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, 2009
 
 o
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
transition period from ___________________ to ___________________
 
 Commission
file no. 001-33143
 
 AmTrust Financial Services,
Inc.
 (Exact
name of registrant as specified in its charter)
  Delaware
                    04-3106389(State
      or other jurisdiction of
                    (IRS
      Employer Identification No.)incorporation
      or organization)59
      Maiden Lane, 6thFloor,
      New York, New York
                    10038(Address
      of principal executive offices)
                    (Zip
      Code)
 
 (212)
220-7120
 (Registrant’s
telephone number, including area code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
 
 Large accelerated fileroAccelerated Filerx  Non-accelerated filero
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act). Yes o   No x
 
 As of May
1, 2009, the Registrant had one class of Common Stock ($.01 par value), of which
59,330,836 shares were issued and outstanding.
  
  
  INDEX
 
 PagePART
      I
                          FINANCIAL
      INFORMATIONItem
      1.
                          Unaudited
      Financial Statements:Condensed
      Consolidated Balance Sheets as of March 31, 2009 and December 31,
      2008
                          3Condensed
      Consolidated Statements of Income
                          4—
      Three months ended March 31, 2009 and 2008Condensed
      Consolidated Statements of Cash Flows
                          5—
      Three months ended March 31, 2009 and 2008Notes
      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
                          38Item
      4.
                          Controls
      and Procedures
                          40PART
      II
                          OTHER
      INFORMATIONItem
      6.
                          Exhibits
                          41Signatures
                          42
  
  PART 1 -
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 AMTRUST
FINANCIAL SERVICES, INC. AND SUBSIDIARIES
 
 Condensed
Consolidated Balance Sheets
 (in
thousands, except per share data)
 
 March 31, 2009
                                    
                                    
                                    December 31,
      2008(Unaudited)ASSETSInvestments:Fixed
      maturities, held-to-maturity, at amortized cost (fair value $45,490;
      $50,242)
                                    
                                    $
                                    43,763
                                    
                                    
                                    $
                                    48,881Fixed
      maturities, available-for-sale, at market value (amortized cost
      $1,011,526; $988,779)
                                    
                                    
                                    920,949
                                    
                                    
                                    
                                    910,376Equity
      securities, available-for-sale, at market value (cost $82,787;
      $84,090)
                                    
                                    
                                    25,687
                                    
                                    
                                    
                                    28,828Short-term
      investments
                                    
                                    
                                    187,512
                                    
                                    
                                    
                                    167,845Other
      investments
                                    
                                    
                                    12,607
                                    
                                    
                                    
                                    13,457Total
      investments
                                    
                                    
                                    1,190,518
                                    
                                    
                                    
                                    1,169,387Cash
      and cash equivalents
                                    
                                    
                                    165,287
                                    
                                    
                                    
                                    192,053Funds
      held with reinsurance companies
                                    
                                    
                                    110
                                    
                                    
                                    
                                    110Accrued
      interest and dividends
                                    
                                    
                                    8,246
                                    
                                    
                                    
                                    9,028Premiums
      receivable, net
                                    
                                    
                                    390,338
                                    
                                    
                                    
                                    419,577Note
      receivable – related party
                                    
                                    
                                    21,808
                                    
                                    
                                    
                                    21,591Reinsurance
      recoverable
                                    
                                    
                                    399,758
                                    
                                    
                                    
                                    363,608Reinsurance
      recoverable – related party
                                    
                                    
                                    244,940
                                    
                                    
                                    
                                    221,214Prepaid
      reinsurance premium
                                    
                                    
                                    130,069
                                    
                                    
                                    
                                    128,519Prepaid
      reinsurance premium – related party
                                    
                                    
                                    233,633
                                    
                                    
                                    
                                    243,511Federal
      income tax receivable
                                    
                                    
                                    600
                                    
                                    
                                    
                                    4,677Prepaid
      expenses and other assets
                                    
                                    
                                    57,869
                                    
                                    
                                    
                                    72,221Deferred
      policy acquisition costs
                                    
                                    
                                    121,876
                                    
                                    
                                    
                                    103,965Deferred
      income taxes
                                    
                                    
                                    79,937
                                    
                                    
                                    
                                    76,910Property
      and equipment, net
                                    
                                    
                                    15,035
                                    
                                    
                                    
                                    15,107Goodwill
                                    
                                    
                                    52,414
                                    
                                    
                                    
                                    49,794Intangible
      assets
                                    
                                    
                                    51,585
                                    
                                    
                                    
                                    52,631$
                                    3,164,023
                                    
                                    
                                    $
                                    3,143,893LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Loss
      and loss expense reserves
                                    
                                    $
                                    1,094,401
                                    
                                    
                                    $
                                    1,014,059Unearned
      premiums
                                    
                                    
                                    754,273
                                    
                                    
                                    
                                    759,915Ceded
      reinsurance premiums payable
                                    
                                    
                                    53,203
                                    
                                    
                                    
                                    59,990Ceded
      reinsurance premium payable – related party
                                    
                                    
                                    99,296
                                    
                                    
                                    
                                    102,907Reinsurance
      payable on paid losses
                                    
                                    
                                    3,266
                                    
                                    
                                    
                                    8,820Funds
      held under reinsurance treaties
                                    
                                    
                                    875
                                    
                                    
                                    
                                    228Securities
      sold but not yet purchased, market
                                    
                                    
                                    12,665
                                    
                                    
                                    
                                    22,608Securities
      sold under agreements to repurchase, at contract value
                                    
                                    
                                    248,352
                                    
                                    
                                    
                                    284,492Accrued
      expenses and other current liabilities
                                    
                                    
                                    145,659
                                    
                                    
                                    
                                    144,304Derivatives
      liabilities
                                    
                                    
                                    982
                                    
                                    
                                    
                                    1,439Note
      payable – related party
                                    
                                    
                                    167,975
                                    
                                    
                                    
                                    167,975Non
      interest bearing note – net of unamortized discount of
    $2,126
                                    
                                    
                                    27,874
                                    
                                    
                                    
                                    27,561Term
      loan
                                    
                                    
                                    30,000
                                    
                                    
                                    
                                    33,333Junior
      subordinated debt
                                    
                                    
                                    123,714
                                    
                                    
                                    
                                    123,714Total
      liabilities
                                    
                                    
                                    2,762,535
                                    
                                    
                                    
                                    2,751,345Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $.01 par value; 100,000 shares authorized, 84,146 issued in March
      31, 2009 and December 31, 2008, respectively; 59,331 and 60,033
      outstanding as of March 31, 2009 and December 31, 2008,
      respectively
                                    
                                    
                                    842
                                    
                                    
                                    
                                    842Preferred
      stock, $.01 par value; 10,000,000 shares authorized
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Additional
      paid-in capital
                                    
                                    
                                    540,092
                                    
                                    
                                    
                                    539,421Treasury
      stock at cost; 24,815 shares and 24,113 shares as of March 31, 2009 and
      December 31, 2008, respectively
                                    
                                    
                                    (300,295
                                    )
                                    
                                    
                                    (294,803
                                    )Accumulated
      other comprehensive income (loss)
                                    
                                    
                                    (113,211
                                    )
                                    
                                    
                                    (105,815
                                    )Retained
      earnings
                                    
                                    
                                    274,060
                                    
                                    
                                    
                                    252,903Total
      stockholders’ equity
                                    
                                    
                                    401,488
                                    
                                    
                                    
                                    392,548$
                                    3,164,023
                                    
                                    
                                    $
                                    3,143,893
  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 31,2009
                                      
                                      
                                      2008Revenues:Premium
      income:Net
      premium written
                                      
                                      $
                                      136,179
                                      
                                      
                                      $
                                      117,442Change
      in unearned premium
                                      
                                      
                                      (3,756
                                      )
                                      
                                      
                                      (20,029
                                      )Net
      earned premium
                                      
                                      
                                      132,423
                                      
                                      
                                      
                                      97,413Ceding
      commission – primarily related party
                                      
                                      
                                      27,591
                                      
                                      
                                      
                                      20,875Commission
      and fee income
                                      
                                      
                                      7,454
                                      
                                      
                                      
                                      6,287Net
      investment income
                                      
                                      
                                      13,589
                                      
                                      
                                      
                                      13,531Net
      realized loss on investments
                                      
                                      
                                      (9,238
                                      )
                                      
                                      
                                      (5,220
                                      )Other
      investment loss on managed assets
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (2,900
                                      )Total
      revenues
                                      
                                      
                                      171,819
                                      
                                      
                                      
                                      129,986Expenses:Loss
      and loss adjustment expense
                                      
                                      
                                      74,915
                                      
                                      
                                      
                                      55,165Acquisition
      costs and other underwriting expenses
                                      
                                      
                                      58,154
                                      
                                      
                                      
                                      40,877Other
                                      
                                      
                                      5,194
                                      
                                      
                                      
                                      4,794Total
      expenses
                                      
                                      
                                      138,263
                                      
                                      
                                      
                                      100,836Operating
      income from continuing operations
                                      
                                      
                                      33,556
                                      
                                      
                                      
                                      29,150Other
      income (expenses):Foreign
      currency gain
                                      
                                      
                                      33
                                      
                                      
                                      
                                      159Interest
      expense
                                      
                                      
                                      (4,171
                                      )
                                      
                                      
                                      (2,629
                                      )Total
      other expenses
                                      
                                      
                                      (4,138
                                      )
                                      
                                      
                                      (2,470
                                      )Income
      from continuing operations before provision for income taxes and minority
      interest
                                      
                                      
                                      29,418
                                      
                                      
                                      
                                      26,680Provision
      for income taxes
                                      
                                      
                                      5,256
                                      
                                      
                                      
                                      7,317Minority
      interest in net loss of subsidiary
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (2,900
                                      )Net
      income
                                      
                                      $
                                      24,162
                                      
                                      
                                      $
                                      22,263Earnings
      per common share:Basic
      - EPS
                                      
                                      $
                                      0.40
                                      
                                      
                                      $
                                      0.37Diluted
      - EPS
                                      
                                      
                                      0.40
                                      
                                      
                                      
                                      0.37Dividends
      Declared Per Share
                                      
                                      $
                                      0.05
                                      
                                      
                                      $
                                      0.04
  See
accompanying notes unaudited to condensed consolidated financial
statements.
  4
  AmTrust
Financial Services, Inc.
 Consolidated
Statements of Cash Flows
 (Unaudited)
 (in
thousands)
  Three Months Ended March 31,2009
                                  
                                  
                                  2008Cash flows from operating
      activities:Net
      income from continuing operations
                                  
                                  $
                                  24,162
                                  
                                  
                                  $
                                  22,263Adjustments
      to reconcile net income from continuing operations to net cash provided by
      operating activities of continuing operations:Depreciation
      and amortization
                                  
                                  
                                  3,120
                                  
                                  
                                  
                                  1,614Realized
      loss marketable securities
                                  
                                  
                                  7,811
                                  
                                  
                                  
                                  4,478Non-cash
      write-down of marketable securities
                                  
                                  
                                  1,427
                                  
                                  
                                  
                                  742Discount
      on notes payable
                                  
                                  
                                  313
                                  
                                  
                                  
                                  -Stock
      compensation expense
                                  
                                  
                                  671
                                  
                                  
                                  
                                  758Bad
      debt expense
                                  
                                  
                                  1,005
                                  
                                  
                                  
                                  475Foreign
      currency (gain)
                                  
                                  
                                  (33
                                  )
                                  
                                  
                                  (159
                                  )Changes
      in assets - (increase) decrease:Premiums
      receivable
                                  
                                  
                                  28,234
                                  
                                  
                                  
                                  (37,525
                                  )Reinsurance
      recoverable
                                  
                                  
                                  (36,150
                                  )
                                  
                                  
                                  (7,253
                                  )Reinsurance
      recoverable – related party
                                  
                                  
                                  (23,726
                                  )
                                  
                                  
                                  (31,077
                                  )Deferred
      policy acquisition costs, net
                                  
                                  
                                  (17,911
                                  )
                                  
                                  
                                  (2,102
                                  )Prepaid
      reinsurance premiums
                                  
                                  
                                  (1,550
                                  )
                                  
                                  
                                  (1,330
                                  )Prepaid
      reinsurance premiums – related party
                                  
                                  
                                  9,878
                                  
                                  
                                  
                                  (19,159
                                  )Prepaid
      expenses and other assets
                                  
                                  
                                  18,984
                                  
                                  
                                  
                                  (4,337
                                  )Deferred
      tax asset
                                  
                                  
                                  (3,027
                                  )
                                  
                                  
                                  (9,065
                                  )Changes
      in liabilities - increase (decrease):Reinsurance
      premium payable
                                  
                                  
                                  (6,787
                                  )
                                  
                                  
                                  28,843Reinsurance
      premium payable – related party
                                  
                                  
                                  (3,611
                                  )
                                  
                                  
                                  46,760Loss
      and loss expense reserve
                                  
                                  
                                  80,342
                                  
                                  
                                  
                                  10,659Unearned
      premiums
                                  
                                  
                                  (5,642
                                  )
                                  
                                  
                                  42,509Funds
      held under reinsurance treaties
                                  
                                  
                                  647
                                  
                                  
                                  
                                  (1,314
                                  )Accrued
      expenses and other current liabilities
                                  
                                  
                                  (2,680
                                  )
                                  
                                  
                                  (983
                                  )Net
      cash provided in operating activities
                                  
                                  
                                  75,477
                                  
                                  
                                  
                                  44,797Cash
      flows from investing activities:Net
      (purchases) sales of securities with fixed maturities
                                  
                                  
                                  (46,090
                                  )
                                  
                                  
                                  139,499Net
      (purchases) sales of equity securities
                                  
                                  
                                  (1,628
                                  )
                                  
                                  
                                  (10,839
                                  )Net
      sales (purchases) of other investments
                                  
                                  
                                  850
                                  
                                  
                                  
                                  5,296Note
      receivable - related party
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (2,000
                                  )Acquisition
      of renewal rights and goodwill
                                  
                                  
                                  (2,462
                                  )
                                  
                                  
                                  (296
                                  )Purchase
      of property and equipment
                                  
                                  
                                  (2,107
                                  )
                                  
                                  
                                  (2,275
                                  )Net
      cash (used in) provided by investing activities
                                  
                                  
                                  (51,437
                                  )
                                  
                                  
                                  129,385Cash
      flows from financing activities:Repurchase
      agreements, net
                                  
                                  
                                  (36,140
                                  )
                                  
                                  
                                  (153,775
                                  )Repayment
      of note payable
                                  
                                  
                                  (3,333
                                  )
                                  
                                  
                                  -Repurchase
      of shares
                                  
                                  
                                  (5,492
                                  )
                                  
                                  
                                  -Option
      exercise
                                  
                                  
                                  -
                                  
                                  
                                  
                                  241Dividends
      distributed on common stock
                                  
                                  
                                  (3,005
                                  )
                                  
                                  
                                  (2,400
                                  )Net
      cash provided by financing activities
                                  
                                  
                                  (47,970
                                  )
                                  
                                  
                                  (155,934
                                  )Effect
      of exchange rate changes on cash
                                  
                                  
                                  (2,836
                                  )
                                  
                                  
                                  5,192Net
      (decrease) increase in cash and cash equivalents
                                  
                                  
                                  (26,766
                                  )
                                  
                                  
                                  23,440Cash
      and cash equivalents, beginning of the period
                                  
                                  
                                  192,053
                                  
                                  
                                  
                                  145,337Cash
      and cash equivalents, end of the period
                                  
                                  $
                                  165,287
                                  
                                  
                                  $
                                  168,777Supplemental
      Cash Flow InformationIncome
      tax payments
                                  
                                  $
                                  952
                                  
                                  
                                  $
                                  574Interest
      payments on debt
                                  
                                  
                                  4,428
                                  
                                  
                                  
                                  2,530
 
 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, 2008, previously filed with the Securities and Exchange Commission
(“SEC”) on March 16, 2009. The balance sheet at December 31, 2008 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, 2008, 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, 2009, as
compared to the recent accounting pronouncements described in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2008, that are of
significance, or potential significance, to us.
 
 In April
2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) No. 115-2 and FSP No. 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP 115-2/124-2”).  FSP 115-2
modifies the existing other-than-temporary impairment guidance to require the
recognition of an other-than-temporary impairment when an entity has the intent
to sell a debt security or when it is more likely than not an entity will be
required to sell the debt security before its anticipated
recovery.  Additionally, FSP FAS 115-2 changes the presentation and
amount of other-than-temporary losses recognized in the income statement for
instances when the Company determines that there is a credit loss on a debt
security but it is more likely than not that the entity will not be required to
sell the security prior to the anticipated recovery of its remaining cost
basis.  For these debt securities, the amount representing the credit loss
will be reported as an impairment loss in the Consolidated Statement of Income
and the amount related to all other factors will be reported in accumulated
other comprehensive income.  FSP FAS 115-2 also requires the presentation
of other-than-temporary impairments separately from realized gains and losses on
the face of the income statement.
  In addition to the changes in
measurement and presentation, FSP FAS 115-2 is intended to enhance the existing
disclosure requirements for other-than-temporary impairments and requires all
disclosures related to other-than-temporary impairments in both interim and
annual periods.
  The
provisions of FSP FAS 115-2 are effective for interim periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009.  The Company will adopt FSP FAS 115-2 on April 1,
2009.  The Company does not believe the adoption will have a material
impact on its financial condition or results of operations.
  6
  In April 2009, the FASB issued
FSP No. 157-4, “Determining Fair Value When Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions that are Not Orderly” (“FSP 157-4”).  
Under FSP 157-4 provides guidance for determining when a transaction is not
orderly and for estimating fair value in accordance with FASB Statement
No. 157,Fair
Value Measurements  (FAS 157), when there has been a
significant decrease in the volume and level of activity for an asset or
liability.  FSP FAS 157-4 does not change the measurement objective of FAS
157 which is “the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date.”
 
 FSP FAS
157-4 requires the disclosure of the inputs and valuation techniques used, as
well as any changes in valuation techniques and inputs used during the period,
to measure fair value in interim and annual periods. In addition, FSP FAS 157-4
requires that the presentation of the fair value hierarchy be presented by major
security type as described in FASB Statement No. 115,Accounting for Certain
Investments in Debt and Equity Securities  (as amended by FSP
FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments
).
  The
provisions of FSP FAS 157-4 are effective for interim periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009.  The Company will adopt FSP FAS 157-4 on April 1,
2009 and does not expect the adoption will have a material effect on its results
of operations, financial position or liquidity.
  In April 2009, the FASB issued
FSP 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments” (“FSP 107-1 and APB 28-1”).   FSP 107-1
and APB 28-1 require disclosures about fair value of financial instruments in
interim and annual financial statements.   FSP FAS 107-1 and APB 28-1 are
effective for periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009.  The Company does not believe
the adoption will have a material impact on the Company’s financial condition or
results of operations.
  In June
2008, the FASB issued FSP No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities”
(“FSP 03-6-1”). FSP 03-6-1 clarifies that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and are to be included in the
computation of earnings per share under the two-class method described in
Statement of Financial Accounting Standards No. 128 (“SFAS No. 128”), “ Earnings Per Share ” This FSP
is effective for financial statements issued for fiscal years beginning after
December 15, 2008 and requires all presented prior-period earnings per share
data to be adjusted retrospectively.  FSP 03-6-1 did not have a
material impact on the Company’s financial condition or results of
operations.
  In April
2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that
should be considered in developing assumptions about renewals or extensions used
in estimating the useful life of a recognized intangible asset under Statement
No. 142, “Goodwill and Other
intangible Assets” (“SFAS No. 142”). This standard is intended to improve
the consistency between the useful life of a recognized intangible asset under
Statement 142 and the period of expected cash flows used to measure the fair
value of the asset under Statement No. 141R and other GAAP. FSP 142-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. The measurement provisions of this standard will apply only
to intangible assets of the Company acquired after the effective
date.  FSP 142-3 did not have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows.
  In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS No. 161”). Statement 161
requires companies with derivative instruments to disclose information that
should enable financial-statement users to understand how and why a company uses
derivative instruments, how derivative instruments and related hedged items are
accounted for under FASB Statement No. 133 “Accounting for Derivative
Instruments and Hedging Activities” and how derivative instruments and
related hedged items affect a company’s financial position, financial
performance and cash flows. Statement 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008.  SFAS 161 did not have a material impact   on the
Company’s consolidated financial position, results of operations or cash
flows.
  7
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No.
160 amends Accounting Research Bulletin No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. In addition, it clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as a component of equity in the consolidated statements.
SFAS 160 is effective on a prospective basis beginning January 1, 2009, except
for presentation and disclosure requirements which are applied on a
retrospective basis for all periods presented.  SFAS 160 did not have
a material impact its consolidated financial position, results of operations or
cash flows.
  In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. SFAS
No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree and recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase.SFAS No. 141(R) also sets
forth the disclosures required to be made in the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No.
141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008.  SFAS 141(R) did not have a material
impact its consolidated financial position, results of operations or cash
flows.
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
which defines fair value, establishes guidelines for measuring fair value and
expands disclosures regarding fair value measurements. SFAS 157 does not
require any new fair value measurements but rather eliminates inconsistencies in
guidance found in various prior accounting pronouncements and is effective for
fiscal years beginning after November 15, 2007. In February 2008, the FASB
issued FASB FSP 157-2 which delayed the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), until fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. These nonfinancial items
include assets and liabilities such as reporting units measured at fair value in
a goodwill impairment test and nonfinancial assets acquired and liabilities
assumed in a business combination.  The Company applied the provisions
of SFAS 157 to the nonfinancial assets, nonfinancial liabilities and reporting
units within the scope of SFAS 157 on January 1, 2009.  The Company’s
adoption of FAS 157 did not materially impact the fair values of nonfinancial
assets, nonfinancial liabilities and reporting units within the scope of this
FSP.
 
 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, 2009, are
presented in the table below:
  Original or
                          amortized
                          cost
                        
                        
                        Gross
                          unrealized
                          gains
                        
                        
                        Gross
                          unrealized
                          losses
                        
                        
                        Market
                          valuePreferred
      stock
                        
                        $
                        6,765
                        
                        
                        $
                        -
                        
                        
                        $
                        (4,262
                        )
                        
                        $
                        2,503Common
      stock
                        
                        
                        76,022
                        
                        
                        
                        870
                        
                        
                        
                        (53,708
                        )
                        
                        
                        23,184U.S.
      treasury securities
                        
                        
                        15,086
                        
                        
                        
                        1,432
                        
                        
                        
                        (6
                        )
                        
                        
                        16,512U.S.
      government agencies
                        
                        
                        11,020
                        
                        
                        
                        984
                        
                        
                        
                        -
                        
                        
                        
                        12,004U.S.
      agency - collateralized mortgage obligations
                        
                        
                        189,604
                        
                        
                        
                        411
                        
                        
                        
                        (2,754
                        )
                        
                        
                        187,261U.S.
      agency - mortgage backed securities
                        
                        
                        258,868
                        
                        
                        
                        13,654
                        
                        
                        
                        (638
                        )
                        
                        
                        271,884Other
      mortgage backed securities
                        
                        
                        3,750
                        
                        
                        
                        -
                        
                        
                        
                        (379
                        )
                        
                        
                        3,371Municipal
      bonds
                        
                        
                        45,760
                        
                        
                        
                        1,767
                        
                        
                        
                        (694
                        )
                        
                        
                        46,833Asset
      backed securities
                        
                        
                        4,237
                        
                        
                        
                        104
                        
                        
                        
                        (273
                        )
                        
                        
                        4,068Corporate
      bonds
                        
                        
                        483,201
                        
                        
                        
                        2,180
                        
                        
                        
                        (106,365
                        )
                        
                        
                        379,016$
                        1,094,313
                        
                        
                        $
                        21,402
                        
                        
                        $
                        (169,079
                        )
                        
                        $
                        946,636
  8
  (b) Held-to-Maturity
Securities
  The
amortized cost, estimated market value and gross unrealized appreciation and
depreciation of held to maturity securities as of March 31, 2009 are presented
in the table below:
 
 Amortized
                          cost
                        
                        
                        Unrealized
                          gains
                        
                        
                        Unrealized
                          losses
                        
                        
                        Fair
                          valueU.S.
      treasury securities
                        
                        $
                        2,141
                        
                        
                        $
                        118
                        
                        
                        $
                        -
                        
                        
                        $
                        2,259U.S.
      government agencies
                        
                        
                        1,116
                        
                        
                        
                        151
                        
                        
                        
                        -
                        
                        
                        
                        1,267U.S.
      agency - collateralized mortgage obligations
                        
                        
                        144
                        
                        
                        
                        4
                        
                        
                        
                        -
                        
                        
                        
                        148U.S.
      agency - mortgage backed securities
                        
                        
                        40,362
                        
                        
                        
                        1,542
                        
                        
                        
                        (88
                        )
                        
                        
                        41,816$
                        43,763
                        
                        
                        $
                        1,842
                        
                        
                        $
                        (88
                        )
                        
                        $
                        45,490
  (c)
Investment Income
 
 Net
investment income for the three months ended March 31, 2009 and 2008 was derived
from the following sources:
  2009
                                
                                
                                2008Cash
      and short term investments
                                
                                $
                                1,804
                                
                                
                                $
                                3,336Fixed
      maturities
                                
                                
                                11,882
                                
                                
                                
                                10,883Equity
      securities
                                
                                
                                188
                                
                                
                                
                                531Equity
      investment in Warrantech
                                
                                
                                (402
                                )
                                
                                
                                —Note
      receivable - related party
                                
                                
                                812
                                
                                
                                
                                58914,284
                                
                                
                                
                                15,339Less:Investment
      expenses and interest expense on securities sold under agreement to
      repurchase
                                
                                
                                695
                                
                                
                                
                                1,808$
                                13,589
                                
                                
                                $
                                13,531
  (d)
Other-Than-Temporary Impairment
  Quarterly,
the Company’s Investment Committee (“Committee”) evaluates each security which
has an unrealized loss as of the end of the subject reporting period for
other-than-temporary-impairment.  The Committee uses a set of
quantitative and qualitative criteria to review our investment portfolio to
evaluate the necessity of recording impairment losses for other-than-temporary
declines in the fair value of our investments.  Some of the criteria
the Company considers include:
  §
              how
      long and by how much the fair value of the security has been below its
      amortized cost;
 §
              the
      financial condition and near-term prospects of the issuer of the security,
      including any specific events that may affect its operations or
      earnings;
 §
              the
      intent and ability to keep the security for a sufficient time period for
      it to recover its value;
 §
              any
      downgrades of the security by a rating agency as well as an entire
      industry sector or sub-sector;
 §
              any
      reduction or elimination of dividends, or nonpayment of scheduled interest
      payments; and
 §
              the
      occurrence of discrete credit event resulting in (i) the issuer defaulting
      on material outstanding obligation (ii) the issuer seeking protection
      under bankruptcy law.
  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 generally considers
investments subject to impairment testing when an asset is in an unrealized loss
position in excess of 25% of cost basis.
  9
  Other-than-temporary
impairment charges of our fixed-maturities and equity securities for the three
months ended March 31, 2009 and 2008 are presented in the table
below:
  2009
                          
                          2008Equity
      securities
                          
                          $
                          1,427
                          
                          
                          $
                          742Fixed
      maturity securities
                          
                          
                          —
                          
                          
                          
                          —$
                          1,427
                          
                          
                          $
                          742
  The
tables below summarize the gross unrealized losses of our fixed maturity and
equity securities as of March 31, 2009:
  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
                    LossesAvailable-for-sale
      securities:Common
      and preferred stock
                  
                  $
                  10,489
                  
                  
                  $
                  (13,204
                  )
                  
                  
                  96
                  
                  
                  $
                  10,990
                  
                  
                  $
                  (44,766
                  )
                  
                  
                  290
                  
                  
                  $
                  21,479
                  
                  
                  $
                  (57,192
                  )U.S.
      treasury securities
                  
                  
                  863
                  
                  
                  
                  (6
                  )
                  
                  
                  1
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  863
                  
                  
                  
                  (6
                  )U.S.
      agency - collateralized mortgage obligations
                  
                  
                  10,367
                  
                  
                  
                  (161
                  )
                  
                  
                  2
                  
                  
                  
                  155,311
                  
                  
                  
                  (2,593
                  )
                  
                  
                  —
                  
                  
                  
                  165,678
                  
                  
                  
                  (2,754
                  )U.S.
      agency - mortgage backed securities
                  
                  
                  5,811
                  
                  
                  
                  (120
                  )
                  
                  
                  1
                  
                  
                  
                  25,036
                  
                  
                  
                  (518
                  )
                  
                  
                  1
                  
                  
                  
                  30,847
                  
                  
                  
                  (638
                  )Other
      mortgage backed securities
                  
                  
                  1,878
                  
                  
                  
                  (225
                  )
                  
                  
                  3
                  
                  
                  
                  1,492
                  
                  
                  
                  (154
                  )
                  
                  
                  4
                  
                  
                  
                  3,370
                  
                  
                  
                  (379
                  )Municipal
      bonds
                  
                  
                  18,299
                  
                  
                  
                  (694
                  )
                  
                  
                  17
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  18,299
                  
                  
                  
                  (694
                  )Asset
      backed securities
                  
                  
                  1,236
                  
                  
                  
                  (41
                  )
                  
                  
                  2
                  
                  
                  
                  761
                  
                  
                  
                  (232
                  )
                  
                  
                  3
                  
                  
                  
                  1,997
                  
                  
                  
                  (273
                  )Corporate
      bonds
                  
                  
                  145,116
                  
                  
                  
                  (35,798
                  )
                  
                  
                  83
                  
                  
                  
                  170,192
                  
                  
                  
                  (70,567
                  )
                  
                  
                  82
                  
                  
                  
                  315,308
                  
                  
                  
                  (106,365
                  )Total
      temporarily impaired -available-for-sale securities
                  
                  $
                  194,059
                  
                  
                  $
                  (50,249
                  )
                  
                  
                  205
                  
                  
                  $
                  363,782
                  
                  
                  $
                  (118,830
                  )
                  
                  
                  391
                  
                  
                  $
                  557,841
                  
                  
                  $
                  (168,301
                  )
 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
                    LossesHeld-to-maturity
      securities:U.S.
      agency – mortgage backed securities
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  3,738
                  
                  
                  $
                  (88
                  )
                  
                  
                  15
                  
                  
                  $
                  3,738
                  
                  
                  $
                  (88
                  )Total
      temporarily impaired – held-to-maturity
    securities
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  3,738
                  
                  
                  $
                  (88
                  )
                  
                  
                  15
                  
                  
                  $
                  3,738
                  
                  
                  $
                  (88
                  )
  10
  (e)
Derivatives
  The
following table presents the notional amounts by remaining maturity of the
Company’s Interest Rate Swaps and Contracts for Differences as of March 31,
2009:
 
 Remaining Life of Notional Amount
      (1)One Year
                          
                          Two Through
                            Five Years
                          
                          Six Through
                            Ten Years
                          
                          After Ten
                            Years
                          
                          TotalInterest
      rate swaps
                          
                          $
                          —
                          
                          
                          $
                          30,000
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          30,000Contracts
      for differences
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          2,066
                          
                          
                          
                          —
                          
                          
                          
                          2,066$
                          —
                          
                          
                          $
                          30,000
                          
                          
                          $
                          2,066
                          
                          
                          $
                          —
                          
                          
                          $
                          32,066
 
 (1)
                Notional amount is not
      representative of either market risk or credit risk and is not recorded in
      the consolidated balance
sheet.
 
 The
Company records changes in valuation on its derivative positions as a component
of net realized gains and losses.  The Company records changes in
valuation on its interest rate swap related to its term loan as a component
of interest expense.
  (f)
Other
  Securities
sold but not yet purchased, represent obligations of the Company to deliver the
specified security at the contracted price and thereby, create a liability to
purchase the security in the market at prevailing prices. The Company’s
liability for securities to be delivered is measured at their fair value and as
of March 31, 2009 was $12,665 for corporate bonds and $0 and for equity
securities. These transactions result in off-balance sheet risk, as the
Company’s ultimate cost to satisfy the delivery of securities sold, not yet
purchased, may exceed the amount reflected at March 31, 2009. Subject
to certain limitations, all securities owned, to the extent 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 hold in short term or
fixed income securities. As of March 31, 2009, there were $248,360 principal
amount outstanding at interest rates between 0.85% and 1.00%. Interest expense
associated with these repurchase agreements for the three months ended March 31,
2009 and 2008 was $694 and $1,784, respectively, of which $261 was accrued as of
March 31, 2009. The Company has approximately $255,000 of collateral pledged in
support of these agreements.
  4.
              Fair Value of Financial
      Instruments
  The fair
value of a financial instrument is the estimated amount at which the instrument
could be exchanged in an orderly transaction between unrelated parties. The
estimated fair value of a financial instrument may differ from the amount that
could be realized if the security was sold in a forced transaction.
Additionally, valuation of fixed maturity investments is more subjective when
markets are less liquid due to lack of market based inputs, which may increase
the potential that the estimated fair value of an investment is not reflective
of the price at which an actual transaction could occur.
  For
investments that have quoted market prices in active markets, the Company uses
the quoted market prices as fair value and includes these prices in the amounts
disclosed in the Level 1 hierarchy. The Company receives the quoted market
prices from a third party nationally recognized pricing services (“pricing
service”). When quoted market prices are unavailable, the Company utilizes a
pricing service to determine an estimate of fair value, which is mainly for its
fixed maturities. The fair value estimates provided from this pricing service
are included in the Level 2 hierarchy. The Company will challenge any prices for
its investments which are considered to not represent fair value. If quoted
market prices and an estimate from pricing services are unavailable, the Company
produces an estimate of fair value based on dealer quotations of the bid price
for recent activity in positions with the same or similar characteristics to
that being valued or through consensus pricing of a pricing service. Depending
on the level of observable inputs, the Company will then determine if the
estimate is Level 2 or Level 3 hierarchy.
  11
  Fixed Maturities (Held to Maturity
and Available for Sale).   The Company utilized a pricing
service to estimate fair value measurements for approximately 99% of its fixed
maturities. The pricing service utilizes market quotations for fixed maturity
securities that have quoted market prices in active markets. Since fixed
maturities other than U.S. treasury securities generally do not trade on a daily
basis, the pricing service prepares estimates of fair value measurements using
relevant market data, benchmark curves, sector groupings and matrix pricing. The
pricing service utilized by the Company has indicated they will only produce an
estimate of fair value if there is verifiable information to produce a
valuation. As the fair value estimates of most fixed maturity investments are
based on observable market information rather than market quotes, the estimates
of fair value other than U.S. Treasury securities are included in Level 2 of the
hierarchy. U.S. Treasury securities are included in the amount disclosed in
Level 1 as the estimates are based on unadjusted prices. The Company’s Level 2
investments include obligations of U.S. government agencies, municipal bonds,
corporate debt securities and other mortgage backed securities. While a vast
majority of the Company’s fixed maturities are included in Level 1 or Level 2,
the Company holds a small percentage, approximately 0.6%, of investments which
were not valued by a pricing service. Typically, the Company estimates the fair
value of these fixed maturities using a pricing matrix with some unobservable
inputs that are significant to the valuation. Due to the limited amount of
unobservable market information, the Company includes the fair value estimates
for these investments in Level 3. At March, 31, 2009 the Company held certain
fixed maturity investments, which included corporate and bank debt, that were
not suitable for matrix pricing. For these assets, a quote is obtained from a
market maker broker. Due to the disclaimers on the quotes that indicate that the
price is indicative only, the Company includes these fair value estimates in
Level 3.
  Equity
Securities.  For public common and preferred stocks, the
Company receives estimates from a pricing service that are based on observable
market transactions and includes these estimates in Level 1
hierarchy.
  Other
Investments.  The Company has approximately 1% of its
investment portfolio, in limited partnerships or hedge funds where the fair
value estimate is determined by a fund a manager based on recent filings,
operating results, balance sheet stability, growth and other business and market
sector fundamentals. Due to the significant unobservable inputs in these
valuations, the Company includes the estimate in the amount disclosed in Level 3
hierarchy. The Company has determined that its investments in Level 3 securities
are not material to its financial position or results of
operations.
  Derivatives.  The
Company from time to time invests in a limited amount of derivatives and other
financial instruments as part of its investment portfolio. Derivatives, as
defined in SFAS 133, are financial arrangements among two or more parties with
returns linked to an underlying equity, debt, commodity, asset, liability,
foreign exchange rate or other index. Unless subject to a scope exclusion, the
Company carries all derivatives on the consolidated balance sheet at fair value.
The changes in fair value of the derivative are presented as a component of
operating income. The Company primarily utilizes the following types of
derivatives at any one time:
  §
              Credit
      default swap contracts (“CDS”), which, are valued in accordance with the
      terms of each contract based on the current interest rate spreads and
      credit risk of the referenced obligation of the underlying issuer and
      interest accrual through valuation date. Fair values are based on the
      price of the underlying bond on the valuation date. The Company may be
      required to deposit collateral with the counterparty if the market values
      of the contract fall below a stipulated amount in the contract. Such
      amounts are limited to the total equity of the
  account;
  §
              Interest
      rate swaps (“IS”), which are valued in terms of the contract between the
      Company and the issuer of the swaps, are based on the difference between
      the stated floating rate of the underlying indebtedness, in this case
      LIBOR, and a predetermined fixed rate for such indebtedness with the
      result that the indebtedness carries a net fixed interest rate;
      and
  §
              Contracts
      for difference contracts (“CFD”), which, are valued based on the market
      price of the underlying stock. The Company may be required to deposit
      collateral with the counterparty if the market values of the contract fall
      below a stipulated amount in the
contract.
  The
Company estimates fair value using information provided by the portfolio manager
for IS and CDS and the counterparty for CFD and classifies derivative as Level 3
hierarchy.
 12
 Fair
Value Hierarchy
 
 The
following table presents the level within the fair value hierarchy at which the
Company’s financial assets and financial liabilities are measured on a recurring
basis as of March 31, 2009:
 Total
                            
                            
                            Level
      1
                            
                            
                            Level
      2
                            
                            
                            Level
      3Assets:Held-to-maturity
      securities
                            
                            $
                            45,490
                            
                            
                            $
                            2,258
                            
                            
                            $
                            43,232
                            
                            
                            $
                            -Available-for-sale
      fixed securities
                            
                            
                            920,950
                            
                            
                            
                            16,512
                            
                            
                            
                            897,900
                            
                            
                            
                            6,538Equity
      securities
                            
                            
                            25,687
                            
                            
                            
                            25,687
                            
                            
                            
                            -
                            
                            
                            
                            -Other
      investments
                            
                            
                            12,607
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            12,607$
                            1,004,734
                            
                            
                            $
                            44,457
                            
                            
                            $
                            941,132
                            
                            
                            $
                            19,145Liabilities:Securities
      sold but not yet purchased, market
                            
                            $
                            12,665
                            
                            
                            $
                            -
                            
                            
                            $
                            12,665
                            
                            
                            $
                            -Securities
      sold under agreements to repurchase, at contract value
                            
                            
                            248,352
                            
                            
                            
                            -
                            
                            
                            
                            248,352
                            
                            
                            
                            -Derivatives
                            
                            
                            982
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            982$
                            261,999
                            
                            
                            $
                            -
                            
                            
                            $
                            261,017
                            
                            
                            $
                            982
  The
following table provides a summary of changes in fair value of the Company’s
Level 3 financial assets as of March 31, 2009:
 
 Other
                            investments
                          
                          
                          Derivatives
                          
                          
                          TotalBeginning
      balance as of January 1, 2009
                          
                          $
                          21,352
                          
                          
                          $
                          (1,439
                          )
                          
                          $
                          19,913Total
      net losses for the quarter include in:Net
      income
                          
                          
                          (36
                          )
                          
                          
                          457
                          
                          
                          
                          421Other
      comprehensive loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Purchases,
      sales, issuances and settlements, net
                          
                          
                          (2,171
                          )
                          
                          
                          -
                          
                          
                          
                          (2,171
                          )Net
      transfers into (out of) Level 3
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Ending
      balance as of March 31, 2009
                          
                          $
                          19,145
                          
                          
                          $
                          (982
                          )
                          
                          $
                          18,163
  5.
              Debt
  Junior
Subordinated Debt
 
 The
Company established four special purpose trusts for the purpose of issuing trust
preferred securities. The proceeds from such issuances, together with the
proceeds of the related issuances of common securities of the trusts, were
invested by the trusts in junior subordinated debentures issued by the Company.
As a result of FIN 46, the Company does not consolidate such special purpose
trusts, as the Company is not considered to be the primary beneficiary under
this accounting standard. The equity investment, totaling $3,714 as of March 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 Company incurred $2,605 of placement fees in connection with these
issuances which is being amortized over thirty years.
 
 13
  The table
below summarizes the Company’s trust preferred securities as of March 31,
2009:
 
 Name
      of Trust
                                  
                                  Aggregate
                                    Liquidation
                                    Amount of
                                    Trust
                                    Preferred
                                    Securities
                                  
                                  
                                  Aggregate
                                    Liquidation
                                    Amount of
                                    Common
                                    Securities
                                  
                                  
                                  Aggregate
                                    Principal
                                    Amount
                                    of Notes
                                  
                                  Stated
                                    Maturity
                                    of Notes
                                  
                                  Per
                                    Annum
                                    Interest
                                    Rate of
                                    NotesAmTrust
      Capital Financing Trust I
                                  
                                  $
                                  25,000
                                  
                                  
                                  $
                                  774
                                  
                                  
                                  $
                                  25,774
                                  
                                  3/17/2035
                                  
                                  
                                  8.275
                                  %(1)AmTrust
      Capital Financing Trust II
                                  
                                  
                                  25,000
                                  
                                  
                                  
                                  774
                                  
                                  
                                  
                                  25,774
                                  
                                  6/15/2035
                                  
                                  
                                  7.710
                                  (1)AmTrust
      Capital Financing Trust III
                                  
                                  
                                  30,000
                                  
                                  
                                  
                                  928
                                  
                                  
                                  
                                  30,928
                                  
                                  9/15/2036
                                  
                                  
                                  8.830
                                  (2)AmTrust
      Capital Financing Trust IV
                                  
                                  
                                  40,000
                                  
                                  
                                  
                                  1,238
                                  
                                  
                                  
                                  41,238
                                  
                                  3/15/2037
                                  
                                  
                                  7.930
                                  (3)Total
      trust preferred securities
                                  
                                  $
                                  120,000
                                  
                                  
                                  $
                                  3,714
                                  
                                  
                                  $
                                  123,714
 
 (1)
              The interest rate will change to
      three-month LIBOR plus 3.40% after the tenth
      anniversary.
 (2)
              The interest rate will change to
      LIBOR plus 3.30% after the fifth
  anniversary.
 (3)
              The interest rate will change to
      LIBOR plus 3.00% after the fifth
  anniversary.
  Term
Loan
  On June
3, 2008, the Company entered into a term loan with JP Morgan Chase Bank, N.A. in
the aggregate amount of $40,000. The term of loan is for a period of three years
and requires quarterly principal payments of $3,333, 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” plus a margin
rate, which was 185 basis points. As of March 31, 2009 the interest rate was
3.07%. The Company recorded $457 and $0 of interest expense for the three months
ended March 31, 2009 and 2008, respectively. The Company can prepay any amount
after the first anniversary date without penalty upon prior notice. The term
loan contains affirmative and negative covenants, including limitations on
additional debt, limitations on investments and acquisitions outside the
Company’s normal course of business. The loan requires the Company to maintain 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 variable
to 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 $275 and $0 for the three months ended March 31, 2009 and 2008,
respectively, related to this agreement.
  Promissory
Note
  In
connection with the stock and asset purchase agreement with a subsidiary of
Unitrin, Inc., the Company 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 beginning on June 1, 2009 through June 1, 2012. The Company
calculated imputed interest of $3,155 based on interest rates available to the
Company at the date of acquisition 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 involving
default of payment or change of control of the Company. The Company included
$313 and $0 of amortized discount on the note in its results of operations for
the three months ended March 31, 2009 and 2008, respectively. The note’s
carrying value at March 31, 2009 was $27,784.
  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
being used for collateral for letters of credit. The line will expire on June
30, 2009. Interest payments are required to be paid monthly on any unpaid
principal and bears interest at a rate of LIBOR plus 150 basis points. As of
March 31, 2009 there was no outstanding balance on the line of credit. The
Company has outstanding letters of credit in place at March 31, 2009 for $24,084
that reduced the availability on the line of credit to $916 as of March 31,
2009.
  14
  Maturities
of Debt
  Maturities
of the Company’s debt for the five years subsequent to March 31, 2009 are as
follows:
  2009
                          
                          2010
                          
                          2011
                          
                          2012
                          
                          2013
                          
                          ThereafterJunior
      subordinated debt
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          123,714Term
      loan
                          
                          
                          10,000
                          
                          
                          
                          13,333
                          
                          
                          
                          6,667
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Promissory
      note
                          
                          
                          6,746
                          
                          
                          
                          6,729
                          
                          
                          
                          7,037
                          
                          
                          
                          7,362
                          
                          
                          
                          —
                          
                          
                          
                          —Total
                          
                          $
                          16,746
                          
                          
                          $
                          20,062
                          
                          
                          $
                          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, 2009 and
2008:
 
 2009
                          
                          
                          2008Policy
      acquisition expenses
                          
                          $
                          29,248
                          
                          
                          $
                          18,999Salaries
      and benefits
                          
                          
                          19,281
                          
                          
                          
                          12,044Other
      insurance general and administrative expense
                          
                          
                          9,625
                          
                          
                          
                          9,834$
                          58,154
                          
                          
                          $
                          40,877
 
 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, 2009 and
2008:
 
 2009
                          
                          
                          2008Net
      income available to common shareholders
                          
                          $
                          24,162
                          
                          
                          $
                          22,263Weighted
      average number of common shares outstanding - basic
                          
                          
                          59,767
                          
                          
                          
                          59,969Potentially
      dilutive shares:Dilutive
      shares from stock-based compensation
                          
                          
                          233
                          
                          
                          
                          956Weighted
      average number of common shares outstanding - dilutive
                          
                          
                          60,000
                          
                          
                          
                          60,925Net
      income - basic and diluted earnings per share
                          
                          $
                          0.40
                          
                          
                          $
                          0.37
  As of
March 31, 2009, there were approximately 1.4 million anti-dilutive securities
excluded from diluted earnings per share.
  During
the three months ended March 31, 2009, the Company repurchased approximately 700
of its common shares for approximately $5,400. The effect of the purchase,
reduced the weighted average shares outstanding by approximately 300 shares for
the three months ended March 31, 2009.
 
 8.
              Share Based
      Compensation
 
 The
Company’s 2005 Equity and Incentive Plan (“2005 Plan”) permits the Company to
grant to officers, employees and non-employee directors of the Company incentive
compensation directly linked to the price of the Company’s stock. The Company
grants options at prices equal to the closing stock price of the Company’s stock
on the dates the options were granted. The Company recognizes compensation
expense under SFAS No. 123(R) “Share-Based Payment” for its share-based payments
based on the fair value of the awards. The fair value of each option grant is
separately estimated for each vesting date. The fair value of each option is
amortized into compensation expense on a straight-line basis between the grant
date for the award and each vesting date. The Company has estimated the fair
value of all stock option awards as of the date of the grant by applying the
Black-Scholes-Merton multiple-option pricing valuation model. The application of
this valuation model involves assumptions that are judgmental and highly
sensitive in the determination of compensation expense. SFAS 123(R)’s fair value
valuation method resulted in share-based expense (a component of salaries and
benefits) in the amount of approximately $671 and $758 related to stock options
for the three months ended March 31, 2009 and 2008, respectively.
  15
  The
following schedule shows all options granted, exercised, expired and exchanged
under the 2005 Plan for the three months ended March 31, 2009 and
2008:
 
 2009
                            
                            2008Amounts
      in thousands except per share
                            Number of
                              Shares
                            
                            Amount per
                              Share
                            
                            Number of
                              Shares
                            
                            Amount per
                              ShareOutstanding
      beginning of period
                            
                            
                            3,728
                            
                            
                            $
                            7.00-15.02
                            
                            
                            
                            3,126
                            
                            
                            $
                            7.00-14.55Granted
                            
                            
                            85
                            
                            
                            
                            9.65
                            
                            
                            
                            50
                            
                            
                            
                            15.02Exercised
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (32
                            )
                            
                            
                            7.50Cancelled
      or terminated
                            
                            
                            (8
                            )
                            
                            
                            7.50
                            
                            
                            
                            (6
                            )
                            
                            
                            7.50Outstanding
      end of period
                            
                            
                            3,805
                            
                            
                            $
                            7.00-15.02
                            
                            
                            
                            3,138
                            
                            
                            $
                            7.00-15.02
  The
weighted average grant date fair value of options granted during the three
months ended March 31, 2008 and 2009 was $4.84 and $2.85, respectively. As of
March 31, 2009 there was approximately $6.4 million 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:
 
 Three Months Ended March 31,2009
                            
                            
                            2008Net
      Income
                            
                            $
                            24,162
                            
                            
                            $
                            22,263Unrealized
      holding loss
                            
                            
                            (14,970
                            )
                            
                            
                            (17,087
                            )Reclassification
      adjustment
                            
                            
                            8,414
                            
                            
                            
                            (135
                            )Foreign
      currency translation
                            
                            
                            (840
                            )
                            
                            
                            888Comprehensive
      Income
                            
                            $
                            16,766
                            
                            
                            $
                            5,929
  16
  10.
              Income
    Taxes
 
 Income
tax expense for the three months ended March 31, 2009 and 2008 was $5,256 and
$7,317, respectively. The following table reconciles the Company’s statutory
federal income tax rate to its effective tax rate.
 
 Three Months Ended
      March 31,2009
                                        
                                        
                                        2008Income
      from continuing operations before provision for income taxes and minority
      interest
                                        
                                        $
                                        29,418
                                        
                                        
                                        $
                                        26,680Less:
      minority interest
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2,900
                                        )Income
      from continuing operations after minority interest before provision for
      income taxes
                                        
                                        
                                        29,418
                                        
                                        
                                        
                                        29,580Income
      taxes at statutory rates
                                        
                                        
                                        10,296
                                        
                                        
                                        
                                        10,231Effect
      of Income not subject to US taxation
                                        
                                        
                                        (5,213
                                        )
                                        
                                        
                                        (2,992
                                        )Other,
      net
                                        
                                        
                                        172
                                        
                                        
                                        
                                        78Provision
      for income taxes as shown on the Consolidated Statements of
      Income
                                        
                                        $
                                        5,256
                                        
                                        
                                        $
                                        7,317GAAP
      effective tax rate
                                        
                                        
                                        17.9
                                        %
                                        
                                        
                                        27.1
                                        %
  The
Company’s management believes that it will realize the benefits of its deferred
tax asset and, accordingly, no valuation allowance has been recorded for the
periods presented. The Company does not provide for income taxes on the
unremitted earnings of foreign subsidiaries where, in management’s opinion, such
earnings have been indefinitely reinvested. It is not practical to determine the
amount of unrecognized deferred tax liabilities for temporary differences
related to these investments.
 
 The
Company’s major taxing jurisdictions include the U.S. (federal and state), the
United Kingdom and Ireland. The years subject to potential audit vary depending
on the tax jurisdiction.  Generally, the Company’s statute of limitation is
open for tax years ended December 31, 2004 and forward. At March 31, 2009, the
Company has approximately $1,500 of accrued interest and penalties related to
FIN 48 unrecognized tax benefits.
  During
2007, the Company, while performing a review of the income tax return filed with
the IRS for calendar year ending December 31, 2006, determined an issue existed
per FIN 48 guidelines concerning its position related to accrued market
discount. The Company reverses accrued market discount income recognized for
book purposes when calculating taxable income. The reversal results from the
accrued market discount income recognized by the insurance subsidiaries for
bonds and other investments. The Company inadvertently reversed the amount
related to commercial paper investments on the 2006 income tax return. The
Company has estimated the potential liability to be approximately $915
(including $98 for penalties and interest) and has reflected this position, per
FIN 48 guidelines, in the consolidated financial statements.
  During
2006, the Internal Revenue Service (“IRS”) completed an audit of the Company’s
subsidiaries, Associated Industries Insurance Services, Inc. (“AIIS”) and
Associated Industries Insurance Company’s (“AIIC”) (collectively “Associated”)
which the Company acquired in 2007. For the IRS’ 2002 and 2003 consolidated
federal income tax returns, the field examiner indicated Associated underpaid
their liability by approximately $3,200. In addition, interest and penalties of
$600 were assessed.  During 2006, management of Associated accrued a
liability for its best estimate of a settlement with the IRS. Although the
predecessor management of Associated disagrees with the majority of the
positions taken by the examiner and appealed the assessment, the Company has
estimated the potential liability related to the audit to be $4,325 (including
$1,395 for penalties and interest) and has reflected this position, per FIN 48
guidelines, in the consolidated financial statements. In October 2008, the
appeals agent found in favor of Associated on substantially all issues and also
agreed to abate all related penalties. The preliminary report and recommendation
of settlement has been prepared by the appeals agent. The Company expects the
IRS to issue their final settlement report and proposed adjustment of tax and
interest due during the second quarter of 2009.  Additionally, during
the second quarter 2008, AIIS received notification from the IRS indicating the
2006 consolidated federal tax return had been selected for audit.  The
majority of the field work has been completed and responses for all initial
information document requests have been provided to the examining
agent.  The Company expects the agent to issue any proposed
adjustments and related audit report during the second quarter
2009.
 
 11.
              Related Party
      Transactions
 
 Reinsurance
Agreement
 
 Maiden
Holdings, Inc. (“Maiden”) is a Bermuda insurance holding company formed by
Michael Karfunkel, George Karfunkel and Barry Zyskind, the principal
shareholders, and, respectively, the Chairman of the Board of Directors, a
Director, and the Chief Executive Officer and Director of AmTrust. Messrs.
Karfunkel and Mr. Zyskind contributed $50,000 to Maiden Insurance. In July 2007,
Maiden raised approximately $480,600 in a private placement. Maiden Insurance
Company, Ltd. (“Maiden Insurance”), a wholly-owned subsidiary of Maiden, is a
Bermuda reinsurer.
  17
  During
the third quarter of 2007, the Company and Maiden entered into master agreement,
as amended, by which they caused the Company’s Bermuda affiliate, AmTrust
International Insurance, Ltd. (“AII”) and Maiden Insurance to enter into a quota
share reinsurance agreement (the “Maiden Quota Share”) by which (a) AII
retrocedes to Maiden Insurance an amount equal to 40% of the premium written by
AmTrust’s U.S., Irish and U.K. insurance companies (the “AmTrust Ceding
Insurers”), net of the cost of unaffiliated inuring reinsurance (and in the case
of AmTrust’s U.K. insurance subsidiary IGI, net of commissions) and 40% of
losses and (b) AII transferred to Maiden Insurance 40% of the AmTrust Ceding
Insurer’s unearned premium reserves, effective as of July 1, 2007, with respect
to the Company's then current lines of business, excluding risks for which the
AmTrust Ceding Insurers’ net retention exceeds $5,000 (“Covered Business”).
AmTrust also has agreed to cause AII, subject to regulatory requirements, to
reinsure any insurance company which writes Covered Business in which AmTrust
acquires a majority interest to the extent required to enable AII to cede to
Maiden Insurance 40% of the premiums and losses related to such Covered
Business. The Maiden Quota Share further provides that AII receives a ceding
commission of 31% of ceded written premiums. The Maiden Quota Share has an
initial term of three years and will automatically renew for successive three
year terms thereafter, unless either AII or Maiden Insurance notifies the other
of its election not to renew not less than nine months prior to the end of any
such three year term. In addition, either party is entitled to terminate on
thirty day’s notice or less upon the occurrence of certain early termination
events, which include a default in payment, insolvency, change in control of AII
or Maiden Insurance, run-off, or a reduction of 50% or more of the shareholders’
equity of Maiden Insurance or the combined shareholders’ equity of AII and the
AmTrust Ceding Insurers.
  Effective
June 1, 2008 the Maiden Quota Share was amended such that AII agreed to cede and
Maiden Insurance agreed to accept and reinsure Retail Commercial Package
Business, which the Company, through Affiliates, commenced writing effective
June 1, 2008, in connection with its acquisition of UBI. AII ceded 100% of the
unearned premium related to in-force Retail Commercial Package Business and
losses related thereto at the acquisition date and 40% the Company’s net written
premium and losses on Retail Commercial Package Business written or renewed on
or after the effective date. The $2,000 maximum liability for a single loss
provided in the Quota Share Reinsurance Agreement shall not be applicable to
Retail Commercial Package Business.  AmTrust receives a ceding
commission of 34.375% for Retail Commercial Package Business.  The
Company recorded approximately $27,118 and $20,184 of ceding commission income
during the three months ended March 31, 2009 and 2008, respectively, as a result
of this agreement.
  The
following is the effect on the Company’s balance sheet as of March 31, 2009 and
December 31, 2008 and the results of operations for the three months ended
December 31, 2009 and 2008 related to the Maiden Quota Share
agreement:
  March 31, 2009
                                
                                
                                December 31, 2008Assets
      and liabilities:Reinsurance
      recoverable
                                
                                $
                                244,940
                                
                                
                                $
                                221,214Prepaid
      reinsurance premium
                                
                                
                                233,633
                                
                                
                                
                                243,511Ceded
      reinsurance premiums payable
                                
                                
                                (99,296
                                )
                                
                                
                                (102,907
                                )Note
      payable
                                
                                
                                (167,975
                                )
                                
                                
                                (167,975
                                )
  18
 
 Three Months Ended March 31,2009
                                                          
                                                          
                                                          2008Results
      of operations:Premium
      written – ceded
                                                          
                                                          $
                                                          (87,480
                                                          )
                                                          
                                                          $
                                                          (82,948
                                                          )Change
      in unearned premium – ceded
                                                          
                                                          
                                                          (6,971
                                                          )
                                                          
                                                          
                                                          19,160Earned
      premium – ceded
                                                          
                                                          $
                                                          (94,451
                                                          )
                                                          
                                                          $
                                                          (63,788
                                                          )Ceding
      commission on premium written
                                                          
                                                          $
                                                          27,553
                                                          
                                                          
                                                          $
                                                          25,992Ceding
      commission – deferred
                                                          
                                                          
                                                          (435
                                                          )
                                                          
                                                          
                                                          (5,808
                                                          )Ceding
      commission – earned
                                                          
                                                          $
                                                          27,118
                                                          
                                                          
                                                          $
                                                          20,184Incurred
      loss and loss adjustment expense – ceded
                                                          
                                                          $
                                                          71,205
                                                          
                                                          
                                                          $
                                                          41,472Interest
      expense on collateral loan
                                                          
                                                          
                                                          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, 2009 was $152,911. Maiden retains ownership of $152,911 in the
trust account.
  Reinsurance
Brokerage Agreement
  Effective
July 1, 2007, AmTrust, through a subsidiary, entered into a reinsurance
brokerage agreement with Maiden. Pursuant to the brokerage agreement, AmTrust
provides brokerage services relating to the Reinsurance Agreement for a fee
equal to 1.25% of reinsured premium. The brokerage fee is payable in
consideration of AII Reinsurance Broker Ltd.’s brokerage services. The Company
recorded $1,133 and $1,036 of brokerage commission during the three months ended
March 31, 2009 and 2008, respectively.
  Asset
Management Agreement
  Effective
July 1, 2007, AmTrust, through a subsidiary, entered into an asset management
agreement with Maiden, pursuant to which it provides investment management
services to Maiden. Pursuant to the asset management agreement, AmTrust earned
an annual fee equal to 0.35% per annum of average invested assets plus all costs
incurred. Effective April 1, 2008, the investment management services fee was
reduced to 0.20% per annum and was further reduced to 0.15% per annum once
the average invested assets exceed $1,000,000. As a result of this agreement,
the Company recorded approximately $597 and $460 of investment management fees
for the three months ended March 31, 2009 and 2008, respectively.
  Services
Agreement
 
 AmTrust,
through its subsidiaries, entered into services agreements in 2008, pursuant to
which it provides certain marketing and back office services to Maiden. Pursuant
to the services agreements, AmTrust earns a fee equal to reimburse AmTrust for
its costs plus 8%. The Company recorded approximately $153 and $0 for the three
months ended March 31, 2009 and 2008, respectively, as a result of this
agreement.
  19
  Note
Payable — Collateral for Proportionate Share of Reinsurance
Obligation
  In
conjunction with the Maiden Quota Share, AII entered into a loan agreement with
Maiden Insurance during the fourth quarter of 2007, whereby, Maiden Insurance
agreed to lend to AII from time to time for 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 December 31, 2008. The Company
recorded $570 of interest expense during the three months ended March 31,
2009.
  Other
Reinsurance Agreement
  Effective
January 1, 2008, Maiden became a participating reinsurer in the first layer of
the Company’s workers’ compensation excess of loss program, which provides
coverage in the amount of $9 million per occurrence in excess of $1 million,
subject to an annual aggregate deductible of $1.25 million. Maiden, which is one
of two participating reinsurers in the layer, has a 45% participation. Maiden
participates in the first layer of the excess of loss program on the same market
terms and conditions as the other participant.
  Leap
Tide Capital Management
  Leap Tide
Capital Management, Inc. (“LTCMI”), our wholly owned subsidiary, currently
manages approximately $27,000 of our assets. LTCMI also serves as the Investment
Manager of Leap Tide Partners, L.P., a domestic partnership and Leap Tide
Offshore, Ltd., a Cayman exempted company, both of which were formed for the
purpose of providing qualified third-party investors the opportunity to invest
funds in a vehicle managed by LTCMI (the “Hedge Funds”). As of March 31, 2009,
the current value of the invested funds in the Hedge funds was less than
$1,000.  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 violate the Company’s Code of Business
Conduct and Ethics. The management company earned approximately $0 and $63 of
fees under the agreement during the three months ended March 31, 2009 and 2008,
respectively.
 
 Lease
Agreements
 
 In 2002,
we entered into a lease for approximately 9,000 square feet of office space at
59 Maiden Lane in downtown Manhattan from 59 Maiden Lane Associates, LLC, an
entity which is wholly owned by Michael Karfunkel and George Karfunkel.
Effective January 1, 2008, we entered into an amended lease whereby we increased
our leased space to 14,807 square feet and extended the lease through December
31, 2017. The Audit Committee reviewed and approved the amended lease agreement.
The Company paid approximately $166 and $83 for the lease for the three months
ended March 31, 2009 and 2008, respectively.
  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. The Company paid approximately $41
and $51 for the lease for the three months ended March 31, 2009 and 2008,
respectively.
  20
  Employment
Relationship
 
 Barry
Karfunkel, was an analyst with a Company subsidiary through January 31, 2009,
earned approximately $21 and $63 for the three months ended March 31, 2009 and
2008, respectively. Barry Karfunkel is the son of Michael Karfunkel and the
brother-in-law of Barry Zyskind.
  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
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
premium written of approximately $23,000 and $17,700 during the three months
ended 2009 and 2008, respectively. The Company recorded investment loss of
approximately $402 and $0 from its equity investment for the three months ended
March 31, 2009 and 2008, respectively. As of March 31, 2009 the Company’s equity
interest was approximately $1,708. 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, 2009 the carrying value of the note receivable was $21,808 (note
receivable — related party).
 
 12.
              Acquisition
  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”).  The purchase price of ACHL was
$20 which represented the capital of ACHL.  The acquisition allows the
Company to obtain the benefit of the Captives’ utilization of their equalization
reserves.  In accordance with SFAS No 141(R), the Company recorded
approximately $12,500 of cash, $66,500 of receivables and $79,000 of
equalization reserves.  The results of operations have been included since
acquisition date.
 
 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 AII, entered into a novation agreement by
which AII assumed all of Imagine’s rights and obligations under the stop
loss agreement.
  13.
              Contingent
      Liabilities
  The Company’s insurance subsidiaries
are named as defendants in various legal actions arising principally from claims
made under insurance policies and contracts. Those actions are considered by the
Company in estimating the loss and LAE reserves. The Company’s management
believes the resolution of those actions should not have a material adverse
effect on the Company’s financial position or results of
operations.
  21
  14.
              Assets Under
      Management
  In
December 2006, the Company formed two, wholly-owned subsidiaries currently
named, Leap Tide Capital Management, Inc. (LTCM) and Leap Tide Capital
Management GP, LLC (LTCM GP). Concurrently with these formations, the Company
also formed Leap Tide Partners, LP (LTP), a hedge fund limited partnership, for
the purpose of managing the assets of its limited partners. LTCM has a 1%
ownership in LTP. LTCMI earns a management fee equal to 1% of the LTP’s assets.
LTCM also earns an incentive fee of 20% of the cumulative profits of the LTP.
Through March 31, 2008 LTCM, the general partner of LTP, consolidated LTP in
accordance with EITF 04-05 “Determining Whether a General Partner, or the
General Partners as a Group Controls a Limited Partnership or Similar Entity
When the Limited Partners Have Certain Rights,” as the rights of the limited
partners did not overcome the rights of the general partner. Effective April 1,
2008, the limited partnership agreement was amended such that a majority of the
limited partners had the right to liquidate the limited partnership. In addition
the Company ceased being the managing member of LTCM GP. Due to this amendment,
in accordance with EITF 04-05, the Company ceased to consolidate LTP as of April
1, 2008.
 
 Through
March 31, 2008, we allocated an equivalent portion of the limited partners’
income or loss to minority interest.  For the three months ended March
31, 2009 and 2008, LTP had an investment loss of $0 and $2,900, respectively and
resulted in an allocation to minority interest of $0 and $2,900. The management
companies earned approximately $0 and $43 of fees under the agreement during the
three months ended March 31, 2009 and 2008, respectively.
 
 Net
investment income for the three months ended March 31, 2009 and 2008 for LTCM
was derived from the following sources:
 
 2009
                            
                            
                            2008Equity
      securities:Dividends
                            
                            $
                            -
                            
                            
                            $
                            8Realized
      gain (loss)
                            
                            
                            -
                            
                            
                            
                            431Unrealized
      gain (loss)
                            
                            
                            -
                            
                            
                            
                            (3,297
                            )Cash
      and cash equivalents
                            
                            
                            -
                            
                            
                            
                            6-
                            
                            
                            
                            (2,852
                            )Less:
      Investment expenses
                            
                            
                            -
                            
                            
                            
                            (48
                            )$
                            -
                            
                            
                            $
                            (2,900
                            )
  15.
              Segments
 
 The
Company currently operates three business segments, Small Commercial Business;
Specialty Risk and Extended Warranty Insurance; and Specialty Middle-Market
Property and Casualty Insurance. The “Corporate & Other” segment represents
the activities of the holding company as well as a portion of fee revenue. In
determining total assets (excluding cash and invested assets) by segment the
Company identifies those assets that are attributable to a particular segment
such as premium receivable, deferred acquisition cost, reinsurance recoverable
and prepaid reinsurance while the remaining assets are allocated based on net
written premium by segment. In determining cash and invested assets by segment,
the Company matches certain identifiable liabilities such as unearned premium
and loss and loss adjustment expense reserves by segment. The remaining cash and
invested assets are then allocated based on net written premium by segment.
Investment income and realized gains (losses) are determined by calculating an
overall annual return on cash and invested assets and applying that overall
return to the cash and invested assets by segment. Interest expense and
income taxes are allocated based on net written premium by segment.
Additionally, management reviews the performance of underwriting income in
assessing the performance of and making decisions regarding the allocation of
resources to the segments. Underwriting income excludes, primarily, commission
and fee revenue, investment income and other revenues, other underwriting
expenses, interest expense and income taxes. Management believes that providing
this information in this manner is essential to providing Company’s shareholders
with an understanding of the Company’s business and operating
performance.
  22
  The following tables summarize business
segments as follows for the three months ended March 31, 2009 and
2008:
 
 Small
                                    commercial
                                    business
                                  
                                  
                                  Specialty risk
                                    andextended
                                    warranty
                                  
                                  
                                  Specialty middle-
                                    market property and
                                    casualty insurance
                                  
                                  
                                  Corporate and
                                    other
                                  
                                  
                                  TotalThree months ended March 31,
      2009:Gross
      premium written
                                  
                                  $
                                  127,470
                                  
                                  
                                  $
                                  82,708
                                  
                                  
                                  $
                                  57,349
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  267,527Net
      premium written
                                  
                                  
                                  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
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  26,945Commission
      and fee income
                                  
                                  
                                  3,489
                                  
                                  
                                  
                                  2,138
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,827
                                  
                                  
                                  
                                  7,454Investment
      income and realized gain (loss)
                                  
                                  
                                  2,168
                                  
                                  
                                  
                                  1,340
                                  
                                  
                                  
                                  842
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  4,351Other
      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
                                  
                                  
                                  (1,640
                                  )
                                  
                                  
                                  (3,058
                                  )
                                  
                                  
                                  (231
                                  )
                                  
                                  
                                  (326
                                  )
                                  
                                  
                                  (5,256
                                  )Net
      income
                                  
                                  $
                                  7,538
                                  
                                  
                                  $
                                  14,061
                                  
                                  
                                  $
                                  1,062
                                  
                                  
                                  $
                                  1,501
                                  
                                  
                                  $
                                  24,162
 
 Small
                                    commercial
                                    business
                                  
                                  
                                  Specialty
      risk
                                    and
      extended
                                    warranty
                                  
                                  
                                  Specialty
      middle-
                                    market
      property and
                                    casualty
      insurance
                                  
                                  
                                  Corporate
      and
                                    other
                                  
                                  
                                  TotalThree months ended March 31,
      2008:Gross
      premium written
                                  
                                  $
                                  89,621
                                  
                                  
                                  $
                                  87,769
                                  
                                  
                                  $
                                  57,726
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  234,756Net
      premium written
                                  
                                  
                                  51,332
                                  
                                  
                                  
                                  38,085
                                  
                                  
                                  
                                  28,025
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  117,442Change
      in unearned premium
                                  
                                  
                                  (5,027
                                  )
                                  
                                  
                                  (8,489
                                  )
                                  
                                  
                                  (6,513
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (20,029
                                  )Net
      earned premium
                                  
                                  
                                  46,305
                                  
                                  
                                  
                                  29,596
                                  
                                  
                                  
                                  21,512
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  97,413Ceding
      commission – primarily related party
                                  
                                  
                                  12,600
                                  
                                  
                                  
                                  3,431
                                  
                                  
                                  
                                  4,844
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  20,875Loss
      and loss adjustment expense
                                  
                                  
                                  (24,567
                                  )
                                  
                                  
                                  (17,914
                                  )
                                  
                                  
                                  (12,684
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (55,165
                                  )Acquisition
      costs and other underwriting expenses
                                  
                                  
                                  (23,352
                                  )
                                  
                                  
                                  (6,785
                                  )
                                  
                                  
                                  (10,740
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (40,877
                                  )(47,919
                                  )
                                  
                                  
                                  (24,699
                                  )
                                  
                                  
                                  (23,424
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (96,042
                                  )Underwriting
      income
                                  
                                  
                                  10,986
                                  
                                  
                                  
                                  8,328
                                  
                                  
                                  
                                  2,932
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  22,246Commission
      and fee income
                                  
                                  
                                  2,759
                                  
                                  
                                  
                                  1,796
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,732
                                  
                                  
                                  
                                  6,287Investment
      income, realized gain (loss) and loss on managed assets
                                  
                                  
                                  4,303
                                  
                                  
                                  
                                  2,583
                                  
                                  
                                  
                                  1,425
                                  
                                  
                                  
                                  (2,900
                                  )
                                  
                                  
                                  5,411Other
      expenses
                                  
                                  
                                  (1,940
                                  )
                                  
                                  
                                  (7,186
                                  )
                                  
                                  
                                  4,332
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (4,794
                                  )Interest
      expense
                                  
                                  
                                  (1,100
                                  )
                                  
                                  
                                  (925
                                  )
                                  
                                  
                                  (604
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (2,629
                                  )Foreign
      currency gain
                                  
                                  
                                  —
                                  
                                  
                                  
                                  159
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  159Provision
      for income taxes
                                  
                                  
                                  (3,713
                                  )
                                  
                                  
                                  (1,176
                                  )
                                  
                                  
                                  (2,000
                                  )
                                  
                                  
                                  (428
                                  )
                                  
                                  
                                  (7,317
                                  )Minority
      interest in net loss of subsidiary
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  2,900
                                  
                                  
                                  
                                  2,900Net
      income
                                  
                                  $
                                  11,295
                                  
                                  
                                  $
                                  3,579
                                  
                                  
                                  $
                                  6,085
                                  
                                  
                                  $
                                  1,304
                                  
                                  
                                  $
                                  22,263
  The
following tables summarize business segments as follows as of March 31, 2009 and
December 31, 2008:


Small
                    commercial
                    business
                  
                  
                  Specialty risk
                    and extended
                    warranty
                  
                  
                  Specialty middle-
                    market property and
                    casualty insurance
                  
                  
                  Corporate and
                    other
                  
                  
                  TotalAs of March 31, 2009:Fixed
      assets
                  
                  $
                  7,703
                  
                  
                  $
                  4,130
                  
                  
                  $
                  3,202
                  
                  
                  $
                  —
                  
                  
                  $
                  15,035Goodwill
      and intangible assets
                  
                  
                  78,776
                  
                  
                  
                  11,131
                  
                  
                  
                  14,092
                  
                  
                  
                  —
                  
                  
                  
                  103,999Total
      assets
                  
                  
                  1,752,967
                  
                  
                  
                  947,961
                  
                  
                  
                  463,095
                  
                  
                  
                  —
                  
                  
                  
                  3,164,023As
      of December 31, 2008:Fixed
      assets
                  
                  $
                  6,942
                  
                  
                  $
                  5,528
                  
                  
                  $
                  2,637
                  
                  
                  $
                  —
                  
                  
                  $
                  15,107Goodwill
      and intangible assets
                  
                  
                  79,199
                  
                  
                  
                  10,821
                  
                  
                  
                  12,405
                  
                  
                  
                  —
                  
                  
                  
                  102,425Total
      assets
                  
                  
                  1,718,020
                  
                  
                  
                  933,035
                  
                  
                  
                  492,838
                  
                  
                  
                  —
                  
                  
                  
                  3,143,893


23


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





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




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




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




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




During the third quarter of 2008, the Company entered into a managing
general agency agreement with Cardinal Comp, LLC (“Cardinal Comp”) for the
purpose of producing workers compensation premium. The agency writes premiums in
the states of New York, Massachusetts and Texas.  This relationship
produced approximately $18.0 million of gross written premium during the three
months ended March 31, 2009.




In June
2008, the Company completed a stock and asset purchase agreement with a
subsidiary of Unitrin, Inc. whereby the Company acquired its commercial package
business (“UBI”) including its distribution networks, renewal rights and four
insurance companies through which Unitrin wrote its UBI business. The acquired
insurance companies are located in Kansas, Texas and Wisconsin and are
collectively licensed in 33 states. Consideration paid for the transaction was
approximately $88.5 million and consisted of cash of $61.2 million, a note
payable of $26.8 million, assumed liabilities of $0.3 million and direct
transaction costs of $0.2 million. The Company has recorded approximately $35.0
million of goodwill and $15.0 million of intangible assets related to customer
relationships and licenses. The results of operations have been included in the
Company’s consolidated financial statements since the acquisition
date.





The
Company transacts business through eleven insurance company
subsidiaries:


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





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


24





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




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




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




Net Premium Earned. Net
premium earned is the earned portion of our net premiums written. Insurance
premiums are earned on a pro rata basis over the term of the policy. At the end
of each reporting period, premiums written that are not earned are classified as
unearned premiums and are earned in subsequent periods over the remaining term
of the policy. Our workers’ compensation insurance policies typically have a
term of one year. Thus, for a one-year policy written on July 1, 2008 for an
employer with a constant payroll during the term of the policy, we would earn
half of the premiums in 2008 and the other half in 2009. 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 32 months, but range in duration from one month to 84
months.




Net Loss Ratio. The net loss
ratio is a measure of the underwriting profitability of an insurance company's
business. Expressed as a percentage, this is the ratio of net losses and 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 policy acquisition expenses, salaries and benefits, and other insurance
general and administrative expenses less ceding commission to net premiums
earned.




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





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




One of
the key financial measures that we use to evaluate our operating performance is
return on average equity. Our return on average equity was 24.9% and 22.7% for
the three months ended March 31, 2009 and 2008. 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 79.7% and 77.2% for the
three months ended March 31, 2009 and 2008, respectively.  The
increase in the combined ratio period over period resulted primarily from higher
policy acquisition expenses resulting as a function of having a larger
percentage of gross written premium attributable to our small commercial
business segment in 2009 as well as higher salary expense as a result of the UBI
acquisition in the second quarter of 2008. 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, 2008.


25





Results
of Operations





Consolidated
Results of Operations (Unaudited)




Three Months EndedMarch
31,2009
                  
                  
                  2008($
      amounts in thousands)Gross
      written premium
                  
                  $
                  267,527
                  
                  
                  $
                  234,756Net
      premium written
                  
                  $
                  136,179
                  
                  
                  $
                  117,442Change
      in unearned premium
                  
                  
                  (3,756
                  )
                  
                  
                  (20,029
                  )Net
      earned premium
                  
                  
                  132,423
                  
                  
                  
                  97,413Ceding
      commission – primarily related party
                  
                  
                  27,591
                  
                  
                  
                  20,875Commission
      and fee income
                  
                  
                  7,454
                  
                  
                  
                  6,287Net
      investment income
                  
                  
                  13,589
                  
                  
                  
                  13,531Net
      realized (loss) gain on investments
                  
                  
                  (9,238
                  )
                  
                  
                  (5,220
                  )Other
      investment income (loss) on managed assets
                  
                  
                  —
                  
                  
                  
                  (2,900
                  )Total
      revenue
                  
                  
                  171,819
                  
                  
                  
                  129,986Loss
      and loss adjustment expense
                  
                  
                  74,915
                  
                  
                  
                  55,165Acquisition
      costs and other underwriting expenses
                  
                  
                  58,154
                  
                  
                  
                  40,877Other
                  
                  
                  5,194
                  
                  
                  
                  4,794138,263
                  
                  
                  
                  100,836Income
      from continuing operations
                  
                  
                  33,556
                  
                  
                  
                  29,150Other
      income (expense):Foreign
      currency gain (loss)
                  
                  
                  33
                  
                  
                  
                  159
                  )Interest
      expense
                  
                  
                  (4,171
                  )
                  
                  
                  (2,629
                  )Total
      other expense
                  
                  
                  (4,138
                  )
                  
                  
                  (2,470
                  )Income
      from continuing operations before provision for income taxes and minority
      interest
                  
                  
                  29,418
                  
                  
                  
                  26,680Provision
      for Income taxes
                  
                  
                  5,256
                  
                  
                  
                  7,317Minority
      interest in net loss of subsidiary
                  
                  
                  —
                  
                  
                  
                  (2,900
                  )Net
      income
                  
                  $
                  24,162
                  
                  
                  $
                  22,263Key
      measures:Net
      loss ratio
                  
                  
                  56.6
                  %
                  
                  
                  56.6
                  %Net
      expense ratio
                  
                  
                  23.1
                  %
                  
                  
                  20.5
                  %Net
      combined ratio
                  
                  
                  79.7
                  %
                  
                  
                  77.2
                  %


26





Consolidated
Result of Operations for the Three Months Ended March 31, 2009 and
2008





Gross Premium
Written.  Gross premium written increased $32.8 million or
14.0% from $234.8 million to $267.5 million for the three months ended March 31,
2008 and 2009, respectively. The increase of $32.8 million was attributable to a
$38.2 million increase in our small commercial business, a $5.0 million decrease
in our specialty risk and extended warranty business and a $0.4 million decrease
in our specialty middle-market property and casualty business. The increase in
small commercial business resulted primarily from gross written premium
attributable to the UBI acquisition in the second quarter of 2008 and entering
into a managing general agency agreement with Cardinal Comp in the third quarter
of 2008.  The decrease in specialty risk and extended warranty
business resulted primarily from the currency effect on its premium writings in
Europe.  The specialty middle-market gross premiums were flat period
over period.





Net Premium
Written.  Net premium written increased $18.8 million or 16.0%
from $117.4 million to $136.2 million for the three months ended March 31, 2008
and 2009, respectively.  Net premium written reflected cessions of
$82.9 million and $87.5 million to Maiden Insurance for the three months ended
March 31, 2008 and 2009, respectively, under the terms of their Maiden Quota
Share. Before the cessions to Maiden Insurance, net premium written increased by
$23.4 million in the first quarter of 2009 compared to the first quarter of
2008. The increase (decrease) before the cessions, by segment, was: small
commercial business - $30.8 million, specialty risk and extended warranty -
$(9.1) million and specialty middle market - $1.7 million.





Net Premium
Earned.  Net premium earned increased $35.0 million or 35.9%
from $97.4 million to $132.4 million for the three months ended March 31, 2008
and 2009.  Net premium earned for the first quarter of 2008 and 2009,
respectively, reflected the cessions of $63.8 million and $94.5 million to
Maiden Insurance under the terms of the Maiden Quota Share.  Before
the cessions to Maiden Insurance, net premium earned increased by $65.7 million
in the first quarter of 2009 compared to the first quarter of 2008. The increase
before the cessions, by segment, was: small commercial business - $42.8 million;
specialty risk and extended warranty - $13.7 million; and specialty middle
market - $9.2 million.





Ceding
Commission.  Ceding commission represents commission earned
primarily through the Maiden Quota Share, whereby AmTrust receives a 31% or 34%
ceding commission depending on the business ceded on ceded written premiums to
Maiden.  The ceding commission earned during the three months ended
March 31, 2009 and 2008 was $27.6 million and $20.9 million,
respectively.





Commission and Fee Income. Commission and
fee income increased $1.2 million or 18.6% from $6.3 million to $7.5 million for
the three months ended March 31, 2008 and 2009, respectively.  The
increase was attributable primarily to additional fees earned through existing
agreements with Maiden and administration fees from new warranty
business.





Net Investment
Income.Net investment income increased $0.1 million or 0.4%
from $13.5 million to $13.6 million for the three months ended March 31, 2008
and 2009, respectively. The increase was relatively flat as invested assets
(excluding equity securities) over the three months ended March 31, 2008 and
2009 was approximately $1.4 billion and $1.3 billion,
respectively.  Yields on the Company’s fixed maturities for the three
months ended March 31, 2008 and 2009 were approximately 4.2% and 4.1%,
respectively.





Net Realized Gains (Losses) on
Investments. Net realized losses on investments for the three months
ended March 31, 2009 were $9.2 million, compared to net realized losses of $5.2
million for the same period in 2008.  During the three months ended
March 31, 2009, realized losses related to the timing of certain sales of
underperforming investments in the Company’s fixed income portfolio and a
non-cash write-down of one equity security of $1.4 million that was determined
to be other than temporarily impaired.  During the three months ended
March 31, 2008, realized losses related to the timing of certain sales of
underperforming investments in the Company’s equity portfolio and the non-cash
write-down of four equity securities of $0.7 million that were determined to be
other than temporarily impaired.





Loss and Loss Adjustment
Expenses.  Loss and loss adjustment expenses increased $19.7
million or 35.7% from $55.2 million for the three months ended March 31, 2008 to
$74.9 million for the three months ended March 31, 2009. The Company’s loss
ratio for the three months ended March 31, 2008 and 2009 was
56.6%.  The loss ratio remained flat on a consolidated basis as the
Company’s actuarially projected ultimate losses based on the Company’s loss
experience remained constant period over period.


27


Acquisition Costs and Other
Underwriting Expenses.  Acquisition Costs and Other
Underwriting Expenses increased $17.3 million or 42.2% from $40.9 million for
the three months ended March 31, 2008 to $58.2 million for the three months
ended March 31, 2009. The expense ratio for the same periods increased from
20.5% to 23.1%, respectively.  The increase in the expense ratio
period over period resulted primarily from a higher percentage of gross written
premium attributable to the small commercial business segment than in the prior
period in 2008.  This segment typically has higher policy acquisition
expenses compared to the specialty risk and extended warranty
segment.  Additionally, the Company incurred higher commission expense
in the first quarter of 2009 as well as higher salary expense related to the
retail commercial package business acquired in the second quarter of
2008.





Operating Income from Continuing
Operations. Income from continuing operations increased $2.7 million or
10.1% from $26.7 million to $29.4 million for the three months ended March 31,
2008 and 2009, respectively. The change in income from continuing operations
from 2008 to 2009 resulted primarily from higher net earned premium offset
partially by higher acquisition costs and other underwriting
expenses.





Interest Expense. Interest
expense for the three months ended March 31, 2009 was $4.2 million, compared to
$2.6 million for the same period in 2008.  The increase was
attributable to interest expense on the Company’s promissory note with Maiden,
the $40 million term loan the Company entered into with J.P. Morgan Chase and
$30 million promissory note related to the acquisition of UBI.  The
term loan and promissory note were entered into the second quarter of
2008.





Income Tax Expense (Benefit).
Income tax expense for three months ended March 31, 2009 was $5.3 million which
resulted in an effective tax rate of 17.9%. Income tax expense for three months
ended March 31, 2008 was $7.3 million which resulted in an effective tax rate of
24.7%.  The decrease in our effective rate resulted primarily from
certain Company subsidiaries not subject to U.S. taxation earning a higher
percentage of the Company’s pretax income.





Small
Commercial Business Segment (Unaudited)




Three Months EndedMarch 31,2009
                
                
                2008($
      amounts in thousands)Gross
      premium written
                
                $
                127,470
                
                
                $
                89,261Net
      premium written
                
                
                70,459
                
                
                
                51,332Change
      in unearned premium
                
                
                (12,368
                )
                
                
                (5,027
                )Net
      premium earned
                
                
                58,091
                
                
                
                46,305Ceding
      commission revenue
                
                
                19,776
                
                
                
                12,600Loss
      and loss adjustment expense
                
                
                35,394
                
                
                
                24,567Acquisition
      costs and other underwriting expenses
                
                
                34,154
                
                
                
                23,35269,548
                
                
                
                47,919Net
      premiums earned less expenses included in combined ratio (Underwriting
      income)
                
                $
                8,319
                
                
                $
                10,986Key
      Measures:Net
      loss ratio
                
                
                60.9
                %
                
                
                53.1
                %Net
      expense ratio
                
                
                24.7
                %
                
                
                23.2
                %Net
      combined ratio
                
                
                85.7
                %
                
                
                76.3
                %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                
                
                34,154
                
                
                
                23,352Less:
      ceding commission revenue
                
                
                19,776
                
                
                
                12,60014,378
                
                
                
                10,752Net
      premium earned
                
                
                58,091
                
                
                
                46,305Net
      expense ratio
                
                
                24.7
                %
                
                
                23.2
                %


28





Small
Commercial Business Segment Results of Operations for the Three Months Ended
March 31, 2009 and 2008





Gross Premium
Written.  Gross premium written increased $38.1 million or
42.8% from $89.3 million for the three months ended March 31, 2008 to $127.4
million for the three months ended March 31, 2009.  The increase in
small commercial business resulted primarily, from gross written premium
attributable to the UBI acquisition in the second quarter of 2008 and a managing
general agency agreement with Cardinal Comp entered into in the third quarter of
2008, offset by state mandated workers’ compensation rate reductions in
Florida.





Net Premium
Written.  Net premium written increased $19.2 million or 37.3%
from $51.3 million to $70.5 million for the three months ended March 31, 2008
and 2009, respectively.  Net premium written reflected the cessions of
$32.5 million and $44.1 million to Maiden Insurance for the three months ended
March 31, 2008 and 2009, respectively, under the terms of the Maiden Quota
Share. Before the cessions to Maiden Insurance, net premium written increased by
$30.8 million in the first quarter of 2009 compared to the first quarter of
2008.  The increase of $30.8 million resulted from the increase in
gross premium of $38.1 million period over period.





Net Premium
Earned.  Net premium earned increased $11.8 million or 25.5%
from $46.3 million for the three months ended March 31, 2008 to $58.1 million
for the three months ended March 31, 2009.  Net earned premium for the
first quarter of 2008 and 2009 reflected the cessions of $25.4 million and $56.4
million, respectively, to Maiden Insurance under the terms of the Maiden Quota
Share.  Before the cessions to Maiden Insurance, net premium earned
increased by $42.8 million in the first quarter of 2009 compared to the first
quarter of 2008.  The increase was a result of the net premium written
in the preceding twelve months being greater than the net premium written twelve
months ended March 31, 2008.





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%, based on the
business ceded, on written premiums ceded to Maiden.  The ceding
commission earned during the three months ended March 31, 2008 and 2009 was
$12.6 million and $19.8 million, respectively.





Loss and Loss Adjustment
Expenses.  Loss and loss adjustment expenses increased $10.8
million or 43.9% from $24.6 million for the three months ended March 31, 2008 to
$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, 2009 increased to
60.9% from 53.1% for the three months ended March 31, 2008. The increase in the
loss and loss adjustment ratio resulted, primarily, from the integration of
retail commercial package business acquired in the UBI acquisition in the second
quarter of 2008.  The commercial package business has historically had
a higher loss ratio than the Company’s small workers’ compensation
business.





Acquisition Costs and Other
Underwriting Expenses.  Acquisition Costs and Other
Underwriting Expenses increased $10.8million or 46.2% from $23.4 million for the
three months ended March 31, 2008 to $34.2 million for the three months ended
March 31, 2009. The expense ratio increased from 23.2% for the three months
ended March 31, 2008 to 24.4% for the three months ended March 31, 2009. The
increase in expense ratio resulted primarily from higher policy acquisition
costs and increased salary expense related to the UBI acquisition.





Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income).   Net premiums
earned less expenses included in combined ratio decreased $2.7 million or 24.5%
from $11.0 million for the three months ended March 31, 2008 to $8.3 million for
the three months ended March 31, 2009. This decrease resulted primarily from
higher policy acquisition costs and increased salary expense related to the
commercial package business obtained from the UBI acquisition in the second
quarter of 2008.


29





Specialty
Risk and Extended Warranty Segment (Unaudited)




Three Months Ended March 31,2009
                
                
                2008($
      amounts in thousands)Gross
      premium written
                
                $
                82,708
                
                
                $
                87,769Net
      premium written
                
                
                38,259
                
                
                
                38,085Change
      in unearned premium
                
                
                2,416
                
                
                
                (8,489
                )Net
      premiums earned
                
                
                40,675
                
                
                
                29,596Ceding
      commission revenue
                
                
                6,027
                
                
                
                3,431Loss
      and loss adjustment expense
                
                
                17,818
                
                
                
                17,914Acquisition
      costs and other underwriting expenses
                
                
                12,703
                
                
                
                6,78530,521
                
                
                
                24,699Net
      premiums earned less expenses included in combined ratio (Underwriting
      Income)
                
                $
                16,181
                
                
                $
                8,328Key
      Measures:Net
      loss ratio
                
                
                43.8
                %
                
                
                60.5
                %Net
      expense ratio
                
                
                16.4
                %
                
                
                11.3
                %Net
      combined ratio
                
                
                60.2
                %
                
                
                71.9
                %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                
                
                12,703
                
                
                
                6,785Less:
      ceding commission revenue
                
                
                6,027
                
                
                
                3,4316,676
                
                
                
                3,354Net
      premium earned
                
                
                40,675
                
                
                
                29,596Net
      expense ratio
                
                
                16.4
                %
                
                
                11.3
                %





Specialty Risk
and Extended Warranty Segment Results of Operations for the Three Months Ended
March 31, 2009 and 2008





Gross Premium Written. Gross
premium written decreased $5.0 million or 5.8% from $87.8 million for the three
months ended March 31, 2008 to $82.7 million for the three months ended March
31, 2009. The strengthening of the U.S. dollar on the Company’s European
business negatively impacted gross premium written by $11.5
million.  This decrease was mitigated by a small increase in
underwriting growth of coverage plans in the United States.




Net Premium Written. Net
premium written increased $0.1 million or 0.5% from $38.1 million to $38.2
million for the three months ended March 31, 2008 and 2009,
respectively.  Net premium written reflected the cessions of $32.4
million and $23.2 million to Maiden Insurance for the three months ended March
31, 2008 and 2009, respectively, under the terms of the Maiden Quota Share.
Before the cessions to Maiden Insurance, net premium written decreased by $9.1
million in the first quarter of 2009 compared to the first quarter of
2008.  The decrease of $9.1 million resulted from the strengthening of
the U.S. dollar on the the Company’s European business.


30





Net Premium Earned. Net
premium earned increased $11.0 million or 37.4% from $29.6 million for the three
months ended March 31, 2008 to $40.6 million for the three months ended March
31, 2009.  Net earned premium for the first quarter of 2008 and 2009
reflected the cession of $21.5 million and $24.3 million, respectively, to
Maiden Insurance under the terms of their Maiden Quota Share
agreement.  Before the cessions to Maiden Insurance, net earned
premium increased by $13.8 million in the first quarter of 2009 compared to the
first quarter of 2008.  The increase was a result of the net premium
written in the preceding twelve months being greater than net premium written in
the twelve months ended March 31, 2008.





Ceding
Commission.  Ceding commission represents commission earned
primarily through the Maiden Quota Share, whereby AmTrust receives a 31% ceding
commission on written premiums ceded to Maiden.  The ceding commission
earned during the three months ended March 31, 2008 and 2009 was $3.4 million
and $6.0 million, respectively.





Loss and Loss Adjustment
Expenses. Loss and loss adjustment expenses were $17.9 million and $17.8
million for the three months ended March 31, 2008 and 2009. The Company’s loss
ratio for the segment for the three months ended March 31, 2009 decreased to
43.8% from 60.5% for the three months ended March 31, 2008.  The
improvement of the loss ratio for the resulted primarily, from improvement in
loss development on acquired loss reserves as well as the continued improvement
in the Company’s actual loss experience, which has continued to develop more
favorably than projected.





Acquisition Costs and Other
Underwriting Expenses.  Acquisition Costs and Other
Underwriting Expenses increased $5.9 million or 87.2% from $6.8 million for the
three months ended March 31, 2008 to $12.7 million for the three months ended
March 31, 2009. The expense ratio increased from 11.3% for the three months
ended March 31, 2008 to 16.4% for the three months ended March 31,
2009.  The increase in expense ratio resulted, primarily, from higher
policy acquisition expenses and salary expense.





Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income).  Net premiums
earned less expenses included in combined ratio increased $7.9 million or 95.2%
from $8.3 million for the three months ended March 31, 2008 to $16.2 million for
the three months ended March 31, 2009. This increase is attributable primarily
to an improvement in the loss ratio period over period.


31





Specialty
Middle Market Property and Casualty Segment Results of Operations





(Unaudited)Three Months EndedMarch 31,2009
                
                
                2008($
      amounts in thousands)Gross
      premium written
                
                $
                57,349
                
                
                $
                57,726Net
      premium written
                
                
                27,461
                
                
                
                28,025Change
      in unearned premium
                
                
                6,196
                
                
                
                (6,513
                )Net
      premium earned
                
                
                33,657
                
                
                
                21,512Ceding
      commission revenue
                
                
                1,788
                
                
                
                4,844Loss
      and loss adjustment expense
                
                
                21,703
                
                
                
                12,684Acquisition
      costs and other underwriting expenses
                
                
                11,297
                
                
                
                10,74033,000
                
                
                
                23,424Net
      premiums earned less expenses included in combined ratio
                
                $
                2,445
                
                
                $
                2,932Key
      Measures:Net
      loss ratio
                
                
                64.5
                %
                
                
                59.0
                %Net
      expense ratio
                
                
                28.3
                %
                
                
                27.4
                %Net
      combined ratio
                
                
                92.7
                %
                
                
                86.4
                %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                
                
                11,297
                
                
                
                10,740Less:
      ceding commission revenue
                
                
                1,788
                
                
                
                4,8449,509
                
                
                
                5,896Net
      premium earned
                
                
                33,657
                
                
                
                21,512Net
      expense ratio
                
                
                28.3
                %
                
                
                27.4
                %





Specialty
Middle Market Segment Result of Operations for the Three Months Ended March 31,
2008 and 2007





Gross Premium
Written.  Gross premium decreased $0.4 million or 0.7% from
$57.7 million for the three months ended March 31, 2008 to $57.3 million for the
three months ended March 31, 2009. The segment’s results were relatively flat
period over period.





Net Premium
Written.  Net premium decreased $0.5 million or 2.0% from $28.0
million for the three months ended March 31, 2008 to $27.5 million for the three
months ended March 31, 2009.  Net premium written reflected the
cessions of $18.0 million and $20.2 million to Maiden Insurance for the three
months ended March 31, 2008 and 2009, respectively, under the terms of the
Maiden Quota Share agreement.  Before the cessions to Maiden
Insurance, net premium written increased $1.7 million which resulted, primarily,
from a decrease in gross written premium.





Net Premium
Earned.  Net premium earned increased $12.2 million or 56.5%
from $21.5 million for the three months ended March 31, 2007 to $33.7 million
for the three months ended March 31, 2009.  Net premium earned for the
first quarter of 2008 and 2009 reflected the cessions of $16.8 million and $13.8
million, respectively, to Maiden Insurance under the terms of the Maiden Quota
Share agreement.  Before the cessions to Maiden Insurance, net earned
premium increased by $9.2 million in the first quarter of 2009 compared to the
first quarter of 2008.  The increase was a result of the net premium
written in the preceding twelve months being greater than the net premium
written twelve months ended March 31, 2008.


32





Ceding
Commission.Ceding commission represents commission earned
primarily through its quota share agreement with Maiden Insurance, whereby
AmTrust receives a 31% ceding commission on ceded written premiums to
Maiden.  The ceding commission earned during the three months ended
March 31, 2008 and 2009 was $4.8 million and $1.8 million,
respectively.





Loss and Loss Adjustment
Expenses.Loss and loss adjustment expenses increased $9.1
million or 71.1% from $12.6 million for the three months ended March 31, 2008
compared to $21.7 million for the three months ended March 31, 2009. The loss
ratio for the segment increased for the three months ended March 31, 2009 to
64.5% from 59.0% for the three months ended March 31, 2008. The increase in the
loss and loss adjustment ratio resulted primarily from an increase in the
Company’s actuarially projected ultimate losses based on the Company’s loss
experience.





Acquisition Costs and Other
Underwriting Expenses.  Acquisition Costs and Other
Underwriting Expenses increased $0.6 million or 5.2% from $10.7 million for the
three months ended March 31, 2008 to $11.3 million for the three months ended
March 31, 2009. The expense ratio increased from 27.4% for the three months
ended March 31, 2008 to 27.8% for the three months ended March 31, 2009. The
increase in expense ratio resulted primarily from higher other underwriting
expenses.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income).   Net premiums
earned less expenses included in combined ratio were $2.4 million and $2.9
million for the three months ended March 31, 2009 and 2008, respectively. The
decrease of $0.5 million resulted primarily from an increase to the loss
ratio.





Liquidity and Capital
Resources





Our
principal sources of operating funds are premiums, investment income and
proceeds from sales and maturities of investments. Our primary uses of operating
funds include payments of claims and operating expenses. Currently, we pay
claims using cash flow from operations and invest our excess cash primarily in
fixed maturity and equity securities. We forecast claim payments based on our
historical trends. We seek to manage the funding of claim payments by actively
managing available cash and forecasting cash flows on short-term and long-term
bases. Cash payments for claims were $64.7 million and $58.1 million in the
three months ended March 31, 2009 and 2008, respectively. We expect cash flow
from operations should be sufficient to meet our anticipated claim obligations.
We further expect that projected cash flow from operations should provide us
sufficient liquidity to fund our current operations and service our debt
instruments and anticipated growth for at least the next twelve
months.




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





Three Months Ended
      March 31,($ amounts in thousands)
                  2009
                  
                  2008Cash
      and cash equivalents provided by (used in):Operating
      activities
                  
                  $
                  75,477
                  
                  
                  $
                  44,797Investing
      activities
                  
                  
                  (51,437
                  )
                  
                  
                  129,385Financing
      activities
                  
                  
                  (47,970
                  )
                  
                  
                  (155,934
                  )





Net cash
provided by operating activities for the three months ended March 31, 2009
increased compared to cash provided by operating activities in the three months
ended March 31, 2008, primarily because an increase in gross written premium
offset by an increase in claims paid during the three months ended March 31,
2009.




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, 2009, the Company’s net purchases of fixed securities totaled $46.1
million and net purchases of equity securities totaled $1.6 million. For the
three months ended March 31, 2008, the Company’s net sales of fixed income
securities totaled $139.5 million and net sales of equity securities totaled
$10.8 million.


33





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.  Cash
used in financing activities for the three months ended March 31, 2008 consisted
of purchases of $153.8 million of securities sold under agreements to repurchase
and dividend payments of $2.4 million.





Term
Loan





On June 3, 2008, the Company entered
into a term loan with JP Morgan Chase Bank, N.A. in the aggregate amount of $40
million. The term of the loan is for a period of three years and requires
quarterly principal payments, which began on September 3, 2008 of $3.3 million
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 Inter bank Offered Rate “LIBOR” and had a margin
rate of 185 basis points and was 3.07% as of March 31, 2009. The Company
can prepay any amount of the loan after the first anniversary date without
penalty upon prior notice. The term loan contains affirmative and negative
covenants, including limitations on additional debt, limitations on investments
and acquisitions outside the Company’s normal course of business. The loan
requires the Company to maintain debt to equity ratio of 0.35 to 1 or less. The
Company incurred financing fees of $0.1 million related to the
agreement.  The Company reduced the outstanding balance on the note
during the three months ended March 31, 2009 from $33.3 million to $30
million.





Promissory
Note





In
connection with the stock and asset purchase agreement with a subsidiary of
Unitrin, Inc., the Company entered into a promissory note with Unitrin in the
amount of $30 million. The note bears no interest rate and requires four annual
principal payments of $7.5 million beginning on June 1, 2009 through June 1,
2012. The Company calculated imputed interest of $3.2 million based on current
interest rates available to the Company. Accordingly, the note’s carrying
balance was adjusted to $26.8 million at inception. The note is required to be
paid in full immediately, under certain circumstances involving default of
payment or change of control of the Company. The Company recorded $0.3 million
of interest expense during the three months ended March 31, 2009 and the note’s
carrying value at March 31, 2009 was $27.8 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. The line will expire on June 30,
2009. Interest payments are required to be paid monthly on any unpaid principal
and bears interest at a rate of LIBOR plus 150 basis points.  As of
March 31, 2009 there was no outstanding balance on the line of credit. At March
31, 2009, The Company had outstanding letters of credit in place for $24.1
million that reduced the availability on the line of credit to $0.9 million as
of March 31, 2009.  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, that it invests or hold in short term or
fixed income securities. As of March 31, 2009, there were $248.4 million
principal amount outstanding at interest rates between 0.85% and 1.00%. Interest
expense associated with these repurchase agreements for the three months ended
March 31, 2009 was $0.7 million of which $0.3 million was accrued as of March
31, 2009. The Company has approximately $255.0 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
lends 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,
2009.


34





Reinsurance




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




The
Company has coverage for its workers’ compensation line of business under excess
of loss reinsurance agreements.  We have obtained reinsurance for this
line of business with higher limits as our exposures have increased. As the
scale of our workers’ compensation business has increased, we have also
increased the amount of risk we retain.  The agreements cover losses
in excess of $500 through December 31, 2004, $600 effective January 1, 2005 and
$1,000 effective January 1, 2006, per occurrence up to a maximum $130,000
($80,000 prior to 2004) in losses per occurrence.  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. Beginning with
policies effective January 1, 2006, the Company retains the first $1,000 per
occurrence.




The
Company has coverage for its casualty lines of business under excess of loss
reinsurance agreements. The agreement covers losses in excess of $2,000 per
occurrence up to a maximum $12,000. The agreement also provides “clash”
protection for qualifying claims for losses in excess of $12,000 up to a maximum
of $32,000.




The
Company has coverage for its property lines of business under an excess of loss
reinsurance agreements. The agreement covers losses in excess of $2,000 per
property up to a maximum $15,000. In addition the Company has a property
catastrophe excess of loss agreement. The agreement covers losses in excess of
$4,000 per occurrence up to a maximum $65,000.




During
2008, TIC acted as servicing carrier on behalf of workers’ compensation assigned
risk plans in the states of Arkansas, Illinois, Indiana, Georgia and Virginia.
In 2007, TIC acted as servicing carrier on behalf of both the Georgia and
Virginia Workers’ Compensation Assigned Risk Plans. In 2006, TIC was a servicing
carrier only for the Georgia Assigned Risk Plan. In its role as a serving
carrier TIC issues and services certain workers compensation policies to Georgia
and Virginia insureds. Those policies are subject to a 100% quota-share
reinsurance agreement offered by the National Workers Compensation Reinsurance
Pool or a state-basedequivalent, 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
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.


35




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




As part
of the acquisition of Associated, 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 $250 per occurrence up to statutory coverage limits.
Effective April 1, 1999, American Home provided coverage in the amount of $150
in excess of $100. This additional coverage terminated on December 31, 2001 on a
run-off basis. Therefore, for losses occurring in 2002 that attached to a policy
that was in effect in 2001, the retention was $100 per occurrence. Effective
January 1, 2002 American Home increased its attachment was $250 per occurrence.
The excess of loss treaty that had an attachment of $250 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
$250 per occurrence.




In
October 2006, the Company entered into a quota-share reinsurance agreement with
5 syndicate members of Lloyd’s of London who collectively reinsured 10% in 2008
of a particular specialty risk and extended warranty program.




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




Under the
variable quota share reinsurance arrangements with Munich Re, we may elect to
cede from 15% to 50% of each covered risk, but Munich Re shall not reinsure more
than £500 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 £500,000. For the majority of the business ceded under this
reinsurance arrangement, we cede 15% of the risk to Munich Re, but for some
newer or larger risks, we cede a larger share to Munich Re. This reinsurance is
subject to a limit of £2.5 million per occurrence of certain natural perils such
as windstorms, earthquakes, floods and storm surge. Coverage for losses arising
out of acts of terrorism is excluded from the scope of this
reinsurance.





Investment
Portfolio





Our
investment portfolio, including cash and cash equivalents, decreased $4.8
million or 0.4% to $1,343.2 million at March 31, 2009 from $1,348.0 million as
of December 31, 2008 (excluding $12.6 million and $13.5 million of other
investments, respectively). A majority of our fixed maturities are classified as
available for sale (95%) as of March 31, 2009, as defined by SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities.” As such, the
reported value of those securities is equal to their fair value.  The
remainder of our fixed maturities are classified as held to maturity (5%) and
their carrying values are not impacted by changing interest rates. Our fixed
maturity securities, gross, as of this date had a fair value of $966.4 million
and an amortized cost of $1,055.3 million. Our equity securities are classified
as available-for-sale, as defined by SFAS 115. These securities are reported at
fair value. The equity securities, gross, carried at fair value were $25.7
million with a cost of $82.8 million as of March 31, 2009. Securities sold but
not yet purchased, represent obligations of the Company to deliver the specified
security at the contracted price and thereby, create a liability to
purchase the security in the market at prevailing rates. Sales of
securities under repurchase agreements are accounted for as collateralized
borrowing transactions and are recorded at their contracted amounts. Our
investment portfolio is summarized in the table below by type of
investment:


36





March 31, 2009
                            
                            
                            December 31, 2008($
      amounts in thousands)
                            
                            Carrying
                              Value
                            
                            Percentage of
                              Portfolio
                            
                            
                            Carrying
                              Value
                            
                            Percentage of
                              PortfolioCash
      and cash equivalents
                            
                            $
                            165,287
                            
                            12.3
                            %
                            
                            $
                            192,053
                            
                            14.2
                            %Time
      and short-term deposits
                            
                            
                            187,512
                            
                            14.0
                            
                            
                            
                            167,845
                            
                            12.5U.S.
      treasury securities
                            
                            
                            18,653
                            
                            1.4
                            
                            
                            
                            17,851
                            
                            1.3U.S.
      government agencies
                            
                            
                            13,120
                            
                            1.0
                            
                            
                            
                            21,434
                            
                            1.6U.S.
      Agency – Mortgage backed securities
                            
                            
                            312,246
                            
                            23.2
                            
                            
                            
                            286,795
                            
                            21.3U.S.
      Agency – Commercial mortgage obligations
                            
                            
                            187,405
                            
                            14.0
                            
                            
                            
                            205,610
                            
                            15.3Municipals
                            
                            
                            46,833
                            
                            3.5
                            
                            
                            
                            45,208
                            
                            3.4Commercial
      mortgage back securities
                            
                            
                            3,371
                            
                            0.3
                            
                            
                            
                            3,390
                            
                            0.2Asset
      backed securities
                            
                            
                            4,068
                            
                            0.3
                            
                            
                            
                            5,068
                            
                            0.4Corporate
      bonds
                            
                            
                            379,016
                            
                            28.2
                            
                            
                            
                            373,901
                            
                            27.7Preferred
      stocks
                            
                            
                            2,503
                            
                            0.2
                            
                            
                            
                            5,315
                            
                            0.4Common
      stocks
                            
                            
                            23,184
                            
                            1.7
                            
                            
                            
                            23,513
                            
                            1.7$
                            1,343,198
                            
                            100.0
                            %
                            
                            $
                            1,347,983
                            
                            100.0
                            %





As of
March 31, 2009, the weighted average duration of our fixed income securities was
4.9 years and had a yield of 4.45%.




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




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


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


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


§
            any
      downgrades of the security by a rating agency as well as an entire
      industry sector or sub-sector;


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


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




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 generally considers
investments subject to impairment testing when an asset is in an unrealized loss
position in excess of 25% of cost basis.


37




During
the three months ended March 31, 2009, based on the criteria above, we
determined that one security was other-than-temporarily-impaired.  The
impairment charges of our fixed-maturities and equity securities for the three
months ended March 31, 2009 and 2008 are presented in the table
below:





($ amounts in thousands)
                    
                    2009
                    
                    
                    2008Equity
      securities
                    
                    $
                    1,427
                    
                    
                    $
                    742Fixed
      maturity securities
                    
                    
                    —
                    
                    
                    
                    —$
                    1,427
                    
                    
                    $
                    742




In
addition to the other than temporary impairment of $1.4 million recorded during
the three months ended March 31, 2009, at March 31, 2009, the Company had $58.0
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 common
stocks, 36 equity securities comprised $53 million, or 92.6% of the unrealized
loss. 12 securities in the consumer products sectorrepresent approximately
22.5% of the total fair value and 32.5% of the Company’s unrealized loss. 7
securities in the financial sector represent approximately 16.4% of the total
fair value and 11.2% of the Company’s total unrealized losses and 13 common
stocks in the health care, industrial and technology sectors which have fair
values of approximately 29.0%, 10.4% and 7.4%, respectively, and approximately
15.0%, 16.8% and 15.0%, respectively, of the Company’s unrealized losses.
Additionally, the Company owns 4 stocks in other sectors which accounts for 2.1%
of the Company’s unrealized losses.  The duration of these impairments
ranges from 2 to 21 months. The remaining securities in a loss position are not
considered individually significant and accounted for 7.4% 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, 2009, the Company had $111.1 million of gross unrealized losses related to
available-for-sale fixed income securities as of March 31, 2009. Corporate bonds
represent 39% of the fair value of our fixed maturities and 96% of the total
unrealized losses of our fixed maturities. The Company owns 215 corporate bonds
in the industrial, bank and financial and other sectors, which have a fair value
of approximately 13%, 25% and 1%, respectively, and 16%, 80% and 0% 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 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.





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





We are
subject to credit risk with respect to our third party reinsurers. Although our
third party reinsurers are obligated to reimburse us to the extent we cede risk
to them, we are ultimately liable to our policyholders on all risks we have
ceded. As a result, reinsurance contracts do not limit our ultimate obligations
to pay claims covered under the insurance policies we issue and we might not
collect amounts recoverable from our reinsurers. We address this credit risk by
selecting reinsurers which have an A.M. Best rating of “A” (Excellent) or better
at the time we enter into the agreement and by performing, along with our
reinsurance 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.”


38




Interest Rate Risk. We had
fixed maturity securities (excluding $187.5 million of time and short-term
deposits) with a fair value of $966.4 million and a carrying value of $964.7
million as of March 31, 2009 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, 2009 to selected hypothetical
changes in interest rates, and the associated impact on our stockholders’
equity.  Temporary changes in the fair value of our fixed maturity
securities that are held-to-maturity, such as those resulting from interest rate
fluctuations, do not impact the carrying value of these securities and,
therefore, do not affect our shareholders’ equity.  However, temporary
changes in the fair value of our fixed maturity securities that are held as
available-for-sale do impact the carrying value of these securities and are
reported in our shareholders’ equity as a component of other comprehensive
income, net of deferred taxes. The selected scenarios in the table below are not
predictions of future events, but rather are intended to illustrate the effect
such events may have on the fair value and carrying value of our fixed maturity
securities and on our shareholders’ equity, each as of March 31,
2009.





Hypothetical Change in Interest Rates
                
                Fair Value
                
                
                Estimated
                  Change in
                  Fair Value
                
                
                Carrying
                  Value
                
                
                Estimated
                  Change in
                  Carrying
                  Value
                
                
                Hypothetical
                  Percentage
                  (Increase)
                  Decrease in
                  Shareholders’
                  Equity($
      in thousands)200
      basis point increase
                
                $
                920,420
                
                
                $
                (46,012
                )
                
                $
                —
                
                
                $
                (42,941
                )
                
                
                (10.7
                )%100
      basis point increase
                
                
                942,090
                
                
                
                (24,350
                )
                
                
                —
                
                
                
                (22,642
                )
                
                
                (5.6
                )No
      change
                
                
                966,440
                
                
                
                —
                
                
                
                964,714
                
                
                
                —
                
                
                
                —100
      basis point decrease
                
                
                990,685
                
                
                
                24,245
                
                
                
                —
                
                
                
                22,476
                
                
                
                5.6200
      basis point decrease
                
                
                1,017,072
                
                
                
                50,632
                
                
                
                —
                
                
                
                46,912
                
                
                
                11.7




Foreign Currency Risk. We
write insurance in the United Kingdom and certain other European Union member
countries through AIU. While the functional currency of AIU is the Euro, we
write coverages that are settled in local currencies, including the British
Pound. We attempt to maintain sufficient local currency assets on deposit to
minimize our exposure to realized currency losses. Assuming a 5% increase in the
exchange rate of the local currency in which the claims will be paid and that we
do not hold that local currency, we would recognize a $1.5 million after tax
realized currency loss based on our outstanding foreign denominated reserves of
$47.5 million at March 31, 2009.




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, 2009, the equity securities in our
investment portfolio had a fair value of $26.5 million, representing
approximately nine 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, 2009. The hypothetical scenarios below assume that the Company’s Beta is 1
when compared to the S&P 500 index.


39





Hypothetical Change in S&P 500 Index
                    
                    Fair Value
                    
                    
                    Estimated
                      Change in
                      Fair Value
                    
                    
                    Carrying
                      Value
                    
                    
                    Estimated
                      Change in
                      Carrying
                      Value
                    
                    
                    Hypothetical
                      Percentage
                      Increase
                      (Decrease) in
                      Shareholders
                      Equity($
      in thousands)5%
      increase
                    
                    $
                    26,971
                    
                    
                    $
                    1,284
                    
                    
                    
                    
                    
                    $
                    1,284
                    
                    
                    
                    0.2
                    %No
      change
                    
                    
                    25,687
                    
                    
                    
                    
                    
                    
                    $
                    25,6875%
      decrease
                    
                    
                    24,403
                    
                    
                    
                    (1,284
                    )
                    
                    
                    
                    
                    
                    
                    (1,284
                    )
                    
                    
                    (0.2
                    )%




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





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





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




Item
4. Controls and Procedures





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


40


PART II -
OTHER INFORMATION




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, 2009.31.2
              
              Certification
      of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
      for the quarter ended March 31, 2009.32.1
              
              Certification
      of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, for
      the quarter ended March 31, 2009.32.2
              
              Certification
      of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, for
      the quarter ended March 31,
2009.


41





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 11, 2009
                
                /s/ Barry D.
ZyskindBarry
      D. Zyskind
                  President
      and Chief Executive Officer/s/ Ronald E. Pipoly,
    Jr.Ronald
      E. Pipoly, Jr.
                  Chief
      Financial Officer


42