 31, 2010 and 2009, respectively. The
increase in net premium written resulted from an increase of gross written
premium for the three months ended March 31, 2010 compared to gross written
premium for the three months ended March 31, 2009.
 
 Net Earned Premium. Net
earned premium increased $11.1 million, or 27.3%, to $51.8 million for the three
months ended March 31, 2010 from $40.7 million for the three months ended March
31, 2009. Becasue 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 AmTrust receives a 31% or 34.375% ceding commission, depending on
the business ceded, on written premiums ceded to Maiden.  The ceding
commission earned during the three months ended March 31, 2010 and 2009 was $7.9
million and $6.0 million, respectively.
 
 Loss and Loss Adjustment Expenses.Loss and loss adjustment expenses were $31.2 million and $17.8 million
for the three months ended March 31, 2010 and 2009. The Company’s loss ratio for
the segment for the three months ended March 31, 2010 increased to 60.2% from
43.8% for the three months ended March 31, 2009.  The increase in the
loss ratio resulted primarily from a one-time benefit of $5.9 million in 2009
related to the acquisition of ACHL in 2009.
 
 Acquisition Costs and Other
Underwriting Expenses.   Acquisition costs and other
underwriting expenses increased $2.0 million, or 15.8%, to $14.7 million for the
three months ended March 31, 2010 from $12.7 million for the three months ended
March 31, 2009. The expense ratio decreased to 13.2% for the three months ended
March 31, 2010 from 16.4% for the three months ended March 31,
2009.  The decrease in expense ratio resulted primarily from higher
earned premium in 2010 combined with one-time policy acquisition expenses of
$1.7 million incurred in 2009 related to the acquisition of ACHL in
2009.
 
 Net Earned Premiums less Expenses
Included in Combined Ratio (Underwriting Income).   Net earned
premiums less expenses included in combined ratio decreased $2.4 million, or
14.7%, to $13.8 million for the three months ended March 31, 2010 from $16.2
million for the three months ended March 31, 2009. This decrease is attributable
primarily to an increase in the loss ratio period over period.
  32
 
 Specialty
Program Segment Results of Operations
  (Unaudited)Three Months Ended
                        March 31,2010
                      
                      
                      2009(Amounts in Thousands)Gross
      written premium
                      
                      $
                      54,655
                      
                      
                      $
                      57,349Net
      written premium
                      
                      
                      33,227
                      
                      
                      
                      27,461Change
      in unearned premium
                      
                      
                      3,505
                      
                      
                      
                      6,196Net
      earned premium
                      
                      
                      36,732
                      
                      
                      
                      33,657Ceding
      commission revenue
                      
                      
                      3,119
                      
                      
                      
                      1,788Loss
      and loss adjustment expense
                      
                      
                      23,573
                      
                      
                      
                      21,703Acquisition
      costs and other underwriting expenses
                      
                      
                      12,454
                      
                      
                      
                      11,29736,027
                      
                      
                      
                      33,000Net
      earned premiums less expenses included in combined ratio (Underwriting
      income)
                      
                      $
                      3,824
                      
                      
                      $
                      2,445Key
      Measures:Net
      loss ratio
                      
                      
                      64.2
                      %
                      
                      
                      64.5
                      %Net
      expense ratio
                      
                      
                      25.4
                      %
                      
                      
                      28.3
                      %Net
      combined ratio
                      
                      
                      89.6
                      %
                      
                      
                      92.7
                      %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                      
                      
                      12,454
                      
                      
                      
                      11,297Less:
      ceding commission revenue
                      
                      
                      3,119
                      
                      
                      
                      1,7889,335
                      
                      
                      
                      9,509Net
      earned premium
                      
                      
                      36,732
                      
                      
                      
                      33,657Net
      expense ratio
                      
                      
                      25.4
                      %
                      
                      
                      28.3
                      %
 
 Specialty
Program Segment Results of Operations for the Three Months Ended March 31, 2010
and 2009
 
 Gross Written Premium. Gross
premium decreased $2.7 million, or 4.7%, to $54.7 million for the three months
ended March 31, 2010 from $57.4 million for the three months ended March 31,
2009. The decrease in Specialty Program related primarily to a decline from
business the Company wrote on behalf of HSBC Insurance Company of Delaware
pursuant to a 100% fronting arrangement which was entered into connection with
the Company’s acquisition of WIC from an HSBC affiliate as an accommodation to
HSBC and is now in run-off. Additionally, the segment experienced declines in
gross written premium because of the Company’s maintenance of its pricing and
administrative discipline which resulted in a decrease in production from a
large MGA. This decline was offset by new programs brought on by a team of
underwriters hired during the middle of 2009.
  Net Written Premium. Net
premium increased $5.8 million, or 21.0%, to $33.2 million for the three months
ended March 31, 2010 from $27.4 million for the three months ended March 31,
2009. The increase in net premium written resulted primarily from a decline in
premium written in 2010 on behalf of HSBC which is ceded 100%.
 
 Net Earned Premium. Net
earned premium increased $3.0 million, or 9.1%, to $36.7 million for the three
months ended March 31, 2010 from $33.7 million for the three months ended March
31, 2009. As premiums written earn ratably over a twelve month period, the
increase in net premium earned resulted from higher net premium written for
the twelve months ended March 31, 2010 compared to the twelve months ended March
31, 2009.
  33
  Ceding
Commission. Ceding commission represents commission earned
primarily through its quota share agreement with Maiden Insurance, whereby
AmTrust receives a 31% or 34.375% ceding commission, depending on the business
ceded, on ceded written premiums to Maiden.  The ceding commission
earned during the three months ended March 31, 2010 and 2009 was $3.1 million
and $1.8 million, respectively. Ceding commission increased period over period
as a result of increased earned premium in the three months ended March 31, 2010
compared to the same period in 2009.
 
 Loss and Loss Adjustment Expenses.Loss and loss adjustment expenses increased $1.9 million, or 8.6%, to
$23.6 million for the three months ended March 31, 2010 compared from $21.7
million for the three months ended March 31, 2009. The loss ratio for the
segment was flat for the three months ended March 31, 2010 (64.2% compared to
64.5% for the three months ended March 31, 2009).
 
 Acquisition Costs and Other
Underwriting Expenses. Acquisition Costs and Other Underwriting Expenses
increased $1.2 million, or 10.2%, to $12.5 million for the three months ended
March 31, 2010 from $11.3 million for the three months ended March 31, 2009. The
expense ratio decreased to 25.4% for the three months ended March 31, 2010 from
28.3% for the three months ended March 31, 2009. The decrease in expense ratio
resulted primarily from higher ceding commissions partially offset by higher
policy acquisition costs and salary expense.
 
 Net Earned Premiums less Expenses
Included in Combined Ratio (Underwriting Income)   Net earned
premiums less expenses included in combined ratio were $3.8 million and $2.4
million for the three months ended March 31, 2010 and 2009, respectively. The
increase of $1.4 million resulted primarily from an increase to earned premiums
and ceding commission.
  Personal
Lines Reinsurance Segment Results of Operations
 (Unaudited)Three Months Ended
                      March 31,2010
                    
                    
                    2009(Amounts in Thousands)Gross
      written premium
                    
                    $
                    8,700
                    
                    
                    $
                    -Net
      written premium
                    
                    
                    8,700
                    
                    
                    
                    -Change
      in unearned premium
                    
                    
                    (8,700
                    )
                    
                    
                    -Net
      earned premium
                    
                    
                    -
                    
                    
                    
                    -Ceding
      commission revenue
                    
                    
                    -
                    
                    
                    
                    -Loss
      and loss adjustment expense
                    
                    
                    -
                    
                    
                    
                    -Acquisition
      costs and other underwriting expenses
                    
                    
                    -
                    
                    
                    
                    --
                    
                    
                    
                    -Net
      earned premiums less expenses included in combined ratio (Underwriting
      income)
                    
                    $
                    -
                    
                    
                    $
                    -
 
 The
Company began assuming commercial auto business from GMAC effective March 1,
2010 pursuant to a quota share reinsurance agreement with GMAC’s personal lines
insurance companies. The Company did not realize any earned premium or related
losses or expenses during the period in association with this
segment.
  34
 
 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 $98.2 million and $64.7 million in the
three months ended March 31, 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:
 
 Three Months Ended
                            March 31,(Amounts in Thousands)
                          2010
                          
                          2009Cash
      and cash equivalents provided by (used in):Operating
      activities
                          $
                          21,975
                          
                          $
                          75,477Investing
      activities
                          
                          (82,609
                          )
                          
                          (51,437
                          )Financing
      activities
                          
                          47,066
                          
                          
                          (47,970
                          )
 
 Net cash
provided by operating activities for the three months ended March 31, 2010
decreased compared to cash provided by operating activities in the three months
ended March 31, 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 used
in investing activities during the period represents primarily the net purchases
(purchases less sales) of investments. For the three months ended March 31,
2010, the Company’s net purchases of fixed securities totaled $32.3 million
offset by sales of equity securities of $3.9 million. Additionally, the Company
invested $53.1 million in ACAC. For the three months ended March 31, 2009, the
Company’s net sales of fixed income securities totaled $46.1 million and net
sales of equity securities totaled $1.6 million.
 
 Cash used
in financing activities for the three months ended March 31, 2010 consisted of
selling of $54 million of securities sold under agreements to repurchase and
dividend payments of $3.6 million. Cash used in financing activities for the
three months ended March 31, 2009 consisted of purchases of $36.1 million of
securities sold under agreements to repurchase and dividend payments of $3.0
million.
 
 Term
Loan
 
 On June
3, 2008, the Company entered into a term loan with JP Morgan Chase Bank, N.A. in
the aggregate amount of $40 million. The term of the loan is for a period of
three years and requires quarterly principal payments 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 March 31,
2010. The Company can prepay any amount of the loan after the first anniversary
date without penalty upon prior notice. The term loan contains affirmative and
negative covenants, including limitations on additional debt, limitations on
investments and acquisitions outside the Company’s normal course of business.
The loan requires the Company to maintain debt to equity ratio of 0.35 to 1 or
less.  The Company reduced the outstanding balance on the note during
the three months ended March 31, 2010 from $20 million to $16.7
million.
  35
  Promissory
Note
 
 In
connection with the stock and asset purchase agreement with a subsidiary of
Unitrin, Inc., the Company entered into a promissory note with Unitrin in the
amount of $30 million. The note bears no interest rate and requires four annual
principal payments of $7.5 million, the first of which was paid June 1, 2009,
and the remaining principal payments are due on June 1, 2010, 2011 and 2012. The
Company calculated imputed interest of $3.2 million based on current interest
rates available to the Company. Accordingly, the note’s carrying balance was
adjusted to $26.8 million at inception. The note is required to be paid in full
immediately, under certain circumstances involving default of payment or change
of control of the Company. The Company recorded $0.2 million of interest expense
during the three months ended March 31, 2010 and the note’s carrying value at
March 31, 2010 was $21.4 million.
 
 Line
of Credit
 
 On June
3, 2008, the Company entered into an agreement for an unsecured line of credit
with JP Morgan Chase Bank, N.A. in the aggregate amount of $25 million. The line
is used for collateral for letters of credit. On June 30, 2009, the Company
amended this agreement, whereby, the line was increased in the aggregate amount
to $30 million and its term was extended to June 30, 2010. 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 March 31, 2010, there was no outstanding
balance on the line of credit. At March 31, 2010, the Company had outstanding
letters of credit in place for $26.3 million which reduced the availability on
the line of credit to $3.7 million as of March 31, 2010. The Company currently
is negotiating to replace its existing line of credit.  The Company
does not believe its liquidity or borrowing rate will be materially
impacted.
 
 Securities
Sold Under Agreements to Repurchase, at Contract Value
 
 The
Company enters into repurchase agreements. The agreements are accounted for as
collateralized borrowing transactions and are recorded at contract amounts. The
Company receives cash or securities, which it invests or hold in short term or
fixed income securities. As of March 31, 2010, there were $226.4 million
principal amount outstanding at interest rates between 0.25% and 0.30%. Interest
expense associated with these repurchase agreements for the three months ended
March 31, 2010 was $0.1 million of which $0.03 million was accrued as of March
31, 2010. The Company has approximately $230.0 million of collateral pledged in
support of these agreements.
 
 Note
Payable — Collateral for Proportionate Share of Reinsurance
Obligation
 
 In
conjunction with the Reinsurance Agreement between AII and Maiden Insurance (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. The
Company is required to deposit all proceeds from the advances into a sub-account
of each trust account that has been established for each AmTrust Ceding Insurer.
To the extent of the loan, Maiden Insurance is discharged from providing
security for its proportionate share of the obligations as contemplated by the
Maiden Quota Share agreement. If an AmTrust Ceding Insurer withdraws loan
proceeds from the trust account for the purpose of reimbursing such AmTrust
Ceding Insurer, for an ultimate net loss, the outstanding principal balance of
the loan shall be reduced by the amount of such withdrawal. The loan agreement
was amended in February 2008 to provide for interest at a rate of LIBOR plus 90
basis points and is payable on a quarterly basis. Each advance under the loan is
secured by a promissory note. Advances totaled $168.0 million as of March 31,
2010.
 
 Reinsurance
  The Company utilizes reinsurance
agreements to reduce its exposure to large claims and catastrophic loss
occurrences and to increase its capacity to write profitable business. These
agreements provide for recovery from reinsurers of a portion of losses and LAE
under certain circumstances without relieving the Company of its obligation to
the policyholder. Losses and LAE incurred and premiums earned are reflected
after deduction for reinsurance. In the event reinsurers are unable to meet
their obligations under reinsurance agreements, the Company would not be able to
realize the full value of the reinsurance recoverable balances. The Company
periodically evaluates the financial condition of its reinsurers in order to
minimize its exposure to significant losses from reinsurer insolvencies.
Reinsurance does not discharge or diminish the primary liability of the Company;
however, it does permit recovery of losses on such risks from the
reinsurers.
  36
  The
Company has coverage for its 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, the
Company has 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.
  The
Company has coverage for its 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. The Company purchases quota share reinsurance for its
umbrella business and also purchases various pro-rata and excess reinsurance
relating to specific insurance programs and/or specialty lines of
business.
  The
Company has coverage for foreign liability, professional lines, directors and
officers and medical malpractice business written in the U.K. under excess of
loss reinsurance agreements. The agreements cover losses in excess of £1.0
million up to a maximum of £10.0 million. The Company also purchases quota share
reinsurance for its European
casualty and liability businessand it purchases various pro-rata and
excess reinsurance relating to specific foreign insurance programs and/or
specialty lines of business.
  The
Company has coverage for its U.S. property lines of business under an excess of
loss reinsurance agreements. The agreement covers losses in excess of $2 million
per location up to a maximum $20 million. In addition the Company has 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 Wesco from Household Insurance Group Holding
Company (“Household”), the Company agreed to write certain business on behalf of
Household for a three year period. The premium written under this arrangement is
100% reinsured by HSBC Insurance Company of Delaware, a subsidiary of Household.
The reinsurance recoverable associated with this business is guaranteed by
Household.
  During
the third quarter of 2007, the Company and Maiden entered into a master
agreement, as amended, by which 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 IGI, 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 $10,000 net
retention for workers’ compensation risks.
  37
 
 AmTrust
also has agreed to cause AII, subject to regulatory requirements, to reinsure
any insurance company which writes Covered Business in which AmTrust acquires a
majority interest to the extent required to enable AII to cede to Maiden
Insurance 40% of the premiums and losses related to such Covered
Business.
  The
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, the Company 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 XOL treaty that had an attachment of $0.25 million
was terminated on a run-off basis on December 31, 2002. Therefore, losses
occurring in 2003 that attached to a 2002 policy were ceded to American Home at
an attachment point of $0.25 million per occurrence.
  Since
January 1, 2003, the Company has had variable quota share reinsurance with
Munich Reinsurance Company (“Munich Re”) for our Specialty Risk and Extended
Warranty insurance. The scope of this reinsurance arrangement is broad enough to
cover all of our Specialty Risk and Extended Warranty insurance worldwide.
Currently, we do not cede to Munich Re the majority of our U.S. specialty risks
and 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 which we at acceptance regard as one individual risk. This
means that regardless of the amount of insured losses generated by any ceded
risk, the maximum coverage for that ceded risk under this reinsurance
arrangement is £0.5 million. For the majority of the business ceded under this
reinsurance arrangement, we cede 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 the Company’s strategic investment in American Capital
Acquisition Company (“ACAC”) and ACAC’s acquisition from GMAC Insurance
Holdings, Inc. (“GMACI”) and Motors Insurance Corporation (“MIC”, together with
GMACI, “GMAC”) of GMAC’s U.S. consumer property and casualty insurance business,
which was completed on March 1, 2010 (the “Acquisition”), the Company’s
subsidiary TIC has entered into a quota share reinsurance agreement (the
“Personal Lines Quota Share”) with GMAC personal lines insurance companies (“PL
Insurers”) by which TIC assumes an amount equal to 10% of the premium written by
the PL Insurers, net of the cost of unaffiliated insuring reinsurance. The
Personal Lines Quota Share further provides that the PL 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 PL
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 PL Insureres, run-off, or a reduction of
50% or more of the shareholders’ equity. The PL
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 PL Insurers to
TIC to $220.0 million during calendar year 2010. The premium cap increases by
10% per annum thereafter.
  38
 
 Investment
Portfolio
  Our investment portfolio, including
cash and cash equivalents, increased $17.1 million, or 1.2%, to $1,417.9 million
for the three months ended March 31, 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 $1,145.8 million and an amortized
cost of $1,131.9 million as of March 31, 2010. Our equity securities are
classified as available-for-sale. These securities are reported at fair
value or $54.2 million with a cost of $55.9 million as of March 31, 2010.
Securities sold but not yet purchased, which was $17.8 million as of March 31,
2010, represent obligations of the Company to deliver the specified security at
the contracted price and thereby create a liability to purchase the security in
the market at prevailing rates. Sales of securities under repurchase agreements,
which were $226.4 million as of March 31, 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:
  March 31, 2010
                                              
                                              December 31, 2009(Amounts in Thousands)
                                              
                                              Carrying
                                                Value
                                              
                                              Percentage of
                                                Portfolio
                                              
                                              Carrying
                                                Value
                                              
                                              Percentage of
                                                PortfolioCash
      and cash equivalents
                                              
                                              $
                                              215,442
                                              
                                              15.2
                                              %
                                              $
                                              233,810
                                              
                                              16.7
                                              %Time
      and short-term deposits
                                              
                                              
                                              2,467
                                              
                                              0.2
                                              
                                              
                                              31,265
                                              
                                              2.2U.S.
      treasury securities
                                              
                                              
                                              80,521
                                              
                                              5.7
                                              
                                              
                                              124,143
                                              
                                              8.9U.S.
      government agencies
                                              
                                              
                                              67,255
                                              
                                              4.7
                                              
                                              
                                              47,424
                                              
                                              3.4Municipals
                                              
                                              
                                              36,972
                                              
                                              2.6
                                              
                                              
                                              27,268
                                              
                                              1.9Commercial
      mortgage back securities
                                              
                                              
                                              2,345
                                              
                                              0.2
                                              
                                              
                                              3,359
                                              
                                              0.2Residential
      mortgage backed securities:Agency
      backed
                                              
                                              
                                              466,450
                                              
                                              32.9
                                              
                                              
                                              481,731
                                              
                                              34.4Non-agency
      backed
                                              
                                              
                                              8,658
                                              
                                              0.6
                                              
                                              
                                              8,632
                                              
                                              0.6Asset
      backed securities
                                              
                                              
                                              3,138
                                              
                                              0.2
                                              
                                              
                                              3,619
                                              
                                              0.3Corporate
      bonds
                                              
                                              
                                              480,391
                                              
                                              33.9
                                              
                                              
                                              389,186
                                              
                                              27.8Preferred
      stocks
                                              
                                              
                                              5,238
                                              
                                              0.4
                                              
                                              
                                              5,110
                                              
                                              0.4Common
      stocks
                                              
                                              
                                              49,001
                                              
                                              3.4
                                              
                                              
                                              45,245
                                              
                                              3.2$
                                              1,417,878
                                              
                                              100.0
                                              %
                                              $
                                              1,400,792
                                              
                                              100.0
                                              %
 As of March 31, 2010, the weighted
average duration of our fixed income securities was 3.3 years and had a yield of
3.8%.
  Quarterly,
the Company’s 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. Some of the 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 the Company will be required to sell the security before recovery of
      its 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;
      and
  •
              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.
  Impairment
of investment securities results in a charge to operations when a market decline
below cost is deemed to be other-than-temporary. The Company writes down
investments immediately which it considers 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.
  39
 
 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 for the three
months ended March 31, 2010 and 2009 are presented in the table
below:
  (Amounts in thousands)
                    
                    2010
                    
                    
                    2009Equity
      securities
                    
                    $
                    5,138
                    
                    
                    $
                    1,427Fixed
      maturity securities
                    
                    
                    —
                    
                    
                    
                    —$
                    5,138
                    
                    
                    $
                    1,427
 
 In
addition to the other than temporary impairment of $5.1 million recorded during
the three months ended March 31, 2010, at March 31, 2010, the Company had $7.8
million of gross unrealized losses related to marketable equity securities. The
Company’s investment in marketable equity securities consist of investments in
preferred and common stock across a wide range of sectors. The Company evaluated
the near-term prospects for recovery of fair value in relation to the severity
and duration of the impairment and has determined in each case that the
probability of recovery is reasonable. Within the Company’s portfolio of equity
securities, 13 common stocks comprised $7.0 million, or 90 percent of the
unrealized loss. One security in the consumer products sector represent
approximately one percent of the total fair value and four percent of the
Company’s unrealized loss. Four securities in the financial sector
represent approximately eight percent of the total fair value and 22 percent of
the Company’s total unrealized losses and eight common stocks in the health
care, industrial and technology sectors which have fair values of approximately
19 percent, four percent and nine percent, respectively, and approximately 47
percent, nine percent and eight percent, respectively, of the Company’s
unrealized losses.  The duration of these impairments ranges from two
to 33 months. The remaining securities in a loss position are not considered
individually significant and accounted for ten percent of the Company’s
unrealized losses. The Company believes these securities will recover and that
we have the ability and intent to hold them until recovery.
 
 At March
31, 2010, the Company had $17.4 million of gross unrealized losses related to
available-for-sale fixed income securities as of March 31, 2010. Corporate bonds
represent 41.9% of the fair value of our fixed maturities and 96.7% of the total
unrealized losses of our fixed maturities. The Company owns 149 corporate bonds
in the industrial, bank and financial and other sectors, which have a fair value
of approximately 6.0%, 33.2% and 2.7%, respectively, and 0.8%, 93.3% and 2.6% of
total unrealized losses, respectively, of our fixed maturities. The Company
believes that the unrealized losses in these securities are the result,
primarily, of general economic conditions and not the condition of the issuers,
which we believe are solvent and have the ability to meet their obligations.
Therefore, the Company expects that the market price for these securities should
recover within a reasonable time.
 
 Item
3. Quantitative and Qualitative Disclosures About Market Risk
 
 Market
risk is the risk of potential economic loss principally arising from adverse
changes in the fair value of financial instruments. The major components of
market risk affecting us are liquidity risk, credit risk, interest rate risk,
foreign currency risk and equity price risk.
 
 Liquidity Risk.
  Liquidity risk represents the potential inability of AmTrust to meet
all payment obligations when they become due. The Company maintains sufficient
cash and marketable securities to fund claim payments and operations. We
purchase reinsurance coverage to mitigate the 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.
  40
 
 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 have
ceded. As a result, reinsurance contracts do not limit our ultimate obligations
to pay claims covered under the insurance policies we issue and we might not
collect amounts recoverable from our reinsurers. We address this credit risk by
selecting reinsurers which have an A.M. Best rating of “A” (Excellent) or better
at the time we enter into the agreement and by performing, along with our
reinsurance 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 “—Reinsurance.”
 
 Interest Rate Risk. We had
fixed maturity securities (excluding $2.5 million of time and short-term
deposits) with a fair value and carry value of $1,145.8 million as of March 31,
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 March 31, 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
March 31, 2010.
  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
                    
                    $
                    1,072,802
                    
                    
                    $
                    (73,015
                    )
                    
                    
                    (12.1
                    )%100
      basis point increase
                    
                    
                    1,110,094
                    
                    
                    
                    (35,723
                    )
                    
                    
                    (5.9
                    )No
      change
                    
                    
                    1,145,817
                    
                    
                    
                    —
                    
                    
                    
                    —100
      basis point decrease
                    
                    
                    1,175,973
                    
                    
                    
                    30,156
                    
                    
                    
                    5.0200
      basis point decrease
                    
                    
                    1,201,264
                    
                    
                    
                    55,447
                    
                    
                    
                    9.2
 
 Foreign Currency Risk. We
write insurance in the United Kingdom and certain other European Union member
countries through AIU and IGI. While the functional currency of AIU and IGI are,
respectively, the Euro and the British Pound, we write coverages that are
settled in local currencies, including 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 $2.1 million after tax realized currency
loss based on our outstanding foreign denominated reserves of $65.9
million at March 31, 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 March 31, 2010, the equity securities in our
investment portfolio had a fair value of $54.2 million, representing
approximately four percent of our total invested assets on that date. We are
fundamental long buyers and short sellers, with a focus on value oriented
stocks. The table below illustrates the impact on our equity portfolio and
financial position given a hypothetical movement in the broader equity markets.
The selected scenarios in the table below are not predictions of future events,
but rather are intended to illustrate the effect such events may have on the
carrying value of our equity portfolio and on shareholders’ equity as of March
31, 2010.
 
 41
  The
hypothetical scenarios below assume that the Company’s 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
                    
                    $
                    56,951
                    
                    
                    $
                    2,712
                    
                    
                    
                    0.4No
      change
                    
                    
                    54,239
                    
                    
                    
                    —
                    
                    
                    
                    —5 %
      decrease
                    
                    
                    51,527
                    
                    
                    
                    (2,712
                    )
                    
                    
                    (0.4
                    )%
 
 Off Balance Sheet Risk. The
Company has exposure or risk related to securities sold but not yet
purchased.
 
 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 the Company’s 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 have concluded that, as of the end of the period covered by
this report, such disclosure controls and procedures were effective in
ensuring that information required to be disclosed by the Company in the reports
it files of submits under the Exchange Act is timely recorded, processed,
summarized and reported, and accumulated and communicated to the Company’s
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 the Company’s 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, the Company’s internal control over
financial reporting.
  42
  PART II -
OTHER INFORMATION
 
 Item
1.  Legal Proceedings
 
 See Item 3. Legal Proceedings included
in the Company’s Annual Report Form 10-K for the period ended December 31, 2009
for a description of the Company’s legal proceedings.
 
 Item
1A.  Risk Factors
 
 Item 1A of the Annual Report Form 10-K
for the year ended December 31, 2009 presents risk factors that may affect the
Company’s future results.
 
 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.
 
 Item 6.   Exhibits
  Exhibit
                    Number
                  
                  Description31.1
                  
                  Certification
      of the Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
      for the quarter ended March 31, 2010.31.2
                  
                  Certification
      of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
      for the quarter ended March 31, 2010.32.1
                  
                  Certification
      of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, for
      the quarter ended March 31, 2010.32.2
                  
                  Certification
      of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, for
      the quarter ended March 31,
2010.
  43
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
 
 AmTrust
      Financial Services, Inc.(Registrant)Date:
      May 10, 2010
                    
                    /s/ Barry
      D. ZyskindBarry
      D. Zyskind
                      President
      and Chief Executive Officer/s/ Ronald
      E. Pipoly, Jr.Ronald
      E. Pipoly, Jr.
                      Chief
      Financial
Officer
  44