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 September 30, 2009





 ̈
            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  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrants were required to
submit and post such files).




Yes  ̈ No  ̈




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





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





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





As of
November 3, 2009, the Registrant had one class of Common Stock ($.01 par value),
of which 59,304,627 shares were issued and outstanding.





INDEX





PagePART
      I
                                        FINANCIAL
      INFORMATIONItem
      1.
                                        Unaudited
      Financial Statements:Condensed
      Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008
      (audited)
                                        3Condensed
      Consolidated Statements of Income—
      Three and nine months ended September 30, 2009 and 2008
                                        4Condensed
      Consolidated Statements of Cash Flows— Nine
      months ended September 30, 2009 and 2008
                                        5Notes
      to Condensed Consolidated Financial Statements
                                        6Item
      2.
                                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                        30Item
      3.
                                        Quantitative
      and Qualitative Disclosures About Market Risk
                                        49Item
      4.
                                        Controls
      and Procedures
                                        50PART
      II
                                        OTHER
      INFORMATIONItem
      1.
                                        Legal
      Proceedings
                                        51Item
      1A.
                                        Risk
      Factors
                                        51Item
      2.
                                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                                        51Item
      3.
                                        Defaults
      Upon Senior Securities
                                        52Item
      4.
                                        Submission
      of Matters to a Vote of Security Holders
                                        52Item
      5.
                                        Other
      Information
                                        52Item
      6.
                                        Exhibits
                                        52Signatures
                                        53


2


PART 1 -
FINANCIAL INFORMATION





Item 1. Financial Statements


AMTRUST
FINANCIAL SERVICES, INC. AND SUBSIDIARIES


Condensed
Consolidated Balance Sheets





(Unaudited)(in
      thousands, except per share data)
                  
                  September 30,
                    2009
                  
                  
                  December 31,
                    2008ASSETSFixed
      maturities, held-to-maturity, at amortized cost (fair value $-;
      $50,242)
                  
                  $
                  —
                  
                  
                  $
                  48,881Fixed
      maturities, available-for-sale, at market value (amortized cost
      $1,000,111; $988,779)
                  
                  
                  1,001,371
                  
                  
                  
                  910,376Equity
      securities, available-for-sale, at market value (cost $67,006;
      $84,090)
                  
                  
                  53,567
                  
                  
                  
                  28,828Short-term
      investments
                  
                  
                  134,956
                  
                  
                  
                  167,845Other
      investments
                  
                  
                  11,457
                  
                  
                  
                  13,457Total
      investments
                  
                  
                  1,201,351
                  
                  
                  
                  1,169,387Cash
      and cash equivalents
                  
                  
                  263,160
                  
                  
                  
                  192,053Funds
      held with reinsurance companies
                  
                  
                  110
                  
                  
                  
                  110Accrued
      interest and dividends
                  
                  
                  6,556
                  
                  
                  
                  9,028Premiums
      receivable, net
                  
                  
                  409,386
                  
                  
                  
                  419,577Note
      receivable – related party
                  
                  
                  22,247
                  
                  
                  
                  21,591Reinsurance
      recoverable
                  
                  
                  339,895
                  
                  
                  
                  363,608Reinsurance
      recoverable – related party
                  
                  
                  285,088
                  
                  
                  
                  221,214Prepaid
      reinsurance premium
                  
                  
                  137,208
                  
                  
                  
                  128,519Prepaid
      reinsurance premium – related party
                  
                  
                  238,321
                  
                  
                  
                  243,511Federal
      income tax receivable
                  
                  
                  -
                  
                  
                  
                  4,667Prepaid
      expenses and other assets
                  
                  
                  70,712
                  
                  
                  
                  72,221Deferred
      policy acquisition costs
                  
                  
                  166,689
                  
                  
                  
                  103,965Deferred
      income taxes
                  
                  
                  40,283
                  
                  
                  
                  76,910Property
      and equipment, net
                  
                  
                  13,620
                  
                  
                  
                  15,107Goodwill
                  
                  
                  52,331
                  
                  
                  
                  49,794Intangible
      assets, net
                  
                  
                  56,090
                  
                  
                  
                  52,631Total
      assets
                  
                  $
                  3,303,047
                  
                  
                  $
                  3,143,893LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Loss
      and loss expense reserves
                  
                  $
                  1,060,059
                  
                  
                  $
                  1,014,059Unearned
      premiums
                  
                  
                  790,452
                  
                  
                  
                  759,915Ceded
      reinsurance premiums payable
                  
                  
                  53,969
                  
                  
                  
                  59,990Ceded
      reinsurance premium payable – related party
                  
                  
                  93,407
                  
                  
                  
                  102,907Reinsurance
      payable on paid losses
                  
                  
                  895
                  
                  
                  
                  8,820Federal
      income tax payable
                  
                  
                  15,129
                  
                  
                  
                  —Funds
      held under reinsurance treaties
                  
                  
                  958
                  
                  
                  
                  228Securities
      sold but not yet purchased, at market value
                  
                  
                  17,741
                  
                  
                  
                  22,608Securities
      sold under agreements to repurchase, at contract value
                  
                  
                  256,877
                  
                  
                  
                  284,492Accrued
      expenses and other current liabilities
                  
                  
                  138,603
                  
                  
                  
                  144,304Derivatives
      liabilities
                  
                  
                  3,422
                  
                  
                  
                  1,439Note
      payable – related party
                  
                  
                  167,975
                  
                  
                  
                  167,975Non
      interest bearing note – net of unamortized discount of ($1,609 and
      $2,439)
                  
                  
                  20,891
                  
                  
                  
                  27,561Term
      loan
                  
                  
                  23,333
                  
                  
                  
                  33,333Junior
      subordinated debt
                  
                  
                  123,714
                  
                  
                  
                  123,714Total
      liabilities
                  
                  
                  2,767,425
                  
                  
                  
                  2,751,345Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $.01 par value; 100,000 shares authorized, 84,170 and 84,146 issued
      as of September 30, 2009 and December 31, 2008, respectively; 59,304 and
      60,033 outstanding as of September 30, 2009 and December 31, 2008,
      respectively
                  
                  
                  842
                  
                  
                  
                  842Preferred
      stock, $.01 par value; 10,000 shares authorized
                  
                  
                  —
                  
                  
                  
                  —Additional
      paid-in capital
                  
                  
                  542,627
                  
                  
                  
                  539,421Treasury
      stock at cost; 24,866 shares and 24,113 shares as of September 30, 2009
      and December 31, 2008, respectively
                  
                  
                  (300,889
                  )
                  
                  
                  (294,803
                  )Accumulated
      other comprehensive income (loss)
                  
                  
                  (24,929
                  )
                  
                  
                  (105,815
                  )Retained
      earnings
                  
                  
                  317,971
                  
                  
                  
                  252,903Total
      stockholders’ equity
                  
                  
                  535,622
                  
                  
                  
                  392,548Total
      liabilities and stockholders’ equity
                  
                  $
                  3,303,047
                  
                  
                  $
                  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
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenues:Premium
      income:Net
      premium written
                  
                  $
                  167,317
                  
                  
                  $
                  139,429
                  
                  
                  $
                  440,616
                  
                  
                  $
                  388,928Change
      in unearned premium
                  
                  
                  (22,025
                  )
                  
                  
                  (47,096
                  )
                  
                  
                  (26,098
                  )
                  
                  
                  (83,237
                  )Net
      premium earned
                  
                  
                  145,292
                  
                  
                  
                  92,333
                  
                  
                  
                  414,518
                  
                  
                  
                  305,691Ceding
      commission – primarily related party
                  
                  
                  27,369
                  
                  
                  
                  37,116
                  
                  
                  
                  87,238
                  
                  
                  
                  92,522Commission
      and fee income
                  
                  
                  6,951
                  
                  
                  
                  8,749
                  
                  
                  
                  22,012
                  
                  
                  
                  23,411Net
      investment income
                  
                  
                  14,079
                  
                  
                  
                  15,391
                  
                  
                  
                  41,250
                  
                  
                  
                  43,112Net
      realized gain (loss) on investments
                  
                  
                  (11,653
                  )
                  
                  
                  (45,885
                  )
                  
                  
                  (28,600
                  )
                  
                  
                  (53,240
                  )Other
      investment loss on managed assets
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (2,900
                  )Total
      revenues
                  
                  
                  182,038
                  
                  
                  
                  107,704
                  
                  
                  
                  536,418
                  
                  
                  
                  408,596Expenses:Loss
      and loss adjustment expense
                  
                  
                  77,531
                  
                  
                  
                  37,094
                  
                  
                  
                  229,031
                  
                  
                  
                  166,393Acquisition
      costs and other underwriting expenses
                  
                  
                  63,154
                  
                  
                  
                  53,549
                  
                  
                  
                  185,895
                  
                  
                  
                  149,572Other
      expense
                  
                  
                  5,764
                  
                  
                  
                  6,062
                  
                  
                  
                  16,732
                  
                  
                  
                  13,360Total
      expenses
                  
                  
                  146,449
                  
                  
                  
                  96,705
                  
                  
                  
                  431,658
                  
                  
                  
                  329,325Operating
      income from continuing operations
                  
                  
                  35,589
                  
                  
                  
                  10,999
                  
                  
                  
                  104,760
                  
                  
                  
                  79,271Other
      income (expenses):Foreign
      currency gain (loss)
                  
                  
                  552
                  
                  
                  
                  515
                  
                  
                  
                  1,196
                  
                  
                  
                  659Interest
      expense
                  
                  
                  (3,813
                  )
                  
                  
                  (3,682
                  )
                  
                  
                  (11,991
                  )
                  
                  
                  (11,852
                  )Total
      other expenses
                  
                  
                  (3,261
                  )
                  
                  
                  (3,167
                  )
                  
                  
                  (10,795
                  )
                  
                  
                  (11,193
                  )Income
      from continuing operations before provision for income taxes and minority
      interest
                  
                  
                  32,328
                  
                  
                  
                  7,832
                  
                  
                  
                  93,965
                  
                  
                  
                  68,078Provision
      for income taxes
                  
                  
                  8,107
                  
                  
                  
                  (1,529
                  )
                  
                  
                  18,811
                  
                  
                  
                  13,004Minority
      interest in net income of subsidiary
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (2,900
                  )Net
      income
                  
                  
                  24,221
                  
                  
                  
                  9,361
                  
                  
                  
                  75,154
                  
                  
                  
                  57,974Basic
      earnings per common share
                  
                  $
                  0.41
                  
                  
                  $
                  0.16
                  
                  
                  $
                  1.26
                  
                  
                  $
                  0.97Diluted
      earnings per common share
                  
                  $
                  0.40
                  
                  
                  $
                  0.15
                  
                  
                  $
                  1.25
                  
                  
                  $
                  0.95Dividends
      declared per common share
                  
                  $
                  0.06
                  
                  
                  $
                  0.05
                  
                  
                  $
                  0.17
                  
                  
                  $
                  0.13





Three Months Ended
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      Realized Gain (Loss) on Investments:Total
      other-than-temporary impairment losses
                  
                  $
                  (3,147
                  )
                  
                  $
                  (36,662
                  )
                  
                  $
                  (15,360
                  )
                  
                  $
                  (44,633
                  )Portion
      of loss recognized in other comprehensive income
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Net
      impairment losses recognized in earnings
                  
                  
                  (3,147
                  )
                  
                  
                  (36,662
                  )
                  
                  
                  (15,360
                  )
                  
                  
                  (44,633
                  )Other
      net realized gain (loss) on investments
                  
                  
                  (8,506
                  )
                  
                  
                  (9,223
                  )
                  
                  
                  (13,240
                  )
                  
                  
                  (8,607
                  )Net
      realized investment gain (loss)
                  
                  $
                  (11,653
                  )
                  
                  $
                  (45,885
                  )
                  
                  $
                  (28,600
                  )
                  
                  $
                  (53,240
                  )





See
accompanying notes to unaudited condensed consolidated financial
statements.


4


AmTrust
Financial Services, Inc.


Consolidated
Statements of Cash Flows


(Unaudited)




Nine Months Ended September 30,(in
      thousands)
                  
                  2009
                  
                  
                  2008Cash flows from operating
      activities:Net
      income from continuing operations
                  
                  $
                  75,154
                  
                  
                  $
                  57,974Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  6,650
                  
                  
                  
                  6,387Realized
      loss (gain) marketable securities
                  
                  
                  15,360
                  
                  
                  
                  8,607Non-cash
      write-down of marketable securities
                  
                  
                  13,240
                  
                  
                  
                  44,633Discount
      on notes payable
                  
                  
                  830
                  
                  
                  
                  407Stock
      compensation expense
                  
                  
                  3,024
                  
                  
                  
                  2,314Bad
      debt expense
                  
                  
                  1,950
                  
                  
                  
                  1,812Foreign
      currency (gain)
                  
                  
                  (1,196
                  )
                  
                  
                  (659
                  )Changes
      in assets - (increase) decrease:Premium
      and notes receivable
                  
                  
                  8,240
                  
                  
                  
                  (127,090
                  )Reinsurance
      recoverable
                  
                  
                  23,713
                  
                  
                  
                  (173,804
                  )Reinsurance
      recoverable – related party
                  
                  
                  (63,874
                  )
                  
                  
                  (131,656
                  )Deferred
      policy acquisition costs, net
                  
                  
                  (62,724
                  )
                  
                  
                  (23,164
                  )Prepaid
      reinsurance premiums
                  
                  
                  (8,689
                  )
                  
                  
                  (26,163
                  )Prepaid
      reinsurance premiums – related party
                  
                  
                  5,190
                  
                  
                  
                  (101,961
                  )Prepaid
      expenses and other assets
                  
                  
                  7,992
                  
                  
                  
                  (9,323
                  )Deferred
      tax asset
                  
                  
                  38,540
                  
                  
                  
                  (28,711
                  )Changes
      in liabilities - increase (decrease):Reinsurance
      premium payable
                  
                  
                  (6,021
                  )
                  
                  
                  4,829Reinsurance
      premium payable – related party
                  
                  
                  (9,500
                  )
                  
                  
                  69,683Loss
      and loss expense reserve
                  
                  
                  46,000
                  
                  
                  
                  231,573Unearned
      premiums
                  
                  
                  30,537
                  
                  
                  
                  205,918Funds
      held under reinsurance treaties
                  
                  
                  730
                  
                  
                  
                  50,859Accrued
      expenses and other current liabilities
                  
                  
                  2,462
                  
                  
                  
                  27,562Net
      cash provided by operating activities
                  
                  
                  127,608
                  
                  
                  
                  90,027Cash
      flows from investing activities:Net
      sales (purchases) of securities with fixed
      maturities
                  
                  
                  2,445
                  
                  
                  
                  (194,564
                  )Net
      sales of equity securities
                  
                  
                  6,682
                  
                  
                  
                  17,832Net
      sales of other investments
                  
                  
                  2,001
                  
                  
                  
                  11,175Note
      receivable - related party
                  
                  
                  -
                  
                  
                  
                  (2,000
                  )Acquisition
      of subsidiary, net of cash obtained
                  
                  
                  -
                  
                  
                  
                  (55,883
                  )Acquisition
      of renewal rights
                  
                  
                  (6,404
                  )
                  
                  
                  (2,950
                  )Purchase
      of property and equipment
                  
                  
                  (2,334
                  )
                  
                  
                  (1,719
                  )Net
      cash provided by (used in) investing activities
                  
                  
                  2,390
                  
                  
                  
                  (228,109
                  )Cash
      flows from financing activities:Repurchase
      agreements, net
                  
                  
                  (27,615
                  )
                  
                  
                  163,660Term
      loan borrowing
                  
                  
                  -
                  
                  
                  
                  40,000Term
      loan payment
                  
                  
                  (10,000
                  )
                  
                  
                  (3,333
                  )Non-interest
      bearing note payment
                  
                  
                  (7,500
                  )
                  
                  
                  -Debt
      financing fees
                  
                  
                  -
                  
                  
                  
                  (52
                  )Repurchase
      of common stock
                  
                  
                  (6,086
                  )
                  
                  
                  -Stock
      option exercise
                  
                  
                  183
                  
                  
                  
                  334Dividends
      distributed on common stock
                  
                  
                  (9,530
                  )
                  
                  
                  (7,197
                  )Net
      cash (used in) provided by financing activities
                  
                  
                  (60,548
                  )
                  
                  
                  193,412Effect
      of exchange rate changes on cash
                  
                  
                  1,657
                  
                  
                  
                  (2,571
                  )Net increase
      in cash and cash equivalents
                  
                  
                  71,107
                  
                  
                  
                  52,759Cash
      and cash equivalents, beginning of the period
                  
                  
                  192,053
                  
                  
                  
                  145,337Cash
      and cash equivalents, end of the period
                  
                  $
                  263,160
                  
                  
                  $
                  198,096Supplemental
      Cash Flow Information:Income
      tax payments
                  
                  $
                  9,282
                  
                  
                  $
                  21,678Interest
      payments on debt
                  
                  
                  13,718
                  
                  
                  
                  10,250





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 changes 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 and nine
months ended September 30, 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 June 2009, the Financial
Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - a
replacement of FASB Statement No. 162  (“The
Codification”).  The Codification supersedes all existing U.S.
accounting standards issued by the FASB and other related private sector
standard setters into a single source of authoritative accounting principles
arranged by topic and will serve as the single source of authoritative
non-governmental U.S. Generally Accepted Accounting Principles.  The
codification was effective on a prospective basis for interim and annual
reporting periods ending after September 15, 2009.  The adoption of
the Codification changed the Company’s references to U.S. GAAP accounting
standards but did not impact the Company’s results of operations, financial
position or liquidity.





In
June 2009, the FASB issued new guidance on the accounting for the transfers
of financial assets.  The new guidance, which was issued as SFAS
No. 166, Accounting for
Transfers of Financial Assets, an Amendment of FASB Statement No. 140 has
not yet been adopted into Codification.  SFAS 166 requires additional
disclosures for transfers of financial assets, including securitization
transactions, and any continuing exposure to the risks related to transferred
financial assets. SFAS 166 eliminates the concept of a qualifying
special-purpose entity and changes the requirements for derecognizing financial
assets.  SFAS 166 is effective on a prospective basis for the annual period
beginning after November 15, 2009 and interim and annual periods
thereafter.  The Company does not expect that the provisions of SFAS 166
will have a material effect on its results of operations, financial position or
liquidity.




6





In June 2009, the FASB issued
revised guidance on the accounting for variable interest
entities.  The revised guidance, which was issued as SFAS
No. 167, Amendments to
FASB Interpretation No. 46(R) has not yet been adopted into
Codification.  The revised guidance requires an analysis of whether a
company has: (1) the power to direct the activities of a variable interest
entity that most significantly impact the entity’s economic performance, and
(2) the obligation to absorb the losses that could potentially be
significant to the entity or the right to receive benefits from the entity that
could potentially be significant to the entity.  The revised guidance also
requires an entity to be re-evaluated as a variable interest entity when the
holders of the equity investment at risk, as a group, lose the power from voting
rights or similar rights to direct the activities that most significantly impact
the entity’s economic performance.  The revised guidance requires
additional disclosures about a company’s involvement in variable interest
entities and an ongoing assessment of whether a company is the primary
beneficiary.  The revised guidance is effective on a prospective basis for
the annual period beginning after November 15, 2009 and interim and annual
periods thereafter.  The Company does not expect that the revised guidance
will have a material effect on its results of operations, financial position or
liquidity.





In May 2009, the FASB issued new
guidance for accounting for subsequent events.  The new guidance, which is
now part of ASC 855,Subsequent Events, is consistent with existing auditing standards in
defining subsequent events as events or transactions that occur after the
balance sheet date but before the financial statements are issued or are
available to be issued, but it also requires the disclosure of the date through
which an entity has evaluated subsequent events and the basis for that
date.  The new guidance defines two types of subsequent events: “recognized
subsequent events” and “non-recognized subsequent events.”  Recognized
subsequent events provide additional evidence about conditions that existed at
the balance sheet date and must be reflected in the company’s financial
statements.  Non-recognized subsequent events provide evidence about
conditions that arose after the balance sheet date and are not reflected in the
financial statements of a company.  Certain non-recognized subsequent
events may require disclosure to prevent the financial statements from being
misleading.  The new guidance was effective on a prospective basis for
interim or annual periods ending after June 15, 2009.  The adoption of
the new guidance on April 1, 2009 had no effect on the Company’s results of
operations, financial position or liquidity.





In April
2009, the FASB issued new guidance for the accounting for other-than-temporary
impairments.  Under the new guidance, which is now part of ASC 320,
Investments – Debt and Equity
Securities, an other than temporary impairment is recognized 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, the new guidance 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.  The new guidance 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, the new guidance 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 new guidance was effective for interim periods ended
after June 15, 2009, with early adoption permitted for periods ended after
March 15, 2009.  The Company adopted the new guidance on April 1,
2009.  The adoption did not have a material impact on its results of
operations, financial position, or liquidity.





In April 2009, the FASB issued
new guidance for determining when a transaction is not orderly and for
estimating fair value when there has been a significant decrease in the volume
and level of activity for an asset or liability.  The new guidance,
which is now part of ASC 820, Fair Value Measurements and
Disclosures, 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.  The provisions of the new guidance were effective for
interim periods ended after June 15, 2009, with early adoption permitted
for periods ended after March 15, 2009.  The Company adopted the new
provisions on April 1, 2009 and the adoption did not have a material effect
on its results of operations, financial position or liquidity.




In April 2009, the FASB issued
new guidance related to the disclosure of the fair value of financial
instruments.  The new guidance, which is now part of ASC 820, Fair Value Measurments and
Disclosures, requires disclosure about fair value of financial
instruments in interim and annual financial statements.   The new guidance
was effective for periods ended after June 15, 2009, with early adoption
permitted for periods ended after March 15, 2009.  The Company adopted
the new provisions on April 1, 2009 and the adoption did not have a
material effect on its results of operations, financial position or
liquidity.




7





In
April 2009, the FASB issued revised guidance for recognizing and measuring
pre-acquisition contingencies in a business combination.  Under the revised
guidance, which is now part of ASC 805, Business Combinations,
pre-acquisition contingencies are recognized at their acquisition-date fair
value if a fair value can be determined during the measurement period.  If
the acquisition-date fair value cannot be determined during the measurement
period, a contingency (best estimate) is to be recognized if it is probable that
an asset existed or liability had been incurred at the acquisition date and the
amount can be reasonably estimated.  The revised guidance does not
prescribe specific accounting for subsequent measurement and accounting for
contingencies.  The adoption of the revised guidance on
January 1, 2009 had no effect on the Company’s results of operations,
financial position or liquidity.





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





In April
2008, the FASB issued revised guidance on determining the useful life of
intangible assets.  The revised guidance, which is now part of ASC
350, Intangibles – Goodwill and Other, amends the factors that should be
considered in developing assumptions about renewals or extensions used in
estimating the useful life of a recognized intangible.  The revised
guidance was effective for financial statements issued for fiscal years which
began after December 15, 2008. The measurement provisions of the revised
guidance relate only to intangible assets of the Company acquired after the
effective date.  The revised guidance did not have a material impact
on the Company’s consolidated results of operations, financial position or
liquidity.





In March
2008, the FASB issued new guidance on the disclosure of derivative instruments
and hedging activities.  The new guidance, which is now part of ASC
815, Derivatives and Hedging
Activities, 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 and how derivative instruments and
related hedged items affect a company’s financial position, financial
performance and cash flows.  The new guidance was effective for
financial statements issued for fiscal years and interim periods which began
after November 15, 2008.  The new guidance did not have a material
impact   on the Company’s consolidated results of operations,
financial position or liquidity.





In December 2007, the FASB issued
revised guidance for the accounting for business combinations.  The revised
guidance, which is now part of ASC 805,Business Combinations,
requires the fair value measurement of assets acquired, liabilities assumed and
any noncontrolling interest in the acquiree, at the acquisition date with
limited exceptions.  Previously, a cost allocation approach was used to
allocate the cost of the acquisition based on the estimated fair value of the
individual assets acquired and liabilities assumed.  The cost allocation
approach treated acquisition-related costs and restructuring costs that the
acquirer expected to incur as a liability on the acquisition date, as part of
the cost of the acquisition.  Under the revised guidance, those costs are
recognized in the consolidated statement of income separately from the business
combination.  In addition, the revised guidance includes recognition,
classification and measurement guidance for assets and liabilities related to
insurance and reinsurance contracts acquired in a business combination. 
The revised guidance applies to business combinations for acquisitions occurring
on or after January 1, 2009.





In
December 2007, the FASB issued new guidance for the accounting for
noncontrolling interests.  The new guidance, which is now part of ASC
810, Consolidation,
establishes 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.  The new guidance
became 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.  The new guidance did not have a
material impact on the Company's consolidated results of operations,
financial position or liquidity.




8





3.
            Investments





(a) Available-for-Sale
Securities





The
original cost, estimated fair value and gross unrealized appreciation and
depreciation of available-for-sale securities as of September 30, 2009, are
presented in the table below:




(Amounts
      in thousands)
                  
                  Original or
                    amortized
                    cost
                  
                  
                  Gross
                    unrealized
                    gains
                  
                  
                  Gross
                    unrealized
                    losses
                  
                  
                  Fair
                    valuePreferred
      stock
                  
                  $
                  5,266
                  
                  
                  $
                  -
                  
                  
                  $
                  (1,120
                  )
                  
                  $
                  4,146Common
      stock
                  
                  
                  61,740
                  
                  
                  
                  7,340
                  
                  
                  
                  (19,659
                  )
                  
                  
                  49,421U.S.
      treasury securities
                  
                  
                  15,692
                  
                  
                  
                  768
                  
                  
                  
                  (41
                  )
                  
                  
                  16,419U.S.
      government agencies
                  
                  
                  6,570
                  
                  
                  
                  581
                  
                  
                  
                  -
                  
                  
                  
                  7,151Municipal
      bonds
                  
                  
                  27,203
                  
                  
                  
                  1,896
                  
                  
                  
                  (2
                  )
                  
                  
                  29,097Corporate
      bonds:Finance
                  
                  
                  314,611
                  
                  
                  
                  5,627
                  
                  
                  
                  (25,757
                  )
                  
                  
                  294,481Industrial
                  
                  
                  109,211
                  
                  
                  
                  9,142
                  
                  
                  
                  (6,196
                  )
                  
                  
                  112,157Utilities
                  
                  
                  12,141
                  
                  
                  
                  1,269
                  
                  
                  
                  (252
                  )
                  
                  
                  13,158Commercial
      mortgage backed securities
                  
                  
                  3,340
                  
                  
                  
                  102
                  
                  
                  
                  -
                  
                  
                  
                  3,442Residential
      mortgage backed securities:Agency
      backed
                  
                  
                  499,957
                  
                  
                  
                  16,328
                  
                  
                  
                  (2,333
                  )
                  
                  
                  513,952Non-agency
      backed
                  
                  
                  7,796
                  
                  
                  
                  -
                  
                  
                  
                  (46
                  )
                  
                  
                  7,750Asset-backed
      securities
                  
                  
                  3,590
                  
                  
                  
                  222
                  
                  
                  
                  (48
                  )
                  
                  
                  3,764$
                  1,067,117
                  
                  
                  $
                  43,275
                  
                  
                  $
                  (55,454
                  )
                  
                  $
                  1,054,938





During
the three months ended June 30, 2009, the Company disposed of a portion of its
fixed maturities classified as held to maturity.  As such, the Company
assessed the appropriateness of its remaining fixed maturity portfolio
classified as held to maturity.  The Company determined that all
remaining fixed maturities should be classified as available for sale under the
provisions of FASB ASC 320-10 (Prior authoritative literature: SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities).  The effect of this one time
reclassification increased the carrying value of the fixed maturities by
approximately $1,000.





(b)
Investment Income





Net
investment income for the three and nine months ended September 30, 2009 and
2008 were derived from the following sources:





Three Months Ended September 30,
                    
                    
                    Nine Months Ended September 30,(Amounts
      in thousands)
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Fixed
      maturities
                    
                    $
                    11,647
                    
                    
                    $
                    10,513
                    
                    
                    $
                    35,111
                    
                    
                    $
                    33,579Equity
      securities
                    
                    
                    1,686
                    
                    
                    
                    811
                    
                    
                    
                    2,037
                    
                    
                    
                    1,616Cash
      and cash equivalents
                    
                    
                    336
                    
                    
                    
                    5,777
                    
                    
                    
                    3,908
                    
                    
                    
                    12,646Loss
      on equity investment
                    
                    
                    (166
                    )
                    
                    
                    (177
                    )
                    
                    
                    (785
                    )
                    
                    
                    (738
                    )Note
      receivable - related party
                    
                    
                    829
                    
                    
                    
                    796
                    
                    
                    
                    2,462
                    
                    
                    
                    2,36514,332
                    
                    
                    
                    17,720
                    
                    
                    
                    42,733
                    
                    
                    
                    49,468Less:
      Investment expenses and interest expense on securities sold under
      agreement to repurchase
                    
                    
                    253
                    
                    
                    
                    2,329
                    
                    
                    
                    1,483
                    
                    
                    
                    6,356$
                    14,079
                    
                    
                    $
                    15,391
                    
                    
                    $
                    41,250
                    
                    
                    $
                    43,112
  9





(c)
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:




§
            the current fair value compared
      to amortized cost;


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


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


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


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


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




Impairment
of investment securities results in a charge to operations when a market decline
below cost is deemed to be other-than-temporary. The Company generally considers
investments to be subject to impairment testing when an asset is in an
unrealized loss position in excess of 35% of cost basis and has been in an
unrealized loss position for 24 months or more.





Based on
guidance in FASB ASC 320-10-65 (Prior authoritative literature: FSP 115-2 Recognition and Presentation of
Other-Than-Temporary-Impairments), in the event of the decline in fair
value of a debt security, a holder of that security that does not intend to sell
the debt security and for whom it is not more than likely than not that
such holder will be required to sell the debt security before recovery of its
amortized cost basis, is required to separate the decline in fair value into (a)
the amount representing the credit loss and (b) the amount related to other
factors.  The amount of total decline in fair value related to the
credit loss shall be recognized in earnings as an Other Than Temporary
Impairment (“OTTI”) with the amount related to other factors recognized in
accumulated other comprehensive loss net loss, net of tax.  OTTI
credit losses result in a permanent reduction of the cost basis of the
underlying investment.  The determination of OTTI is a subjective
process, and different judgments and assumptions could affect the timing of the
loss realization.  OTTI charges of our fixed-maturities and equity
securities for the three months and nine months ended September 30, 2009 and
2008 are presented in the table below:





Three Months Ended September 30,
                
                
                Nine Months Ended September 30,(Amounts
      in thousands)
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Equity
      securities recognized in earnings
                
                $
                3,147
                
                
                $
                5,343
                
                
                $
                11,108
                
                
                $
                13,314Fixed
      maturities recognized in earnings
                
                
                -
                
                
                
                31,319
                
                
                
                4,252
                
                
                
                31,319$
                3,147
                
                
                $
                36,662
                
                
                $
                15,360
                
                
                $
                44,633




10




The
tables below summarize the gross unrealized losses of our fixed maturity and
equity securities by length of time the security has continuously been in an
unrealized loss position as of September 30, 2009:




Less Than 12 Months
                  
                  
                  12 Months or More
                  
                  
                  Total(Amounts
      in  thousands)
                  
                  Fair
                    Market
                    Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  No. of
                    Positions
                    Held
                  
                  
                  Fair
                    Market
                    Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  No. of
                    Positions
                    Held
                  
                  
                  Fair
                    Market
                    Value
                  
                  
                  Unrealized
                    LossesCommon
      and preferred stock
                  
                  $
                  688
                  
                  
                  $
                  (655
                  )
                  
                  
                  9
                  
                  
                  $
                  21,510
                  
                  
                  $
                  (20,124
                  )
                  
                  
                  117
                  
                  
                  $
                  22,198
                  
                  
                  $
                  (20,779
                  )U.S.
      treasury securities
                  
                  
                  902
                  
                  
                  
                  (41
                  )
                  
                  
                  2
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  902
                  
                  
                  
                  (41
                  )Municipal
      bonds
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  350
                  
                  
                  
                  (2
                  )
                  
                  
                  1
                  
                  
                  
                  350
                  
                  
                  
                  (2
                  )Corporate
      bonds:Finance
                  
                  
                  28,749
                  
                  
                  
                  (3,914
                  )
                  
                  
                  14
                  
                  
                  
                  146,144
                  
                  
                  
                  (21,843
                  )
                  
                  
                  33
                  
                  
                  
                  174,893
                  
                  
                  
                  (25,757
                  )Industrial
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  22,434
                  
                  
                  
                  (6,196
                  )
                  
                  
                  11
                  
                  
                  
                  22,434
                  
                  
                  
                  (6,196
                  )Utilities
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,834
                  
                  
                  
                  (252
                  )
                  
                  
                  3
                  
                  
                  
                  2,834
                  
                  
                  
                  (252
                  )Commercial  mortgage
      backed securities
                  
                  
                  200
                  
                  
                  
                  —
                  
                  
                  
                  2
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  200
                  
                  
                  
                  —Residential
      mortgage backed securities:Agency
      backed
                  
                  
                  38,923
                  
                  
                  
                  (576
                  )
                  
                  
                  3
                  
                  
                  
                  131,406
                  
                  
                  
                  (1,757
                  )
                  
                  
                  12
                  
                  
                  
                  170,329
                  
                  
                  
                  (2,333
                  )Non-agency
      backed
                  
                  
                  7,729
                  
                  
                  
                  (34
                  )
                  
                  
                  1
                  
                  
                  
                  22
                  
                  
                  
                  (12
                  )
                  
                  
                  1
                  
                  
                  
                  7,751
                  
                  
                  
                  (46
                  )Asset-backed
      securities
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  264
                  
                  
                  
                  (48
                  )
                  
                  
                  1
                  
                  
                  
                  264
                  
                  
                  
                  (48
                  )Total
      temporarily impaired
                  
                  $
                  77,191
                  
                  
                  $
                  (5,220
                  )
                  
                  
                  31
                  
                  
                  $
                  324,964
                  
                  
                  $
                  (50,234
                  )
                  
                  
                  179
                  
                  
                  $
                  402,155
                  
                  
                  $
                  (55,454
                  )





There are 210 securities at September
30, 2009 that account for the gross unrealized loss, none of which is deemed by
the Company to be OTTI.  Significant factors influencing the Company’s
determination that unrealized losses were temporary included the magnitude of
the unrealized losses in relation to each security’s cost, the nature of the
investment and management’s intent not to sell these securities and it being not
more likely than not that the Company will be required to sell these investments
before anticipated recovery of fair value to the Company’s cost
basis.





(d)
Derivatives




The
following table presents the notional amounts by remaining maturity of the
Company’s Interest Rate Swaps, Credit Default Swaps and Contracts for
Differences as of September 30, 2009:





Remaining Life of Notional Amount(1)(Amounts
      in thousands)
                
                One Year
                
                
                Two Through
                  Five Years
                
                
                Six Through
                  Ten Years
                
                
                After Ten
                  Years
                
                
                TotalInterest
      rate swaps
                
                $
                —
                
                
                $
                23,333
                
                
                $
                —
                
                
                $
                —
                
                
                $
                23,333Credit
      default swaps
                
                
                —
                
                
                
                12,000
                
                
                
                —
                
                
                
                —
                
                
                
                12,000Contracts
      for differences
                
                
                —
                
                
                
                —
                
                
                
                2,066
                
                
                
                —
                
                
                
                2,066$
                —
                
                
                $
                35,333
                
                
                $
                2,066
                
                
                $
                —
                
                
                $
                37,399





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





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




11





(e)
Other




Securities
sold but not yet purchased represent obligations of the Company to deliver the
specified security at the contracted price and thereby create a liability to
purchase the security in the market at prevailing prices. The Company’s
liability for securities to be delivered is measured at their fair value and as
of September 30, 2009 was $14,040 for corporate bonds and $3,701 for equity
securities. These transactions result in off-balance sheet risk, as the
Company’s ultimate cost to satisfy the delivery of securities sold but not
yet purchased may exceed the amount reflected at September 30, 2009. Subject to
certain limitations, all securities owned, to the extent required to cover the
Company’s obligations to sell or repledge the securities to others, are pledged
to the clearing broker.





The
Company enters into repurchase agreements. The agreements are accounted for as
collateralized borrowing transactions and are recorded at contract amounts. The
Company receives cash or securities, that it invests or holds in short term or
fixed income securities. As of September 30, 2009, there were $256,877 principal
amount outstanding at interest rates between 0.35% and
0.55%.  Interest expense associated with these repurchase agreements
for the three months ended September 30, 2009 and 2008 was $280 and $2,300,
respectively, of which $150 was accrued as of September 30,
2009.  Interest expense associated with the repurchase agreements for
the nine months ended September 30, 2009 and 2008 was $1,483 and $6,300,
respectively.  The Company has approximately $261,500 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 nationally recognized third-party pricing services (“pricing
service”). When quoted market prices are unavailable, the Company utilizes a
pricing service to determine an estimate of fair value.  This pricing
method is used, primarily, for fixed maturities. The fair value estimates
provided by the pricing service are included in the Level 2
hierarchy.  If the Company determines that the fair value estimate
provided by the pricing service does not represent fair value or 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.




Fixed
Maturities.  The Company utilized a pricing service to estimate
fair value measurements for over 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 it will produce an estimate of fair value
only 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 virtually all of the
Company’s fixed maturities are included in Level 1 or Level 2, the Company holds
a small percentage, approximately 0.1%, 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 September, 30, 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.




12





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 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 to manage interest
rate changes or other exposures to a particular financial market. Derivatives,
as defined in FASB ASC 815-10-15 (Prior authoritative literature: SFAS 133
“Accounting for Derivative Instruments and Hedging Activities”), 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.  The Company carries all derivatives on its consolidated
balance sheet at fair value.  The changes in fair value of the
derivative are presented as a component of operating income.  Changes
in fair value of a derivative used as a hedge are presented as a component of
other comprehensive 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, 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 derivatives as Level
3 hierarchy.





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 September 30, 2009:





(Amounts
      in thousands)
                    
                    Total
                    
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3Assets:Fixed
      securities
                    
                    $
                    1,001,371
                    
                    
                    $
                    16,419
                    
                    
                    $
                    983,612
                    
                    
                    $
                    1,340Equity
      securities
                    
                    
                    53,567
                    
                    
                    
                    53,567
                    
                    
                    
                    -
                    
                    
                    
                    -Other
      investments
                    
                    
                    11,457
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    11,457$
                    1,066,395
                    
                    
                    $
                    69,986
                    
                    
                    $
                    983,612
                    
                    
                    $
                    12,797Liabilities:Securities
      sold but not yet purchased, market
                    
                    $
                    17,741
                    
                    
                    $
                    3,701
                    
                    
                    $
                    14,040
                    
                    
                    $
                    -Securities
      sold under agreements to repurchase, at contract value
                    
                    
                    256,877
                    
                    
                    
                    -
                    
                    
                    
                    256,877
                    
                    
                    
                    -Derivatives
                    
                    
                    3,422
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,422$
                    278,040
                    
                    
                    $
                    3,701
                    
                    
                    $
                    270,917
                    
                    
                    $
                    3,422
  13





The
following table provides a summary of changes in fair value of the Company’s
Level 3 financial assets and financial liabilities as of September 30,
2009:




(Amounts
      in thousands)
                  
                  Assets
                  
                  
                  Liabilities
                  
                  
                  TotalThree
      months ended September 30, 2009:Beginning
      balance as of July 1, 2009
                  
                  $
                  18,757
                  
                  
                  $
                  (2,320
                  )
                  
                  $
                  16,437Total
      net losses for the quarter included in:Net
      income
                  
                  
                  -
                  
                  
                  
                  (554
                  )
                  
                  
                  (554
                  )Other
      comprehensive loss
                  
                  
                  -
                  
                  
                  
                  (548
                  )
                  
                  
                  (548
                  )Purchases,
      sales, issuances and settlements, net
                  
                  
                  (5,960
                  )
                  
                  
                  -
                  
                  
                  
                  (5,960
                  )Net
      transfers into (out of) Level 3
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Ending
      balance as of September 30, 2009
                  
                  $
                  12,797
                  
                  
                  $
                  (3,422
                  )
                  
                  $
                  9,375





(Amounts in thousands
      )
                  
                  Assets
                  
                  
                  Liabilities
                  
                  
                  TotalNine
      months ended September 30, 2009:Beginning
      balance as of January 1, 2009
                  
                  $
                  21,352
                  
                  
                  $
                  (1,439
                  )
                  
                  $
                  19,913Total
      net losses for the quarter included in:Net
      income
                  
                  
                  (39
                  )
                  
                  
                  (677
                  )
                  
                  
                  (716
                  )Other
      comprehensive loss
                  
                  
                  -
                  
                  
                  
                  (1,306
                  )
                  
                  
                  (1,306
                  )Purchases,
      sales, issuances and settlements, net
                  
                  
                  (8,516
                  )
                  
                  
                  -
                  
                  
                  
                  (8,576
                  )Net
      transfers into (out of) Level 3
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Ending
      balance as of September 30, 2009
                  
                  $
                  12,797
                  
                  
                  $
                  (3,422
                  )
                  
                  $
                  9,375





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.  In accordance with FASB ASC 810-10-25 (Prior authoritative
literature: FIN 46(R) “Consolidation of Variable Interest Entities”), the
Company does not consolidate such special purpose trusts, as the Company is not
considered to be the primary beneficiary. The equity investment, totaling $3,714
as of September 30, 2009 on the Company’s consolidated balance sheet, represents
the Company’s ownership of common securities issued by the trusts. The
debentures require interest-only payments to be made on a quarterly basis, with
principal due at maturity.  The debentures contain covenants that
restrict declaration of dividends on the Company’s common stock under certain
circumstances, including default of payment. The Company incurred $2,605 of
placement fees in connection with these issuances which is being amortized over
thirty years.





The table
below summarizes the Company’s trust preferred securities as of September 30,
2009:





(Amounts in
      thousands)
                    
                    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 in 2015.


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


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




14





The Company recorded $2,487 and $2,531
of interest expense for the three months ended September 30, 2009 and 2008,
respectively, and $7,591 and $7,591 of interest expense for the nine months
ended September 30, 2009 and 2008, respectively, related to these trust
preferred securities.





Term
Loan




On June
3, 2008, the Company entered into a term loan with JP Morgan Chase Bank, N.A. in
the aggregate amount of $40,000. The term of the loan is for a period of
three years and requires quarterly principal payments of $3,333, which began on
September 3, 2008 and end on June 3, 2011. The loan carries a variable interest
rate and is based on a Eurodollar rate plus an applicable margin. The Eurodollar
rate is a periodic fixed rate equal to the London Interbank Offered Rate “LIBOR”
plus a margin rate, which is 185 basis points. As of September 30, 2009 the
interest rate was 2.184%. The Company recorded $349 and $638 of interest expense
for the three months ended September 30, 2009 and 2008, respectively, and $1,191
and $789 of interest expense for the nine months ended September 30, 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 (income) of $159 and $(34) for the three months ended September 30, 2009
and 2008, respectively, and $598 and $(34) for the nine months ended September
30, 2009 and 2008 related to this agreement.




Promissory
Note




In
connection with the stock and asset purchase agreement with a subsidiary of
Unitrin, Inc. (“Unitrin”), the Company, on June 1, 2008, issued a promissory
note to Unitrin in the amount of $30,000. The note is non-interest bearing and
requires four annual principal payments of $7,500, the first of which
was paid in 2009, and the remaining principal payments are due on June 1,
2010, 2011 and 2012.  Upon entering into the promissory note, the
Company calculated imputed interest of $3,155 based on interest rates available
to the Company, which was 4.5%. Accordingly, the note’s carrying balance was
adjusted to $26,845 at the acquisition. The note is required to be paid in full,
immediately, under certain circumstances involving default of payment or change
of control of the Company. The Company included $234 and $306 of amortized
discount on the note in its results of operations for the three months ended
September 30, 2009 and 2008, respectively and $830 and $407 for the nine months
ended September 30, 2009 and 2008, respectively. The note’s carrying value at
September 30, 2009 was $20,891.





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.  On June 30, 2009,
the Company amended this agreement, whereby, the line increased in the aggregate
amount to $30,000 and its term was extended to June 30, 2010.  The
Company incurred fees of $30 for this amendment.  Interest payments
are required to be paid monthly on any unpaid principal and bears interest at a
rate of LIBOR plus 150 basis points. As of September 30, 2009 there was no
outstanding balance on the line of credit. The Company has outstanding letters
of credit in place at September 30, 2009 for $22,895 that reduced the
availability on the line of credit to $7,105 as of September 30,
2009.




15





Maturities
of Debt




Maturities
of the Company’s debt for the remainder of 2009 and future periods are as
follows:




(Amounts
      in thousands)
                  
                  2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  ThereafterJunior
      subordinated debt
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  123,714Term
      loan
                  
                  
                  3,333
                  
                  
                  
                  13,333
                  
                  
                  
                  6,667
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Promissory
      note
                  
                  
                  —
                  
                  
                  
                  6,492
                  
                  
                  
                  7,037
                  
                  
                  
                  7,362
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  3,333
                  
                  
                  $
                  19,825
                  
                  
                  $
                  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 and nine months ended September 30, 2009 and
2008:





Three Months Ended September 30,
                    
                    
                    Nine Months Ended September 30,(Amounts
      in thousands)
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Policy
      acquisition expenses
                    
                    $
                    27,572
                    
                    
                    $
                    32,216
                    
                    
                    $
                    91,596
                    
                    
                    $
                    73,215Salaries
      and benefits
                    
                    
                    20,299
                    
                    
                    
                    17,902
                    
                    
                    
                    60,240
                    
                    
                    
                    47,548Other
      insurance general and administrative expense
                    
                    
                    15,283
                    
                    
                    
                    3,431
                    
                    
                    
                    34,059
                    
                    
                    
                    28,809$
                    63,154
                    
                    
                    $
                    53,549
                    
                    
                    $
                    185,895
                    
                    
                    $
                    149,572




7.
            Earnings Per
      Share





The
following is a summary of the elements used in calculating basic and diluted
earnings per share for the three and nine months ended September 30, 2009 and
2008:





Three Months Ended September 30,
                      
                      
                      Nine Months Ended September 30,(Amounts
      in thousands)
                      
                      2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Net
      income available to common shareholders
                      
                      $
                      24,221
                      
                      
                      $
                      9,361
                      
                      
                      $
                      75,154
                      
                      
                      $
                      57,974Weighted
      average number of common shares outstanding – basic
                      
                      
                      59,324
                      
                      
                      
                      59,995
                      
                      
                      
                      59,475
                      
                      
                      
                      59,985Potentially
      dilutive shares:Dilutive
      shares from stock-based compensation
                      
                      
                      664
                      
                      
                      
                      821
                      
                      
                      
                      436
                      
                      
                      
                      921Weighted
      average number of common shares outstanding – dilutive
                      
                      
                      59,988
                      
                      
                      
                      60,816
                      
                      
                      
                      59,911
                      
                      
                      
                      60,906Basic
      earnings per common share
                      
                      $
                      0.41
                      
                      
                      $
                      0.16
                      
                      
                      $
                      1.26
                      
                      
                      $
                      0.97Diluted
      earnings per common share
                      
                      $
                      0.40
                      
                      
                      $
                      0.15
                      
                      
                      $
                      1.25
                      
                      
                      $
                      0.95





As of
September 30, 2009, there were approximately 1,024 of anti-dilutive securities
excluded from diluted earnings per share.




16




8.
            Share Based
      Compensation





The
Company’s 2005 Equity and Incentive Plan (“2005 Plan”) permits the Company to
grant to officers, employees and non-employee directors of the Company incentive
compensation directly linked to the price of the Company’s stock. The Company
grants options at prices equal to the closing stock price of the Company’s stock
on the dates the options are granted. The Company recognizes compensation
expense under FASB ASC 718-10-25 (Prior authoritative literature: 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.  ASC 718-10-30
fair value valuation method resulted in share-based expense (a component of
salaries and benefits) in the amount of approximately $1,212 and $819 related to
stock options for the three months ended September 30, 2009 and 2008,
respectively and $3,024 and $2,314 for the nine months ended September 30, 2009
and 2008, respectively.





The
following schedule shows all options granted, exercised, expired and exchanged
under the 2005 Plan for the nine months ended September 30, 2009 and
2008:





2009
                    
                    2008(Amounts
      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
                    
                    
                    543
                    
                    
                    
                    8.99-11.72
                    
                    
                    
                    733
                    
                    
                    
                    12.73-15.02Exercised
                    
                    
                    (24
                    )
                    
                    
                    7.50
                    
                    
                    
                    (45
                    )
                    
                    
                    7.50Cancelled
      or terminated
                    
                    
                    (87
                    )
                    
                    
                    7.50-14.55
                    
                    
                    
                    (31
                    )
                    
                    
                    7.50-14.55Outstanding
      end of period
                    
                    
                    4,160
                    
                    
                    $
                    7.00-15.02
                    
                    
                    
                    3,783
                    
                    
                    $
                    7.00-15.02




The
weighted average grant date fair value of options granted during the nine months
ended September 30, 2009 and 2008 was $3.02 and $4.46, respectively. As of
September 30, 2009 there was approximately $5,313 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 September 30,
                
                
                Nine Months Ended September 30,(Amounts
      in thousands)
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      income
                
                $
                24,221
                
                
                $
                9,361
                
                
                $
                75,154
                
                
                $
                57,974Unrealized
      holding gain (loss) and other
                
                
                25,441
                
                
                
                (30,310
                )
                
                
                51,438
                
                
                
                (60,726
                )Reclassification
      adjustment
                
                
                11,336
                
                
                
                1,841
                
                
                
                25,743
                
                
                
                10,073Foreign
      currency translation
                
                
                582
                
                
                
                (5,376
                )
                
                
                3,705
                
                
                
                (4,756
                )Comprehensive
      income (loss)
                
                $
                61,580
                
                
                $
                24,484
                
                
                $
                156,040
                
                
                
                2,565
  17





10.
            Income
    Taxes





Income
tax expense (benefit) for the three months ended September 30, 2009 and 2008 was
$8,107 and $(1,529), respectively, and $18,811 and $13,004 for the nine months
ended September 30, 2009 and 2008, respectively.  The following table
reconciles the Company’s statutory federal income tax rate to its effective tax
rate.




Three Months Ended September 30,
                  
                  
                  Nine Months Ended September 30,(Amounts
      in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Income
      from continuing operations before provision for income taxes and minority
      interest
                  
                  $
                  32,328
                  
                  
                  $
                  7,832
                  
                  
                  $
                  93,965
                  
                  
                  $
                  68,078Less:
      minority interest
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (2,900
                  )Income
      from continuing operations after minority interest before provision for
      income taxes
                  
                  $
                  33,328
                  
                  
                  $
                  7,832
                  
                  
                  $
                  93,965
                  
                  
                  $
                  70,978Income
      taxes at statutory rates
                  
                  $
                  11,315
                  
                  
                  $
                  2,741
                  
                  
                  $
                  32,888
                  
                  
                  $
                  24,842Effect
      of income not subject to U.S. taxation
                  
                  
                  (3,791
                  )
                  
                  
                  (4,438
                  )
                  
                  
                  (13,679
                  )
                  
                  
                  (12,306
                  )Other,
      net
                  
                  
                  583
                  
                  
                  
                  168
                  
                  
                  
                  (398
                  )
                  
                  
                  468Provision
      for income taxes as shown on the consolidated statements of
      earnings
                  
                  $
                  8,107
                  
                  
                  $
                  (1,529
                  )
                  
                  $
                  18,811
                  
                  
                  $
                  13,004GAAP
      effective tax rate
                  
                  
                  25.1
                  %
                  
                  
                  (19.5
                  )%
                  
                  
                  20.0
                  %
                  
                  
                  18.3
                  %





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 September 30, 2009,
the Company has approximately $1,520 of accrued interest and penalties related
to unrecognized tax benefits in accordance with FASB ASC 740-10 (Prior
authoritative literature: FIN 48 “Accounting for Uncertainty in Income
Taxes”).




During
2007, the Company, while performing a review of the income tax return filed with
the Internal Revenue Service (“IRS”) for calendar year ending December 31, 2006,
determined an issue existed per FASB ASC 740-10 guidelines concerning its
position related to accrued market discount. The Company reverses accrued market
discount income recognized for book purposes when calculating taxable income.
The reversal results from the accrued market discount income recognized by the
insurance subsidiaries for bonds and other investments. The Company
inadvertently reversed the amount related to commercial paper investments on the
2006 income tax return. The Company has estimated the potential liability to be
approximately $942 (including $125 for penalties and interest) and has reflected
this position, per FASB ASC 740-10 guidelines, in the consolidated financial
statements.





During
2006, the IRS completed an audit of the 2002 and 2003 consolidated federal
income tax returns of the Company’s subsidiaries, Associated Industries
Insurance Services, Inc. (now known as AmTrust North America of Florida, Inc.)
(“AIIS”) and Associated Industries Insurance Company’s (“AIIC”) (collectively
“Associated”), which the Company acquired in 2007.  The field examiner
indicated Associated underpaid its liability by approximately $3,200 and
assessed interest and penalties of $600.  During 2006, Associated’s
prior management accrued a liability for its best estimate of a settlement with
the IRS. Although Associated’s prior management disagreed with the majority of
the positions taken by the examiner and appealed the assessment, the Company
estimated the potential liability related to the audit to be $4,325 (including
$1,395 for penalties and interest) and, in accordance with FASB ASC 740-10
guidelines, reflected that position in the Company’s consolidated financial
statements.  In October 2008, the appeals officer found in favor of
Associated on substantially all issues and agreed to abate all related
penalties.  In August 2009, the IRS, in accordance with the appeals
officer’s findings, issued an assessment of additional tax in the aggregate
amount of $350.  In September 2009, the IRS assessed interest in the total
amount of $287.  The Company accepted the assessments and made payment of
the additional tax in full in the third quarter of 2009 and the related interest
payment in October 2009.  As a result of these payments, the Company
believes the aforementioned liabilities have been settled with the
IRS.




18





During the second quarter 2008, the IRS
commenced an audit of Associated’s consolidated federal tax return for
2006.  As a result of the audit, the IRS proposed adjustments resulting in
additional tax in the total amount of $169 for 2006 and the period ended August
31, 2007.  The Company has accepted the proposed adjustments. 
The Company expects to receive a deficiency notice reflecting the proposed
adjustments in the fourth quarter of 2009.  The Company intends to make
payment upon receipt of the deficiency notice.  In addition, the Company
has estimated interest due on the additional tax in the amount of
$78.




11.
            Related Party
      Transactions





Reinsurance
Agreement





Maiden
Holdings, Ltd. (“Maiden”) is a publicly-held Bermuda insurance holding company
(Nasdaq: MHLD) formed by Michael Karfunkel, George Karfunkel and Barry Zyskind,
the principal shareholders, and, respectively, the Chairman of the Board of
Directors, a Director, and the Chief Executive Officer and Director of AmTrust.
As of September 30, 2009, Michael Karfunkel owns or controls 15% of the issued
and outstanding capital stock of Maiden, George Karfunkel owns or controls 10.5%
of the issued and outstanding capital stock of Maiden and Mr. Zyskind owns or
controls 5.7% of the issued and outstanding stock of Maiden.  Mr.
Zyskind serves as the non-executive Chairman of the Board of Maiden’s Board of
Directors.  Maiden Insurance Company, Ltd (“Maiden Insurance”), a
wholly-owned subsidiary of Maiden, is a Bermuda reinsurer.





During
the third quarter of 2007, the Company and Maiden entered into 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”), as amended, by which (a)
AII retrocedes to Maiden Insurance an amount equal to 40% of the premium written
by AmTrust’s U.S., Irish and U.K. insurance companies (the “AmTrust Ceding
Insurers”), net of the cost of unaffiliated insuring reinsurance (and in the
case of AmTrust’s U.K. insurance subsidiary IGI, net of commissions) and 40% of
losses and (b) AII transferred to Maiden Insurance 40% of the AmTrust Ceding
Insurer’s unearned premium reserves, effective as of July 1, 2007, with respect
to the Company's then current lines of business, excluding risks for which the
AmTrust Ceding Insurers’ net retention exceeded $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.  In June 2008, AII, pursuant to the Maiden Quota Share,
offered to cede to Maiden Insurance and Maiden Insurance agreed to assume 100%
of unearned premium and losses related to in-force retail commercial package
business assumed by the Company in connection with its acquisition of UBI, the
commercial package business of Unitrin, Inc. (“Unitrin”) from a subsidiary of
Unitrin and 40% of prospective net premium written and losses related to retail
commercial package business.  In September 2008, AII, pursuant to the
Maiden Quota Share, offered to cede and Maiden Insurance agreed to assume 40% of
the net premium written and losses with respect to certain business written by
AmTrust’s Irish insurance subsidiary, AIU, for which AIU retains in excess of
$5,000 per loss (“Excess Retention Business”).




The
Maiden Quota Share, as amended, further provides that AII receives a ceding
commission of 31% of ceded written premiums with respect to Covered Business and
the AIU Excess Retention Business and 34.375% with respect to retail commercial
package business. The Maiden Quota Share, which had an initial term of three
years, has been renewed for a successive three year term until June 30, 2013 and
will automatically renew for successive three year terms, unless either AII or
Maiden Insurance notifies the other of its election not to renew not less than
nine months prior to the end of any such three year term. In addition, either
party is entitled to terminate on thirty day’s notice or less upon the
occurrence of certain early termination events, which include a default in
payment, insolvency, change in control of AII or Maiden Insurance, run-off, or a
reduction of 50% or more of the shareholders’ equity of Maiden Insurance or the
combined shareholders’ equity of AII and the AmTrust Ceding
Insurers.


19




The
following is the effect on the Company’s balance sheet as of September 30, 2009
and December 31, 2008 and the results of operations for the three and nine
months ended December 31, 2009 and 2008 related to the Maiden Quota Share
agreement:




(Amounts in thousands)
                    
                    As of September 30, 2009
                    
                    
                    As of December 31, 2008Assets
      and liabilities:Reinsurance
      recoverable
                    
                    $
                    285,088
                    
                    
                    
                    221,214Prepaid
      reinsurance premium
                    
                    
                    238,321
                    
                    
                    
                    243,511Ceded
      reinsurance premiums payable
                    
                    
                    (93,407
                    )
                    
                    
                    (102,907
                    )Note
      payable
                    
                    
                    (167,975
                    )
                    
                    
                    (167,975
                    )




Three Months Ended September 30,
                  
                  
                  Nine Months Ended September 30,(Amounts in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Results
      of operations:Premium
      written - ceded
                  
                  $
                  (92,168
                  )
                  
                  $
                  (102,680
                  )
                  
                  $
                  (269,727
                  )
                  
                  $
                  (353,697
                  )Change
      in unearned premium - ceded
                  
                  
                  2,694
                  
                  
                  
                  (9,022
                  )
                  
                  
                  (2,059
                  )
                  
                  
                  101,960Earned
      premium - ceded
                  
                  $
                  (89,474
                  )
                  
                  $
                  (111,702
                  )
                  
                  $
                  (271,786
                  )
                  
                  $
                  (251,737
                  )Ceding
      commission on premium written
                  
                  $
                  29,462
                  
                  
                  $
                  32,289
                  
                  
                  $
                  84,585
                  
                  
                  $
                  113,034Ceding
      commission – deferred
                  
                  
                  (575
                  )
                  
                  
                  1,654
                  
                  
                  
                  2,950
                  
                  
                  
                  (24,135
                  )Ceding
      commission - earned
                  
                  $
                  28,887
                  
                  
                  $
                  33,943
                  
                  
                  $
                  87,535
                  
                  
                  $
                  88,899Incurred
      loss and loss adjustment expense - ceded
                  
                  $
                  61,712
                  
                  
                  $
                  87,984
                  
                  
                  $
                  199,825
                  
                  
                  $
                  177,991Interest
      expense
                  
                  
                  499
                  
                  
                  
                  1,238
                  
                  
                  
                  1,623
                  
                  
                  
                  3,933





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 has outstanding a
collateral loan issued to Maiden Insurance in the amount of $167,975 (See Note
Payable - Collateral for Proportionate Share of Reinsurance
Obligation).  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 September 30, 2009
was $157,007.
Maiden retains ownership of the collateral 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 $1,348 and $1,320 of brokerage commission during the three months ended
September 30, 2009 and 2008, respectively and $3,577 and $4,458 during the nine
months ended September 30, 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 and its affiliates.  The Company currently has
approximately $1,600,000 of assets under management as of September 30, 2009
related to this agreement.  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 for periods in
which average invested assets are $1,000,000 or less and 0.15% per annum for
periods in which the average invested assets exceed $1,000,000.  As a
result of this agreement, the Company earned approximately $616 and $500 of
investment management fees for the three months ended September 30, 2009 and
2008, respectively and $1,831 and $1,459 for the nine months ended September 30,
2009 and 2008, respectively.


20


Services
Agreement





AmTrust, through its subsidiaries,
entered into services agreements in 2008, pursuant to which it provides certain
marketing and back office services to Maiden. Pursuant to the services
agreements, AmTrust earns a fee equal to the amount required to reimburse
AmTrust for its costs plus 8%.  As a result of this agreement, the
Company recorded approximately $48 and $338 for the three months ended September
30, 2009 and 2008, respectively, and $383 and $836 for the nine months ended
September 30, 2009 and 2008, respectively.





Note
Payable — Collateral for Proportionate Share of Reinsurance
Obligation




In
conjunction with the Maiden Quota Share, AII entered into a loan agreement with
Maiden Insurance during the fourth quarter of 2007, whereby, Maiden Insurance
agreed to lend to AII from time to time the amount of the obligation of the
AmTrust Ceding Insurers that AII is obligated to secure, not to exceed an amount
equal to Maiden Insurance’s proportionate share of such
obligations.  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 September 30, 2008. The Company recorded $499
and $1,238 of interest expense during the three months ended September 30, 2009
and 2008, respectively, and $1,623 and $3,933 during the nine months ended
September 30, 2009 and 2008, respectively.




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 $9,000 per occurrence in excess of $1,000, subject to
an annual aggregate deductible of $1,250.  Maiden has a 45% participation
in the layer.





Leap
Tide Capital Management




In
December 2006, the Company formed a wholly-owned subsidiary currently named Leap
Tide Capital Management, Inc. (LTCMI).  LTCMI currently manages
approximately $47,000 of the Company’s investment portfolio.





Concurrently
with the aforementioned formation, the Company formed Leap Tide Partners, L.P.
(“LTP”), a domestic partnership and Leap Tide Offshore, Ltd. (“LTO”), a Cayman
exempted company, both of which were formed for the purpose of providing
qualified third-party investors the opportunity to invest funds in vehicles
managed by LTCMI (the “Hedge Funds”).  The Company also is a member of
Leap TideCapital Management G.P., LLC (“LTGP ”), which is the general partner of
LTP.  LTCMI earns a management fee equal to 1% of LTP’s and LTO’s
assets.  LTCMI earns an incentive fee of 20% of the cumulative profits
of the LTO. LTGP earns an incentive fee of 20% of the cumulative profits of
each limited partner of LTP, 50% of which is allocated to the Company’s
membership interest.  As of September 30, 2009, the current value of
the invested funds in the Hedge Funds was approximately $17,000.  The
majority of funds invested in the Hedge Funds were provided by members of the
Karfunkel family.  The Company’s Audit Committee has reviewed the Leap
Tide transactions and determined that they were entered into at arm’s-length and
did not violate the Company’s Code of Business Conduct and Ethics.





Through
March 31, 2008 the Company consolidated LTP in accordance with FASB ASC
810-20-25 (Prior authoritative literature: 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 LTGP, as
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 LTGP. Due to this amendment, in accordance with FASB ASC
810-20-25, the Company ceased to consolidate LTP as of April 1, 2008.Through March 31, 2008,
the Company allocated an equivalent portion of the limited partners’ income or
loss to minority interest.  For the three and nine months ended
September 30, 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. LTCMI earned approximately $47 and $30 of fees under the agreement
during the three and months ended September 30, 2009 and 2008, respectively, and
$47 and $111 during the nine months ended September 30, 2009 and 2008,
respectively.


21


Lease
Agreements





In 2002,
the Company entered into a lease for approximately 9,000 square feet of office
space at 59 Maiden Lane in New York, New York from 59 Maiden Lane Associates,
LLC, an entity which is wholly-owned by Michael Karfunkel and George Karfunkel.
Effective January 1, 2008, the Company entered into an amended lease whereby it
increased its leased space to 14,807 square feet and extended the lease
through December 31, 2017. The Company’s Audit Committee reviewed and approved
the amended lease agreement. The Company paid approximately $168 and $163 for
the lease for the three months ended September 30, 2009 and 2008, respectively
and $493 and $380 for the nine months ended September 30, 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.  Effective
May 1, 2009, the Company entered into an amended lease by which the Company
increased its leased space to 7,156 square feet. The Company’s Audit Committee
reviewed and approved the lease agreement. The Company paid approximately $48
and $30 for the lease for the three months ended September 30, 2009 and 2008,
respectively and $139 and $92 for the nine months ended September 30, 2009 and
2008, respectively.




Warrantech




In
February of 2007, the Company participated with H.I.G. Capital, a Miami-based
private equity firm, in financing H.I.G. Capital’s acquisition of Warrantech in
a cash merger. The Company contributed $3,850 for a 27% equity interest in
Warrantech.  Warrantech is an independent developer, marketer and
third party administrator of service contracts and after-market warranty
primarily for the motor vehicle and consumer product industries. The Company
currently insures a majority of Warrantech’s business, which produced gross
written premium of approximately $17,200 and $20,800 during the three months
ended 2009 and 2008, respectively, and $60,500 and $71,400 during the nine
months ended September 30, 2009 and 2008. The Company recorded investment loss
of approximately $166 and $177 from its equity investment for the three months
ended September 30, 2009 and 2008, respectively and $785 and $738 for the nine
months ended September 30, 2009 and 2008, respectively. As of September 30, 2009
the Company’s equity investment was approximately $1,325. Additionally in 2007,
the Company provided Warrantech with $20,000 in funds in exchange for a senior
secured note due January 31, 2012 in that principal amount (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
September 30, 2009 the carrying value of the note receivable was $22,247 (note
receivable — related party).





12.
            Acquisitions





In
September 2009, the Company acquired from subsidiaries of Swiss Re America
Holding Corp. (“Swiss Re”) access to the distribution network and renewal rights
to CyberComp (“CyberComp”), its web-based platform providing workers’
compensation insurance to the small to medium-sized employer market. CyberComp
operates in 26 states and distributes though a network of 13 regional wholesale
agencies and over 600 retail agents. The purchase price is equal to a percentage
of gross written premium through the third anniversary of the closing of the
transaction. Upon
closing, the Company made an initial payment to Swiss Re in the amount of $3,000
which represents an advance on the purchase price and the minimum amount payable
pursuant to the purchase agreement. In accordance with FASB ASC
805-10 (Prior authoritative literature: SFAS No 141(R) “Business Combinations”),
the Company recorded a provisional purchase price of $6,300 which consisted of
$2,800 of renewal rights, $2,300 of distribution networks, $700 of trademarks
and $500 of goodwill. The intangible assets were determined to have useful lives
of between two years and 15 years. The Company anticipates that the purchase
price allocation will be finalized in the fourth quarter of 2009. The Company
produced approximately $7,000 of gross written premium in the third quarter of
2009 as a result of this transaction.





During the three months ended March 31,
2009, the Company, through a subsidiary, acquired all the issued and outstanding
stock of Imagine Captive Holdings Limited (“ICHL”), a Luxembourg holding
company, which owned all of the issued and outstanding stock of Imagine Re Beta
SA, Imagine Re (Luxembourg) 2007 SA and Imagine Re SA (collectively, the
“Captives”), each of which is a Luxembourg domiciled captive insurance company,
from Imagine Finance SARL (“SARL”).  ICHL subsequently changed its name to
AmTrust Captive Holdings Limited (“ACHL”) and the Captives changed their names
to AmTrust Re Beta SA, AmTrust Re (Luxembourg) 2007 SA and AmTrust Re SA,
respectively.  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 FASB ASC 805-10, the Company recorded approximately $12,500 of cash,
$66,500 of receivables and $79,000 of loss 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.


22


13.
            Fair Value of Financial
      Instruments





Statement of Financial Accounting
Standards No. 107, “Disclosures about Fair Value of Financial Instruments,”
requires all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized in the balance sheet, for
which it is practicable to estimate fair value.





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





§
            Equity and fixed income
      investments:Fair value disclosures for
      investments are included in “Note 4 — Fair Value of Financial
      Instruments.”;


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


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




14.
            Contingent
      Liabilities





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





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. Ceding commission
revenue is allocated to each segment based on that segment's proportionate share
of the Company's overall acquisition costs. 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 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.





23




The
following tables summarize results of operations for the Company's business
segments for the three and nine months ended September 30, 2009 and
2008.





(Amounts in thousands)
                        
                        Small
                          commercial
                          business
                        
                        
                        Specialty
                          riskand
                          extended
                          warranty
                        
                        
                        Specialty
                          middle-market
                          property and
                          casualty
                          insurance
                        
                        
                        Corporate
                          andother
                        
                        
                        TotalThree months ended September 30,
      2009:Gross
      written premium
                        
                        $
                        85,810
                        
                        
                        $
                        138,917
                        
                        
                        $
                        71,214
                        
                        
                        $
                        —
                        
                        
                        $
                        295,941Net
      premium written
                        
                        
                        47,408
                        
                        
                        
                        76,793
                        
                        
                        
                        43,116
                        
                        
                        
                        —
                        
                        
                        
                        167,317Change
      in unearned premium
                        
                        
                        8,377
                        
                        
                        
                        (29,673
                        )
                        
                        
                        (729
                        )
                        
                        
                        —
                        
                        
                        
                        (22,025
                        )Net
      premium earned
                        
                        
                        55,785
                        
                        
                        
                        47,120
                        
                        
                        
                        42,387
                        
                        
                        
                        —
                        
                        
                        
                        145,292Ceding
      commission – primarily related party
                        
                        
                        10,311
                        
                        
                        
                        8,031
                        
                        
                        
                        9,027
                        
                        
                        
                        —
                        
                        
                        
                        27,369Loss
      and loss adjustment expense
                        
                        
                        (28,098
                        )
                        
                        
                        (24,746
                        )
                        
                        
                        (24,687
                        )
                        
                        
                        —
                        
                        
                        
                        (77,531
                        )Acquisition
      costs and other underwriting expenses
                        
                        
                        (24,661
                        )
                        
                        
                        (18,099
                        )
                        
                        
                        (20,394
                        )
                        
                        
                        —
                        
                        
                        
                        (63,154
                        )(52,759
                        )
                        
                        
                        (42,845
                        )
                        
                        
                        (45,081
                        )
                        
                        
                        —
                        
                        
                        
                        (140,685
                        )Underwriting
      income
                        
                        
                        13,337
                        
                        
                        
                        12,306
                        
                        
                        
                        6,333
                        
                        
                        
                        —
                        
                        
                        
                        31,976Commission
      and fee income
                        
                        
                        2,943
                        
                        
                        
                        2,625
                        
                        
                        
                        -
                        
                        
                        
                        1,383
                        
                        
                        
                        6,951Investment
      income and realized gain (loss)
                        
                        
                        637
                        
                        
                        
                        1,155
                        
                        
                        
                        634
                        
                        
                        
                        —
                        
                        
                        
                        2,426Other
      expense
                        
                        
                        (2,228
                        )
                        
                        
                        (2,761
                        )
                        
                        
                        (775
                        )
                        
                        
                        —
                        
                        
                        
                        (5,764
                        )Interest
      expense
                        
                        
                        (1,451
                        )
                        
                        
                        (1,880
                        )
                        
                        
                        (482
                        )
                        
                        
                        —
                        
                        
                        
                        (3,813
                        )Foreign
      currency gain
                        
                        
                        -
                        
                        
                        
                        552
                        
                        
                        
                        -
                        
                        
                        
                        —
                        
                        
                        
                        552Provision
      for income taxes
                        
                        
                        (3,149
                        )
                        
                        
                        (3,379
                        )
                        
                        
                        (1,204
                        )
                        
                        
                        (375
                        )
                        
                        
                        (8,107
                        )Net
      income
                        
                        $
                        10,089
                        
                        
                        $
                        8,618
                        
                        
                        $
                        4,506
                        
                        
                        $
                        1,008
                        
                        
                        $
                        24,221


24





(Amounts in thousands)
                                  
                                  Small
                                    commercial
                                    business
                                  
                                  
                                  Specialty
                                    riskand
                                    extended
                                    warranty
                                  
                                  
                                  Specialty
                                    middle-market
                                    property and
                                    casualty
                                    insurance
                                  
                                  
                                  Corporate
                                    and other
                                  
                                  
                                  TotalThree months ended September 30,
      2008:Gross
      written premium
                                  
                                  $
                                  103,568
                                  
                                  
                                  $
                                  130,316
                                  
                                  
                                  $
                                  47,322
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  281,206Net
      premium written
                                  
                                  
                                  53,637
                                  
                                  
                                  
                                  63,774
                                  
                                  
                                  
                                  22,018
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  139,429Change
      in unearned premium
                                  
                                  
                                  (22,186
                                  )
                                  
                                  
                                  (29,296
                                  )
                                  
                                  
                                  4,386
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (47,096
                                  )Net
      premium earned
                                  
                                  
                                  31,451
                                  
                                  
                                  
                                  34,478
                                  
                                  
                                  
                                  26,404
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  92,333Ceding
      commission – primarily related party
                                  
                                  
                                  19,513
                                  
                                  
                                  
                                  8,162
                                  
                                  
                                  
                                  9,441
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  37,116Loss
      and loss adjustment expense
                                  
                                  
                                  (13,215
                                  )
                                  
                                  
                                  (8,535
                                  )
                                  
                                  
                                  (15,344
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (37,094
                                  )Acquisition
      costs and other underwriting expenses
                                  
                                  
                                  (25,472
                                  )
                                  
                                  
                                  (12,895
                                  )
                                  
                                  
                                  (15,182
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (53,549
                                  )(38,687
                                  )
                                  
                                  
                                  (21,430
                                  )
                                  
                                  
                                  (30,526
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (90,643
                                  )Underwriting
      income
                                  
                                  
                                  12,277
                                  
                                  
                                  
                                  21,210
                                  
                                  
                                  
                                  5,319
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  38,806Commission
      and fee income
                                  
                                  
                                  2,205
                                  
                                  
                                  
                                  4,727
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,817
                                  
                                  
                                  
                                  8,749Investment
      income and realized gain (loss)
                                  
                                  
                                  (14,306
                                  )
                                  
                                  
                                  (10,439
                                  )
                                  
                                  
                                  (5,749
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (30,494
                                  )Other
      expenses
                                  
                                  
                                  (2,362
                                  )
                                  
                                  
                                  (2,651
                                  )
                                  
                                  
                                  (1,049
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (6,062
                                  )Interest
      expense
                                  
                                  
                                  (1,382
                                  )
                                  
                                  
                                  (1,772
                                  )
                                  
                                  
                                  (528
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (3,682
                                  )Foreign
      currency gain
                                  
                                  
                                  —
                                  
                                  
                                  
                                  515
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  515Provision
      for income taxes
                                  
                                  
                                  2,100
                                  
                                  
                                  
                                  (1,115
                                  )
                                  
                                  
                                  653
                                  
                                  
                                  
                                  (109
                                  )
                                  
                                  
                                  1,529Net
      income
                                  
                                  $
                                  (1,468
                                  )
                                  
                                  $
                                  10,475
                                  
                                  
                                  $
                                  (1,354
                                  )
                                  
                                  $
                                  1,708
                                  
                                  
                                  $
                                  9,361


25





(Amounts in thousands)
                                  
                                  Small
                                    commercial
                                    business
                                  
                                  
                                  Specialty
                                    riskand
                                    extended
                                    warranty
                                  
                                  
                                  Specialty
                                    middle-market
                                    property and
                                    casualty
                                    insurance
                                  
                                  
                                  Corporate
                                    andother
                                  
                                  
                                  TotalNine months ended September 30,
      2009:Gross
      written premium
                                  
                                  $
                                  322,421
                                  
                                  
                                  $
                                  314,260
                                  
                                  
                                  $
                                  197,016
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  833,697Net
      premium written
                                  
                                  
                                  172,199
                                  
                                  
                                  
                                  162,306
                                  
                                  
                                  
                                  106,111
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  440,616Change
      in unearned premium
                                  
                                  
                                  3,174
                                  
                                  
                                  
                                  (30,567
                                  )
                                  
                                  
                                  (1,295
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (26,098
                                  )Net
      premium earned
                                  
                                  
                                  175,373
                                  
                                  
                                  
                                  131,739
                                  
                                  
                                  
                                  107,406
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  414,518Ceding
      commission – primarily related party
                                  
                                  
                                  47,178
                                  
                                  
                                  
                                  20,233
                                  
                                  
                                  
                                  19,827
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  87,238Loss
      and loss adjustment expense
                                  
                                  
                                  (100,582
                                  )
                                  
                                  
                                  (62,089
                                  )
                                  
                                  
                                  (66,360
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (229,031
                                  )Acquisition
      costs and other underwriting expenses
                                  
                                  
                                  (92,920
                                  )
                                  
                                  
                                  (43,116
                                  )
                                  
                                  
                                  (49,859
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (185,895
                                  )(193,502
                                  )
                                  
                                  
                                  (105,205
                                  )
                                  
                                  
                                  (116,219
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (414,926
                                  )Underwriting
      income
                                  
                                  
                                  29,049
                                  
                                  
                                  
                                  46,767
                                  
                                  
                                  
                                  11,014
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  86,830Commission
      and fee income
                                  
                                  
                                  9,639
                                  
                                  
                                  
                                  7,310
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  5,063
                                  
                                  
                                  
                                  22,012Investment
      income and realized gain (loss)
                                  
                                  
                                  5,775
                                  
                                  
                                  
                                  4,159
                                  
                                  
                                  
                                  2,716
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  12,650Other
      expenses
                                  
                                  
                                  (7,245
                                  )
                                  
                                  
                                  (6,162
                                  )
                                  
                                  
                                  (3,325
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (16,732
                                  )Interest
      expense
                                  
                                  
                                  (5,192
                                  )
                                  
                                  
                                  (4,416
                                  )
                                  
                                  
                                  (2,383
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (11,991
                                  )Foreign
      currency gain
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,196
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,196Provision
      for income taxes
                                  
                                  
                                  (6,411
                                  )
                                  
                                  
                                  (9,780
                                  )
                                  
                                  
                                  (1,606
                                  )
                                  
                                  
                                  (1,014
                                  )
                                  
                                  
                                  (18,811
                                  )Net
      income
                                  
                                  $
                                  25,615
                                  
                                  
                                  $
                                  39,074
                                  
                                  
                                  $
                                  6,416
                                  
                                  
                                  $
                                  4,049
                                  
                                  
                                  $
                                  75,154


26





(Amounts in thousands)
                                          
                                          Small
                                            commercial
                                            business
                                          
                                          
                                          Specialty
                                            riskand
                                            extended
                                            warranty
                                          
                                          
                                          Specialty
                                            middle-market
                                            property and
                                            casualty
                                            insurance
                                          
                                          
                                          Corporate
                                            andother
                                          
                                          
                                          TotalNine months ended September 30,
      2008:Gross
      written premium
                                          
                                          $
                                          304,925
                                          
                                          
                                          $
                                          345,393
                                          
                                          
                                          $
                                          166,706
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          817,024Net
      premium written
                                          
                                          
                                          145,383
                                          
                                          
                                          
                                          163,853
                                          
                                          
                                          
                                          79,692
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          388,928Change
      in unearned premium
                                          
                                          
                                          (24,995
                                          )
                                          
                                          
                                          (56,693
                                          )
                                          
                                          
                                          (1,549
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (83,237
                                          )Net
      premium earned
                                          
                                          
                                          120,388
                                          
                                          
                                          
                                          107,160
                                          
                                          
                                          
                                          78,143
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          305,691Ceding
      commission – primarily related party
                                          
                                          
                                          49,690
                                          
                                          
                                          
                                          19,644
                                          
                                          
                                          
                                          23,188
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          92,522Loss
      and loss adjustment expense
                                          
                                          
                                          (62,554
                                          )
                                          
                                          
                                          (56,325
                                          )
                                          
                                          
                                          (47,514
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (166,393
                                          )Acquisition
      costs and other underwriting expenses
                                          
                                          
                                          (74,305
                                          )
                                          
                                          
                                          (32,794
                                          )
                                          
                                          
                                          (42,473
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (149,572
                                          )(136,859
                                          )
                                          
                                          
                                          (89,119
                                          )
                                          
                                          
                                          (89,987
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (315,965
                                          )Underwriting
      income
                                          
                                          
                                          33,219
                                          
                                          
                                          
                                          37,685
                                          
                                          
                                          
                                          11,344
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          82,248Commission
      and fee income
                                          
                                          
                                          9,542
                                          
                                          
                                          
                                          7,292
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          6,577
                                          
                                          
                                          
                                          23,411Investment
      income and realized gain (loss)
                                          
                                          
                                          (4,795
                                          )
                                          
                                          
                                          (3,541
                                          )
                                          
                                          
                                          (1,792
                                          )
                                          
                                          
                                          (2,900
                                          )
                                          
                                          
                                          (13,028
                                          )Other
      expenses
                                          
                                          
                                          (5,159
                                          )
                                          
                                          
                                          (5,569
                                          )
                                          
                                          
                                          (2,632
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (13,360
                                          )Interest
      expense
                                          
                                          
                                          (4,576
                                          )
                                          
                                          
                                          (4,941
                                          )
                                          
                                          
                                          (2,335
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (11,852
                                          )Foreign
      currency gain
                                          
                                          
                                          —
                                          
                                          
                                          
                                          659
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          659Provision
      for income taxes
                                          
                                          
                                          (5,218
                                          )
                                          
                                          
                                          (5,717
                                          )
                                          
                                          
                                          (864
                                          )
                                          
                                          
                                          (1,205
                                          )
                                          
                                          
                                          (13,004
                                          )Minority
      interest in net loss of subsidiary
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          2,900
                                          
                                          
                                          
                                          2,900Net
      income
                                          
                                          $
                                          23,013
                                          
                                          
                                          $
                                          25,868
                                          
                                          
                                          $
                                          3,721
                                          
                                          
                                          $
                                          5,372
                                          
                                          
                                          $
                                          57,974





The
following tables summarize the financial position of the Company's business
segments as of September 30, 2009 and December 31, 2008:




(Amounts
      in thousands)
                          
                          Small
                            commercial
                            business
                          
                          
                          Specialty
                            risk and
                            extended
                            warranty
                          
                          
                          Specialty
                            middle-market
                            property
      and
                            casualty
                            insurance
                          
                          
                          Corporate
                            and
      other
                          
                          
                          TotalAs of September 30, 2009:Fixed
      assets
                          
                          $
                          5,384
                          
                          
                          $
                          5,016
                          
                          
                          $
                          3,220
                          
                          
                          $
                          —
                          
                          
                          $
                          13,620Goodwill
      and intangible assets
                          
                          
                          82,371
                          
                          
                          
                          11,750
                          
                          
                          
                          14,300
                          
                          
                          
                          —
                          
                          
                          
                          108,421Total
      assets
                          
                          
                          1,518,082
                          
                          
                          
                          1,101,016
                          
                          
                          
                          683,949
                          
                          
                          
                          —
                          
                          
                          
                          3,303,047As 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


27


16.
            Subsequent
      Events





Investment
in Joint Venture that will purchase GMAC’s U.S. Consumer Property and Casualty
Insurance Business




In
October 2009, the Company entered into an agreement to make a strategic
investment in American Capital Acquisition Corporation (“ACAC”). In connection
with the strategic investment, ACAC will acquire from GMAC
Insurance Holdings, Inc. (“GMACI”) and Motors Insurance Corporation (“MIC”,
together with GMACI, “GMAC”) GMAC's
U.S. consumer property and casualty insurance business. The Company will
initially invest approximately $42,500 in Convertible Preferred Stock in ACAC.
ACAC was formed by the Michael Karfunkel 2005 Grantor Retained Annuity Trust
(the “Trust”). The Trust is controlled by Michael Karfunkel, the chairman of the
board of directors of the Company and the father-in-law of Barry D. Zyskind, the
chief executive officer of the Company.  The ultimate beneficiaries of
the Trust include Michael Karfunkel’s children one of whom is married to Mr.
Zyskind. A special
committee of the Company’s board of directors, comprised of independent
directors, reviewed, negotiated and approved the strategic
investment.




GMAC’s
consumer property and casualty insurance business is one of the leading writers
of automobile coverages through independent agents in the United States. It
utilizes a network of 10,500 agents in 12 core markets, as well as exclusive
relationships with 23 affinity partners. GMAC’s U.S. consumer property and
casualty insurance business had a net written premium in excess of $1,000 in
2008 that encompassed all fifty states. Its coverages include standard/preferred
auto, RVs, non-standard auto and commercial auto. The acquisition includes
ten statutory insurance companies that write the automobile coverages for GMAC.
The acquisition is subject to regulatory approval and is expected to close in
the first quarter of 2010.





ACAC, upon
the closing of the GMAC acquisition, shall issue and sell to the Company
for a purchase price equal to 25% of the capital required by ACAC, 42,500 shares
of Series A Preferred Stock (the “Preferred Stock”), the terms of which are
described below, which provides for a semi-annual 8% cumulative dividend, is
non-redeemable and convertible, at Company’s option, into approximately 21.25%
of the issued and outstanding Common Stock.  Initially, the Trust
shall be the owner of 100% of the Common Stock of ACAC.  The Company
has pre-emptive rights with respect to any future issuances of securities by
ACAC and Company’s conversion rights are subject to customary anti-dilution
protections.





The
Company has the right to appoint one member of ACAC’s board of directors, which
consists of three members.  The ACAC board member appointed by the
Company must be approved by the independent members of the
Board.  Subject to certain limitations, the board of directors of ACAC
may not take any action in the absence of the Company’s appointee and ACAC may
not take certain corporate actions without the unanimous prior approval of its
board of directors (including the Company’s appointee).





In
consideration of the Company’s
strategic investment in ACAC:





(i)
            the
      Company, subject
      to regulatory approval, will provide ACAC and its affiliates
      information technology development services at a price of cost plus
      20%.  In addition, once a new system to be developed by the
      Company is implemented and ACAC or its affiliates begin using the system
      in its operations, the Company will be entitled to an additional fee for
      use of the systems in the amount of 1.25% of gross premiums of ACAC and
      its affiliates.


(ii)
            the Company, subject
      to regulatory approval, will also manage the assets of ACAC
      for a fee on terms comparable to those offered by the Company to Maiden
      Holdings, Ltd. (See “Note 11. Related Party
      Transactions”).


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


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


(v)
            The Company has the option to
      reinsure up to 10% of the net premiums of the acquired GMAC business on
      terms no less favorable than those generally available in the market for
      similar transactions.





The
Company is required to make an initial payment to ACAC for issuance of the
Preferred Stock in the amount of approximately $42,500 upon the closing of the
GMAC acquisition, which, among other customary conditions, is subject to
regulatory approval in several states.  In addition, the Company and
the Trust each shall be required to make its proportional share of the deferred
payments payable by ACAC to GMAC pursuant to the GMAC Securities Purchase
Agreement, which are payable over a period of three years from the date of the
closing of the GMAC acquisition, to the extent that ACAC is unable to
otherwise provide for such payments.  The Company’s proportionate
share of such deferred payments shall not exceed $22,500.


28


Acquisition
of Watt Re




In October 2009, the Company, through
its subsidiary, AmTrust Captive Holdings Limited, acquired all the issued
and outstanding stock of Watt Re, a Luxembourg domiciled captive insurance
company, from CREOS LUXEMBOURG S.A. (formerly CEGEDEL S.A.) and ENOVOUS
Luxembourg S.A. (formerly CEGEDEL PARTICIPATIONS S.A.).  The purchase price
of Watt Re was approximately EUR 20,300 which represented loss reserves and
capital of Watt Re. Watt Re subsequently changed its name to AmTrust Gamma Re.
The acquisition allows the Company to obtain the benefit of the Captive's
utilization of its equalization reserves through a series of reinsurance
arrangements with a subsidiary of the Company.





There
were no other subsequent events requiring adjustment to the financial statements
or disclosure through November 9, 2009, the date that the Company’s financial
statements were issued.


29


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





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





Note
on Forward-Looking Statement





This Form
10-Q contains certain forward-looking statements within the meaning of Private
Securities Litigation Reform Act of 1995, which are intended to be covered by
the safe harbors created thereby.  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.  There can be no assurance that actual
developments will be those anticipated by the Company.  Actual results
may differ materially from those projected as a result of significant risks and
uncertainties, including non-receipt of the expected payments, changes in
interest rates, effect of the performance of financial markets on investment
income and fair values of investments, development of claims and the effect on
loss reserves, accuracy in projecting loss reserves, the impact of competition
and pricing environments, changes in the demand for the Company’s products, the
effect of general economic conditions, adverse state and federal legislation,
regulations and regulatory investigations into industry practices, developments
relating to existing agreements, heightened competition, changes in pricing
environments, and changes in asset valuations.  Additional information
about these risks and uncertainties, as well as others that may cause actual
results to differ materially from those projected is contained in Item 1A.
Risk Factors in the Company’s Annual Report on Form 10-K for the period ended
December 31, 2008, as updated by this Form 10-Q.  The projections and
statements in this report speak only as of the date of this report and we
undertake no obligation to update or revise any forward-looking statement,
whether as a result of new information, future developments or otherwise, except
as may be required by law.





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, through which we write commercial insurance for
      homogeneous, narrowly defined classes of insureds, requiring an in-depth
      knowledge of the insured’s industry segment, through general and other
      wholesale agents.





In
September 2009, the Company acquired from the subsidiaries of Swiss Re America
Holding Corp. (“Swiss Re”) access to the distribution network and renewal rights
to CyberComp (“CyberComp”), its web-based platform providing workers’
compensation insurance to the small to medium-sized employer market. CyberComp
operates in 26 states and distributes though a network of 13 regional wholesale
agencies and over 600 retail agents. The Company produced approximately $7
million of gross written premium in the third quarter of 2009 as a result of
this transaction.





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 $6 million and $32 million of gross written premium during the
three and nine months ended September 30, 2009, respectively. The amount of
premium produced from this relationship for the three months ended September 30,
2008 was less than $0.1 million.


30


During
the second quarter of 2008, the Company completed a stock and asset purchase
agreement with a subsidiary of Unitrin, Inc. (“Unitrin”) 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 domiciled in
Kansas, Texas and Wisconsin and are collectively licensed in 33 states. In
connection with this acquisition, the Company assumed the existing unearned
premium of UBI in the amount of $78.2 million and ceded one hundred percent of
the unearned premium to Maiden Insurance during the second quarter of 2008. This
acquisition produced approximately $15 million and $34 million of gross written
premium during the three months ended September 30, 2009 and 2008, respectively,
and $79 million and $45 million of gross written premium during the nine months
ended September 30, 2009 and 2008, respectively.





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·
                    AmTrust
      Insurance Company of Kansas, Inc. (“AICK”)
                    
                    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.





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 descriptions provide
further explanation of the key measures that we use to evaluate our
results:





Gross Written Premium. Gross
written premium represents estimated premiums from each insurance policy that we
write, including as part of an assigned risk 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 is gross written premium less that portion of premium that is
ceded to third party reinsurers under reinsurance agreements. The amount ceded
under these reinsurance agreements is based on a contractual formula contained
in the individual reinsurance 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 small commercial business insurance policies typically have a
term of one year. Thus, for a one-year policy written on July 1, 2009 for an
employer with a constant payroll during the term of the policy, we would earn
half of the premiums in 2009 and the other half in 2010. Our specialty risk and
extended warranty coverages are earned over the estimated exposure time period.
The terms vary depending on the risk and have an average duration of
approximately 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 (acquisition costs and other underwriting
expenses) less ceding commission to net premiums earned.


31


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 19.1% and 9.3% for the three months ended September
30, 2009 and 2008, respectively and 21.6% and 21.3% for the nine months ended
September 30, 2009 and 2008, respectively. In addition, we target a net combined
ratio of 95.0% or lower over the long term, while seeking to maintain optimal
operating leverage in our insurance subsidiaries commensurate with our A.M. Best
rating objectives. Our net combined ratio was 78.0% and 58.0% for the three
months ended September 30, 2009 and 2008, respectively and 79.1% and 73.1% for
the nine months ended September 30, 2009 and 2008.  The increase in
the combined ratio quarter over quarter resulted primarily from an increase in
loss and loss adjustment expenses in the Company’s small commercial business
segment and specialty risk and extended warranty segment resulting from the
impact in 2008 of the reduction in prior year loss reserves in the approximate
amount of $15 million.





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.


32


Results
of Operations





Consolidated
Results of Operations (Unaudited)




Three Months Ended September 30,
                                            
                                            
                                            Nine Months Ended September 30,(Amounts in thousands)
                                            
                                            2009
                                            
                                            
                                            2008
                                            
                                            
                                            2009
                                            
                                            
                                            2008Gross
      written premium
                                            
                                            $
                                            295,942
                                            
                                            
                                            $
                                            281,206
                                            
                                            
                                            $
                                            833,698
                                            
                                            
                                            $
                                            817,024Net
      premium written
                                            
                                            $
                                            167,317
                                            
                                            
                                            $
                                            139,429
                                            
                                            
                                            $
                                            440,616
                                            
                                            
                                            $
                                            388,928Change
      in unearned premium
                                            
                                            
                                            (22,025
                                            )
                                            
                                            
                                            (47,096
                                            )
                                            
                                            
                                            (26,098
                                            )
                                            
                                            
                                            (83,237
                                            )Net
      premium earned
                                            
                                            
                                            145,292
                                            
                                            
                                            
                                            92,333
                                            
                                            
                                            
                                            414,518
                                            
                                            
                                            
                                            305,691Ceding
      commission – primarily related party
                                            
                                            
                                            27,369
                                            
                                            
                                            
                                            37,116
                                            
                                            
                                            
                                            87,238
                                            
                                            
                                            
                                            92,522Commission
      and fee income
                                            
                                            
                                            6,951
                                            
                                            
                                            
                                            8,749
                                            
                                            
                                            
                                            22,012
                                            
                                            
                                            
                                            23,411Net
      investment income
                                            
                                            
                                            14,079
                                            
                                            
                                            
                                            15,391
                                            
                                            
                                            
                                            41,250
                                            
                                            
                                            
                                            43,112Net
      realized loss on investments
                                            
                                            
                                            (11,653
                                            )
                                            
                                            
                                            (45,885
                                            )
                                            
                                            
                                            (28,600
                                            )
                                            
                                            
                                            (53,240
                                            )Other
      investment loss on managed assets
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (2,900
                                            )Total
      revenue
                                            
                                            
                                            182,038
                                            
                                            
                                            
                                            107,704
                                            
                                            
                                            
                                            536,418
                                            
                                            
                                            
                                            408,596Loss
      and loss adjustment expense
                                            
                                            
                                            77,531
                                            
                                            
                                            
                                            37,094
                                            
                                            
                                            
                                            229,031
                                            
                                            
                                            
                                            166,393Acquisition
      costs and other underwriting expense
                                            
                                            
                                            63,154
                                            
                                            
                                            
                                            53,549
                                            
                                            
                                            
                                            185,895
                                            
                                            
                                            
                                            149,572Other
      expense
                                            
                                            
                                            5,764
                                            
                                            
                                            
                                            6,062
                                            
                                            
                                            
                                            16,732
                                            
                                            
                                            
                                            13,360Total
      expense
                                            
                                            
                                            146,449
                                            
                                            
                                            
                                            96,705
                                            
                                            
                                            
                                            431,658
                                            
                                            
                                            
                                            329,325Operating
      income from continuing operations
                                            
                                            
                                            35,589
                                            
                                            
                                            
                                            10,999
                                            
                                            
                                            
                                            104,760
                                            
                                            
                                            
                                            79,271Other
      income (expense):Foreign
      currency gain (loss)
                                            
                                            
                                            552
                                            
                                            
                                            
                                            515
                                            
                                            
                                            
                                            1,196
                                            
                                            
                                            
                                            659Interest
      expense
                                            
                                            
                                            (3,813
                                            )
                                            
                                            
                                            (3,682
                                            )
                                            
                                            
                                            (11,991
                                            )
                                            
                                            
                                            (11,852
                                            )Total
      other expense
                                            
                                            
                                            (3,261
                                            )
                                            
                                            
                                            (3,167
                                            )
                                            
                                            
                                            (10,795
                                            )
                                            
                                            
                                            (11,193
                                            )Income
      from continuing operations before provision for income taxes and minority
      interest
                                            
                                            
                                            32,328
                                            
                                            
                                            
                                            7,832
                                            
                                            
                                            
                                            93,965
                                            
                                            
                                            
                                            68,078Provision
      for income taxes
                                            
                                            
                                            8,107
                                            
                                            
                                            
                                            (1,529
                                            )
                                            
                                            
                                            18,811
                                            
                                            
                                            
                                            13,004Minority
      interest in net loss of subsidiary
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (2,900
                                            )Net
      income
                                            
                                            $
                                            24,221
                                            
                                            
                                            $
                                            9,361
                                            
                                            
                                            $
                                            75,154
                                            
                                            
                                            $
                                            57,974Net
      Realized Gain (Loss) on Investments:Total
      other-than-temporary impairment losses
                                            
                                            $
                                            (3,147
                                            )
                                            
                                            $
                                            (36,662
                                            )
                                            
                                            $
                                            (15,360
                                            )
                                            
                                            $
                                            (44,633
                                            )Portion
      of loss recognized in other comprehensive income
                                            
                                            
                                            -
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            —Net
      impairment losses recognized in earnings
                                            
                                            
                                            (3,147
                                            )
                                            
                                            
                                            (36,662
                                            )
                                            
                                            
                                            (15,360
                                            )
                                            
                                            
                                            (44,633
                                            )Other
      net realized gain (loss) on investments
                                            
                                            
                                            (8,506
                                            )
                                            
                                            
                                            (9,223
                                            )
                                            
                                            
                                            (13,240
                                            )
                                            
                                            
                                            (8,607
                                            )Net
      realized investment gain (loss)
                                            
                                            $
                                            (11,653
                                            )
                                            
                                            $
                                            (45,885
                                            )
                                            
                                            $
                                            (28,600
                                            )
                                            
                                            $
                                            (53,240
                                            )Key
      Measures:Net
      loss ratio
                                            
                                            
                                            53.4
                                            %
                                            
                                            
                                            40.2
                                            %
                                            
                                            
                                            55.3
                                            %
                                            
                                            
                                            54.4
                                            %Net
      expense ratio
                                            
                                            
                                            24.6
                                            %
                                            
                                            
                                            17.8
                                            %
                                            
                                            
                                            23.8
                                            %
                                            
                                            
                                            18.7
                                            %Net
      combined ratio
                                            
                                            
                                            78.0
                                            %
                                            
                                            
                                            58.0
                                            %
                                            
                                            
                                            79.1
                                            %
                                            
                                            
                                            73.1
                                            %


33


Consolidated
Results of Operations for the Three Months Ended September 30, 2009 and
2008





Gross Written
Premium.  Gross written premium increased $14.7 million or 5.2%
to $295.9 million from $281.2 million for the three months ended September 30,
2009 and 2008, respectively. The increase of $14.7 million was attributable to
increases of $23.9 million in our specialty middle-market property and casualty
business and $8.6 million in our specialty risk and extended warranty business
offset by a decrease of $17.8 million in our small commercial business. The
increase in our specialty middle market property and casualty business was
primarily from organic growth in workers compensation and other commercial
package business lines. The
increase in the specialty risk and extended warranty business resulted from the
underwriting of new coverage plans in 2009, including the assumption of unearned
premium of $36 million and the effect of the weakening of the U.S. dollar, which
positively impacted gross written premium for the Company’s European business by
$9.5 million, partially offset by the effect of the assumption of unearned
premium of $47 million in 2008. The
decrease in small commercial business gross written premium resulted primarily
from state mandated workers’ compensation rate reductions in the state of
Florida, lower premium from commercial package business as the Company maintains
it pricing discipline and a decline in assigned risk business offset by an
increase in gross written premium attributable to the acquisition of the
CyberComp distribution network and renewal rights in the third quarter 2009 and
the managing general agency agreement with Cardinal Comp entered into the third
quarter of 2008.





Net Premium Written. Net
premium written increased $27.9 million or 20.0% to $167.3 million from $139.4
million for the three months ended September 30, 2009 and 2008,
respectively.  The increase (decrease) by segment was: small
commercial business - $(6.2) million; specialty risk and extended warranty -
$13.0 million; and specialty middle market - $21.1 million.





Net Premium Earned. Net
premium earned increased $53.0 million or 57.4% to $145.3 million from $92.3
million for the three months ended September 30, 2009 and 2008.  The
increase by segment, was: small commercial business - $24.3 million; specialty
risk and extended warranty - $12.7 million; and specialty middle market - $16.0
million.





Ceding
Commission.




Commission and Fee Income. Commission and
fee income decreased $1.7 million or 20.5% to $7.0 million from $8.7 million for
the three months ended September 30, 2009 and 2008, respectively.  The
decrease was attributable primarily to a reduction in fees earned from
investment management services and servicing carrier contracts for state
workers’ compensation assigned risk plans partially offset by an increase in
administration fees from new warranty business.





Net Investment Income. Net
investment income decreased $1.3 million or 8.5% to $14.1 million from $15.4
million for the three months ended September 30, 2009 and 2008, respectively.
The change period over period related primarily to a decline in the yields on
the Company’s fixed maturities from 4.6% in 2008 to 4.0% in 2009.





Net Realized Gains (Losses) on
Investments. Net realized losses on investments for the three months
ended September 30, 2009 were $11.7 million, compared to net realized losses of
$45.9 million for the same period in 2008.  During the three months
ended September 30, 2009, realized losses related primarily to losses from sales
of underperforming equity securities and the non-cash write-down of $3.2 million
of two equity securities that were determined to be other-than-temporarily
impaired. During the three months ended September 30, 2008, realized losses
related primarily to the non-cash write-down of $31.3 million related to two
fixed income securities, Lehman Brothers Holdings and Washington Mutual, that
were determined to be other than temporarily impaired.





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses increased $40.4 million or
109% to $77.5 million for the three months ended September 30, 2009 from $37.1
million for the three months ended September 30, 2008. The Company’s loss ratio
for the three months ended September 30, 2009 and 2008 was 53.4% and 40.2%,
respectively.  The loss ratio increased on a consolidated basis
quarter over quarter primarily because of the impact in 2008 of the reduction in
prior year loss reserves in the approximate amount of $15
million.


34


Acquisition Costs and Other
Underwriting Expenses; Expense Ratio.  Acquisition Costs and
Other Underwriting Expenses increased $9.7 million or 17.9% to $63.2 million for
the three months ended September 30, 2009 from $53.5 million for the three
months ended September 30, 2008. The expense ratio increased to 24.6% from 17.8%
for the three months ended September 30, 2009 and 2008, respectively. The
increase in the expense ratio resulted, primarily, from the decrease in ceding
commission received from Maiden Insurance during the period. In 2008, the ceding
commission, which is based on earned premium ceded by the Company, included
ceding commission earned on $33.5 million of premium which was part of the $78.2
million of unearned premium that the Company had assumed on June 1, 2008 in
connection with the UBI acquisition.  The reduction in ceding
commission in 2009 had the effect of increasing acquisition costs on a
consolidated basis and for each segment compared to the corresponding period in
2008.




Operating Income from Continuing
Operations. Income from continuing operations increased $24.6 million or
224% to $35.6 million from $11.0 million for the three months ended September
30, 2009 and 2008, respectively. The change in income from continuing operations
from 2008 to 2009 resulted primarily from the reduction in realized losses
on the Company’s investment portfolio offset partially by increased acquisition
costs and other underwriting expenses.





Interest Expense. Interest
expense for the three months ended September 30, 2009 was $3.8 million, compared
to $3.7 million for the same period in 2008.  The increase related to
interest expense on the interest rate swap agreement that the Company entered
into June 4, 2008 in connection with the Company’s $40 million term loan offset
by lower borrowing costs on the Company’s collateral loan with Maiden in
2009.





Income Tax Expense
(Benefit). Income tax expense for the three months ended September
30, 2009 was $8.1 million, which resulted in an effective tax rate of
25.0%.  Income tax expense for the three months ended September 30, 2008
was $(1.5) million, which resulted in an effective tax rate of (19.5)%. 
The increase in the Company’s effective rate resulted, primarily, from an
increase to operating income for the three months ended September 30, 2009
compared to the three months ended September 30, 2008.





Consolidated
Results of Operations for the Nine Months Ended September 30, 2009 and
2008





Gross Written
Premium.  Gross written premium increased $16.7 million or 2.0%
to $833.7 million from $817.0 million for the nine months ended September 30,
2009 and 2008, respectively. The increase of $16.7 million was attributable to a
$17.5 million increase in our small commercial business, a $30.3 million
increase in our specialty middle-market property and casualty business offset by
a decrease of $31.1 million in our specialty risk and extended warranty
business.  The increase in small commercial business resulted
primarily from gross written premium attributable to the UBI acquisition in the
second quarter of 2008, the managing general agency agreement with Cardinal Comp
entered into in the third quarter of 2008, and the acquisition of the
CyberComp distribution network and renewal rights in the third quarter 2009
partially offset by state mandated workers’ compensation rate reductions in the
state of Florida and a decline in assigned risk business.  The
increase in our specialty middle market property and casualty business was
primarily from organic growth in workers compensation and other commercial
package business. The decrease in the specialty risk and extended warranty
business resulted from the impact of the assumption in 2008 of unearned premium
of $47 million and the strengthening of the U.S. dollar in the first half of
2009 on the Company’s European business, which negatively impacted gross written
premium by approximately $10 million for the nine months ended September
30, 2009 partially
offset by the impact of the assumption in 2009 of unearned premium of $36
million.





Net Premium
Written.  Net premium written increased $51.7 million or 13.2%
to $440.6 million from $388.9 million for the nine months ended September 30,
2009 and 2008, respectively.  The increase (decrease), by segment,
was: small commercial business - $26.8 million; specialty risk and extended
warranty - $(1.5) million; and specialty middle market - $26.4
million.





Net Premium
Earned.  Net premium earned increased $108.8 million or 35.6%
to $414.5 million from $305.7 million for the nine months ended September 30,
2009 and 2008, respectively.  The increase by segment, was: small
commercial business - $55.0 million; specialty risk and extended warranty -
$24.5 million; and specialty middle market - $29.3 million.




CedingCommission.




Commission and Fee Income. Commission and
fee income decreased $1.4 million or 5.9% to $22.0 million from $23.4 million
for the nine months ended September 30, 2009 and 2008, respectively. The
decrease was attributable primarily to a reduction in fees earned from
investment management services and servicing carrier contracts for state
workers’ compensation assigned risk plans partially offset by an increase in
administration fees from new warranty business.


35


Net Investment
Income. Net investment income decreased $1.8 million or 4.3%
to $41.3 million from $43.1 million for the nine months ended September 30, 2009
and 2008, respectively.  The change period over period related
primarily to a decline in the yields on the Company’s fixed maturities from 4.6%
in 2008 to 4.0% in 2009.





Net Realized Gains (Losses) on
Investments. Net realized losses on investments for the nine months ended
September 30, 2009 were $28.6 million, compared to net realized losses of $53.2
million for the same period in 2008.  During the nine months ended
September 30, 2009, realized losses related to certain sales of underperforming
investments in the Company’s fixed income portfolio and non-cash write-downs
of four equity securities and one fixed maturity security of $13.1 million
that were determined to be other-than-temporarily impaired. During the nine
months ended September 30, 2008, realized losses related primarily to the
non-cash write-down of $31.3 million related to two fixed income securities,
Lehman Brothers Holdings and Washington Mutual, that were determined to be other
than temporarily impaired and realized losses related to certain sales of
underperforming investments in the Company’s fixed income
portfolio.





Loss and Loss Adjustment Expenses;
Loss Ratio.   Loss and loss adjustment expenses increased $62.6
million or 37.6% to $229.0 million for the nine months ended September 30, 2009
from $166.4 million for the nine months ended September 30, 2008. The Company’s
loss ratio for the nine months ended September 30, 2009 and 2008 was 55.3% and
54.4%, respectively. The loss ratio increased on a consolidated basis for the
nine months ended September 30, 2009 over the nine months ended September 30,
2008 primarily because of the impact in 2008 of the reduction during the third
quarter of 2008 in prior year loss reserves in the approximate amount of
$15 million.




Acquisition Costs and Other
Underwriting Expenses; Expense Ratio.  Acquisition Costs and
Other Underwriting Expenses increased $36.3 million or 24.2% to $185.9 million
for the nine months ended September 30, 2009 from $149.6 million for the nine
months ended September 30, 2008. The expense ratio increased to 23.8% from 18.7%
for the nine months ended September 30, 2009 and 2008, respectively. The
increase in the expense ratio resulted, primarily, from the decrease in ceding
commission received from Maiden Insurance during the period. In 2008, the ceding
commission, which is based on earned premium ceded by the Company, included
ceding commission earned on $44.7 million of premium which was part of the $78.2
million of unearned premium that the Company had assumed on June 1, 2008 in
connection with the UBI acquisition. The reduction in ceding commission had
the effect of increasing acquisition costs on a consolidated basis and for each
segment compared to the corresponding period in
2008.




Operating Income from Continuing
Operations. Income from continuing operations increased $25.5 million or
32.1% to $104.8 million from $79.3 million for the nine months ended September
30, 2009 and 2008, respectively. The change in income from continuing operations
from 2008 to 2009 resulted primarily from a reduction in realized losses on the
Company’s investment portfolio.





Interest Expense.
Interest expense for the nine months ended September 30, 2009 and September 30,
2008 was $12.0 million and $11.9 million, respectively.  Interest
expense was consistent for the two periods as lower borrowing costs on the
Company’s collateral loan of $168 million were offset by an increase from the
full year impact of interest expense related to the Company’s $40 million term
loan and $30 million promissory note entered into during the second quarter of
2008.





Income Tax Expense
(Benefit). Income tax expense for the nine months ended September
30, 2009 was $18.8 million, which resulted in an effective tax rate of
20.0%.  Income tax expense for the nine months ended September 30, 2008 was
$13.0 million, which resulted in an effective tax rate of 18.3%. The increase in
the Company’s effective rate resulted, primarily, from an increase to operating
income for the nine months ended September 30, 2009 compared to the nine months
ended September 30, 2008 partially offset by a one-time income benefit
related to the acquisition of ACHL in the first half of 2009.


36


Small
Commercial Business Segment (Unaudited)




Three Months Ended September 30,
                                      
                                      
                                      Nine Months Ended September 30,(Amounts in thousands)
                                      
                                      2009
                                      
                                      
                                      2008
                                      
                                      
                                      2009
                                      
                                      
                                      2008Gross
      Written Premium
                                      
                                      $
                                      85,810
                                      
                                      
                                      $
                                      103,568
                                      
                                      
                                      $
                                      322,421
                                      
                                      
                                      $
                                      304,925Net
      premium written
                                      
                                      
                                      47,408
                                      
                                      
                                      
                                      53,637
                                      
                                      
                                      
                                      172,199
                                      
                                      
                                      
                                      145,383Change
      in unearned premium
                                      
                                      
                                      8,377
                                      
                                      
                                      
                                      (22,186
                                      )
                                      
                                      
                                      (3,174
                                      )
                                      
                                      
                                      (24,995
                                      )Net
      premium earned
                                      
                                      
                                      55,785
                                      
                                      
                                      
                                      31,451
                                      
                                      
                                      
                                      175,373
                                      
                                      
                                      
                                      120,388Ceding
      commission revenue – primarily related party
                                      
                                      
                                      10,311
                                      
                                      
                                      
                                      19,513
                                      
                                      
                                      
                                      47,178
                                      
                                      
                                      
                                      49,690Loss
      and loss adjustment expense
                                      
                                      
                                      (28,098
                                      )
                                      
                                      
                                      (13,215
                                      )
                                      
                                      
                                      (100,582
                                      )
                                      
                                      
                                      (62,554
                                      )Acquisition
      costs and other underwriting expenses
                                      
                                      
                                      (24,661
                                      )
                                      
                                      
                                      (25,742
                                      )
                                      
                                      
                                      (92,920
                                      )
                                      
                                      
                                      (74,305
                                      )(52,759
                                      )
                                      
                                      
                                      (38,687
                                      )
                                      
                                      
                                      (193,502
                                      )
                                      
                                      
                                      (136,859
                                      )Net
      premiums earned less expenses included in combined ratio (Underwriting
      income)
                                      
                                      $
                                      13,337
                                      
                                      
                                      $
                                      12,277
                                      
                                      
                                      $
                                      29,049
                                      
                                      
                                      $
                                      33,219Key
      Measures:Net
      loss ratio
                                      
                                      
                                      50.4
                                      %
                                      
                                      
                                      42.0
                                      %
                                      
                                      
                                      57.4
                                      %
                                      
                                      
                                      52.0
                                      %Net
      expense ratio
                                      
                                      
                                      25.7
                                      %
                                      
                                      
                                      19.0
                                      %
                                      
                                      
                                      26.1
                                      %
                                      
                                      
                                      20.4
                                      %Net
      combined ratio
                                      
                                      
                                      76.1
                                      %
                                      
                                      
                                      61.0
                                      %
                                      
                                      
                                      83.5
                                      %
                                      
                                      
                                      72.4
                                      %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                                      
                                      
                                      24,661
                                      
                                      
                                      
                                      25,472
                                      
                                      
                                      
                                      92,920
                                      
                                      
                                      
                                      74,305Less:
      ceding commission revenue – primarily related party
                                      
                                      
                                      10,311
                                      
                                      
                                      
                                      19,513
                                      
                                      
                                      
                                      47,178
                                      
                                      
                                      
                                      49,69014,347
                                      
                                      
                                      
                                      5,959
                                      
                                      
                                      
                                      45,742
                                      
                                      
                                      
                                      24,615Net
      premium earned
                                      
                                      
                                      55,785
                                      
                                      
                                      
                                      31,451
                                      
                                      
                                      
                                      175,373
                                      
                                      
                                      
                                      120,388Net
      expense ratio
                                      
                                      
                                      25.7
                                      %
                                      
                                      
                                      19.0
                                      %
                                      
                                      
                                      26.1
                                      %
                                      
                                      
                                      20.4
                                      %





Small
Commercial Business Segment Results of Operations for the Three Months Ended
September 30, 2009 and 2008





Gross Written Premium. Gross
written premium decreased $17.8 million or 17.1% to $85.8 million for the three
months ended September 30, 2009 from $103.6 million for the three months ended
September 30, 2008.  The decrease in small commercial business gross
written premium resulted primarily from state mandated workers’ compensation
rate reductions in the state of Florida, lower premium from the commercial
package business as the Company maintains it pricing discipline and a decline in
assigned risk business partially offset by additional premium resulting from the
acquisition from Swiss Re during the third quarter of 2009 of access to the
distribution network and renewal rights of CyberComp and the managing general
agency agreement with Cardinal Comp entered into in the third quarter of
2008.





Net Premium Written. Net
premium written decreased $6.2 million or 11.6% to $47.4 million for the three
months ended September 30, 2009 from $53.6 million for the three months ended
September 30, 2008. The decrease in net premium written resulted from a decrease
of gross written premium for the three months ended September 30, 2009
compared to gross written premium for the three months ended September 30,
2008.





Net Premium
Earned.  Net premium earned increased $24.3 million or 77.3% to
$55.8 million for the three months ended September 30, 2009 from $31.5 million
for the three months ended September 30, 2008.  As premiums written
earn ratably over a twelve month period, the increase in net premium earned
resulted from higher net premium written for the twelve months ended September
30, 2009 compared to the twelve months ended September 30,
2008.


37


Ceding
Commission.




Loss and Loss Adjustment Expenses;
Loss Ratio.   Loss and loss adjustment expenses increased $14.9
million or 112.6% to $28.1 million for the three months ended September 30, 2009
from $13.2 million for the three months ended September 30, 2008. The Company’s
loss ratio for the segment for the three months ended September 30, 2009
increased to 50.4% from 42.0% for the three months ended September 30, 2008. The
loss ratio increased quarter over quarter primarily because of the impact in
2008 of the reduction during the third quarter of 2008 in prior year loss
reserves in the approximate amount of $8 million.





Acquisition Costs and Other
Underwriting Expenses; Expense Ratio.  Acquisition Costs and
Other Underwriting Expenses decreased $0.8 million or 3.1% to $24.7 million for
the three months ended September 30, 2009 from $25.7 million for the three
months ended September 30, 2008. The expense ratio increased to 25.7% for the
three months ended September 30, 2009 from 19.0% for the three months ended
September 30, 2008. The
increase in the expense ratio resulted, primarily, from the decrease in ceding
commission received from Maiden Insurance during the period. In 2008, the ceding
commission, which is based on earned premium ceded by the Company, included the
segment’s proportionate share of ceding commission earned on the $78.2 million
of unearned premium that the Company had assumed on June 1, 2008 in connection
with the UBI acquisition.  The ceding commission revenue is allocated to
each segment based on that segment’s proportionate share of the Company’s
overall acquisition costs.  Therefore, the reduction in ceding
commission had the effect of increasing acquisition costs compared to the
corresponding period in 2008.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income).   Net premiums
earned less expenses included in combined ratio increased $1.0 million or 8.6%
to $13.3 million for the three months ended September 30, 2009 from $12.3
million for the three months ended September 30, 2008. The increase resulted
primarily from an increase in earned premium offset by an increase in the loss
and loss adjustment expense.





Small
Commercial Business Segment Results of Operations for the Nine Months Ended
September 30, 2009 and 2008





Gross Written
Premium.  Gross written premium increased $17.5 million or 5.7%
to $322.4 million for the nine months ended September 30, 2009 from $304.9
million for the nine months ended September 30, 2008.  The increase in
small commercial business resulted primarily, from the acquisition from Swiss Re
during the third quarter of 2009 of access to the distribution network and
renewal rights of CyberComp, the UBI acquisition in the second quarter of 2008
and the managing general agency agreement with Cardinal Comp entered into in the
third quarter of 2008. The increase was partially offset by state mandated
workers’ compensation rate reductions in the state of Florida and a decline in
assigned risk business.





Net Premium
Written.  Net premium written increased $26.8 million or 18.4%
to $172.2 million from $145.4 million for the nine months ended September 30,
2009 and 2008, respectively.  Net premium written increased period
over period as a result of the impact in 2008 of the cession to Maiden of 100%
of approximately $19 million in unearned premium assumed by the Company in
connection with the UBI acquisition.





Net Premium
Earned.  Net premium earned increased $55.0 million or 45.6% to
$175.4 million for the nine months ended September 30, 2009 from $120.4 million
for the nine months ended September 30, 2008.  As premiums written
earn ratably over a twelve month period, the increase in net premium earned
resulted from higher net premium written for the twelve months ended September
30, 2009 compared to the twelve months ended September 30, 2008.





Ceding
Commission.   Ceding
commission represents commission earned, primarily, through the Maiden Quota
Share, whereby AmTrust receives a 31% or 34.375% commission, depending on the
type of business, on earned premium ceded to Maiden Insurance.  The ceding
commission earned during the nine months ended September 30, 2009 and 2008 was
$47.2 million and $49.7 million, respectively.  The decrease in 2009
relates, primarily, to the impact in 2008 of the segment’s proportionate share
of ceding commission earned in the third quarter of 2008 as a result of cession
to Maiden Insurance of $78.2 million of unearned premium assumed in connection
with the acquisition of UBI during the second quarter of
2008.




Loss and Loss Adjustment Expenses;
Loss Ratio.   Loss and loss adjustment expenses increased $38.0
million or 60.7% to $100.6 million for the nine months ended September 30, 2009
from $62.6 million for the nine months ended September 30, 2008. The Company’s
loss ratio for the segment for the nine months ended September 30, 2009
increased to 57.4% from 52.0% for the nine months ended September 30, 2008. The
loss ratio increased for the nine months ended September 30, 2009 over the nine
months ended September 30, 2008 primarily because of the impact in 2008 of the
reduction during the third quarter of 2008 in prior year loss reserves
in the approximate amount of $8 million. Additionally the loss ratio increased
as a result of the integration of retail commercial package business acquired in
the UBI acquisition in the second quarter of 2008.


38


Acquisition Costs and Other
Underwriting Expenses; Expense Ratio.  Acquisition Costs and
Other Underwriting Expenses increased $18.6 million or 25% to $92.9 million for
the nine months ended September 30, 2009 from $74.3 million for the nine months
ended September 30, 2008. The expense ratio increased to 26.1% for the nine
months ended September 30, 2009 from 20.4% for the nine months ended September
30, 2008. The
increase in the expense ratio resulted, primarily, from the decrease in ceding
commission received from Maiden Insurance during the period. In 2008, the ceding
commission, which is based on earned premium ceded by the Company, included the
segment’s proportionate share of ceding commission earned on the $78.2 million
of unearned premium that the Company had assumed on June 1, 2008 in connection
with the UBI acquisition.  The ceding commission revenue is allocated to
each segment based on that segment’s proportionate share of the Company’s
overall acquisition costs.  Therefore, the reduction in ceding
commission had the effect of increasing acquisition costs compared to the
corresponding period in 2008.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income).   Net premiums
earned less expenses included in combined ratio decreased $4.2 million or 12.5%
to $29.0 million for the nine months ended September 30, 2009 from $33.2 million
for the nine months ended September 30, 2008.  The decrease resulted
primarily from increases to both loss and loss adjustment expenses and policy
acquisition costs related to the commercial package business obtained from the
UBI acquisition in the second quarter of 2008.





Specialty
Risk and Extended Warranty Segment (Unaudited)




Three Months Ended September 30,
                                        
                                        
                                        Nine Months Ended September 30,(Amounts in thousands)
                                        
                                        2009
                                        
                                        
                                        2008
                                        
                                        
                                        2009
                                        
                                        
                                        2008Gross
      Written Premium
                                        
                                        $
                                        138,917
                                        
                                        
                                        $
                                        130,316
                                        
                                        
                                        $
                                        314,260
                                        
                                        
                                        $
                                        345,393Net
      premium written
                                        
                                        
                                        76,793
                                        
                                        
                                        
                                        63,774
                                        
                                        
                                        
                                        162,306
                                        
                                        
                                        
                                        163,853Change
      in unearned premium
                                        
                                        
                                        (29,673
                                        )
                                        
                                        
                                        (29,296
                                        )
                                        
                                        
                                        (30,567
                                        )
                                        
                                        
                                        (56,693
                                        )Net
      premiums earned
                                        
                                        
                                        47,120
                                        
                                        
                                        
                                        34,478
                                        
                                        
                                        
                                        131,739
                                        
                                        
                                        
                                        107,160Ceding
      commission revenue – primarily related party
                                        
                                        
                                        8,031
                                        
                                        
                                        
                                        8,162
                                        
                                        
                                        
                                        20,233
                                        
                                        
                                        
                                        19,644Loss
      and loss adjustment expense
                                        
                                        
                                        (24,746
                                        )
                                        
                                        
                                        (8,535
                                        )
                                        
                                        
                                        (62,089
                                        )
                                        
                                        
                                        (56,325
                                        )Acquisition
      costs and other underwriting expenses
                                        
                                        
                                        (18,099
                                        )
                                        
                                        
                                        (12,895
                                        )
                                        
                                        
                                        (43,116
                                        )
                                        
                                        
                                        (32,794
                                        )(42,845
                                        )
                                        
                                        
                                        (21,430
                                        )
                                        
                                        
                                        (105,205
                                        )
                                        
                                        
                                        (89,119
                                        )Net
      premiums earned less expenses included in combined ratio (Underwriting
      income)
                                        
                                        $
                                        12,306
                                        
                                        
                                        $
                                        21,210
                                        
                                        
                                        $
                                        46,767
                                        
                                        
                                        $
                                        37,685Key
      Measures:Net
      loss ratio
                                        
                                        
                                        52.5
                                        %
                                        
                                        
                                        24.8
                                        %
                                        
                                        
                                        47.1
                                        %
                                        
                                        
                                        52.6
                                        %Net
      expense ratio
                                        
                                        
                                        21.4
                                        %
                                        
                                        
                                        13.7
                                        %
                                        
                                        
                                        17.4
                                        %
                                        
                                        
                                        12.3
                                        %Net
      combined ratio
                                        
                                        
                                        73.9
                                        %
                                        
                                        
                                        38.5
                                        %
                                        
                                        
                                        64.5
                                        %
                                        
                                        
                                        64.8
                                        %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                                        
                                        
                                        18,099
                                        
                                        
                                        
                                        12,895
                                        
                                        
                                        
                                        43,116
                                        
                                        
                                        
                                        32,794Less:
      ceding commission revenue – primarily related party
                                        
                                        
                                        8,031
                                        
                                        
                                        
                                        8,162
                                        
                                        
                                        
                                        20,233
                                        
                                        
                                        
                                        19,64410,068
                                        
                                        
                                        
                                        4,733
                                        
                                        
                                        
                                        22,883
                                        
                                        
                                        
                                        13,150Net
      premium earned
                                        
                                        
                                        47,120
                                        
                                        
                                        
                                        34,478
                                        
                                        
                                        
                                        131,739
                                        
                                        
                                        
                                        107,160Net
      expense ratio
                                        
                                        
                                        21.4
                                        %
                                        
                                        
                                        13.7
                                        %
                                        
                                        
                                        17.4
                                        %
                                        
                                        
                                        12.3
                                        %


39







Specialty Risk
and Extended Warranty Segment Results of Operations for the Three Months Ended
September 30, 2009 and 2008




Gross Written Premium. Gross
written premium increased $8.6 million or 6.6% to $138.9 million for the three
months ended September 30, 2009 from $130.3 million for the three months ended
September 30, 2008.  The increase in premium resulted, primarily, from
the underwriting of new coverage plans, which included the benefit of unearned
premium assumptions of $36 million.  Additionally, the weakening of
the U.S. dollar positively impacted gross written premium for the Company’s
European business by $9.5 million during the three months ended September 30,
2009.  The increase was partially offset by the impact of the
assumption of unearned premium of $47 million on the underwriting of certain
insurance programs in 2008.




Net Premium Written. Net
premium written increased $13.0 million or 20.4% to $76.8 million from $63.8
million for the three months ended September 30, 2009 and 2008,
respectively.  The increase in net premium written resulted from an
increase of gross written premium for the three months ended September 30, 2009
compared to gross written premium for the three months ended September 30,
2008.





Net Premium Earned. Net
premium earned increased $12.7 million or 36.6% to $47.1 million for the three
months ended September 30, 2009 from $34.4 million for the three months ended
September 30, 2008.  As net premiums are earned ratably over the term
of a policy, the increase was a result of higher net premium written for the
twelve months ended September 30, 2009 compared to the twelve months ended
September 30, 2008.





Ceding Commission. Ceding
commission represents commission earned, primarily, through the Maiden Quota
Share, whereby AmTrust receives a 31% or 34.375% commission, depending on the
type of business, on earned premium ceded to Maiden Insurance.  The ceding
commission earned during the three months ended September 30, 2009 and 2008 was
$8.0 million and $8.2 million, respectively.  The decrease in 2009 relates,
primarily, to the impact in 2008 of the segment’s proportionate share of ceding
commission earned in the third quarter of 2008 as a result of cession to Maiden
Insurance of $78.2 million of unearned premium assumed in connection with the
acquisition of UBI during the second quarter of 2008.




Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses were $24.7 million and $8.5
million for the three months ended September 30, 2009 and 2008, respectively.
The Company’s loss ratio for the segment for the three months ended September
30, 2009 increased to 52.5% from 24.8% for the three months ended September 30,
2008.  The loss ratio increased quarter over quarter primarily because
of the impact in 2008 of the reduction during the third quarter of 2008 in
prior year loss reserves in the approximate amount of $7 million.




Acquisition Costs and Other
Underwriting Expenses; Expense Ratio.  Acquisition Costs and
Other Underwriting Expenses increased $5.2 million or 40.3% to $18.1 million for
the three months ended September 30, 2009 from $12.9 million for the three
months ended September 30, 2009. The expense ratio increased to 21.4% for the
three months ended September 30, 2009 from 13.7% for the three months ended
September 30, 2008. The
increase in the expense ratio resulted, primarily, from the decrease in ceding
commission as a percentage of earned premium received from Maiden Insurance
during the period. In 2008, the ceding commission, which is based on earned
premium ceded by the Company, included the segment’s proportionate share of
ceding commission earned on the $78.2 million of unearned premium that the
Company had assumed on June 1, 2008 in connection with the UBI
acquisition.  The ceding commission revenue is allocated to each segment
based on that segment’s proportionate share of the Company’s overall acquisition
costs.  Therefore, the reduction in ceding commission had the effect
of increasing acquisition costs compared to the corresponding period in
2008.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income). Net premiums earned
less expenses included in combined ratio decreased $8.9 million or 41.9% to
$12.3 million for the three months ended September 30, 2009 from $21.2 million
for the three months ended September 30, 2008. This decrease is attributable
primarily to the increase in the loss ratio period over period.





Specialty Risk
and Extended Warranty Segment Results of Operations for the Nine Months Ended
September 30, 2009 and 2008





Gross Written
Premium.  Gross written premium decreased $31.1 million or 9.0%
to $314.3 million for the nine months ended September 30, 2009 from $345.4
million for the nine months ended September 30, 2008.  The decrease in
gross written premium related primarily to the strengthening of the U.S. dollar
in the first six months of 2009 which negatively impacted the Company’s European
business by approximately $10 million.  Additionally in 2008, the
segment had been positively impacted by the assumption of unearned premium of
approximately $63 million on the underwriting of certain insurance
programs.  The decrease was partially offset by the underwriting of
new coverage plans and the impact of the assumption in 2009 of unearned premium
of approximately $36 million on the underwriting of certain insurance
programs.




Net Premium Written. Net
premium written decreased $1.5 million or 0.9% to $162.3 million from $163.8
million for the nine months ended September 30, 2009 and 2008,
respectively.  The decrease in net premium written resulted from a
decrease of gross written premium for the nine months ended September 30, 2009
compared to gross written premium for the nine months ended September 30,
2008.


40


Net Premium Earned. Net
premium earned increased $24.5 million or 22.9% to $131.7 million for the nine
months ended September 30, 2009 from $107.2 million for the nine months ended
September 30, 2008.  As net premiums are earned ratably over the term
of a policy which range from one to three years, the increase was a result
of higher net premium written in 2007 and 2008.





Ceding
Commission.  Ceding commission represents commission earned
primarily through the Maiden Quota Share, whereby AmTrust receives a 31% or
34.375% commission, depending on the type of business, on earned premium ceded
to Maiden Insurance .  The
ceding commission earned during the nine months ended September 30, 2009 and
2008 was $20.2 million and $19.6 million, respectively.





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses were $62.1 million and
$56.3 million for the three months ended September 30, 2009 and 2008,
respectively. The Company’s loss ratio for the segment for the nine months ended
September 30, 2009 decreased to 47.1% from 52.6% for the nine months ended
September 30, 2008.  The improvement in the loss ratio resulted from a
one-time benefit of $11.8 million related to the acquisition of ACHL and
the strengthening of the U.S. dollar, which positively impacted loss adjustment
expenses for the Company’s European business by approximately $2.0 million
offset by the impact in 2008 of the reduction during the third quarter of
2008 in prior year loss reserves in the approximate amount of $7
million.




Acquisition Costs and Other
Underwriting Expenses; Expense Ratio.  Acquisition Costs and
Other Underwriting Expenses increased $10.3 million or 31.4% to $43.1 million
for the nine months ended September 30, 2009 from $32.8 million for the nine
months ended September 30, 2009. The expense ratio increased to 17.4% for the
nine months ended September 30, 2009 from 12.3% for the nine months ended
September 30, 2008. The
increase in the expense ratio resulted, primarily, from the decrease in ceding
commission received from Maiden Insurance during the period. In 2008, the ceding
commission, which is based on earned premium ceded by the Company, included the
segment’s proportionate share of ceding commission earned on the $78.2 million
of unearned premium that the Company had assumed on June 1, 2008 in connection
with the UBI acquisition.  The ceding commission revenue is allocated to
each segment based on that segment’s proportionate share of the Company’s
overall acquisition costs.  Therefore, the reduction in ceding
commission had the effect of increasing acquisition costs compared to the
corresponding period in 2008.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income).   Net
premiums earned less expenses included in combined ratio increased $9.1 million
or 24.0% to $46.8 million for the nine months ended September 30, 2009 from
$37.7 million for the nine months ended September 30, 2008. This increase is
primarily from an improvement in earned premium period over period.




Specialty
Middle Market Property and Casualty Segment Results of Operations





Three Months Ended September 30,
                            
                            
                            Nine Months Ended September 30,(Amounts in thousands)
                            
                            2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Gross
      Written Premium
                            
                            $
                            71,214
                            
                            
                            $
                            47,322
                            
                            
                            $
                            197,016
                            
                            
                            $
                            166,706Net
      premium written
                            
                            
                            43,116
                            
                            
                            
                            22,018
                            
                            
                            
                            106,111
                            
                            
                            
                            79,692Change
      in unearned premium
                            
                            
                            (729
                            )
                            
                            
                            4,386
                            
                            
                            
                            1,295
                            
                            
                            
                            (1,549
                            )Net
      premiums earned
                            
                            
                            42,387
                            
                            
                            
                            26,404
                            
                            
                            
                            107,406
                            
                            
                            
                            78,143Ceding
      commission revenue – primarily related party
                            
                            
                            9,027
                            
                            
                            
                            9,441
                            
                            
                            
                            19,827
                            
                            
                            
                            23,188Loss
      and loss adjustment expense
                            
                            
                            (24,687
                            )
                            
                            
                            (15,344
                            )
                            
                            
                            (66,360
                            )
                            
                            
                            (47,514
                            )Acquisition
      costs and other underwriting expenses
                            
                            
                            (20,394
                            )
                            
                            
                            (15,182
                            )
                            
                            
                            (49,859
                            )
                            
                            
                            (42,473
                            )(45,081
                            )
                            
                            
                            (30,526
                            )
                            
                            
                            (116,219
                            )
                            
                            
                            (89,987
                            )Net
      premiums earned less expenses included in combined ratio (Underwriting
      income)
                            
                            $
                            6,333
                            
                            
                            $
                            5,319
                            
                            
                            $
                            11,014
                            
                            
                            $
                            11,344Key
      Measures:Net
      loss ratio
                            
                            
                            58.2
                            %
                            
                            
                            58.1
                            %
                            
                            
                            61.8
                            %
                            
                            
                            60.8
                            %Net
      expense ratio
                            
                            
                            26.8
                            %
                            
                            
                            21.7
                            %
                            
                            
                            28.0
                            %
                            
                            
                            24.7
                            %Net
      combined ratio
                            
                            
                            85.1
                            %
                            
                            
                            79.9
                            %
                            
                            
                            89.7
                            %
                            
                            
                            85.5
                            %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                            
                            
                            20,394
                            
                            
                            
                            15,182
                            
                            
                            
                            49,859
                            
                            
                            
                            42,473Less:
      ceding commission revenue – primarily related party
                            
                            
                            9,027
                            
                            
                            
                            9,441
                            
                            
                            
                            19,827
                            
                            
                            
                            23,18811,367
                            
                            
                            
                            5,741
                            
                            
                            
                            30,032
                            
                            
                            
                            19,285Net
      premium earned
                            
                            
                            42,387
                            
                            
                            
                            26,404
                            
                            
                            
                            107,406
                            
                            
                            
                            78,143Net
      expense ratio
                            
                            
                            26.8
                            %
                            
                            
                            21.7
                            %
                            
                            
                            28.0
                            %
                            
                            
                            24.7
                            %


41





Specialty
Middle Market Segment Result of Operations for the Three Months Ended September
30, 2009 and 2008





Gross Written
Premium.  Gross written premium increased $23.9 million or
50.4% to $71.2 million for the three months ended September 30, 2009 from $47.3
million for the three months ended September 30, 2008.  The increase
resulted from organic growth of approximately $11 million in certain product
lines including workers compensation and other commercial package business
lines.  Additionally, the Company entered into an agreement during the
third quarter of 2009 by which the Company assumed premium of approximately $15
million on certain commercial lines of business. The increase was partially
offset by a decline in the credit business of approximately $2 million, which
the Company wrote on behalf of HSBC Insurance Company of Delaware, pursuant to a
100% fronting arrangement which is now in run-off.





Net Premium
Written.  Net premium written increased $21.1 million or 95.8%
to $43.1 million for the three months ended September 30, 2009 from $22.0
million for the three months ended September 30, 2008.  The increase
in net premium written resulted from an increase of gross written premium for
the three months ended September 30, 2009 compared to gross written premium for
the three months ended September 30, 2008.





Net Premium
Earned.  Net premium earned increased $16.0 million or 60.5% to
$42.4 million for the three months ended September 30, 2009 from $26.4 million
for the three months ended September 30, 2008.  As a majority of
premiums written earn ratably over a twelve month period, the increase was
a result of higher net premium written for the twelve months ended September 30,
2009 compared to the twelve months ended September 30, 2008.





Ceding
Commission. Ceding commission represents commission earned
primarily through the Maiden Quota Share agreement, whereby AmTrust receives a
31% or
34.375% commission, depending on the type of business, on earned premium ceded
to Maiden Insurance .  The
ceding commission earned during the three months ended September 30, 2009 and
2008 was $9.0 million and $9.4 million, respectively.





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses increased $9.4
million or 60.8% to $24.7 million for the three months ended September 30, 2009
compared to $15.3 million for the three months ended September 30, 2008. The
loss ratio was 58.2% and 58.1% for the three months ended September 30, 2009 and
2008, respectively.




Acquisition Costs and Other
Underwriting Expenses; Expense Ratio.  Acquisition Costs and
Other Underwriting Expenses increased $5.2 million or 34.3% to $20.4 million for
the three months ended September 30, 2009 from $15.2 million for the three
months ended September 30, 2009. The expense ratio decreased to 26.8% for the
three months ended September 30, 2009 from 21.7% for the three months ended
September 30, 2008. The
increase in the expense ratio resulted, primarily, from the decrease in ceding
commission received from Maiden Insurance during the period. In 2008, the ceding
commission, which is based on earned premium ceded by the Company, included the
segment’s proportionate share of ceding commission earned on the $78.2 million
of unearned premium that the Company had assumed on June 1, 2008 in connection
with the UBI acquisition.  The ceding commission revenue is allocated
to each segment based on that segment’s proportionate share of the Company’s
overall acquisition costs.  Therefore, the reduction in ceding
commission had the effect of increasing acquisition costs compared to the
corresponding period in 2008.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income).   Net premiums
earned less expenses included in combined ratio were $6.3 million and $5.3
million for the three months ended September 30, 2009 and 2008, respectively.
The increase of $1.0 million resulted primarily from an increase in earned
premium offset by higher acquisition costs.





Specialty
Middle Market Segment Result of Operations for the Nine Months Ended September
30, 2009 and 2008





Gross Written
Premium.  Gross written premium increased $30.3 million or
18.1% to $197.0 million for the nine months ended September 30, 2009 from $166.7
million for the nine months ended September 30, 2008.  The increase
resulted from organic growth of approximately $20 million in certain product
lines including workers compensation and other commercial package business
lines.  Additionally, the Company entered into an agreement during the
third quarter of 2009 by which the Company assumed premium of approximately $15
million on certain commercial lines of business.  The increase was
partially offset by a decline in the credit business of approximately $5
million, which the Company wrote on behalf of HSBC Insurance Company of Delaware
pursuant to a 100% fronting arrangement which is in run-off.


42





Net Premium
Written.  Net premium written increased $26.4 million or 33.1%
to $106.1 million for the nine months ended September 30, 2009 from $79.7
million for the nine months ended September 30, 2008.  The increase in
net premium written resulted from an increase of gross written premium for the
nine months ended September 30, 2009 compared to gross written premium for the
nine months ended September 30, 2008.





Net Premium
Earned.  Net premium earned increased $29.3 million or 37.4% to
$107.4 million for the nine months ended September 30, 2009 from $78.1 million
for the nine months ended September 30, 2008.  As premiums written
earn ratably primarily over a twelve month period, the   increase
was a result of higher net premium written for the twelve months ended September
30, 2009 compared to the twelve months ended September 30, 2008.





Ceding
Commission.  Ceding commission represents commission earned
primarily through the Maiden Quota Share, whereby AmTrust receives a 31%
or
34.375% commission, depending on the type of business, on earned premium ceded
to Maiden Insurance .  The
ceding commission earned during the nine months ended September 30, 2009 and
2008 was $19.8 million and $23.2 million, respectively.





Loss and Loss Adjustment Expenses;
Loss Ratio.   Loss and loss adjustment expenses increased $18.9
million or 39.6% to $66.4 million for the nine months ended September 30, 2009
compared to $47.5 million for the nine months ended September 30, 2008. The loss
ratio for the segment increased for the nine months ended September 30, 2009 to
61.8% from 60.8% for the nine months ended September 30, 2008.  The
increase in the loss and loss adjustment expense ratio in 2009 resulted
primarily from higher actuarial estimates based on actual losses.




Acquisition Costs and Other
Underwriting Expenses; Expense Ratio.  Acquisition Costs and
Other Underwriting Expenses increased $7.4 million or 17.3% to $49.9 million for
the nine months ended September 30, 2009 from $42.5 million for the nine months
ended September 30, 2008. The expense ratio increased to 28.0% for the three
months ended September 30, 2009 from 24.7% for the nine months ended September
30, 2008. The increase in the expense ratio resulted, primarily, from the
decrease in ceding commission received from Maiden Insurance during the period.
In 2008, the ceding commission, which is based on earned premium ceded by the
Company, included the segment’s proportionate share of ceding commission earned
on the $78.2 million of unearned premium that the Company had assumed on June 1,
2008 in connection with the UBI acquisition.  The ceding commission revenue
is allocated to each segment based on that segment’s proportionate share of the
Company’s overall acquisition costs.  Therefore, the reduction in
ceding commission had the effect of increasing acquisition costs compared to the
corresponding period in 2008.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income).   Net
premiums earned less expenses included in combined ratio were $11.0 million and
$11.3 million for the nine months ended September 30, 2009 and 2008,
respectively. The decrease of $0.3 million resulted primarily from an increase
in policy acquisition costs.





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 $232 million and $192 million for the nine
months ended September 30, 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, service our debt
instruments and anticipated growth for at least the next twelve
months.




However,
if the Maiden Quota Share were to be terminated or our growth attributable to
acquisitions or internally generated growth, or a combination of these exceed
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:





open
                      Nine Months Ended
                        September 30,(Amounts in thousands)
                      2009
                      
                      2008Cash
      and cash equivalents provided by (used in):Operating
      activities
                      
                      $
                      127,608
                      
                      
                      $
                      90,027Investing
      activities
                      
                      
                      2,390
                      
                      
                      
                      (228,109
                      )Financing
      activities
                      
                      
                      (60,548
                      )
                      
                      
                      193,412


43


Net cash
provided by operating activities for the nine months ended September 30, 2009
increased compared to cash provided by operating activities in the nine months
ended September 30, 2008, primarily because of increased collections of premiums
during the nine months ended September 30, 2009.





Cash
provided by investing activities during the period represents, primarily, the
net sales (sales less purchases) of investments. For the nine months ended
September 30, 2009, the Company’s net sales of fixed securities totaled $2
million and the net sales of equity securities totaled $7
million.  Additionally, the Company had approximately $2 million of
purchases related to property and equipment and $6 million of intangibles
primarily related to a renewal rights transaction in the third quarter of
2009. For the nine months ended September 30, 2008, the Company’s net
purchases of fixed income securities totaled approximately $195 million offset
by net sales of $18 million of equity securities and $11 million of other
investments.  Additionally, the company paid approximately $56 million
related to the acquisition of the commercial package
business.


Cash used
in financing activities for the nine months ended September 30, 2009 consisted
primarily of approximately $28 million paid for the net settling of repurchase
agreements, $18 million paid on certain Company debt agreements, $10 million
paid for dividends and $6 million for the purchase of Company
shares.  Cash provided by financing activities for the nine months
ended September 30, 2008 consisted primarily of approximately $164 million
received for the net entering into repurchase agreements, $40 million received
on a term loan partially offset by $7 million paid for dividends and $3 million
principal payment on the aforementioned term loan.





Term Loan





On
June 3, 2008, the Company entered into a term loan with JP Morgan Chase Bank,
N.A. in the aggregate amount of $40 million. The term of the loan is for a
period of three years and requires quarterly principal payments of 3.3 million,
which began on September 3, 2008 and end on June 3, 2011. The loan carries
a variable rate and is based on a Eurodollar rate plus an applicable margin. The
Eurodollar rate is a periodic fixed rate equal to the London Inter bank Offered
Rate “LIBOR” and had a margin rate of 185 basis points and was 2.184% as of
September 30, 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 a debt to equity ratio of
0.35 to 1 or less.  The Company recorded $1.2 million of interest
expense during the nine months ended September 30, 2009 related to this
agreement.  The Company reduced the outstanding balance on the note
during the nine months ended September 30, 2009 from $33.3 million to $23.3
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, the first of which was paid June 1, 2009,
and the remaining principal payments are due on June 1, 2010, 2011 and
2012. The Company calculated imputed interest of $3.2 million based on current
interest rates available to the Company. Accordingly, the note’s carrying
balance was adjusted to $26.8 million at inception. The note is required to be
paid in full immediately, under certain circumstances involving default of
payment or change of control of the Company. The Company recorded $0.8 million
of interest expense during the nine months ended September 30, 2009 and the
note’s carrying value at September 30, 2009 was $20.9 million.





Line
of Credit





On June
3, 2008, the Company entered into an agreement for an unsecured line of credit
with JP Morgan Chase Bank, N.A. in the aggregate amount of $25 million. The line
is used for collateral for letters of credit.  On June 30, 2009, the
Company amended this agreement, whereby, the line was increased in the aggregate
amount to $30 million and its term was extended to June 30,
2010.  Interest payments are required to be paid monthly on any unpaid
principal and bears interest at a rate of LIBOR plus 150 basis
points.  As of September 30, 2009 there was no outstanding balance on
the line of credit. At September 30, 2009, The Company had outstanding letters
of credit in place for $22.9 million that reduced the availability on the line
of credit to $7.1 million as of September 30, 2009.


44





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 in or holds in short term
or fixed income securities. As of September 30, 2009, there were $256.9 million
principal amount outstanding at interest rates between 0.35% and 0.55%. Interest
expense associated with these repurchase agreements for the nine months ended
September 30, 2009 was $1.3 million of which $0.2 million was accrued as of
September 30, 2009. The Company has approximately $261.5 million of collateral
pledged in support of these agreements.




Note
Payable — Collateral for Proportionate Share of Reinsurance
Obligation




In
conjunction with the Maiden Quota Share (See “Note 11. Related Party
Transactions”), AII entered into a loan agreement with Maiden Insurance during
the fourth quarter of 2007, whereby, Maiden Insurance lent to AII 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 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 September 30, 2009.




Reinsurance




The
Company utilizes reinsurance agreements to reduce its exposure to large claims
and catastrophic loss occurrences and to increase its capacity for writing
profitable business. These agreements provide for recovery from reinsurers of a
portion of losses and loss adjustment expense (“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 $0.5 million through December 30, 2004, $0.6 million effective
January 1, 2005 and $1.0 million effective January 1, 2006, per occurrence up to
a maximum $130 million ($80 million 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 $1.0 million per occurrence.  For the
period from July 1, 2009 through January 1, 2010, the Company retains, per
occurrence, 100% of the first $1.0 million of losses incurred and 55% of losses
incurred in excess of $1.0 million up to $10 million.




The
Company has coverage for its casualty lines of business under excess of loss
reinsurance agreements. The agreement effective through May 2009 covers
losses in excess of $2 million per occurrence up to a maximum $12 million. The
agreement also provides “clash” protection for qualifying claims for losses in
excess of $12 million up to a maximum of $32 million.  Effective June
1, 2009, as respects in-force, new and renewal business, the Company changed the
structure of its casualty reinsurance program.  As of that date, the
Company’s non-program umbrella business is reinsured on a quota share basis,
whereby the company cedes 70% of the first $5 million of loss per policy per
occurrence or in the aggregate, and 100% of the next $5 million of loss per
policy per occurrence or in the aggregate.  The quota share protection
inures to the benefit of the Company’s casualty excess of loss program, which
provides coverage for losses greater than $2.5 million, up to a maximum of $30
million.




The
Company has coverage for its property lines of business under an excess of loss
reinsurance agreement. The agreement covers losses in excess of $2 million per
location up to a maximum of $15 million; for dates of loss on or after June 1,
2009, the agreement covers losses to a maximum of $20 million per location. In
addition the Company has a property catastrophe excess of loss agreement.
Through May 31, 2009, the agreement covers losses in excess of $4 million per
occurrence up to a maximum $65 million.  For dates of loss on or after
June 1, 2009, the property catastrophe excess of loss agreement covers losses in
excess of $5 million per occurrence to a maximum of $65 million.





The
Company also purchases quota share and/or excess treaty and/or facultative
reinsurance for specific programs, policies or specialty lines of business, to
limit our loss exposure and/or to allow our program managers to share the risks
and rewards of the business they produce.


45





TIC acts
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-based equivalent, which is administered by the National Council
on Compensation Insurance, Inc. (“NCCI”).





As part
of the agreement to purchase WIC from Household Insurance Group Holding Company
(“Household”), the Company agreed to write certain business on behalf of
Household for a three year period, which concluded June 1, 2009. The premium
written under this arrangement is 100% reinsured by HSBC Insurance Company of
Delaware, a subsidiary of Household. The reinsurance recoverable associated with
this business is guaranteed by Household.





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, as amended, 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 exceeded $5 million
(“Covered Business”).





AmTrust
also agreed to cause AII, subject to regulatory requirements, to reinsure any
insurance company which writes Covered Business in which AmTrust acquires a
majority interest to the extent required to enable AII to cede to Maiden
Insurance 40% of the premiums and losses related to such Covered Business. In
June 2008, AII, pursuant to the Maiden Quota Share, offered to cede to Maiden
and Maiden agreed to assume 100% of unearned premium and losses related to
in-force retail commercial package business assumed by the Company in connection
with its acquisition of UBI and 40% of prospective net premium written and
losses related to retail commercial package business.  In September
2008, AII, pursuant to the Maiden Quota Share, offered to cede and Maiden
Insurance agreed to assume 40% of the net premium written and losses with
respect to certain business written by AmTrust’s Irish insurance subsidiary,
AIU, for which AIU retains in excess of $5 million per loss (“Excess Retention
Business”).  Effective July 1, 2009, Maiden Insurance has accepted its
quota share of that part of the Company’s net retained workers’ compensation
business in the $9 million excess of $1 million per occurrence
layer.





The
Maiden Quota Share, as amended, further provides that the AII receives a ceding
commission of 31% of ceded written premiums with respect to Covered Business and
the AIU Excess Retention Business and 34.375% with respect to retail commercial
package business.





The
Maiden Quota Share agreement which had an initial term of three years, has been
renewed for a successive three year term through June 30, 2013 and
will automatically renew for successive three year terms, unless either AII or
Maiden Insurance notifies the other of its election not to renew not less than
nine months prior to the end of any such three year term. In addition, either
party is entitled to terminate on thirty day’s notice or less upon the
occurrence of certain early termination events, which include a default in
payment, insolvency, change in control of AII or Maiden Insurance, run-off, or a
reduction of 50% or more of the shareholders’ equity of Maiden Insurance or the
combined shareholders’ equity of AII and the AmTrust Ceding
Insurers.





As part
of the acquisition of 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 June 30, 1999 the American Home reinsurance covered
losses in excess of $0.25 million per occurrence up to statutory coverage
limits. Effective April 1, 1999, American Home provided coverage in the amount
of $0.15 million in excess of $0.1 million. This additional coverage terminated
on December 31, 2001 on a run-off basis.  Therefore, for losses
occurring in 2002 that attached to a policy that was in effect in 2001, the
retention was $0.1 million per occurrence. Effective January 1, 2002 American
Home increased its attachment to $0.25 million per occurrence. The excess of
loss treaty that had an attachment of $0.25 million was terminated on a run-off
basis on December 31, 2002. Therefore, losses occurring in 2003 that attached to
a 2002 policy were ceded to American Home at an attachment point of $0.25
million per occurrence.




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.


46




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 £0.5 million for
each ceded risk which we at acceptance regard as one individual risk. This means
that regardless of the amount of insured losses generated by any ceded risk, the
maximum coverage for that ceded risk under this reinsurance arrangement is £0.5
million. For the majority of the business ceded under this reinsurance
arrangement, we cede 15% of the risk to Munich Re, but for some newer or larger
risks, we cede a larger share to Munich Re. This reinsurance is subject to a
limit of £2.5 million per occurrence of certain natural perils such as
windstorms, earthquakes, floods and storm surge. Coverage for losses arising out
of acts of terrorism is excluded from the scope of this
reinsurance.





Investment
Portfolio





Our
investment portfolio, including cash and cash equivalents, increased $105.1
million or 7.7% to $1,453.1 million at September 30, 2009 from $1,348.0 million
as of December 31, 2008 (excluding $11.5 million and $13.5 million of other
investments, respectively).  During the second quarter ended June 30,
2009, the Company disposed of a portion of its fixed maturities classified as
held to maturity.  As such, the Company assessed the appropriateness
of its remaining fixed maturity portfolio classified as held to
maturity.  The Company determined that all remaining fixed maturities
should be classified as available for sale under the provisions of ASC 320,
Investments – Debt and Equity
Securities.  The effect of this one time
reclassification increased the carrying value of the fixed securities by
approximately $1.0 million. Our fixed maturity securities, gross, as of
September 30, 2009 had a fair value of $1,001.4 million and an amortized cost of
$1,000.1 million. Our equity securities are classified as available-for-sale, as
defined by ASC 320. These securities are reported at fair value. The equity
securities, gross, carried at fair value were $53.6 million with a cost of $67.0
million as of September 30, 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:





September
      30, 2009
                      
                      
                      December
      31, 2008(Amounts
      in thousands)
                      
                      Carrying
                        Value
                      
                      
                      Percentage of
                        Portfolio
                      
                      
                      Carrying
                        Value
                      
                      
                      Percentage of
                        PortfolioCash
      and cash equivalents
                      
                      $
                      263,160
                      
                      
                      
                      18.1
                      %
                      
                      $
                      192,053
                      
                      
                      
                      14.2
                      %Time
      and short-term deposits
                      
                      
                      134,956
                      
                      
                      
                      9.3
                      
                      
                      
                      167,845
                      
                      
                      
                      12.5U.S.
      treasury securities
                      
                      
                      16,419
                      
                      
                      
                      1.1
                      
                      
                      
                      17,851
                      
                      
                      
                      1.3U.S.
      government agencies
                      
                      
                      7,151
                      
                      
                      
                      0.5
                      
                      
                      
                      21,434
                      
                      
                      
                      1.6Municipals
                      
                      
                      29,097
                      
                      
                      
                      2.0
                      
                      
                      
                      45,208
                      
                      
                      
                      3.4Commercial
      mortgage back securities
                      
                      
                      3,442
                      
                      
                      
                      0.2
                      
                      
                      
                      3,390
                      
                      
                      
                      0.2Residential  mortgage
      backed securities - primarily agency backed
                      
                      
                      521,702
                      
                      
                      
                      35.9
                      
                      
                      
                      492,405
                      
                      
                      
                      36.6Asset
      backed securities
                      
                      
                      3,764
                      
                      
                      
                      0.3
                      
                      
                      
                      5,068
                      
                      
                      
                      0.4Corporate
      bonds
                      
                      
                      419,796
                      
                      
                      
                      28.9
                      
                      
                      
                      373,901
                      
                      
                      
                      27.7Preferred
      stocks
                      
                      
                      4,146
                      
                      
                      
                      0.3
                      
                      
                      
                      5,315
                      
                      
                      
                      0.4Common
      stocks
                      
                      
                      49,421
                      
                      
                      
                      3.4
                      
                      
                      
                      23,513
                      
                      
                      
                      1.7$
                      1,453,054
                      
                      
                      
                      100.0
                      %
                      
                      $
                      1,347,983
                      
                      
                      
                      100.0
                      %





As of
September 30, 2009, the weighted average duration of our fixed income securities
was 2.9 years and had a yield of 4.36%.


47





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:




§
            the current fair value compared
      to amortized cost;


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


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


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


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


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





Impairment
of investment securities results in a charge to operations when a market decline
below cost is deemed to be other-than-temporary. The Company generally considers
investments subject to impairment testing when an asset is in an unrealized loss
position in excess of 35% of cost basis and has
been in an unrealized loss position for 24 months or more.





During
the nine months ended September 30, 2009, based on the criteria above, we
determined that four equity securities and one fixed maturity was
other-than-temporarily-impaired.  The impairment charges of our
fixed-maturities and equity securities for the nine months ended September 30,
2009 and 2008 are presented in the table below:




(Amounts in thousands)
                      
                      2009
                      
                      
                      2008Equity
      securities
                      
                      $
                      11,108
                      
                      
                      $
                      13,314Fixed
      maturity securities
                      
                      
                      4,252
                      
                      
                      
                      31,319$
                      15,360
                      
                      
                      $
                      44,633




In
addition to the other than temporary impairment of $15.4 million recorded during
the nine months ended September 30, 2009, at September 30, 2009, the Company had
$21 million of gross unrealized losses related to equity
securities.  The Company’s investment in equity securities consist of
investments in preferred and common stocks 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 and preferred stocks, 21 equity securities comprised $16 million,
or 77% of the unrealized loss.  The Company holds 10 and 4
securities in the consumer products sector and healthcare sector, respectively,
which represents approximately 9.4% and 9.8%, respectively, of the total fair
value and 26.9% and 18.6%, respectively, of the Company’s unrealized
losses.  The Company also holds 7 equity securities in the
technology, industrial and financial sectors which have fair values of
approximately 9.3%, 0.4% and 6.1%, respectively, and approximately 23.1%, 4.3%
and 4.0%, respectively, of the Company’s unrealized losses. The duration of
these impairments ranges from 1 to 24 months. The remaining securities in a loss
position are not considered individually significant and accounted for 23% 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
September 30, 2009, the Company had $34.7 million of gross unrealized losses
related to fixed income securities as of September 30, 2009. Corporate bonds
represent approximately 42% of the fair value of our fixed maturities and
approximately 93% of the total unrealized losses of our fixed maturities. The
Company owns 164 corporate bonds in the industrial, financial  and
other sectors, which have a fair value of approximately 11%, 29% and 1%,
respectively, and 18%, 74% and 1% 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.


48





Item
3. Quantitative and Qualitative Disclosures About Market Risk





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




LiquidityRisk.  Liquidity risk represents the potential inability of the
Company to meet all payment obligations when they become due. The Company
maintains sufficient cash and marketable securities to fund claim payments and
operations. We purchase reinsurance coverage to mitigate the 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.





CreditRisk.  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.”




Interest Rate Risk. We had
fixed maturity securities (excluding $135.0 million of time and short-term
deposits) with a fair value of $1,001.4 million and an amortized cost of
$1,000.1 million as of September 30, 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 September 30, 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 impact the carrying value of these securities
and are reported in our shareholders’ equity as a component of other
comprehensive income, net of deferred taxes. The selected scenarios in the table
below are not predictions of future events, but rather are intended to
illustrate the effect such events may have on the fair value and carrying value
of our fixed maturity securities and on our shareholders’ equity, each as of
September 30, 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(Amounts
      in thousands)200
      basis point increase
                    
                    $
                    928,788
                    
                    
                    $
                    (72,581
                    )
                    
                    $
                    —
                    
                    
                    $
                    (72,581
                    )
                    
                    
                    (8.8
                    )%100
      basis point increase
                    
                    
                    958,093
                    
                    
                    
                    (43,276
                    )
                    
                    
                    —
                    
                    
                    
                    (43,276
                    )
                    
                    
                    (5.2
                    )No
      change
                    
                    
                    1,001,369
                    
                    
                    
                    —
                    
                    
                    
                    1,001,369
                    
                    
                    
                    —
                    
                    
                    
                    —100
      basis point decrease
                    
                    
                    1,019,659
                    
                    
                    
                    18,290
                    
                    
                    
                    —
                    
                    
                    
                    18,290
                    
                    
                    
                    2.2200
      basis point decrease
                    
                    
                    1,054,610
                    
                    
                    
                    53,241
                    
                    
                    
                    —
                    
                    
                    
                    53,241
                    
                    
                    
                    6.4




Changes in interest rates would affect
the fair market value of our fixed rate debt instruments but would not have an
impact on our earnings or cash flow.  We currently have approximately
$336 million of debt instruments of which $145 million are fixed rate debt
instruments.  A fluctuation of 100 basis points in interest on our
variable rate debt instruments, which are tied to LIBOR, would affect our
earnings and cash flows by $1.9 million before income tax, on an annual basis,
but would not affect the fair market value of the variable rate
debt.


49





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 $1.8 million after tax
realized currency loss based on our outstanding foreign denominated reserves of
$56.7 million at September 30, 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 September 30, 2009, the equity securities in
our investment portfolio had a fair value of $53.6 million, representing
approximately three percent of our total invested assets on that date. We are
fundamental long buyers and short sellers, with a focus on value oriented
stocks. The table below illustrates the impact on our equity portfolio and
financial position given a hypothetical movement in the broader equity markets.
The selected scenarios in the table below are not predictions of future events,
but rather are intended to illustrate the effect such events may have on the
carrying value of our equity portfolio and on shareholders’ equity as of
September 30, 2009. The hypothetical scenarios below assume that the Company’s
Beta is 1 when compared to the S&P 500 index.





Hypothetical Change in S&P 500 Index
                    
                    Fair Value
                    
                    
                    Estimated
                      Change in
                      Fair Value
                    
                    
                    Carrying
                      Value
                    
                    
                    Estimated
                      Change in
                      Carrying
                      Value
                    
                    
                    Hypothetical
                      Percentage
                      Increase
                      (Decrease) in
                      Shareholders
                      Equity(Amounts
      in thousands)5%
      increase
                    
                    $
                    56,245
                    
                    
                    $
                    2,678
                    
                    
                    
                    
                    
                    $
                    2,678
                    
                    
                    
                    0.3
                    %No
      change
                    
                    
                    53,567
                    
                    
                    
                    
                    
                    
                    $
                    53,5675%
      decrease
                    
                    
                    50,889
                    
                    
                    
                    (2,678
                    )
                    
                    
                    
                    
                    
                    
                    (2,678
                    )
                    
                    
                    (0.3
                    )%




Item
4. Controls and Procedures





Our
management, with the participation and under the supervision of
our principal executive officer and principal financial officer has
evaluated the Company’s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) and have concluded that, as of the end of the period covered by
this report, such disclosure controls and procedures were effective. During the
most recent fiscal quarter, there have been no changes in the Company’s internal
controls over financial reporting (as defined in Exchange Act Rule 13a-15(f) and
15d-15(f) that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial
reporting.


50





PART II - OTHER
INFORMATION





Item
1.  Legal Proceedings.





See Item 3. Legal Proceedings included
in the Company’s Annual Report Form 10-K for the period ended December 31, 2008
for a description of the Company’s legal proceedings.





Item
1A.  Risk Factors.





Item 1A
of the Annual Report Form 10-K for the year ended December 31, 2008 presents
risk factors that may affect the Company’s future results.  Such risk
factors are supplemented by the following additional information:




Negative
developments in the workers’ compensation insurance industry would adversely
affect our financial condition and results of operations.




Although
we engage in other businesses, approximately 39% of our premium currently is
attributable to workers’ compensation insurance. As a result, negative
developments in the economic, competitive or regulatory conditions affecting the
workers’ compensation insurance industry could have an adverse effect on our
financial condition and results of operations. For example, if legislators in
one of our larger markets were to enact legislation to increase the scope or
amount of benefits for employees under workers’ compensation insurance policies
without related premium increases or loss control measures, this could
negatively affect the workers’ compensation insurance industry. Negative
developments in the workers’ compensation insurance industry could have a
greater effect on us than on more diversified insurance companies that also sell
many other types of insurance.




In
Florida, our second largest state for underwriting workers’ compensation
insurance premiums, insurance regulators set the premium rates we may charge.
The Florida insurance regulators may set rates below those that we require to
maintain profitability. For example, the Florida Office of Insurance Regulation
(OIR) approved overall average decreases in premium rates for all workers’
compensation insurance policies written by Florida licensed insurers totaling
approximately 37% between 2008 and 2009.  In October of 2009, the OIR
approved an additional 6.8% rate decrease effective for January 1,
2010.





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




In November 2007, the Board of
Directors authorized the Company to repurchase up to three million shares of
common stock in one or more transactions at prevailing prices in the open market
or in privately negotiated transactions. Management plans to utilize the
authority at such times and to the extent that management determines it is in
the best interests of the Company.  During the three months ended
September 30, 2009, the Company purchased 50,659 of its common shares as
part of its stock repurchase plan.The following table
summarizes the Company’s stock repurchases for the three-month period ended
September 30, 2009.





Period
                      
                      (a) Total
                        Number of
                        Shares (or
                        Units)
                        Purchased
                      
                      
                      (b) Average
                        Price Paid
                        Per Share (or
                        Unit)
                      
                      
                      (c) Total Number
                        of Shares (or
                        Units) Purchased
                        as Part of
                        Publicly
                        Announced Plan
                        or Program
                      
                      
                      (d) Maximum
                        Number (or
                        Approximate
                        Dollar Value) of
                        Shares (or Units)
                        that May Yet Be
                        Purchased Under
                        the Plan or
                        Program7/1
      – 7/31/2009
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      2,283,3728/1
      – 8/31/2009
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      2,283,3729/1
      - 9/30/2009
                      
                      
                      50,659
                      
                      
                      $
                      11.70
                      
                      
                      
                      776,287
                      
                      
                      
                      2,223,713


51





Item
3. Defaults Upon Senior Securities.





None.





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





None.





Item
5. Other Information.





None.





Item 6.   Exhibits




Exhibit
                  Number
                
                Description31.1
                
                Certification
      of the Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
      for the quarter ended September 30, 2009.31.2
                
                Certification
      of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
      for the quarter ended September 30, 2009.32.1
                
                Certification
      of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, for
      the quarter ended September 30, 2009.32.2
                
                Certification
      of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, for
      the quarter ended September 30,
2009.




52





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:
      November 9, 2009
                
                /s/ Barry
      D. ZyskindBarry
      D. Zyskind
                  President
      and Chief Executive Officer/s/ Ronald
      E. Pipoly, Jr.Ronald
      E. Pipoly, Jr.
                  Chief
      Financial Officer


53