UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)
 
 x
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the
quarterly period ended June 30, 2009
 
 o
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from ___________________ to ___________________





Commission
file no. 001-33143





AmTrust Financial Services,
Inc.


(Exact
name of registrant as specified in its charter)




Delaware
                  04-3106389(State
      or other jurisdiction of
                  (IRS
      Employer Identification No.)incorporation
      or organization)59 Maiden Lane, 6 th
      Floor, New York, New
    York
                  10038(Address
      of principal executive offices)
                  (Zip
      Code)





(212)
220-7120


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o





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 oNo o




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 o
              
              Accelerated
      filer xNon-accelerated
      filer o
              
              Smaller
      reporting company o(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
July 31, 2009, the Registrant had one class of Common Stock ($.01 par value), of
which 59,344,936 shares were issued and outstanding.





INDEX





PagePART
      I
                    FINANCIAL
      INFORMATIONItem
      1.
                    Unaudited
      Financial Statements:Condensed
      Consolidated Balance Sheets as of June 30, 2009 and December 31,
      2008
                    3Condensed
      Consolidated Statements of Income
                    4—
      Three and six months ended June 30, 2009 and 2008Condensed
      Consolidated Statements of Cash Flows
                    5—
      Three and six months ended June 30, 2009 and 2008Notes
      to Condensed Consolidated Financial Statements
                    6Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    28Item
      3.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    47Item
      4.
                    Controls
      and Procedures
                    49PART
      II
                    OTHER
      INFORMATIONItem
      1.
                    Legal
      Proceedings
                    50Item
      1A.
                    Risk
      Factors
                    50Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    50Item
      3.
                    Defaults
      Upon Senior Securities
                    50Item
      4.
                    Submission
      of Matters to a Vote of Security Holders
                    50Item
      5.
                    Other
      Information
                    51Item
      6.
                    Exhibits
                    51Signatures
                    52


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)
                            
                            June 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 $952,502;
      $988,779)
                            
                            
                            912,513
                            
                            
                            
                            910,376Equity
      securities, available-for-sale, at market value (cost $72,034;
      $84,090)
                            
                            
                            38,343
                            
                            
                            
                            28,828Short-term
      investments
                            
                            
                            189,088
                            
                            
                            
                            167,845Other
      investments
                            
                            
                            13,017
                            
                            
                            
                            13,457Total
      investments
                            
                            
                            1,152,961
                            
                            
                            
                            1,169,387Cash
      and cash equivalents
                            
                            
                            257,872
                            
                            
                            
                            192,053Funds
      held with reinsurance companies
                            
                            
                            110
                            
                            
                            
                            110Accrued
      interest and dividends
                            
                            
                            6,731
                            
                            
                            
                            9,028Premiums
      receivable, net
                            
                            
                            383,736
                            
                            
                            
                            419,577Note
      receivable – related party
                            
                            
                            22,026
                            
                            
                            
                            21,591Reinsurance
      recoverable
                            
                            
                            345,604
                            
                            
                            
                            363,608Reinsurance
      recoverable – related party
                            
                            
                            265,989
                            
                            
                            
                            221,214Prepaid
      reinsurance premium
                            
                            
                            135,668
                            
                            
                            
                            128,519Prepaid
      reinsurance premium – related party
                            
                            
                            235,852
                            
                            
                            
                            243,511Federal
      income tax receivable
                            
                            
                            4,529
                            
                            
                            
                            4,667Prepaid
      expenses and other assets
                            
                            
                            64,371
                            
                            
                            
                            72,221Deferred
      policy acquisition costs
                            
                            
                            137,481
                            
                            
                            
                            103,965Deferred
      income taxes
                            
                            
                            49,793
                            
                            
                            
                            76,910Property
      and equipment, net
                            
                            
                            14,413
                            
                            
                            
                            15,107Goodwill
                            
                            
                            51,468
                            
                            
                            
                            49,794Intangible
      assets
                            
                            
                            51,254
                            
                            
                            
                            52,631Total
      assets
                            
                            $
                            3,179,858
                            
                            
                            $
                            3,143,893LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Loss
      and loss expense reserves
                            
                            $
                            1,057,646
                            
                            
                            $
                            1,014,059Unearned
      premiums
                            
                            
                            767,842
                            
                            
                            
                            759,915Ceded
      reinsurance premiums payable
                            
                            
                            50,696
                            
                            
                            
                            59,990Ceded
      reinsurance premium payable – related party
                            
                            
                            89,624
                            
                            
                            
                            102,907Reinsurance
      payable on paid losses
                            
                            
                            4,780
                            
                            
                            
                            8,820Funds
      held under reinsurance treaties
                            
                            
                            305
                            
                            
                            
                            228Securities
      sold but not yet purchased, at market value
                            
                            
                            15,486
                            
                            
                            
                            22,608Securities
      sold under agreements to repurchase, at contract value
                            
                            
                            230,605
                            
                            
                            
                            284,492Accrued
      expenses and other current liabilities
                            
                            
                            144,688
                            
                            
                            
                            144,304Derivatives
      liabilities
                            
                            
                            2,320
                            
                            
                            
                            1,439Note
      payable – related party
                            
                            
                            167,975
                            
                            
                            
                            167,975Non
      interest bearing note – net of unamortized discount of ($1,843) and
      ($2,439)
                            
                            
                            20,657
                            
                            
                            
                            27,561Term
      loan
                            
                            
                            26,667
                            
                            
                            
                            33,333Junior
      subordinated debt
                            
                            
                            123,714
                            
                            
                            
                            123,714Total
      liabilities
                            
                            
                            2,703,005
                            
                            
                            
                            2,751,345Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $.01 par value; 100,000 shares authorized, 84,158 and 84,146 issued
      as of June 30, 2009 and December 31, 2008, respectively; 59,343 and 60,033
      outstanding as of June 30, 2009 and December 31, 2008,
      respectively
                            
                            
                            842
                            
                            
                            
                            842Preferred
      stock, $.01 par value; 10,000,000 shares authorized
                            
                            
                            —
                            
                            
                            
                            —Additional
      paid-in capital
                            
                            
                            541,328
                            
                            
                            
                            539,421Treasury
      stock at cost; 24,815 shares and 24,113 shares as of June 30, 2009 and
      December 31, 2008, respectively
                            
                            
                            (300,295
                            )
                            
                            
                            (294,803
                            )Accumulated
      other comprehensive income (loss)
                            
                            
                            (62,288
                            )
                            
                            
                            (105,815
                            )Retained
      earnings
                            
                            
                            297,266
                            
                            
                            
                            252,903Total
      stockholders’ equity
                            
                            
                            476,853
                            
                            
                            
                            392,548Total
      liabilities and stockholders’ equity
                            
                            $
                            3,179,858
                            
                            
                            $
                            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 June 30,
                                          
                                          
                                          Six Months Ended June 30,2009
                                          
                                          
                                          2008
                                          
                                          
                                          2009
                                          
                                          
                                          2008Revenues:Premium
      income:Net
      premium written
                                          
                                          $
                                          137,120
                                          
                                          
                                          $
                                          132,057
                                          
                                          
                                          $
                                          273,299
                                          
                                          
                                          $
                                          249,499Change
      in unearned premium
                                          
                                          
                                          (317
                                          )
                                          
                                          
                                          (16,112
                                          )
                                          
                                          
                                          (4,073
                                          )
                                          
                                          
                                          (36,141
                                          )Net
      premium earned
                                          
                                          
                                          136,803
                                          
                                          
                                          
                                          115,945
                                          
                                          
                                          
                                          269,226
                                          
                                          
                                          
                                          213,358Ceding
      commission – primarily related party
                                          
                                          
                                          32,278
                                          
                                          
                                          
                                          37,209
                                          
                                          
                                          
                                          59,869
                                          
                                          
                                          
                                          58,084Commission
      and fee income
                                          
                                          
                                          7,607
                                          
                                          
                                          
                                          8,375
                                          
                                          
                                          
                                          15,061
                                          
                                          
                                          
                                          14,662Net
      investment income
                                          
                                          
                                          13,582
                                          
                                          
                                          
                                          14,190
                                          
                                          
                                          
                                          27,171
                                          
                                          
                                          
                                          27,721Net
      realized gain (loss) on investments
                                          
                                          
                                          (7,709
                                          )
                                          
                                          
                                          (2,135
                                          )
                                          
                                          
                                          (16,947
                                          )
                                          
                                          
                                          (7,355
                                          )Other
      investment loss on managed assets
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (2,900
                                          )Total
      revenues
                                          
                                          
                                          182,561
                                          
                                          
                                          
                                          173,584
                                          
                                          
                                          
                                          354,380
                                          
                                          
                                          
                                          303,570Expenses:Loss
      and loss adjustment expense
                                          
                                          
                                          76,585
                                          
                                          
                                          
                                          74,134
                                          
                                          
                                          
                                          151,500
                                          
                                          
                                          
                                          129,299Acquisition
      costs and other underwriting expenses
                                          
                                          
                                          64,587
                                          
                                          
                                          
                                          57,824
                                          
                                          
                                          
                                          122,741
                                          
                                          
                                          
                                          98,701Other
      expense
                                          
                                          
                                          5,774
                                          
                                          
                                          
                                          2,504
                                          
                                          
                                          
                                          10,968
                                          
                                          
                                          
                                          7,298Total
      expenses
                                          
                                          
                                          146,946
                                          
                                          
                                          
                                          134,462
                                          
                                          
                                          
                                          285,209
                                          
                                          
                                          
                                          235,298Operating
      income from continuing operations
                                          
                                          
                                          35,615
                                          
                                          
                                          
                                          39,122
                                          
                                          
                                          
                                          69,171
                                          
                                          
                                          
                                          68,272Other
      income (expenses):Foreign
      currency gain (loss)
                                          
                                          
                                          611
                                          
                                          
                                          
                                          (15
                                          )
                                          
                                          
                                          644
                                          
                                          
                                          
                                          144Interest
      expense
                                          
                                          
                                          (4,007
                                          )
                                          
                                          
                                          (5,541
                                          )
                                          
                                          
                                          (8,178
                                          )
                                          
                                          
                                          (8,170
                                          )Total
      other expenses
                                          
                                          
                                          (3,396
                                          )
                                          
                                          
                                          (5,556
                                          )
                                          
                                          
                                          (7,534
                                          )
                                          
                                          
                                          (8,026
                                          )Income
      from continuing operations before provision for income taxes and minority
      interest
                                          
                                          
                                          32,219
                                          
                                          
                                          
                                          33,566
                                          
                                          
                                          
                                          61,637
                                          
                                          
                                          
                                          60,246Provision
      for income taxes
                                          
                                          
                                          5,448
                                          
                                          
                                          
                                          7,216
                                          
                                          
                                          
                                          10,704
                                          
                                          
                                          
                                          14,533Minority
      interest in net income of subsidiary
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (2,900
                                          )Net
      income
                                          
                                          
                                          26,771
                                          
                                          
                                          
                                          26,350
                                          
                                          
                                          
                                          50,933
                                          
                                          
                                          
                                          48,613Basic
      earnings per common share
                                          
                                          $
                                          0.45
                                          
                                          
                                          $
                                          0.44
                                          
                                          
                                          $
                                          0.86
                                          
                                          
                                          $
                                          0.81Diluted
      earnings per common share
                                          
                                          $
                                          0.45
                                          
                                          
                                          $
                                          0.43
                                          
                                          
                                          $
                                          0.85
                                          
                                          
                                          $
                                          0.80Dividends
      declared per common share
                                          
                                          $
                                          0.06
                                          
                                          
                                          $
                                          0.04
                                          
                                          
                                          $
                                          0.11
                                          
                                          
                                          $
                                          0.08





Three Months Ended June 30,
                          
                          
                          Six Months Ended June 30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Net
      Realized Gain (Loss) on Investments:Total
      other-than-temporary impairment losses
                          
                          $
                          (10,786
                          )
                          
                          $
                          (7,230
                          )
                          
                          $
                          (12,213
                          )
                          
                          $
                          (7,972
                          )Portion
      of loss recognized in other comprehensive income
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Net
      impairment losses recognized in earnings
                          
                          
                          (10,786
                          )
                          
                          
                          (7,230
                          )
                          
                          
                          (12,213
                          )
                          
                          
                          (7,972
                          )Other
      net realized gain (loss) on investments
                          
                          
                          3,077
                          
                          
                          
                          5,095
                          
                          
                          
                          (4,734
                          )
                          
                          
                          617Net
      realized investment gain (loss)
                          
                          $
                          (7,709
                          )
                          
                          $
                          (2,135
                          )
                          
                          $
                          (16,947
                          )
                          
                          $
                          (7,355
                          )





See
accompanying notes to unaudited  condensed consolidated financial
statements.


4


AmTrust Financial Services, Inc.


Consolidated
Statements of Cash Flows


(Unaudited)




Six Months Ended June 30,(in
      thousands)
                                    
                                    2009
                                    
                                    
                                    2008Cash flows from operating
      activities:Net
      income from continuing operations
                                    
                                    $
                                    50,933
                                    
                                    
                                    $
                                    48,613Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                                    
                                    
                                    4,415
                                    
                                    
                                    
                                    3,736Realized
      loss (gain) marketable securities
                                    
                                    
                                    4,734
                                    
                                    
                                    
                                    (616
                                    )Non-cash
      write-down of marketable securities
                                    
                                    
                                    12,213
                                    
                                    
                                    
                                    7,971Discount
      on notes payable
                                    
                                    
                                    596
                                    
                                    
                                    
                                    101Stock
      compensation expense
                                    
                                    
                                    1,812
                                    
                                    
                                    
                                    1,495Bad
      debt expense
                                    
                                    
                                    1,951
                                    
                                    
                                    
                                    1,237Foreign
      currency (gain)
                                    
                                    
                                    (644
                                    )
                                    
                                    
                                    (144
                                    )Changes
      in assets - (increase) decrease:Premium
      and notes receivable
                                    
                                    
                                    33,890
                                    
                                    
                                    
                                    (91,137
                                    )Reinsurance
      recoverable
                                    
                                    
                                    18,004
                                    
                                    
                                    
                                    (6,869
                                    )Reinsurance
      recoverable – related party
                                    
                                    
                                    (44,775
                                    )
                                    
                                    
                                    (64,889
                                    )Deferred
      policy acquisition costs, net
                                    
                                    
                                    (33,516
                                    )
                                    
                                    
                                    (9,950
                                    )Prepaid
      reinsurance premiums
                                    
                                    
                                    (7,149
                                    )
                                    
                                    
                                    (34,502
                                    )Prepaid
      reinsurance premiums – related party
                                    
                                    
                                    7,659
                                    
                                    
                                    
                                    (111,583
                                    )Prepaid
      expenses and other assets
                                    
                                    
                                    9,850
                                    
                                    
                                    
                                    (4,591
                                    )Deferred
      tax asset
                                    
                                    
                                    27,117
                                    
                                    
                                    
                                    (11,738
                                    )Changes
      in liabilities - increase (decrease):Reinsurance
      premium payable
                                    
                                    
                                    (9,294
                                    )
                                    
                                    
                                    (55,555
                                    )Reinsurance
      premium payable – related party
                                    
                                    
                                    (13,283
                                    )
                                    
                                    
                                    (28,436
                                    )Loss
      and loss expense reserve
                                    
                                    
                                    43,587
                                    
                                    
                                    
                                    47,631Unearned
      premiums
                                    
                                    
                                    7,927
                                    
                                    
                                    
                                    184,553Funds
      held under reinsurance treaties
                                    
                                    
                                    77
                                    
                                    
                                    
                                    50,804Accrued
      expenses and other current liabilities
                                    
                                    
                                    (3,270
                                    )
                                    
                                    
                                    (3,981
                                    )Net
      cash provided by operating activities
                                    
                                    
                                    112,834
                                    
                                    
                                    
                                    90,132Cash
      flows from investing activities:Net
      sales (purchases) of securities with fixed maturities
                                    
                                    
                                    36,935
                                    
                                    
                                    
                                    (237,556
                                    )Net
      (purchases) sales of equity securities
                                    
                                    
                                    (4,615
                                    )
                                    
                                    
                                    14,234Net
      sales of other investments
                                    
                                    
                                    441
                                    
                                    
                                    
                                    12,680Note
      receivable - related party
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (2,000
                                    )Acquisition
      of subsidiary, net of cash obtained
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (55,883
                                    )Acquisition
      of renewal rights and goodwill
                                    
                                    
                                    (910
                                    )
                                    
                                    
                                    (963
                                    )Purchase
      of property and equipment
                                    
                                    
                                    (1,833
                                    )
                                    
                                    
                                    (1,214
                                    )Net
      cash provided by (used in) investing activities
                                    
                                    
                                    30,018
                                    
                                    
                                    
                                    (270,702
                                    )Cash
      flows from financing activities:Repurchase
      agreements, net
                                    
                                    
                                    (53,887
                                    )
                                    
                                    
                                    185,909Term
      loan borrowing
                                    
                                    
                                    -
                                    
                                    
                                    
                                    40,000Term
      loan payment
                                    
                                    
                                    (6,666
                                    )
                                    
                                    
                                    -Non-interest
      bearing note payment
                                    
                                    
                                    (7,500
                                    )
                                    
                                    
                                    -Debt
      financing fees
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (52
                                    )Repurchase
      of common stock
                                    
                                    
                                    (5,492
                                    )
                                    
                                    
                                    -Stock
      option exercise
                                    
                                    
                                    95
                                    
                                    
                                    
                                    307Dividends
      distributed on common stock
                                    
                                    
                                    (5,970
                                    )
                                    
                                    
                                    (4,800
                                    )Net
      cash (used in) provided by financing activities
                                    
                                    
                                    (79,420
                                    )
                                    
                                    
                                    221,364Effect
      of exchange rate changes on cash
                                    
                                    
                                    2,387
                                    
                                    
                                    
                                    4,955Net increase
      in cash and cash equivalents
                                    
                                    
                                    65,819
                                    
                                    
                                    
                                    45,749Cash
      and cash equivalents, beginning of the period
                                    
                                    
                                    192,053
                                    
                                    
                                    
                                    145,337Cash
      and cash equivalents, end of the period
                                    
                                    $
                                    257,872
                                    
                                    
                                    $
                                    191,086Supplemental
      Cash Flow Information:Income
      tax payments
                                    
                                    $
                                    9,098
                                    
                                    
                                    $
                                    18,125Interest
      payments on debt
                                    
                                    
                                    8,296
                                    
                                    
                                    
                                    7,125





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 six
months ended June 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 (“SFAS 168”).  SFAS
168 will serve as the single source of authoritative non-governmental U.S.
Generally Accepted Accounting Principles.  Accordingly, all other
accounting literature not included is considered non-authoritative.  SFAS
168 is effective on a prospective basis for interim and annual periods ending
after September 15, 2009.  The Company does not expect that the
adoption of SFAS 168 will impact the Company’s results of operations, financial
position or liquidity.





In June 2009, the FASB issued SFAS
No. 166,Accounting for
Transfers of Financial Assets, an Amendment of FASB Statement
No. 140 (“SFAS 166”).  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.





In June 2009, the FASB issued SFAS
No. 167,Amendments
to FASB Interpretation
No. 46(R)(“SFAS 167”). SFAS 167 amends
FIN 46(R) to require 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.  SFAS 167 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.  SFAS 167 amends FIN 46(R) to require additional
disclosures about a company’s involvement in variable interest entities and an
ongoing assessment of whether a company is the primary beneficiary.  SFAS
167 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 167 will have a material
effect on its results of operations, financial position or
liquidity.





6





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. The provisions of SFAS 165 are effective for interim
and annual reporting periods ended after June 15, 2009.  The adoption
of SFAS 165 on June 30, 2009 had no effect on the Company’s results of
operations, financial position or liquidity.





In April
2009, the FASB issued FASB Staff Position (“FSP”) No. 115-2 and FSP No. 124-2,
“Recognition and Presentation
of Other-Than-Temporary Impairments” (“FSP 115-2/124-2”).  FSP 115-2
modifies the existing other-than-temporary impairment guidance to require the
recognition of an other-than-temporary impairment when an entity has the intent
to sell a debt security or when it is more likely than not an entity will be
required to sell the debt security before its anticipated
recovery.  Additionally, FSP 115-2 changes the presentation and amount
of other-than-temporary losses recognized in the income statement for instances
when the Company determines that there is a credit loss on a debt security but
it is more likely than not that the entity will not be required to sell the
security prior to the anticipated recovery of its remaining cost basis. 
For these debt securities, the amount representing the credit loss will be
reported as an impairment loss in the Consolidated Statement of Income and the
amount related to all other factors will be reported in accumulated other
comprehensive income.  FSP 115-2 also requires the presentation of
other-than-temporary impairments separately from realized gains and losses on
the face of the income statement.




In
addition to the changes in measurement and presentation, FSP 115-2 is intended
to enhance the existing disclosure requirements for other-than-temporary
impairments and requires all disclosures related to other-than-temporary
impairments in both interim and annual periods.




The
provisions of FSP 115-2 are effective for interim periods ended after
June 15, 2009, with early adoption permitted for periods ended after
March 15, 2009.  The Company adopted FSP 115-2 on April 1,
2009.  The adoption did not have a material impact on its financial
condition or results of operations.





In April 2009, the FASB issued
FSP No. 157-4, “Determining Fair
Value When Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions that are Not
Orderly” (“FSP 157-4”).
  FSP 157-4 provides guidance for determining when a transaction is
not orderly and for estimating fair value in accordance with FASB Statement
No. 157,Fair
Value Measurements(“SFAS 157”), when there has been
a significant decrease in the volume and level of activity for an asset or
liability.  FSP 157-4 does not change the measurement objective of SFAS 157
which is “the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the
measurement date.”





FSP 157-4
requires the disclosure of the inputs and valuation techniques used, as well as
any changes in valuation techniques and inputs used during the period, to
measure fair value in interim and annual periods. In addition, FSP 157-4
requires that the presentation of the fair value hierarchy be presented by major
security type as described in FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities   (as amended by FSP
115-2 and FSP 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments ).




The
provisions of FSP 157-4 are effective for interim periods ended after
June 15, 2009, with early adoption permitted for periods ended after
March 15, 2009.  The Company adopted FSP 157-4 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
FSP 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments” (“FSP 107-1 and APB 28-1”).   FSP 107-1
and APB 28-1 require disclosures about fair value of financial instruments in
interim and annual financial statements.   FSP 107-1 and APB 28-1 are
effective for periods ended after June 15, 2009, with early adoption permitted
for periods ended after March 15, 2009.  The adoption of the FSP 107-1
did not have a material impact on the Company’s financial condition or results
of operations.





7





In June
2008, the FASB issued FSP No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities”
(“FSP 03-6-1”). FSP 03-6-1 clarifies that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and are to be included in the
computation of earnings per share under the two-class method described in
Statement of Financial Accounting Standards No. 128 (“SFAS 128”), “Earnings Per Share” This FSP
is effective for financial statements issued for fiscal years which began after
December 15, 2008 and requires all presented prior-period earnings per share
data to be adjusted retrospectively.  FSP 03-6-1 did not have a
material impact on the Company’s financial condition or results of
operations.




In April
2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that
should be considered in developing assumptions about renewals or extensions used
in estimating the useful life of a recognized intangible asset under Statement
No. 142, “ Goodwill and Other
intangible Assets ” (“SFAS 142”). This standard is intended to improve
the consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair value of
the asset under Statement No. 141(R) and other GAAP. FSP 142-3 is effective for
financial statements issued for fiscal years which began after December 15,
2008. The measurement provisions of this standard applies only to intangible
assets of the Company acquired after the effective date.  FSP 142-3
did not have a material impact on the Company’s consolidated financial position,
results of operations or cash flows.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires
companies with derivative instruments to disclose information that should enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FASB Statement No. 133 “Accounting for Derivative
Instruments and Hedging Activities” and how derivative instruments and
related hedged items affect a company’s financial position, financial
performance and cash flows.  SFAS 161 is effective for financial
statements issued for fiscal years and interim periods which began after
November 15, 2008.  SFAS 161 did not have a material
impact   on the Company’s consolidated financial position,
results of operations or cash flows.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. (“SFAS
160”) SFAS 160 amends Accounting Research Bulletin No. 51 to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. In addition, it
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as a component of
equity in the consolidated statements. SFAS 160 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.  SFAS 160 did not have a material impact on
the Company's consolidated financial position, results of operations or
cash flows.




In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141(R)”). SFAS 141(R) establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree and recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase.   SFAS 141(R) also sets
forth the disclosures required to be made in the financial statements to
evaluate the nature and financial effects of the business combination. SFAS
141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008.  SFAS 141(R) did not have a material
impact on the Company’s consolidated financial position, results of operations
or cash flows.




In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
(“SFAS 157”) which defines fair value, establishes guidelines for measuring fair
value and expands disclosures regarding fair value
measurements.  SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. Pursuant to FASB FSP 157-2, issued in February,
2008, which delayed the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), SFAS 157 became effective for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. These
nonfinancial items include assets and liabilities such as reporting units
measured at fair value in a goodwill impairment test and nonfinancial assets
acquired and liabilities assumed in a business combination.  The
Company applied the provisions of SFAS 157 to the nonfinancial assets,
nonfinancial liabilities and reporting units within the scope of SFAS 157 on
January 1, 2009.  The Company’s adoption of SFAS 157 did not
materially impact the fair values of its nonfinancial assets, nonfinancial
liabilities and reporting units within the scope of this FSP.





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 June 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
                  
                  
                  $
                  -
                  
                  
                  $
                  (1,803
                  )
                  
                  $
                  3,463Common
      stock
                  
                  
                  66,768
                  
                  
                  
                  1,721
                  
                  
                  
                  (33,609
                  )
                  
                  
                  34,880U.S.
      treasury securities
                  
                  
                  14,738
                  
                  
                  
                  529
                  
                  
                  
                  (59
                  )
                  
                  
                  15,208U.S.
      government agencies
                  
                  
                  7,693
                  
                  
                  
                  606
                  
                  
                  
                  -
                  
                  
                  
                  8,299Municipal
      bonds
                  
                  
                  27,835
                  
                  
                  
                  851
                  
                  
                  
                  (415
                  )
                  
                  
                  28,271Corporate
      bonds:Finance
                  
                  
                  321,895
                  
                  
                  
                  1,873
                  
                  
                  
                  (46,868
                  )
                  
                  
                  276,900Industrial
                  
                  
                  115,591
                  
                  
                  
                  4,110
                  
                  
                  
                  (12,826
                  )
                  
                  
                  106,875Utilities
                  
                  
                  11,839
                  
                  
                  
                  773
                  
                  
                  
                  (446
                  )
                  
                  
                  12,166Commercial
      mortgage backed securities
                  
                  
                  3,504
                  
                  
                  
                  4
                  
                  
                  
                  (146
                  )
                  
                  
                  3,362Residential
      mortgage backed securities:Agency
      backed
                  
                  
                  445,650
                  
                  
                  
                  13,600
                  
                  
                  
                  (1,502
                  )
                  
                  
                  457,748Non-agency
      backed
                  
                  
                  35
                  
                  
                  
                  -
                  
                  
                  
                  (15
                  )
                  
                  
                  20Asset-backed
      securities
                  
                  
                  3,722
                  
                  
                  
                  120
                  
                  
                  
                  (178
                  )
                  
                  
                  3,664$
                  1,024,536
                  
                  
                  $
                  24,187
                  
                  
                  $
                  (97,867
                  )
                  
                  $
                  950,856





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 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 six months ended June 30, 2009 and 2008 were
derived from the following sources:





Three Months Ended June 30,
                                
                                
                                Six Months Ended June 30,(Amounts
      in thousands)
                                
                                2009
                                
                                
                                2008
                                
                                
                                2009
                                
                                
                                2008Fixed
      maturities
                                
                                $
                                11,582
                                
                                
                                $
                                12,183
                                
                                
                                $
                                23,464
                                
                                
                                $
                                23,066Equity
      securities
                                
                                
                                163
                                
                                
                                
                                274
                                
                                
                                
                                351
                                
                                
                                
                                805Cash
      and cash equivalents
                                
                                
                                1,768
                                
                                
                                
                                3,534
                                
                                
                                
                                3,572
                                
                                
                                
                                6,869Loss
      on equity investment
                                
                                
                                (217
                                )
                                
                                
                                (561
                                )
                                
                                
                                (619
                                )
                                
                                
                                (561
                                )Note
      receivable - related party
                                
                                
                                821
                                
                                
                                
                                980
                                
                                
                                
                                1,633
                                
                                
                                
                                1,56914,117
                                
                                
                                
                                16,410
                                
                                
                                
                                28,401
                                
                                
                                
                                31,748Less:
      Investment expenses and interest expense on securities sold under
      agreement to repurchase
                                
                                
                                535
                                
                                
                                
                                2,220
                                
                                
                                
                                1,230
                                
                                
                                
                                4,027$
                                13,582
                                
                                
                                $
                                14,190
                                
                                
                                $
                                27,171
                                
                                
                                $
                                27,721





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 25% of cost basis.





Based on
recent guidance in 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 six months ended June 30, 2009 and 2008 are
presented in the table below:





Three Months Ended June 30,
                        
                        
                        Six Months Ended June 30,(Amounts
      in thousands)
                        
                        2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Equity
      securities
                        
                        $
                        8,761
                        
                        
                        $
                        7,230
                        
                        
                        $
                        10,188
                        
                        
                        $
                        7,972Fixed
      maturities
                        
                        
                        2,025
                        
                        
                        
                        -
                        
                        
                        
                        2,025
                        
                        
                        
                        -$
                        10,786
                        
                        
                        $
                        7,230
                        
                        
                        $
                        12,213
                        
                        
                        $
                        7,972




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 June 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
                                      
                                      $
                                      8,368
                                      
                                      
                                      $
                                      (5,608
                                      )
                                      
                                      
                                      58
                                      
                                      
                                      $
                                      21,571
                                      
                                      
                                      $
                                      (29,804
                                      )
                                      
                                      
                                      301
                                      
                                      
                                      $
                                      29,939
                                      
                                      
                                      $
                                      (35,412
                                      )U.S.
      treasury securities
                                      
                                      
                                      1,012
                                      
                                      
                                      
                                      (59
                                      )
                                      
                                      
                                      3
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,012
                                      
                                      
                                      
                                      (59
                                      )U.S.
      government agencies
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Municipal
      bonds
                                      
                                      
                                      13,082
                                      
                                      
                                      
                                      (333
                                      )
                                      
                                      
                                      5
                                      
                                      
                                      
                                      1,860
                                      
                                      
                                      
                                      (82
                                      )
                                      
                                      
                                      2
                                      
                                      
                                      
                                      14,942
                                      
                                      
                                      
                                      (415
                                      )Corporate
      bonds:Finance
                                      
                                      
                                      29,953
                                      
                                      
                                      
                                      (1,337
                                      )
                                      
                                      
                                      22
                                      
                                      
                                      
                                      176,914
                                      
                                      
                                      
                                      (45,531
                                      )
                                      
                                      
                                      54
                                      
                                      
                                      
                                      206,867
                                      
                                      
                                      
                                      (46,868
                                      )Industrial
                                      
                                      
                                      13,658
                                      
                                      
                                      
                                      (3,963
                                      )
                                      
                                      
                                      15
                                      
                                      
                                      
                                      30,807
                                      
                                      
                                      
                                      (8,863
                                      )
                                      
                                      
                                      16
                                      
                                      
                                      
                                      44,465
                                      
                                      
                                      
                                      (12,826
                                      )Utilities
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2,642
                                      
                                      
                                      
                                      (446
                                      )
                                      
                                      
                                      3
                                      
                                      
                                      
                                      2,642
                                      
                                      
                                      
                                      (446
                                      )Commercial
      mortgage backed securities
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2,469
                                      
                                      
                                      
                                      (146
                                      )
                                      
                                      
                                      5
                                      
                                      
                                      
                                      2,469
                                      
                                      
                                      
                                      (146
                                      )Residential
      mortgage backed securities:Agency
      backed
                                      
                                      
                                      5,639
                                      
                                      
                                      
                                      (45
                                      )
                                      
                                      
                                      1
                                      
                                      
                                      
                                      164,170
                                      
                                      
                                      
                                      (1,457
                                      )
                                      
                                      
                                      23
                                      
                                      
                                      
                                      169,809
                                      
                                      
                                      
                                      (1,502
                                      )Non-agency
      backed
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      20
                                      
                                      
                                      
                                      (15
                                      )
                                      
                                      
                                      1
                                      
                                      
                                      
                                      20
                                      
                                      
                                      
                                      (15
                                      )Asset-backed
      securities
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      176
                                      
                                      
                                      
                                      (178
                                      )
                                      
                                      
                                      1
                                      
                                      
                                      
                                      176
                                      
                                      
                                      
                                      (178
                                      )Total
      temporarily impaired
                                      
                                      $
                                      71,712
                                      
                                      
                                      $
                                      (11,345
                                      )
                                      
                                      
                                      104
                                      
                                      
                                      $
                                      400,629
                                      
                                      
                                      $
                                      (86,522
                                      )
                                      
                                      
                                      406
                                      
                                      
                                      $
                                      472,341
                                      
                                      
                                      $
                                      (97,867
                                      )





There are 510 securities at June 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 June 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
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              26,667
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              26,667Credit
      default swaps
                                              
                                              
                                              —
                                              
                                              
                                              
                                              12,000
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              12,000Contracts
      for differences
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2,066
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2,066$
                                              —
                                              
                                              
                                              $
                                              38,667
                                              
                                              
                                              $
                                              2,066
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              40,733








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


The
Company records changes in valuation on its derivative positions as a component
of net realized gains and losses.  The Company records changes in
valuation on its interest rate swap related to its term loan (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 June 30, 2009 was $14,120 for corporate bonds and $1,366 for equity
securities. These transactions result in off-balance sheet risk, as the
Company’s ultimate cost to satisfy the delivery of securities sold, not yet
purchased, may exceed the amount reflected at June 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 June 30, 2009, there were $230,605 principal
amount outstanding at interest rates between 0.40% and
0.60%.  Interest expense associated with these repurchase agreements
for the three months ended June 30, 2009 and 2008 was $535 and $2,219,
respectively, of which $38 was accrued as of June 30, 2009.  Interest
expense associated with the repurchase agreements for the six months ended June
30, 2009 and 2008 was $1,230 and $4,004, respectively.  The Company
has approximately $235,000 of collateral pledged in support of these
agreements.




4.
              Fair
      Value of Financial
Instruments




The fair
value of a financial instrument is the estimated amount at which the instrument
could be exchanged in an orderly transaction between unrelated parties. The
estimated fair value of a financial instrument may differ from the amount that
could be realized if the security was sold in a forced transaction.
Additionally, valuation of fixed maturity investments is more subjective when
markets are less liquid due to lack of market based inputs, which may increase
the potential that the estimated fair value of an investment is not reflective
of the price at which an actual transaction could occur.




For
investments that have quoted market prices in active markets, the Company uses
the quoted market prices as fair value and includes these prices in the amounts
disclosed in the Level 1 hierarchy. The Company receives the quoted market
prices from 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. The
Company will challenge any prices for its investments which are considered to
not represent fair value. If quoted market prices and an estimate from pricing
services are unavailable, the Company produces an estimate of fair value based
on dealer quotations of the bid price for recent activity in positions with the
same or similar characteristics to that being valued or through consensus
pricing of a pricing service. Depending on the level of observable inputs, the
Company will then determine if the estimate is Level 2 or Level 3
hierarchy.




Fixed
Maturities.  The Company utilized a pricing service to estimate
fair value measurements for approximately 99% of its fixed maturities. The
pricing service utilizes market quotations for fixed maturity securities that
have quoted market prices in active markets. Since fixed maturities other than
U.S. treasury securities generally do not trade on a daily basis, the pricing
service prepares estimates of fair value measurements using relevant market
data, benchmark curves, sector groupings and matrix pricing. The pricing service
utilized by the Company has indicated 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 0.6%, of investments which were not valued by
a pricing service. Typically, the Company estimates the fair value of these
fixed maturities using a pricing matrix with some unobservable inputs that are
significant to the valuation. Due to the limited amount of unobservable market
information, the Company includes the fair value estimates for these investments
in Level 3. At June, 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. Derivatives, as
defined in SFAS 133, are financial arrangements among two or more parties with
returns linked to an underlying equity, debt, commodity, asset, liability,
foreign exchange rate or other index. Unless subject to a scope exclusion, the
Company carries all derivatives on the consolidated balance sheet at fair value.
The changes in fair value of the derivative are presented as a component of
operating income. The Company primarily utilizes the following types of
derivatives at any one time:




§
            Credit default swap contracts
      (“CDS”), which, are valued in accordance with the terms of each contract
      based on the current interest rate spreads and credit risk of the
      referenced obligation of the underlying issuer and interest accrual
      through valuation date. Fair values are based on the price of the
      underlying bond on the valuation date. The Company may be required to
      deposit collateral with the counterparty if the market values of the
      contract fall below a stipulated amount in the contract. Such amounts are
      limited to the total equity of the
  account;





§
            Interest rate swaps (“IS”), which
      are valued in terms of the contract between the Company and the issuer of
      the swaps, are based on the difference between the stated floating rate of
      the underlying indebtedness, 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 June 30, 2009:





(Amounts
      in thousands)
                      
                      Total
                      
                      
                      Level 1
                      
                      
                      Level 2
                      
                      
                      Level 3Assets:Fixed
      securities
                      
                      $
                      912,514
                      
                      
                      $
                      15,208
                      
                      
                      $
                      891,566
                      
                      
                      $
                      5,740Equity
      securities
                      
                      
                      38,343
                      
                      
                      
                      38,343
                      
                      
                      
                      -
                      
                      
                      
                      -Other
      investments
                      
                      
                      13,017
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      13,017$
                      963,874
                      
                      
                      $
                      53,551
                      
                      
                      $
                      891,566
                      
                      
                      $
                      18,757Liabilities:Securities
      sold but not yet purchased, market
                      
                      $
                      15,486
                      
                      
                      $
                      1,366
                      
                      
                      $
                      14,120
                      
                      
                      $
                      -Securities
      sold under agreements to repurchase, at contract value
                      
                      
                      230,605
                      
                      
                      
                      -
                      
                      
                      
                      230,605
                      
                      
                      
                      -Derivatives
                      
                      
                      2,320
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,320$
                      248,411
                      
                      
                      $
                      1,366
                      
                      
                      $
                      244,725
                      
                      
                      $
                      2,320





13





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




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





(Amounts in
      thousands)
                            
                            Assets
                            
                            
                            Liabilities
                            
                            
                            TotalSix
      months ended June 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
                            )
                            
                            
                            (123
                            )
                            
                            
                            (162
                            )Other
      comprehensive loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Purchases,
      sales, issuances and settlements, net
                            
                            
                            (2,556
                            )
                            
                            
                            (758
                            )
                            
                            
                            (3,314
                            )Net
      transfers into (out of) Level 3
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Ending
      balance as of June 30, 2009
                            
                            $
                            18,757
                            
                            
                            $
                            (2,320
                            )
                            
                            $
                            16,437


5.
              Debt







Junior
Subordinated Debt





The Company established four special
purpose trusts for the purpose of issuing trust preferred securities. The
proceeds from such issuances, together with the proceeds of the related
issuances of common securities of the trusts, were invested by the trusts in
junior subordinated debentures issued by the Company. As a result of FIN 46, the
Company does not consolidate such special purpose trusts, as the Company is not
considered to be the primary beneficiary under this accounting standard. The
equity investment, totaling $3,714 as of June 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.





14





The table
below summarizes the Company’s trust preferred securities as of June 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.


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


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





The Company recorded $2,552 and $2,530
of interest expense for the three months ended June 30, 2009 and 2008,
respectively, and $5,104 and $5,060 of interest expense for the six months ended
June 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 rate and
is based on a Eurodollar rate plus an applicable margin. The Eurodollar rate is
a periodic fixed rate equal to the London Interbank Offered Rate “LIBOR” plus a
margin rate, which was 185 basis points. As of June 30, 2009 the interest rate
was 2.45%. The Company recorded $385 and $151 of interest expense for the three
months ended June 30, 2009 and 2008, respectively, and $842 and $151 of interest
expense for the six months ended June 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 was 185 basis points. The variable rate
is reset every three months, at which time the interest will be settled and will
be recognized as adjustments to interest expense. The Company recorded interest
expense of $164 and $0 for the three months ended June 30, 2009 and 2008,
respectively, and $439 and $0 for the six months ended June 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 beginning on June 1, 2009
through June 1, 2012, 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 $283 and $101 of amortized discount on the note in
its results of operations for the three months ended June 30, 2009 and 2008,
respectively and $596 and $101 for the six months ended June 30, 2009 and 2008,
respectively. The note’s carrying value at June 30, 2009 was
$20,657.





15




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 June 30, 2009 there was no
outstanding balance on the line of credit. The Company has outstanding letters
of credit in place at June 30, 2009 for $24,075 that reduced the availability on
the line of credit to $5,925 as of June 30, 2009.





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
                                    
                                    
                                    6,667
                                    
                                    
                                    
                                    13,333
                                    
                                    
                                    
                                    6,667
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Promissory
      note
                                    
                                    
                                    —
                                    
                                    
                                    
                                    6,258
                                    
                                    
                                    
                                    7,037
                                    
                                    
                                    
                                    7,362
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Total
                                    
                                    $
                                    6,667
                                    
                                    
                                    $
                                    19,591
                                    
                                    
                                    $
                                    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 six months ended June 30, 2009 and
2008:





Three Months Ended June 30,
                          
                          
                          Six Months Ended June 30,(Amounts
      in thousands)
                          
                          2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Policy
      acquisition expenses
                          
                          $
                          34,776
                          
                          
                          $
                          24,678
                          
                          
                          $
                          64,024
                          
                          
                          $
                          43,677Salaries
      and benefits
                          
                          
                          20,660
                          
                          
                          
                          17,602
                          
                          
                          
                          39,941
                          
                          
                          
                          29,646Other
      insurance general and administrative expense
                          
                          
                          9,151
                          
                          
                          
                          15,544
                          
                          
                          
                          18,776
                          
                          
                          
                          25,378$
                          64,587
                          
                          
                          $
                          57,824
                          
                          
                          $
                          122,741
                          
                          
                          $
                          98,701




16





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 six months ended June 30, 2009 and
2008:





Three Months Ended June 30,
                                  
                                  
                                  Six Months Ended June 30,(Amounts
      in thousands)
                                  
                                  2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008Net
      income available to common shareholders
                                  
                                  $
                                  26,771
                                  
                                  
                                  $
                                  26,350
                                  
                                  
                                  $
                                  50,933
                                  
                                  
                                  $
                                  48,613Weighted
      average number of common shares outstanding – basic
                                  
                                  
                                  59,338
                                  
                                  
                                  
                                  59,989
                                  
                                  
                                  
                                  59,551
                                  
                                  
                                  
                                  59,979Potentially
      dilutive shares:Dilutive
      shares from stock-based compensation
                                  
                                  
                                  397
                                  
                                  
                                  
                                  1,012
                                  
                                  
                                  
                                  312
                                  
                                  
                                  
                                  981Weighted
      average number of common shares outstanding – dilutive
                                  
                                  
                                  59,735
                                  
                                  
                                  
                                  61,001
                                  
                                  
                                  
                                  59,863
                                  
                                  
                                  
                                  60,960Basic
      earnings per common share
                                  
                                  $
                                  0.45
                                  
                                  
                                  $
                                  0.44
                                  
                                  
                                  $
                                  0.86
                                  
                                  
                                  $
                                  0.81Diluted
      earnings per common share
                                  
                                  $
                                  0.45
                                  
                                  
                                  $
                                  0.43
                                  
                                  
                                  $
                                  0.85
                                  
                                  
                                  $
                                  0.80





As of
June 30, 2009, there were approximately 1,345 of anti-dilutive securities
excluded from diluted earnings per share.




During
the three months ended March 31, 2009, the Company repurchased approximately 702
of its common shares for approximately $5,492. The effect of the purchase,
reduced the weighted average shares outstanding by approximately 310 shares for
the six months ended June 30, 2009.




17





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 SFAS No. 123(R) “Share-Based Payment” for its share-based payments
based on the fair value of the awards. The fair value of each option grant is
separately estimated for each vesting date. The fair value of each option is
amortized into compensation expense on a straight-line basis between the grant
date for the award and each vesting date. The Company has estimated the fair
value of all stock option awards as of the date of the grant by applying the
Black-Scholes-Merton multiple-option pricing valuation model. The application of
this valuation model involves assumptions that are judgmental and highly
sensitive in the determination of compensation expense. SFAS 123(R)’s fair value
valuation method resulted in share-based expense (a component of salaries and
benefits) in the amount of approximately $1,141 and $737 related to stock
options for the three months ended June 30, 2009 and 2008, respectively and
$1,812 and $1,495 for the six months ended June 30, 2009 and 2008,
respectively.





The
following schedule shows all options granted, exercised, expired and exchanged
under the 2005 Plan for the six months ended June 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
                        
                        
                        423
                        
                        
                        
                        8.99-11.40
                        
                        
                        
                        50
                        
                        
                        
                        15.02Exercised
                        
                        
                        (13
                        )
                        
                        
                        7.50
                        
                        
                        
                        (41
                        )
                        
                        
                        7.50Cancelled
      or terminated
                        
                        
                        (86
                        )
                        
                        
                        7.50-14.55
                        
                        
                        
                        (15
                        )
                        
                        
                        7.50Outstanding
      end of period
                        
                        
                        4,052
                        
                        
                        $
                        7.00-15.02
                        
                        
                        
                        3,120
                        
                        
                        $
                        7.00-15.02




The
weighted average grant date fair value of options granted during the six months
ended June 30, 2009 and 2008 was $2.94 and $4.84, respectively. As of June 30,
2009 there was approximately $6,127 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 June 30,
                          
                          
                          Six Months Ended June 30,(Amounts
      in thousands)
                          
                          2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Net
      income
                          
                          $
                          26,771
                          
                          
                          $
                          26,350
                          
                          
                          $
                          50,933
                          
                          
                          $
                          48,613Unrealized
      holding gain (loss)
                          
                          
                          40,967
                          
                          
                          
                          (13,329
                          )
                          
                          
                          25,997
                          
                          
                          
                          (30,416
                          )Reclassification
      adjustment
                          
                          
                          5,993
                          
                          
                          
                          8,367
                          
                          
                          
                          14,407
                          
                          
                          
                          8,232Foreign
      currency translation
                          
                          
                          3,963
                          
                          
                          
                          (268
                          )
                          
                          
                          3,123
                          
                          
                          
                          620Comprehensive
      income (loss)
                          
                          $
                          77,694
                          
                          
                          $
                          21,120
                          
                          
                          $
                          94,460
                          
                          
                          
                          27,049





18





10.
            Income
    Taxes





Income
tax expense (benefit) for the three months ended June 30, 2009 and 2008 was
$5,448 and $7,216, respectively, and $10,704 and $14,533 for the six months
ended June 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 June 30,
                            
                            
                            Six Months Ended June 30,(Amounts
      in thousands)
                            
                            2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Income
      from continuing operations before provision for income taxes and minority
      interest
                            
                            $
                            32,219
                            
                            
                            $
                            33,566
                            
                            
                            $
                            61,637
                            
                            
                            $
                            60,246Less:
      minority interest
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (2,900
                            )Income
      from continuing operations after minority interest before provision for
      income taxes
                            
                            $
                            32,219
                            
                            
                            $
                            33,566
                            
                            
                            $
                            61,637
                            
                            
                            $
                            63,146Income
      taxes at statutory rates
                            
                            $
                            11,277
                            
                            
                            $
                            11,714
                            
                            
                            $
                            21,573
                            
                            
                            $
                            22,101Effect
      of income not subject to U.S. taxation
                            
                            
                            (4,675
                            )
                            
                            
                            (4,876
                            )
                            
                            
                            (9,888
                            )
                            
                            
                            (7,868
                            )Other,
      net
                            
                            
                            (1,154
                            )
                            
                            
                            378
                            
                            
                            
                            (981
                            )
                            
                            
                            300Provision
      for income taxes as shown on the consolidated statements of
      earnings
                            
                            $
                            5,448
                            
                            
                            $
                            7,216
                            
                            
                            $
                            10,704
                            
                            
                            $
                            14,533GAAP
      effective tax rate
                            
                            
                            16.9
                            %
                            
                            
                            21.5
                            %
                            
                            
                            17.4
                            %
                            
                            
                            23.0
                            %





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 June 30, 2009, the
Company has approximately $1,520 of accrued interest and penalties related to
FIN 48 unrecognized tax benefits.




During
2007, the Company, while performing a review of the income tax return filed with
the Internal Revenue Service (“IRS”) for calendar year ending December 31, 2006,
determined an issue existed per FIN 48 guidelines concerning its position
related to accrued market discount. The Company reverses accrued market discount
income recognized for book purposes when calculating taxable income. The
reversal results from the accrued market discount income recognized by the
insurance subsidiaries for bonds and other investments. The Company
inadvertently reversed the amount related to commercial paper investments on the
2006 income tax return. The Company has estimated the potential liability to be
approximately $942 (including $125 for penalties and interest) and has reflected
this position, per FIN 48 guidelines, in the consolidated financial
statements.





During
2006, the IRS completed an audit of the Company’s subsidiaries, Associated
Industries Insurance Services, Inc. (“AIIS”) and Associated Industries Insurance
Company’s (“AIIC”) (collectively “Associated”), which the Company acquired in
2007.  For Associated’s 2002 and 2003 consolidated federal income tax
returns, the field examiner indicated Associated underpaid their liability by
approximately $3,200. In addition, interest and penalties of $600 were
assessed.  During 2006, management of Associated accrued a liability
for its best estimate of a settlement with the IRS. Although the predecessor
management of Associated disagreed with the majority of the positions taken by
the examiner and appealed the assessment, the Company has estimated the
potential liability related to the audit to be $4,325 (including $1,395 for
penalties and interest) and has reflected this position, per FIN 48 guidelines,
in the consolidated financial statements. In October 2008, the appeals agent
found in favor of Associated on substantially all issues and also agreed to
abate all related penalties. The preliminary report and recommendation of
settlement has been prepared by the appeals agent. The Company expects the IRS
to issue their final settlement report and proposed adjustment of tax and
interest due during the second half of 2009.  Additionally, during the
second quarter 2008, AIIS received notification from the IRS indicating the 2006
consolidated federal tax return had been selected for audit.  The
majority of the field work has been completed and responses for all initial
information document requests have been provided to the examining
agent.  The Company expects the agent to issue any proposed
adjustments and related audit report during the second half of
2009.





19





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 June 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 inuring reinsurance (and in the case
of AmTrust’s U.K. insurance subsidiary IGI, net of commissions) and 40% of
losses and (b) AII transferred to Maiden Insurance 40% of the AmTrust Ceding
Insurer’s unearned premium reserves, effective as of July 1, 2007, with respect
to the Company's then current lines of business, excluding risks for which the
AmTrust Ceding Insurers’ net retention 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 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, 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 has an initial term of three years and
will automatically renew for successive three year terms thereafter, unless
either AII or Maiden Insurance notifies the other of its election not to renew
not less than nine months prior to the end of any such three year term. In
addition, either party is entitled to terminate on thirty day’s notice or less
upon the occurrence of certain early termination events, which include a default
in payment, insolvency, change in control of AII or Maiden Insurance, run-off,
or a reduction of 50% or more of the shareholders’ equity of Maiden Insurance or
the combined shareholders’ equity of AII and the AmTrust Ceding
Insurers.





20





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




(Amounts
      in thousands)
                          
                          As of June 30, 2009
                          
                          
                          As of December 31, 2008Assets
      and liabilities:Reinsurance
      recoverable
                          
                          $
                          265,989
                          
                          
                          
                          221,214Prepaid
      reinsurance premium
                          
                          
                          235,852
                          
                          
                          
                          243,511Ceded
      reinsurance premiums payable
                          
                          
                          (89,624
                          )
                          
                          
                          (102,907
                          )Note
      payable
                          
                          
                          (167,975
                          )
                          
                          
                          (167,975
                          )




Three Months Ended June 30,
                                                
                                                
                                                Six Months Ended June 30,(Amounts
      in thousands)
                                                
                                                2009
                                                
                                                
                                                2008
                                                
                                                
                                                2009
                                                
                                                
                                                2008Results
      of operations:Premium
      written - ceded
                                                
                                                $
                                                (90,079
                                                )
                                                
                                                $
                                                (168,069
                                                )
                                                
                                                $
                                                (177,559
                                                )
                                                
                                                $
                                                (251,017
                                                )Change
      in unearned premium - ceded
                                                
                                                
                                                2,218
                                                
                                                
                                                
                                                91,824
                                                
                                                
                                                
                                                (4,753
                                                )
                                                
                                                
                                                110,983Earned
      premium - ceded
                                                
                                                $
                                                (87,861
                                                )
                                                
                                                $
                                                (76,245
                                                )
                                                
                                                $
                                                (182,312
                                                )
                                                
                                                $
                                                (140,034
                                                )Ceding
      commission on premium written
                                                
                                                $
                                                27,570
                                                
                                                
                                                $
                                                54,753
                                                
                                                
                                                $
                                                55,123
                                                
                                                
                                                $
                                                80,745Ceding
      commission – deferred
                                                
                                                
                                                3,960
                                                
                                                
                                                
                                                (19,531
                                                )
                                                
                                                
                                                3,525
                                                
                                                
                                                
                                                (25,339
                                                )Ceding
      commission - earned
                                                
                                                $
                                                31,530
                                                
                                                
                                                $
                                                35,222
                                                
                                                
                                                $
                                                58,648
                                                
                                                
                                                $
                                                55,406Incurred
      loss and loss adjustment expense - ceded
                                                
                                                $
                                                66,908
                                                
                                                
                                                $
                                                48,528
                                                
                                                
                                                $
                                                138,113
                                                
                                                
                                                $
                                                90,000Interest
      expense
                                                
                                                
                                                554
                                                
                                                
                                                
                                                2,695
                                                
                                                
                                                
                                                1,124
                                                
                                                
                                                
                                                2,695





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 June 30, 2009 was
$155,994. 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 $1,096 and $2,101 of brokerage commission during the three months ended
June 30, 2009 and 2008, respectively and $2,229 and $3,138 during the six months
ended June 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. 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 recorded
approximately $618 and $460 of investment management fees for the three months
ended June 30, 2009 and 2008, respectively and $1,215 and $960 for the six
months ended June 30, 2009 and 2008, respectively.





21




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 $182 and $382 for the three months
ended June 30, 2009 and 2008, respectively, and $335 and $498 for the six months
ended June 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 June 30, 2008. The Company recorded $554 and
$2,695 of interest expense during the three months ended June 30, 2009 and 2008,
respectively, and $1,124 and $2,695 during the six months ended June 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, which is one of two
participating reinsurers in the layer, has a 45% participation. Maiden
participates in the first layer of the excess of loss program on the same market
terms and conditions as the other participant.




Leap
Tide Capital Management




Leap Tide
Capital Management, Inc. (“LTCMI”), our wholly owned subsidiary, currently
manages approximately $35,600 of our assets. LTCMI also serves as the Investment
Manager of Leap Tide Partners, L.P., a domestic partnership and Leap Tide
Offshore, Ltd., a Cayman exempted company, both of which were formed for the
purpose of providing qualified third-party investors the opportunity to invest
funds in a vehicle managed by LTCMI (the “Hedge Funds”). As of June 30, 2009,
the current value of the invested funds in the Hedge Funds was less than
$7,700.  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. The management company earned approximately $0 and $37 of
fees under the agreement during the three months ended June 30, 2009 and 2008,
respectively and $0 and $80 during the six months ended June 30, 2009 and
2008.





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 $159 and $134 for
the lease for the three months ended June 30, 2009 and 2008, respectively and
$325 and $217 for the six months ended June 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 $50
and $31 for the lease for the three months ended June 30, 2009 and 2008,
respectively and $91 and $62 for the six months ended June 30, 2009 and 2008,
respectively.





22




Employment
Relationship





Barry
Karfunkel, was an analyst with a Company subsidiary through January 31, 2009,
earned approximately $0 and $87 for the three months ended June 30, 2009 and
2008, respectively and $21 and $150 for the six months ended June 30, 2009 and
2008, respectively. Barry Karfunkel is the son of Michael Karfunkel and the
brother-in-law of Barry Zyskind.




Warrantech




In
February of 2007, the Company participated with H.I.G. Capital, a Miami-based
private equity firm, in financing H.I.G. Capital’s acquisition of Warrantech in
a cash merger. The Company contributed $3,850 for a 27% equity interest 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 $20,300 and $32,900 during the three months
ended 2009 and 2008, respectively, and $43,300 and $50,600 during the six months
ended June 30, 2009 and 2008. The Company recorded investment loss of
approximately $217 and $561 from its equity investment for the three months
ended June 30, 2009 and 2008, respectively and $619 and $561 for the six months
ended June 30, 2009 and 2008, respectively. As of June 30, 2009 the Company’s
equity investment was approximately $1,491. 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 June
30, 2009 the carrying value of the note receivable was $22,026 (note
receivable — related party).





12.
            Acquisition




During the three months ended March 31,
2009, the Company, through a subsidiary, acquired all the issued and outstanding
stock of Imagine Captive Holdings Limited (“ICHL”), a Luxembourg holding
company, which owned all of the issued and outstanding stock of Imagine Re Beta
SA, Imagine Re (Luxembourg) 2007 SA and Imagine Re SA (collectively, the
“Captives”), each of which is a Luxembourg domiciled captive insurance company,
from Imagine Finance SARL (“SARL”).  ICHL subsequently changed its name to
AmTrust Captive Holdings Limited (“ACHL”) 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 SFAS No 141(R), 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.





23





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 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.
            Assets Under
      Management




In
December 2006, the Company formed two, wholly-owned subsidiaries currently named
Leap Tide Capital Management, Inc. (LTCMI) and Leap Tide Capital Management GP,
LLC (LTCM GP). Concurrently with these formations, the Company also formed Leap
Tide Partners, LP (LTP), a hedge fund limited partnership, for the purpose of
managing the assets of its limited partners. LTCMI has a 1% ownership in LTP.
LTCMI earns a management fee equal to 1% of the LTP’s assets. LTCMI also earns
an incentive fee of 20% of the cumulative profits of the LTP. Through March 31,
2008 LTCMI, the general partner of LTP, consolidated LTP in accordance with EITF
04-05 “Determining Whether a General Partner, or the General Partners as a Group
Controls a Limited Partnership or Similar Entity When the Limited Partners Have
Certain Rights,” as the rights of the limited partners did not overcome the
rights of the general partner. Effective April 1, 2008, the limited partnership
agreement was amended such that a majority of the limited partners had the right
to liquidate the limited partnership. In addition, the Company ceased being the
managing member of LTCM GP. Due to this amendment, in accordance with EITF
04-05, the Company ceased to consolidate LTP as of April 1, 2008.





Through
March 31, 2008, we allocated an equivalent portion of the limited partners’
income or loss to minority interest.  For the three and six months
ended June 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. The management companies earned approximately $0 and $37 of fees under
the agreement during the three and months ended June 30, 2009 and 2008,
respectively, and $0 and $80 during the six months ended June 30, 2009 and 2008,
respectively.





24





16.
            Segments





The
Company currently operates three business segments, Small Commercial Business;
Specialty Risk and Extended Warranty Insurance; and Specialty Middle-Market
Property and Casualty Insurance. The “Corporate & Other” segment represents
the activities of the holding company as well as a portion of fee revenue. In
determining total assets (excluding cash and invested assets) by segment the
Company identifies those assets that are attributable to a particular segment
such as premium receivable, deferred acquisition cost, reinsurance recoverable
and prepaid reinsurance while the remaining assets are allocated based on net
written premium by segment. In determining cash and invested assets by segment,
the Company matches certain identifiable liabilities such as unearned premium
and loss and loss adjustment expense reserves by segment. The remaining cash and
invested assets are then allocated based on net written premium by segment.
Investment income and realized gains (losses) are determined by calculating an
overall annual return on cash and invested assets and applying that overall
return to the cash and invested assets by segment. Interest expense and
income taxes are allocated based on net written premium by segment.
Additionally, management reviews the performance of underwriting income in
assessing the performance of and making decisions regarding the allocation of
resources to the segments. Underwriting income excludes, primarily, commission
and fee revenue, investment income and other revenues, other underwriting
expenses, interest expense and income taxes. Management believes that providing
this information in this manner is essential to providing Company’s shareholders
with an understanding of the Company’s business and operating
performance.  The following tables summarize business segments for the
three and six months ended June 30, 2009 and 2008.





(Amounts
      in thousands)
                                
                                Small
                                  commercial
                                  business
                                
                                
                                Specialty
      risk
                                  and
      extended
                                  warranty
                                
                                
                                Specialty
                                  middle-market
                                  property
      and
                                  casualty
                                  insurance
                                
                                
                                Corporate
      and
                                  other
                                
                                
                                TotalThree months ended June 30,
      2009:Gross
      written premium
                                
                                $
                                109,141
                                
                                
                                $
                                92,635
                                
                                
                                $
                                68,453
                                
                                
                                $
                                —
                                
                                
                                $
                                270,229Net
      premium written
                                
                                
                                54,332
                                
                                
                                
                                47,254
                                
                                
                                
                                35,534
                                
                                
                                
                                —
                                
                                
                                
                                137,120Change
      in unearned premium
                                
                                
                                7,165
                                
                                
                                
                                (3,310
                                )
                                
                                
                                (4,172
                                )
                                
                                
                                —
                                
                                
                                
                                (317)Net
      premium earned
                                
                                
                                61,497
                                
                                
                                
                                43,944
                                
                                
                                
                                31,362
                                
                                
                                
                                —
                                
                                
                                
                                136,803Ceding
      commission – primarily related party
                                
                                
                                17,091
                                
                                
                                
                                6,175
                                
                                
                                
                                9,012
                                
                                
                                
                                —
                                
                                
                                
                                32,278Loss
      and loss adjustment expense
                                
                                
                                (37,090
                                )
                                
                                
                                (19,525
                                )
                                
                                
                                (19,970
                                )
                                
                                
                                —
                                
                                
                                
                                (76,585
                                )Acquisition
      costs and other underwriting expenses
                                
                                
                                (34,105
                                )
                                
                                
                                (12,314
                                )
                                
                                
                                (18,168
                                )
                                
                                
                                —
                                
                                
                                
                                (64,587
                                )(71,195
                                )
                                
                                
                                (31,839
                                )
                                
                                
                                (38,138
                                )
                                
                                
                                —
                                
                                
                                
                                (141,172
                                )Underwriting
      income
                                
                                
                                7,393
                                
                                
                                
                                18,280
                                
                                
                                
                                2,236
                                
                                
                                
                                —
                                
                                
                                
                                27,909Commission
      and fee income
                                
                                
                                3,207
                                
                                
                                
                                2,547
                                
                                
                                
                                —
                                
                                
                                
                                1,853
                                
                                
                                
                                7,607Investment
      income and realized gain (loss)
                                
                                
                                2,969
                                
                                
                                
                                1,664
                                
                                
                                
                                1,240
                                
                                
                                
                                —
                                
                                
                                
                                5,873Other
      expense
                                
                                
                                (2,356
                                )
                                
                                
                                (1,974
                                )
                                
                                
                                (1,444
                                )
                                
                                
                                —
                                
                                
                                
                                (5,774
                                )Interest
      expense
                                
                                
                                (1,604
                                )
                                
                                
                                (1,390
                                )
                                
                                
                                (1,013
                                )
                                
                                
                                —
                                
                                
                                
                                (4,007
                                )Foreign
      currency gain
                                
                                
                                —
                                
                                
                                
                                611
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                611Provision
      for income taxes
                                
                                
                                (1,621
                                )
                                
                                
                                (3,343
                                )
                                
                                
                                (171
                                )
                                
                                
                                (313
                                )
                                
                                
                                (5,448
                                )Net
      income
                                
                                $
                                7,988
                                
                                
                                $
                                16,395
                                
                                
                                $
                                848
                                
                                
                                $
                                1,540
                                
                                
                                $
                                26,771





25





(Amounts
      in thousands)
                                
                                Small
                                  commercial
                                  business
                                
                                
                                Specialty
      risk
                                  and
      extended
                                  warranty
                                
                                
                                Specialty
                                  middle-market
                                  property
      and
                                  casualty
                                  insurance
                                
                                
                                Corporate
      and
                                  other
                                
                                
                                TotalThree months ended June 30,
      2008:Gross
      written premium
                                
                                $
                                112,096
                                
                                
                                $
                                127,308
                                
                                
                                $
                                61,658
                                
                                
                                $
                                —
                                
                                
                                $
                                301,062Net
      premium written
                                
                                
                                40,414
                                
                                
                                
                                61,994
                                
                                
                                
                                29,649
                                
                                
                                
                                —
                                
                                
                                
                                132,057Change
      in unearned premium
                                
                                
                                2,218
                                
                                
                                
                                (18,908
                                )
                                
                                
                                578
                                
                                
                                
                                —
                                
                                
                                
                                (16,112
                                )Net
      premium earned
                                
                                
                                42,632
                                
                                
                                
                                43,086
                                
                                
                                
                                30,227
                                
                                
                                
                                —
                                
                                
                                
                                115,945Ceding
      commission – primarily related party
                                
                                
                                20,255
                                
                                
                                
                                8,051
                                
                                
                                
                                8,903
                                
                                
                                
                                —
                                
                                
                                
                                37,209Loss
      and loss adjustment expense
                                
                                
                                (24,772
                                )
                                
                                
                                (29,876
                                )
                                
                                
                                (19,486
                                )
                                
                                
                                —
                                
                                
                                
                                (74,134
                                )Acquisition
      costs and other underwriting expenses
                                
                                
                                (28,159
                                )
                                
                                
                                (13,114
                                )
                                
                                
                                (16,551
                                )
                                
                                
                                —
                                
                                
                                
                                (57,824
                                )(52,931
                                )
                                
                                
                                (42,990
                                )
                                
                                
                                (36,037
                                )
                                
                                
                                —
                                
                                
                                
                                (131,958
                                )Underwriting
      income
                                
                                
                                9,956
                                
                                
                                
                                8,147
                                
                                
                                
                                3,093
                                
                                
                                
                                —
                                
                                
                                
                                21,196Commission
      and fee income
                                
                                
                                4,578
                                
                                
                                
                                769
                                
                                
                                
                                —
                                
                                
                                
                                3,028
                                
                                
                                
                                8,375Investment
      income and realized gain (loss)
                                
                                
                                5,208
                                
                                
                                
                                4,315
                                
                                
                                
                                2,532
                                
                                
                                
                                —
                                
                                
                                
                                12,055Other
      expenses
                                
                                
                                (857
                                )
                                
                                
                                207
                                
                                
                                
                                (1,854
                                )
                                
                                
                                —
                                
                                
                                
                                (2,504
                                )Interest
      expense
                                
                                
                                (2,094
                                )
                                
                                
                                (2,244
                                )
                                
                                
                                (1,203
                                )
                                
                                
                                —
                                
                                
                                
                                (5,541
                                )Foreign
      currency gain
                                
                                
                                —
                                
                                
                                
                                (15
                                )
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                (15
                                )Provision
      for income taxes
                                
                                
                                (3,605
                                )
                                
                                
                                (3,426
                                )
                                
                                
                                483
                                
                                
                                
                                (668
                                )
                                
                                
                                (7,216
                                )Net
      income
                                
                                $
                                13,186
                                
                                
                                $
                                7,753
                                
                                
                                $
                                3,051
                                
                                
                                $
                                2,360
                                
                                
                                $
                                26,350





(Amounts
      in thousands)
                                
                                Small
                                  commercial
                                  business
                                
                                
                                Specialty
      risk
                                  and
      extended
                                  warranty
                                
                                
                                Specialty
                                    middle-market
                                    property
      and
                                    casualty
                                    insurance
                                
                                
                                Corporate
      and
                                  other
                                
                                
                                TotalSix months ended June 30,
    2009:Gross
      written premium
                                
                                $
                                236,611
                                
                                
                                $
                                175,343
                                
                                
                                $
                                125,802
                                
                                
                                $
                                —
                                
                                
                                $
                                537,756Net
      premium written
                                
                                
                                124,791
                                
                                
                                
                                85,513
                                
                                
                                
                                62,995
                                
                                
                                
                                —
                                
                                
                                
                                273,299Change
      in unearned premium
                                
                                
                                (5,203
                                )
                                
                                
                                (894
                                )
                                
                                
                                2,024
                                
                                
                                
                                —
                                
                                
                                
                                (4,073
                                )Net
      premium earned
                                
                                
                                119,588
                                
                                
                                
                                84,619
                                
                                
                                
                                65,019
                                
                                
                                
                                —
                                
                                
                                
                                269,226Ceding
      commission – primarily related party
                                
                                
                                36,867
                                
                                
                                
                                12,202
                                
                                
                                
                                10,800
                                
                                
                                
                                —
                                
                                
                                
                                59,869Loss
      and loss adjustment expense
                                
                                
                                (72,484
                                )
                                
                                
                                (37,343
                                )
                                
                                
                                (41,673
                                )
                                
                                
                                —
                                
                                
                                
                                (151,500
                                )Acquisition
      costs and other underwriting expenses
                                
                                
                                (68,259
                                )
                                
                                
                                (25,017
                                )
                                
                                
                                (29,465
                                )
                                
                                
                                —
                                
                                
                                
                                (122,741
                                )(140,743
                                )
                                
                                
                                (62,360
                                )
                                
                                
                                (71,138
                                )
                                
                                
                                —
                                
                                
                                
                                (274,241
                                )Underwriting
      income
                                
                                
                                15,712
                                
                                
                                
                                34,461
                                
                                
                                
                                4,681
                                
                                
                                
                                —
                                
                                
                                
                                54,854Commission
      and fee income
                                
                                
                                6,696
                                
                                
                                
                                4,685
                                
                                
                                
                                —
                                
                                
                                
                                3,680
                                
                                
                                
                                15,061Investment
      income and realized gain (loss)
                                
                                
                                5,138
                                
                                
                                
                                3,004
                                
                                
                                
                                2,082
                                
                                
                                
                                —
                                
                                
                                
                                10,224Other
      expenses
                                
                                
                                (5,017
                                )
                                
                                
                                (3,401
                                )
                                
                                
                                (2,550
                                )
                                
                                
                                —
                                
                                
                                
                                (10,968
                                )Interest
      expense
                                
                                
                                (3,741
                                )
                                
                                
                                (2,536
                                )
                                
                                
                                (1,901
                                )
                                
                                
                                —
                                
                                
                                
                                (8,178
                                )Foreign
      currency gain
                                
                                
                                —
                                
                                
                                
                                644
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                644Provision
      for income taxes
                                
                                
                                (3,262
                                )
                                
                                
                                (6,401
                                )
                                
                                
                                (402
                                )
                                
                                
                                (639
                                )
                                
                                
                                (10,704
                                )Net
      income
                                
                                $
                                15,526
                                
                                
                                $
                                30,456
                                
                                
                                $
                                1,910
                                
                                
                                $
                                3,041
                                
                                
                                $
                                50,933





26





(Amounts
      in thousands)
                                
                                Small
                                  commercial
                                  business
                                
                                
                                Specialty
      risk
                                  and
      extended
                                  warranty
                                
                                
                                Specialty
                                    middle-market
                                    property
      and
                                    casualty
                                    insurance
                                
                                
                                Corporate
      and
                                  other
                                
                                
                                TotalSix months ended June 30,
    2008:Gross
      written premium
                                
                                $
                                201,357
                                
                                
                                $
                                215,077
                                
                                
                                $
                                119,384
                                
                                
                                $
                                —
                                
                                
                                $
                                535,818Net
      premium written
                                
                                
                                91,746
                                
                                
                                
                                100,079
                                
                                
                                
                                57,674
                                
                                
                                
                                —
                                
                                
                                
                                249,499Change
      in unearned premium
                                
                                
                                (2,809
                                )
                                
                                
                                (27,397
                                )
                                
                                
                                (5,935
                                )
                                
                                
                                —
                                
                                
                                
                                (36,141
                                )Net
      premium earned
                                
                                
                                88,937
                                
                                
                                
                                72,682
                                
                                
                                
                                51,739
                                
                                
                                
                                —
                                
                                
                                
                                213,358Ceding
      commission – primarily related party
                                
                                
                                32,855
                                
                                
                                
                                11,482
                                
                                
                                
                                13,747
                                
                                
                                
                                —
                                
                                
                                
                                58,084Loss
      and loss adjustment expense
                                
                                
                                (49,339
                                )
                                
                                
                                (47,790
                                )
                                
                                
                                (32,170
                                )
                                
                                
                                —
                                
                                
                                
                                (129,299
                                )Acquisition
      costs and other underwriting expenses
                                
                                
                                (51,511
                                )
                                
                                
                                (19,899
                                )
                                
                                
                                (27,291
                                )
                                
                                
                                —
                                
                                
                                
                                (98,701
                                )(100,850
                                )
                                
                                
                                (67,689
                                )
                                
                                
                                (59,461
                                )
                                
                                
                                —
                                
                                
                                
                                (228,000
                                )Underwriting
      income
                                
                                
                                20,942
                                
                                
                                
                                16,475
                                
                                
                                
                                6,025
                                
                                
                                
                                —
                                
                                
                                
                                43,442Commission
      and fee income
                                
                                
                                7,337
                                
                                
                                
                                2,565
                                
                                
                                
                                —
                                
                                
                                
                                4,760
                                
                                
                                
                                14,662Investment
      income, realized gain (loss) and loss on managed assets
                                
                                
                                9,511
                                
                                
                                
                                6,898
                                
                                
                                
                                3,957
                                
                                
                                
                                (2,900
                                )
                                
                                
                                17,466Other
      expenses
                                
                                
                                (2,797
                                )
                                
                                
                                (2,918
                                )
                                
                                
                                (1,583
                                )
                                
                                
                                —
                                
                                
                                
                                (7,298
                                )Interest
      expense
                                
                                
                                (3,194
                                )
                                
                                
                                (3,169
                                )
                                
                                
                                (1,807
                                )
                                
                                
                                —
                                
                                
                                
                                (8,170
                                )Foreign
      currency gain
                                
                                
                                —
                                
                                
                                
                                144
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                144Provision
      for income taxes
                                
                                
                                (7,318
                                )
                                
                                
                                (4,602
                                )
                                
                                
                                (1,517
                                )
                                
                                
                                (1,096
                                )
                                
                                
                                (14,533
                                )Minority
      interest in net loss of subsidiary
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                2,900
                                
                                
                                
                                2,900Net
      income
                                
                                $
                                24,481
                                
                                
                                $
                                15,393
                                
                                
                                $
                                5,075
                                
                                
                                $
                                3,664
                                
                                
                                $
                                48,613





The
following tables summarize business segments as follows as of June 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 June 30, 2009:Fixed
      assets
                      
                      $
                      6,593
                      
                      
                      $
                      4,469
                      
                      
                      $
                      3,351
                      
                      
                      $
                      —
                      
                      
                      $
                      14,413Goodwill
      and intangible assets
                      
                      
                      76,141
                      
                      
                      
                      12,142
                      
                      
                      
                      14,439
                      
                      
                      
                      —
                      
                      
                      
                      102,722Total
      assets
                      
                      
                      1,724,346
                      
                      
                      
                      940,131
                      
                      
                      
                      515,381
                      
                      
                      
                      —
                      
                      
                      
                      3,179,858As 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





17.
            Subsequent
      Events





There
were no subsequent events requiring adjustment to the financial statements or
disclosure through August 10, 2009, the date that the Company’s financial
statements were issued.





27





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.  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.





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 $8 million and $26 million of gross written premium
during the three and six months ended June 30, 2009.




In June
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 domiciled in Kansas, Texas and
Wisconsin and are collectively licensed in 33 states. Consideration paid for the
transaction was approximately $88.5 million and consisted of cash of $61.2
million, a note payable of $26.8 million, assumed liabilities of $0.3 million
and direct transaction costs of $0.2 million. The Company has recorded
approximately $35.0 million of goodwill and $15.0 million of intangible assets
related to customer relationships and licenses. The results of operations have
been included in the Company’s consolidated financial statements since the
acquisition date.





28











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, 2008 for an
employer with a constant payroll during the term of the policy, we would earn
half of the premiums in 2008 and the other half in 2009. Our specialty risk and
extended warranty coverages are earned over the estimated exposure time period.
The terms vary depending on the risk and have an average duration of
approximately 32 months, but range in duration from one month to 84
months.




Net Loss Ratio. The net loss
ratio is a measure of the underwriting profitability of an insurance company's
business. Expressed as a percentage, this is the ratio of net losses and loss
adjustment expense incurred to net premiums earned.





Net Expense Ratio. The net
expense ratio is a measure of an insurance company's operational efficiency in
administering its business. Expressed as a percentage, this is the ratio of the
sum of policy acquisition expenses, salaries and benefits, and other insurance
general and administrative expenses (acquisition costs and other underwriting
expenses) less ceding commission to net premiums earned.




29





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





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




One of the key financial measures that
we use to evaluate our operating performance is return on average equity. Our
return on average equity was 24.4% and 26.0% for the three months ended June 30,
2009 and 2008, respectively and 23.4% and 24.2% for the six months ended June
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 79.6% and 81.7% for the three months
ended June 30, 2009 and 2008, respectively and 79.6% for both the six months
ended June 30, 2009 and 2008.  The decrease in the combined ratio
quarter over quarter resulted primarily from a reduction in loss and loss
adjustment expenses in the Company’s specialty risk and extended warranty
segment as the segment experienced improvement in loss development on acquired
loss reserves in the second quarter of 2009.





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.





30





Results
of Operations





Consolidated
Results of Operations (Unaudited)




Three Months Ended June 30,
                                            
                                            
                                            Six Months Ended June 30,(Amounts in thousands)
                                            
                                            2009
                                            
                                            
                                            2008
                                            
                                            
                                            2009
                                            
                                            
                                            2008Gross
      written premium
                                            
                                            $
                                            270,229
                                            
                                            
                                            $
                                            301,062
                                            
                                            
                                            $
                                            537,756
                                            
                                            
                                            $
                                            535,818Net
      premium written
                                            
                                            $
                                            137,120
                                            
                                            
                                            $
                                            132,057
                                            
                                            
                                            $
                                            273,299
                                            
                                            
                                            $
                                            249,499Change
      in unearned premium
                                            
                                            
                                            (317
                                            )
                                            
                                            
                                            (16,112
                                            )
                                            
                                            
                                            (4,073
                                            )
                                            
                                            
                                            (36,141
                                            )Net
      premium earned
                                            
                                            
                                            136,803
                                            
                                            
                                            
                                            115,945
                                            
                                            
                                            
                                            269,226
                                            
                                            
                                            
                                            213,358Ceding
      commission – primarily related party
                                            
                                            
                                            32,278
                                            
                                            
                                            
                                            37,209
                                            
                                            
                                            
                                            59,869
                                            
                                            
                                            
                                            58,084Commission
      and fee income
                                            
                                            
                                            7,607
                                            
                                            
                                            
                                            8,375
                                            
                                            
                                            
                                            15,061
                                            
                                            
                                            
                                            14,662Net
      investment income
                                            
                                            
                                            13,582
                                            
                                            
                                            
                                            14,190
                                            
                                            
                                            
                                            27,171
                                            
                                            
                                            
                                            27,721Net
      realized loss on investments
                                            
                                            
                                            (7,709
                                            )
                                            
                                            
                                            (2,135
                                            )
                                            
                                            
                                            (16,947
                                            )
                                            
                                            
                                            (7,355
                                            )Other
      investment loss on managed assets
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (2,900
                                            )Total
      revenue
                                            
                                            
                                            182,561
                                            
                                            
                                            
                                            173,584
                                            
                                            
                                            
                                            354,380
                                            
                                            
                                            
                                            303,570Loss
      and loss adjustment expense
                                            
                                            
                                            76,585
                                            
                                            
                                            
                                            74,134
                                            
                                            
                                            
                                            151,500
                                            
                                            
                                            
                                            129,299Acquisition
      costs and other underwriting expense
                                            
                                            
                                            64,587
                                            
                                            
                                            
                                            57,824
                                            
                                            
                                            
                                            122,741
                                            
                                            
                                            
                                            98,701Other
      expense
                                            
                                            
                                            5,774
                                            
                                            
                                            
                                            2,504
                                            
                                            
                                            
                                            10,968
                                            
                                            
                                            
                                            7,298Total
      expense
                                            
                                            
                                            146,946
                                            
                                            
                                            
                                            134,462
                                            
                                            
                                            
                                            285,209
                                            
                                            
                                            
                                            235,298Operating
      income from continuing operations
                                            
                                            
                                            35,614
                                            
                                            
                                            
                                            39,122
                                            
                                            
                                            
                                            69,171
                                            
                                            
                                            
                                            68,272Other
      income (expense):Foreign
      currency gain (loss)
                                            
                                            
                                            611
                                            
                                            
                                            
                                            (15
                                            )
                                            
                                            
                                            644
                                            
                                            
                                            
                                            144Interest
      expense
                                            
                                            
                                            (4,007
                                            )
                                            
                                            
                                            (5,541
                                            )
                                            
                                            
                                            (8,178
                                            )
                                            
                                            
                                            (8,170
                                            )Total
      other expense
                                            
                                            
                                            (3,396
                                            )
                                            
                                            
                                            (5,556
                                            )
                                            
                                            
                                            (7,534
                                            )
                                            
                                            
                                            (8,026
                                            )Income
      from continuing operations before provision for income taxes and minority
      interest
                                            
                                            
                                            32,219
                                            
                                            
                                            
                                            33,566
                                            
                                            
                                            
                                            61,637
                                            
                                            
                                            
                                            60,246Provision
      for income taxes
                                            
                                            
                                            5,448
                                            
                                            
                                            
                                            7,216
                                            
                                            
                                            
                                            10,704
                                            
                                            
                                            
                                            14,533Minority
      interest in net loss of subsidiary
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (2,900
                                            )Net
      income
                                            
                                            $
                                            26,771
                                            
                                            
                                            $
                                            26,350
                                            
                                            
                                            $
                                            50,933
                                            
                                            
                                            $
                                            48,613Key
      Measures:Net
      loss ratio
                                            
                                            
                                            56.0
                                            %
                                            
                                            
                                            63.9
                                            %
                                            
                                            
                                            56.3
                                            %
                                            
                                            
                                            60.6
                                            %Net
      expense ratio
                                            
                                            
                                            23.6
                                            %
                                            
                                            
                                            17.8
                                            %
                                            
                                            
                                            23.4
                                            %
                                            
                                            
                                            19.0
                                            %Net
      combined ratio
                                            
                                            
                                            79.6
                                            %
                                            
                                            
                                            81.7
                                            %
                                            
                                            
                                            79.6
                                            %
                                            
                                            
                                            79.6
                                            %Net
      Realized Gain (Loss) on Investments:Total
      other-than-temporary impairment losses
                                            
                                            $
                                            (10,786
                                            )
                                            
                                            $
                                            (7,230
                                            )
                                            
                                            $
                                            (12,213
                                            )
                                            
                                            $
                                            (7,972
                                            )Portion
      of loss recognized in other comprehensive income
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Net
      impairment losses recognized in earnings
                                            
                                            
                                            (10,786
                                            )
                                            
                                            
                                            (7,230
                                            )
                                            
                                            
                                            (12,213
                                            )
                                            
                                            
                                            (7,972
                                            )Other
      net realized gain (loss) on investments
                                            
                                            
                                            3,077
                                            
                                            
                                            
                                            5,095
                                            
                                            
                                            
                                            (4,734
                                            )
                                            
                                            
                                            617Net
      realized investment gain (loss)
                                            
                                            $
                                            (7,709
                                            )
                                            
                                            $
                                            (2,135
                                            )
                                            
                                            $
                                            (16,947
                                            )
                                            
                                            $
                                            (7,355
                                            )




31




Consolidated
Result of Operations for the Three Months Ended June 30, 2009 and
2008





Gross Written
Premium.  Gross written premium decreased $30.9 million or
10.2% to $270.2 million from $301.1 million for the three months ended June 30,
2009 and 2008, respectively. The decrease of $30.9 million was attributable to
decreases of $3.0 million in our small commercial business and $34.7 million in
our specialty risk and extended warranty business offset by an increase of $6.8
million increase in our specialty middle-market property and casualty
business.  The decrease in small commercial business gross written
premium resulted primarily from state mandated workers’ compensation rate
reductions in the state of Florida and a decline in assigned risk business
offset by an increase in gross written premium attributable to entering into a
managing general agency agreement with Cardinal Comp in the third quarter of
2008. The increase in our specialty middle market property and casualty business
was primarily from organic growth in workers compensation and other commercial
package lines of business. A
majority of the decrease in the specialty risk and extended warranty business
resulted from the strengthening of the U.S. dollar on the Company’s European
business, which negatively impacted gross written premium by $8.0 million in the
second quarter of 2009 and unearned premium assumed in connection
with certain insurance programs which positively impacted the
Company in the amount of $16 million the second quarter of
2008.





Net Premium
Written.  Net premium written increased $5.0 million or 3.8% to
$137.1 million from $132.1 million for the three months ended June 30, 2009 and
2008, respectively.  The increase (decrease) by segment was: small
commercial business - $13.9 million; specialty risk and extended warranty -
$(14.7) million; and specialty middle market - $5.8 million.





Net Premium
Earned.  Net premium earned increased $20.9 million or 18.0% to
$136.8 million from $115.9 million for the three months ended June 30, 2009 and
2008.  The increase by segment, was: small commercial business - $18.9
million; specialty risk and extended warranty - $0.8 million; and specialty
middle market - $1.2 million.





Ceding Commission.
  Ceding commission represents commission earned primarily through the
Maiden Quota Share, whereby AmTrust receives a 31% or 34.375% ceding commission
depending on the business ceded on ceded written premiums to Maiden
Insurance.  The ceding commission earned during the three months ended
June 30, 2009 and 2008 was $32.3 million and $37.2 million,
respectively.





Commission and Fee Income. Commission and
fee income decreased $0.8 million or 9.2% to $7.6 million from $8.4 million for
the three months ended June 30, 2009 and 2008, respectively.  The
decrease was attributable primarily to a reduction in investment management fees
and servicing carrying fees offset by an increase in administration fees
from new warranty business.





Net Investment
Income. Net investment income decreased $0.6 million or 4.3%
to $13.6 million from $14.2 million for the three months ended June 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 4.2% in 2008 to 4.1% in
2009.





Net Realized Gains (Losses) on
Investments. Net realized losses on investments for the three months
ended June 30, 2009 were $7.7 million, compared to net realized losses of $2.1
million for the same period in 2008.  During the three months ended
June 30, 2009, realized losses related primarily to non-cash write-downs of two
equity securities and one fixed maturity security totaling $10.8 million that
was determined to be other than temporarily impaired offset by realized gains
from certain sales of the Company’s investments.  During the three
months ended June 30, 2008, realized losses related primarily to the non-cash
write-down of three equity securities of $7.2 million that were determined to be
other than temporarily impaired offset by realized gains from the timing of
certain sales of the Company’s investments.





Loss and Loss Adjustment Expenses;
Loss Ratio.   Loss and loss adjustment expenses increased $2.5
million or 3.3% to $76.6 million for the three months ended June 30, 2009 from
$74.1 million for the three months ended June 30, 2008. The Company’s loss ratio
for the three months ended June 30, 2009 and 2008 was 56.0% and 63.9%,
respectively.  The loss ratio declined on a consolidated basis as the
Company benefited from an improvement in the loss development on acquired loss
reserves in its specialty risk and extended warranty segment offset by the
integration of retail commercial package business acquired in the UBI
acquisition in the second quarter of 2008. The commercial package business
historically has had a higher loss ratio than the Company's small workers'
compensation business.




32




Acquisition Costs and Other
Underwriting Expenses; Expense Ratio.  Acquisition Costs and
Other Underwriting Expenses increased $6.8 million or 11.7% to $64.6 million for
the three months ended June 30, 2009 from $57.8 million for the three months
ended June 30, 2008. The expense ratio increased to 23.6% from 17.8% for the
three months ended June 30, 2009 and 2008, respectively.  The increase
in the expense ratio period over period resulted primarily from a higher
percentage of gross written premium attributable to the small commercial
business segment than in the corresponding period in 2008.  This
segment typically has higher policy acquisition expenses compared to the
specialty risk and extended warranty segment.  Additionally, the
Company incurred higher commission expense in the second quarter of 2009 as well
as higher salary expense related to the retail commercial package business
acquired in the second quarter of 2008.





Operating Income from Continuing
Operations. Income from continuing operations decreased $3.5 million or
9.0% to $35.6 million from $39.1 million for the three months ended June 30,
2009 and 2008, respectively. The change in income from continuing operations
from 2008 to 2009 resulted from reduced ceding commission revenue and increased
realized losses on investments coupled with higher policy acquisition costs and
salary expense partially offset by higher earned premiums.





Interest
Expense.Interest expense for the three months ended June 30,
2009 was $4.0 million, compared to $5.5 million for the same period in
2008.  The decrease was attributable to 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 June 30,
2009 was $5.4 million, which resulted in an effective tax rate of 16.9%. 
Income tax expense for the three months ended June 30, 2008 was $7.2 million,
which resulted in an effective tax rate of 21.5%.  The decrease in the
Company’s effective rate resulted, primarily, from certain Company subsidiaries
not subject to U.S. taxation earning a higher percentage of the Company’s
pre-tax income, including a one-time income benefit related to the acquisition
of Amtrust Captive Holdings Limited ("ACHL") in the first
quarter





Consolidated
Result of Operations for the Six Months Ended June 30, 2009 and
2008





Gross Written
Premium.  Gross written premium increased $2.0 million or 0.4%
to $537.8 million from $535.8 million for the six months ended June 30, 2009 and
2008, respectively. The increase of $2.0 million was attributable to a $35.2
million increase in our small commercial business, a $6.4 million increase in
our specialty middle-market property and casualty business offset by a decrease
of $39.6 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 and entering into a managing general agency agreement
with Cardinal Comp in the third quarter of 2008 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.  A
majority of the decrease in the specialty risk and extended warranty business
resulted from the strengthening of the U.S. dollar on the Company’s European
business, which negatively impacted gross written premium by  $19.5
million for the six months ended June 30, 2009 and unearned premium assumed in
connection with certain insurance programs which positively impacted the Company
in the amount of $16 million in the second quarter of
2008.




Net Premium
Written.  Net premium written increased $23.8 million or 9.5%
to $273.3 million from $249.5 million for the six months ended June 30, 2009 and
2008, respectively.  The increase (decrease), by segment, was: small
commercial business - $33.1 million; specialty risk and extended warranty -
$(14.6) million; and specialty middle market - $5.3 million.





Net Premium
Earned.  Net premium earned increased $55.8 million or 26.2% to
$269.2 million from $213.4 million for the six months ended June 30, 2009 and
2008, respectively.  The increase by segment, was: small commercial
business - $30.7 million; specialty risk and extended warranty - $11.9 million;
and specialty middle market - $13.2 million.





Ceding Commission.
  Ceding commission represents commission earned primarily through the
Maiden Quota Share, whereby AmTrust receives a 31% or 34.375% ceding commission,
depending on the business ceded, on ceded written premiums to Maiden
Insurance.  The ceding commission earned during the six months ended
June 30, 2009 and 2008 was $59.9 million and $58.1 million,
respectively.





Commission and Fee Income. Commission and
fee income increased $0.4 million or 2.7% to $15.1 million from $14.7 million
for the six months ended June 30, 2009 and 2008, respectively.  The
increase was attributable primarily to additional fees earned
through  administration fees from new warranty
business.





33





Net Investment
Income. Net investment income decreased $0.5 million or 2.0%
to $27.2 million from $27.7 million for the six months ended June 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 4.1% in 2008
to 4.0% in 2009.





Net Realized Gains (Losses) on
Investments. Net realized losses on investments for the six months ended
June 30, 2009 were $16.9 million, compared to net realized losses of $7.4
million for the same period in 2008.  During the six months ended June
30, 2009, realized losses related to certain sales of underperforming
investments in the Company’s fixed income portfolio and non-cash write-downs of
three equity securities and one fixed maturity security of $12.2 million that
was determined to be other than temporarily impaired.  During the six
months ended June 30, 2008, realized losses related primarily to the non-cash
write-down of three equity securities of $8.0 million that were determined to be
other than temporarily impaired.





Loss and Loss Adjustment Expenses;
Loss Ratio.   Loss and loss adjustment expenses increased $22.2
million or 17.2% to $151.5 million for the six months ended June 30, 2009 from
$129.3 million for the six months ended June 30, 2008. The Company’s loss ratio
for the six months ended June 30, 2009 and 2008 was 56.3% and 60.6%,
respectively.  The loss ratio declined on a consolidated basis as the
Company benefited from an improvement in the loss development on acquired loss
reserves in its specialty risk and extended warranty segment partially
offset by the integration of retail commercial package business acquired in
the UBI acquisition in the second quarter of 2008.  The commercial
package business historically has had a higher loss ratio than the Company’s
small workers’ compensation business.





Acquisition Costs and Other
Underwriting Expenses; Expense Ratio.  Acquisition Costs and
Other Underwriting Expenses increased $24.0 million or 24.4% to $122.7 million
for the six months ended June 30, 2009 from $98.7 million for the six months
ended June 30, 2008. The expense ratio increased to 23.4% from 19.0% for
the six months ended June 30, 2009 and 2008, respectively.  The
increase in the expense ratio period over period resulted primarily from a
higher percentage of gross written premium attributable to the small commercial
business segment than in the prior period in 2008.  This segment
typically has higher policy acquisition expenses compared to the specialty risk
and extended warranty segment.  Additionally, the Company incurred
higher commission expense in the first half of 2009 as well as higher salary
expense related to the retail commercial package business acquired in the second
quarter of 2008.





Operating Income from Continuing
Operations. Income from continuing operations increased $0.9 million or
1.3% to $69.2 million from $68.3 million for the six months ended June 30, 2009
and 2008, respectively. The change in income from continuing operations from
2008 to 2009 resulted primarily from higher net premium earned offset by higher
loss and loss adjustment expense, as well as increased policy acquisition costs
and salary expense.





Interest
Expense.Interest expense for the six months ended June 30,
2009 and June 30, 2008 was $8.2 million.  Interest expense was
consistent for the two periods as lower borrowing costs on the Company’s
collateral loan of $168 million were offset by increases in interest expense
related to a $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 six months ended June 30,
2009 was $10.7 million, which resulted in an effective tax rate of 17.4%. 
Income tax expense for the six months ended June 30, 2008 was $14.5 million,
which resulted in an effective tax rate of 23.0%.  The decrease in the
Company’s effective rate resulted, primarily, from certain Company subsidiaries
not subject to U.S. taxation earning a higher percentage of the Company’s
pre-tax income, including a one-time income benefit related to the
acquisition of ACHL in the first quarter.




34





Small
Commercial Business Segment (Unaudited)




Three Months Ended June 30,
                                    
                                    
                                    Six Months Ended June 30,(Amounts in thousands)
                                    
                                    2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008Gross
      Written Premium
                                    
                                    $
                                    109,141
                                    
                                    
                                    $
                                    112,096
                                    
                                    
                                    $
                                    236,611
                                    
                                    
                                    $
                                    201,357Net
      premium written
                                    
                                    
                                    54,332
                                    
                                    
                                    
                                    40,414
                                    
                                    
                                    
                                    124,791
                                    
                                    
                                    
                                    91,746Change
      in unearned premium
                                    
                                    
                                    7,165
                                    
                                    
                                    
                                    2,218
                                    
                                    
                                    
                                    (5,203
                                    )
                                    
                                    
                                    (2,809
                                    )Net
      premium earned
                                    
                                    
                                    61,497
                                    
                                    
                                    
                                    42,632
                                    
                                    
                                    
                                    119,588
                                    
                                    
                                    
                                    88,937Ceding
      commission revenue – primarily related party
                                    
                                    
                                    17,091
                                    
                                    
                                    
                                    20,255
                                    
                                    
                                    
                                    36,867
                                    
                                    
                                    
                                    32,855Loss
      and loss adjustment expense
                                    
                                    
                                    37,090
                                    
                                    
                                    
                                    24,772
                                    
                                    
                                    
                                    72,484
                                    
                                    
                                    
                                    49,339Acquisition
      costs and other underwriting expenses
                                    
                                    
                                    34,105
                                    
                                    
                                    
                                    28,159
                                    
                                    
                                    
                                    68,259
                                    
                                    
                                    
                                    51,51171,195
                                    
                                    
                                    
                                    52,931
                                    
                                    
                                    
                                    140,743
                                    
                                    
                                    
                                    100,850Net
      premiums earned less expenses included in combined ratio (Underwriting
      income)
                                    
                                    $
                                    7,393
                                    
                                    
                                    $
                                    9,956
                                    
                                    
                                    $
                                    15,712
                                    
                                    
                                    $
                                    20,943Key
      Measures:Net
      loss ratio
                                    
                                    
                                    60.3
                                    %
                                    
                                    
                                    58.1
                                    %
                                    
                                    
                                    60.6
                                    %
                                    
                                    
                                    55.5
                                    %Net
      expense ratio
                                    
                                    
                                    27.7
                                    %
                                    
                                    
                                    18.5
                                    %
                                    
                                    
                                    26.3
                                    %
                                    
                                    
                                    21.0
                                    %Net
      combined ratio
                                    
                                    
                                    88.0
                                    %
                                    
                                    
                                    76.6
                                    %
                                    
                                    
                                    86.9
                                    %
                                    
                                    
                                    76.5
                                    %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                                    
                                    
                                    34,105
                                    
                                    
                                    
                                    28,159
                                    
                                    
                                    
                                    68,259
                                    
                                    
                                    
                                    51,511Less:
      ceding commission revenue – primarily related party
                                    
                                    
                                    17,091
                                    
                                    
                                    
                                    20,255
                                    
                                    
                                    
                                    36,867
                                    
                                    
                                    
                                    32,85517,014
                                    
                                    
                                    
                                    7,904
                                    
                                    
                                    
                                    31,392
                                    
                                    
                                    
                                    18,656Net
      premium earned
                                    
                                    
                                    61,497
                                    
                                    
                                    
                                    42,632
                                    
                                    
                                    
                                    119,588
                                    
                                    
                                    
                                    88,937Net
      expense ratio
                                    
                                    
                                    27.7
                                    %
                                    
                                    
                                    18.5
                                    %
                                    
                                    
                                    26.3
                                    %
                                    
                                    
                                    21.0
                                    %





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





Gross Written
Premium.  Gross written premium decreased $3.0 million or 2.6%
to $109.1 million for the three months ended June 30, 2009 from $112.1 million
for the three months ended June 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 and a decline in
assigned risk business offset by gross written premium attributable to 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.





Net Premium
Written.  Net premium written increased $13.9 million or 34.3%
to $54.3 million for the three months ended June 30, 2009 from $40.4 million for
the three months ended June 30, 2008.  Net premium written increased
period over period as the Company in 2008 ceded 100% of approximately $19
million written premium to Maiden as part of non-recurring written premium
obtained through the UBI acquisition.




35





Net Premium
Earned.  Net premium earned increased $18.8 million or 44.2% to
$61.4 million for the three months ended June 30, 2009 from $42.6 million for
the three months ended June 30, 2008.  As premiums written earn
ratably over a twelve month period, the increase in net premium written resulted
from higher net premium written for the twelve months ended June 30, 2009
compared to the twelve months ended June 30, 2008.





Ceding
Commission.  Ceding commission represents commission earned
primarily through the Maiden Quota Share, whereby AmTrust receives a ceding
commission of 31% or 34.375%, based on the business ceded, on written premiums
ceded to Maiden Insurance.  The ceding commission earned during the
three months ended June 30, 2009 and 2008 was $17.1 million and $20.3 million,
respectively.





Loss and Loss Adjustment Expenses;
Loss Ratio.  Loss and loss adjustment expenses increased $12.3
million or 49.7% to $37.1 million for the three months ended June 30, 2009 from
$24.8 million for the three months ended June 30, 2008. The Company’s loss ratio
for the segment for the three months ended June 30, 2009 increased to 60.3% from
58.1% for the three months ended June 30, 2008. The increase in the loss and
loss adjustment ratio resulted, primarily, from the integration of retail
commercial package business acquired in the UBI acquisition in the second
quarter of 2008.  The commercial package business historically has had
a higher loss ratio than the Company’s small workers’ compensation
business.





Acquisition Costs and Other
Underwriting Expenses; Expense Ratio.  Acquisition Costs and
Other Underwriting Expenses increased $5.9 million or 21.1% to $34.1 million for
the three months ended June 30, 2009 from $28.2 million for the three months
ended June 30, 2008. The expense ratio increased to 27.7% for the three months
ended June 30, 2009 from 18.5% for the three months ended June 30, 2008. The
increase in expense ratio resulted primarily from higher policy acquisition
costs and increased salary expense related to the UBI acquisition.





Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income).   Net premiums
earned less expenses included in combined ratio decreased $2.6 million or 26.0%
to $7.4 million for the three months ended June 30, 2009 from $10.0 million for
the three months ended June 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.





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





Gross Written
Premium.  Gross written premium increased $35.2 million or
17.5% to $236.6 million for the six months ended June 30, 2009 from $201.4
million for the six months ended June 30, 2008.  The increase in small
commercial business resulted primarily, from gross written premium attributable
to 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,
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 $33.1 million or 36.0%
to $124.8 million from $91.7 million for the six months ended June 30, 2009 and
2008, respectively.  Net premium written increased period over period
as the Company in 2008 ceded 100% of approximately $19 million net premium
written to Maiden as part of non-recurring premium written obtained through the
UBI acquisition.





Net Premium
Earned.  Net premium earned increased $30.7 million or 34.5% to
$119.6 million for the six months ended June 30, 2009 from $88.9 million for the
six months ended June 30, 2008.  As premiums written earn ratably over
a twelve month period, the increase in net premium written resulted from higher
net premium written for the twelve months ended June 30, 2009 compared to the
twelve months ended June 30, 2008.





Ceding Commission.
  Ceding commission represents commission earned primarily through the
Maiden Quota Share agreement with Maiden Insurance, whereby AmTrust receives a
ceding commission of 31% or 34.375%, based on the business ceded, on written
premiums ceded to Maiden.  The ceding commission earned during the six
months ended June 30, 2009 and 2008 was $36.9 million and $32.9 million,
respectively.





36





Loss and Loss Adjustment Expenses;
Loss Ratio.   Loss and loss adjustment expenses increased $23.2
million or 46.9% to $72.5 million for the six months ended June 30, 2009 from
$49.3 million for the six months ended June 30, 2008. The Company’s loss ratio
for the segment for the six months ended June 30, 2009 increased to 60.6% from
55.5% for the three months ended June 30, 2008. The increase in the loss and
loss adjustment ratio resulted, primarily, from the integration of retail
commercial package business acquired in the UBI acquisition in the second
quarter of 2008.  The commercial package business historically has had
a higher loss ratio than the Company’s small workers’ compensation
business.





Acquisition Costs and Other
Underwriting Expenses; Expense Ratio.  Acquisition Costs and
Other Underwriting Expenses increased $16.8 million or 32.6% to $68.3 million
for the six months ended June 30, 2009 from $51.5 million for the six months
ended June 30, 2008. The expense ratio increased to 26.3% for the six months
ended June 30, 2009 from 21.0% for the six months ended June 30,
2008.  The increase in expense ratio resulted primarily from higher
policy acquisition costs and increased salary expense related to the UBI
acquisition.





Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income).   Net premiums
earned less expenses included in combined ratio decreased $5.2 million or 25.0%
to $15.7 million for the six months ended June 30, 2009 from $20.9 million for
the six months ended June 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 June 30,
                                        
                                        
                                        Six Months Ended June 30,(Amounts in thousands)
                                        
                                        2009
                                        
                                        
                                        2008
                                        
                                        
                                        2009
                                        
                                        
                                        2008Gross
      Written Premium
                                        
                                        $
                                        92,635
                                        
                                        
                                        $
                                        127,308
                                        
                                        
                                        $
                                        175,343
                                        
                                        
                                        $
                                        215,077Net
      premium written
                                        
                                        
                                        47,254
                                        
                                        
                                        
                                        61,994
                                        
                                        
                                        
                                        85,513
                                        
                                        
                                        
                                        100,079Change
      in unearned premium
                                        
                                        
                                        (3,310
                                        )
                                        
                                        
                                        (18,908
                                        )
                                        
                                        
                                        (894
                                        )
                                        
                                        
                                        (27,397
                                        )Net
      premiums earned
                                        
                                        
                                        43,944
                                        
                                        
                                        
                                        43,086
                                        
                                        
                                        
                                        84,619
                                        
                                        
                                        
                                        72,682Ceding
      commission revenue – primarily related party
                                        
                                        
                                        6,175
                                        
                                        
                                        
                                        8,051
                                        
                                        
                                        
                                        12,202
                                        
                                        
                                        
                                        11,482Loss
      and loss adjustment expense
                                        
                                        
                                        19,525
                                        
                                        
                                        
                                        29,876
                                        
                                        
                                        
                                        37,343
                                        
                                        
                                        
                                        47,790Acquisition
      costs and other underwriting expenses
                                        
                                        
                                        12,314
                                        
                                        
                                        
                                        13,114
                                        
                                        
                                        
                                        25,017
                                        
                                        
                                        
                                        19,89931,839
                                        
                                        
                                        
                                        42,990
                                        
                                        
                                        
                                        62,360
                                        
                                        
                                        
                                        67,689Net
      premiums earned less expenses included in combined ratio (Underwriting
      income)
                                        
                                        $
                                        18,280
                                        
                                        
                                        $
                                        8,147
                                        
                                        
                                        $
                                        34,461
                                        
                                        
                                        $
                                        16,475Key
      Measures:Net
      loss ratio
                                        
                                        
                                        44.4
                                        %
                                        
                                        
                                        69.3
                                        %
                                        
                                        
                                        44.1
                                        %
                                        
                                        
                                        65.8
                                        %Net
      expense ratio
                                        
                                        
                                        14.0
                                        %
                                        
                                        
                                        11.8
                                        %
                                        
                                        
                                        15.1
                                        %
                                        
                                        
                                        11.6
                                        %Net
      combined ratio
                                        
                                        
                                        58.4
                                        %
                                        
                                        
                                        81.1
                                        %
                                        
                                        
                                        59.3
                                        %
                                        
                                        
                                        77.4
                                        %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                                        
                                        
                                        12,314
                                        
                                        
                                        
                                        13,114
                                        
                                        
                                        
                                        25,017
                                        
                                        
                                        
                                        19,899Less:
      ceding commission revenue – primarily related party
                                        
                                        
                                        6,175
                                        
                                        
                                        
                                        8,051
                                        
                                        
                                        
                                        12,202
                                        
                                        
                                        
                                        11,4826,139
                                        
                                        
                                        
                                        5,063
                                        
                                        
                                        
                                        12,815
                                        
                                        
                                        
                                        8,417Net
      premium earned
                                        
                                        
                                        43,944
                                        
                                        
                                        
                                        43,086
                                        
                                        
                                        
                                        84,619
                                        
                                        
                                        
                                        72,682Net
      expense ratio
                                        
                                        
                                        14.0
                                        %
                                        
                                        
                                        11.8
                                        %
                                        
                                        
                                        15.1
                                        %
                                        
                                        
                                        11.6
                                        %




37





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




Gross Written Premium. Gross written premium
decreased $34.7 million or 27.2% to $92.6 million for the three months ended
June 30, 2009 from $127.3 million for the three months ended June 30, 2008. The
strengthening of the U.S. dollar negatively impacted gross written premium by
the Company’s European business by $8.0 million during the three months ended
June 30, 2009.  Additionally, the segment was positively impacted in
the second quarter of 2008 from the assumption of unearned premium in the total
amount of $16 million in connection with certain insurance
programs.




Net Premium Written. Net
premium written decreased $14.7 million or 23.8% to $47.3 million from $62.0
million for the three months ended June 30, 2009 and 2008,
respectively.  The decrease in net premium written resulted from a
decrease of gross written premium for the six months ended June 30, 2009
compared to gross written premium for the six months ended June 30,
2008





Net Premium Earned. Net
premium earned increased $0.8 million or 2.0% to $43.9 million for the three
months ended June 30, 2009 from $43.1 million for the three months ended June
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 June 30, 2009 compared to the twelve
months ended June 30, 2008.





Ceding Commission. Ceding
commission represents commission earned primarily through the Maiden Quota
Share, whereby AmTrust receives a 31% ceding commission on written premiums
ceded to Maiden Insurance.  The ceding commission earned during the
three months ended June 30, 2009 and 2008 was $6.2 million and $8.1 million,
respectively.




Loss and Loss
Adjustment Expenses; Loss Ratio. Loss and loss adjustment expenses were
$19.5 million and $29.9 million for the three months ended June 30, 2009 and
2008, respectively. The Company’s loss ratio for the segment for the three
months ended June 30, 2009 decreased to 44.3% from 69.3% for the three months
ended June 30, 2008.  The improvement in the loss ratio resulted from
a one-time benefit of $5.9 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 $1.0 million.




Acquisition Costs and Other
Underwriting Expenses; Expense Ratio. Acquisition Costs and Other
Underwriting Expenses decreased $0.8 million or 6.1% to $12.3 million for the
three months ended June 30, 2009 from $13.1 million for the three months ended
June 30, 2009. The expense ratio increased to 14.0% for the three months ended
June 30, 2009 from 11.8% for the three months ended June 30,
2008.  The increase in the expense ratio resulted, primarily, from
higher one-time policy acquisition expenses of $1.7 million related to the
acquisition of ACHL.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income). Net premiums earned
less expenses included in combined ratio increased $10.2 million or 124.4% to
$18.3 million for the three months ended June 30, 2009 from $8.1 million for the
three months ended June 30, 2008. This increase is attributable primarily to an
improvement in the loss ratio period over period.





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





Gross Written
Premium.  Gross written premium decreased $39.8 million or
18.5% to $175.3 million for the six months ended June 30, 2009 from $215.1
million for the six months ended June 30, 2008. The strengthening of the U.S.
dollar business negatively impacted gross written premium by the Company’s
European business by $19.5 million during the six months ended June 30,
2009.  Additionally, the segment was positively impacted in 2008 from
the assumption of unearned premium in the total amount of $16 million in
connection with certain insurance programs.




Net Premium Written. Net
premium written decreased $14.6 million or 14.6% to $85.5 million from $100.1
million for the six months ended June 30, 2009 and 2008,
respectively.  The decrease in net premium written resulted from a
decrease of gross written premium for the six months ended June 30, 2009
compared to gross written premium for the six months ended June 30,
2008.





38





Net Premium Earned. Net
premium earned increased $11.9 million or 16.4% to $84.6 million for the six
months ended June 30, 2009 from $72.7 million for the six months ended June 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 June 30, 2009 compared to the twelve months ended
June 30, 2008.





Ceding Commission.
  Ceding commission represents commission earned primarily through the
Maiden Quota Share, whereby AmTrust receives a 31% ceding commission on written
premiums ceded to Maiden Insurance.  The ceding commission earned
during the six months ended June 30, 2009 and 2008 was $12.2 million and $11.5
million, respectively.




Loss and Loss
Adjustment Expenses; Loss Ratio. Loss and loss adjustment expenses were
$19.5 million and $29.9 million for the three months ended June 30, 2009 and
2008, respectively. The Company’s loss ratio for the segment for the six months
ended June 30, 2009 decreased to 44.3% from 69.3% for the six months ended June
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 $3.0 million.




Acquisition Costs and Other
Underwriting Expenses; Expense Ratio. Acquisition Costs and Other
Underwriting Expenses increased $5.1 million or 25.7% to $25.0 million for the
six months ended June 30, 2009 from $19.9 million for the six months ended June
30, 2009. The expense ratio increased to 15.1% for the six months ended June 30,
2009 from 11.6% for the six months ended June 30, 2008.  The increase
in expense ratio resulted, primarily, from higher one-time policy acquisition
expenses of $3.4 million related to the acquisition of ACHL.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income).   Net
premiums earned less expenses included in combined ratio increased $18.0 million
or 109% to $34.5 million for the six months ended June 30, 2009 from $16.5
million for the six months ended June 30, 2008. This increase is attributable
primarily to an improvement in the loss ratio period over
period.





39





Specialty
Middle Market Property and Casualty Segment Results of Operations





Three Months Ended June 30,
                                        
                                        
                                        Six Months Ended June 30,(Amounts in thousands)
                                        
                                        2009
                                        
                                        
                                        2008
                                        
                                        
                                        2009
                                        
                                        
                                        2008Gross
      Written Premium
                                        
                                        $
                                        68,453
                                        
                                        
                                        $
                                        61,658
                                        
                                        
                                        $
                                        125,802
                                        
                                        
                                        $
                                        119,384Net
      premium written
                                        
                                        
                                        35,534
                                        
                                        
                                        
                                        29,649
                                        
                                        
                                        
                                        62,995
                                        
                                        
                                        
                                        57,674Change
      in unearned premium
                                        
                                        
                                        (4,172
                                        )
                                        
                                        
                                        578
                                        
                                        
                                        
                                        2,024
                                        
                                        
                                        
                                        (5,935
                                        )Net
      premiums earned
                                        
                                        
                                        31,362
                                        
                                        
                                        
                                        30,227
                                        
                                        
                                        
                                        65,019
                                        
                                        
                                        
                                        51,739Ceding
      commission revenue – primarily related party
                                        
                                        
                                        9,012
                                        
                                        
                                        
                                        8,903
                                        
                                        
                                        
                                        10,800
                                        
                                        
                                        
                                        13,747Loss
      and loss adjustment expense
                                        
                                        
                                        19,970
                                        
                                        
                                        
                                        19,486
                                        
                                        
                                        
                                        41,673
                                        
                                        
                                        
                                        32,170Acquisition
      costs and other underwriting expenses
                                        
                                        
                                        18,168
                                        
                                        
                                        
                                        16,551
                                        
                                        
                                        
                                        29,465
                                        
                                        
                                        
                                        27,29138,138
                                        
                                        
                                        
                                        36,037
                                        
                                        
                                        
                                        71,138
                                        
                                        
                                        
                                        59,461Net
      premiums earned less expenses included in combined ratio (Underwriting
      income)
                                        
                                        $
                                        2,236
                                        
                                        
                                        $
                                        3,093
                                        
                                        
                                        $
                                        4,681
                                        
                                        
                                        $
                                        6,025Key
      Measures:Net
      loss ratio
                                        
                                        
                                        63.7
                                        %
                                        
                                        
                                        64.5
                                        %
                                        
                                        
                                        64.1
                                        %
                                        
                                        
                                        62.2
                                        %Net
      expense ratio
                                        
                                        
                                        29.2
                                        %
                                        
                                        
                                        25.3
                                        %
                                        
                                        
                                        28.7
                                        %
                                        
                                        
                                        26.2
                                        %Net
      combined ratio
                                        
                                        
                                        92.9
                                        %
                                        
                                        
                                        89.8
                                        %
                                        
                                        
                                        92.8
                                        %
                                        
                                        
                                        88.4
                                        %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                                        
                                        
                                        18,168
                                        
                                        
                                        
                                        16,551
                                        
                                        
                                        
                                        29,465
                                        
                                        
                                        
                                        27,291Less:
      ceding commission revenue – primarily related party
                                        
                                        
                                        9,012
                                        
                                        
                                        
                                        8,903
                                        
                                        
                                        
                                        10,800
                                        
                                        
                                        
                                        13,7479,156
                                        
                                        
                                        
                                        7,648
                                        
                                        
                                        
                                        18,665
                                        
                                        
                                        
                                        13,544Net
      premium earned
                                        
                                        
                                        31,362
                                        
                                        
                                        
                                        30,227
                                        
                                        
                                        
                                        65,019
                                        
                                        
                                        
                                        51,739Net
      expense ratio
                                        
                                        
                                        29.2
                                        %
                                        
                                        
                                        25.3
                                        %
                                        
                                        
                                        28.7
                                        %
                                        
                                        
                                        26.2
                                        %





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





Gross Written
Premium.  Gross written premium increased $6.8 million or 11.0%
to $68.5 million for the three months ended June 30, 2009 from $61.7 million for
the three months ended June 30, 2008.  The increase resulted from
organic growth in certain product lines including workers compensation and other
commercial package business lines. The increase was partially offset by a
decline in the credit business, 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 $5.8 million or 19.8%
to $35.5 million for the three months ended June 30, 2009 from $29.7 million for
the three months ended June 30, 2008.  The increase in net premium
written resulted from an increase of gross written premium for the three months
ended June 30, 2009 compared to gross written premium for the three months ended
June 30, 2008.





40





Net Premium
Earned.  Net premium earned increased $1.2 million or 3.8% to
$31.4 million for the three months ended June 30, 2009 from $30.2 million for
the three months ended June 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 June 30, 2009
compared to the twelve months ended June 30, 2008.





Ceding
Commission. Ceding commission represents commission earned
primarily through the Maiden Quota Share agreement , whereby AmTrust receives a
31% ceding commission on ceded written premiums to Maiden
Insurance.  The ceding commission earned during the three months ended
June 30, 2009 and 2008 was $9.0 million and $8.9 million,
respectively.





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses increased $0.5
million or 2.5% to $20.0 million for the three months ended June 30, 2009
compared to $19.5 million for the three months ended June 30, 2008. The loss
ratio was 63.7% and 64.5% for the three months ended June 30, 2009 and 2008,
respectively, which was relatively flat.




Acquisition Costs and Other
Underwriting Expenses; Expense Ratio.  Acquisition Costs and
Other Underwriting Expenses increased $1.6 million or 9.8% to $18.2 million for
the three months ended June 30, 2009 from $16.6 million for the three months
ended June 30, 2009. The expense ratio increased to 29.2% for the three months
ended June 30, 2009 from 25.3% for the three months ended June 30, 2008. The
increase resulted from a greater percentage allocation of other underwriting
expenses to this segment as a result of increased premiums in this segment
relative to the other segments.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income).   Net premiums
earned less expenses included in combined ratio were $2.2 million and $3.1
million for the three months ended June 30, 2009 and 2008, respectively. The
decrease of $0.9 million resulted primarily from an increase in other
underwriting expenses.





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





Gross Written
Premium.  Gross written premium increased $6.4 million or 5.4%
to $125.8 million for the six months ended June 30, 2009 from $119.4 million for
the six months ended June 30, 2008.  The increase resulted from
organic growth in certain product lines including workers compensation and other
commercial package business lines.  The increase was partially offset
by a decline in the credit business, which the Company wrote on behalf of HSBC
Insurance Company of Delaware pursuant to a 100% fronting arrangement which is
in run-off.





Net Premium
Written.  Net premium written increased $5.3 million or 9.2% to
$63.0 million for the six months ended June 30, 2009 from $57.7 million for the
six months ended June 30, 2008.  The increase in net premium written
resulted from an increase of gross written premium for the six months ended June
30, 2009 compared to gross written premium for the six months ended June 30,
2008.





Net Premium
Earned.  Net premium earned increased $13.2 million or 25.7% to
$65.0 million for the six months ended June 30, 2009 from $51.8 million for the
six months ended June 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 June 30, 2009 compared
to the twelve months ended June 30, 2008.





Ceding
Commission.  Ceding commission represents commission earned
primarily through the Maiden Quota Share,  whereby AmTrust receives a
31% ceding commission on ceded written premiums to Maiden
Insurance.  The ceding commission earned during the six months ended
June 30, 2009 and 2008 was $10.8 million and $13.7 million,
respectively.




Loss and Loss
Adjustment Expenses; Loss Ratio.  Loss and loss adjustment
expenses increased $9.5 million or 29.5% to $41.7 million for the six months
ended June 30, 2009 compared to $32.2 million for the six months ended June 30,
2008. The loss ratio for the segment increased for the six months ended June 30,
2009 to 64.1% from 62.2% for the six months ended June 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 $2.2 million or 8.0% to $29.5 million for
the six months ended June 30, 2009 from $27.3 million for the six months ended
June 30, 2009. The expense ratio increased to 28.7% for the three months ended
June 30, 2009 from 26.2% for the six months ended June 30, 2008. The increase
resulted from a greater percentage allocation of other underwriting expenses to
this segment as a result of increased premiums in this segment relative to the
other segments.




41




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income).  Net premiums
earned less expenses included in combined ratio were $4.7 million and $6.0
million for the six months ended June 30, 2009 and 2008, respectively. The
decrease of $1.3 million resulted primarily from an increase in incurred losses
and other underwriting expenses.





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 $144 million and $119 million for the six
months ended June 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:





Six Months Ended
      June 30,(Amounts in thousands)
                      2009
                      
                      2008Cash
      and cash equivalents provided by (used in):Operating
      activities
                      
                      $
                      112,834
                      
                      
                      $
                      90,132Investing
      activities
                      
                      
                      30,018
                      
                      
                      
                      (270,702
                      )Financing
      activities
                      
                      
                      (79,420
                      )
                      
                      
                      221,364





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




Cash
provided by investing activities during the period represents, primarily, the
net sales (sales less purchases) of investments. For the six months ended June
30, 2009, the Company’s net sales of fixed securities totaled $37 million offset
by net purchases of equity securities that totaled $5
million.  Additionally, the Company had approximately $2 million of
purchases related to property and equipment. For the six months ended June 30,
2008, the Company’s net purchases of fixed income securities totaled
approximately $238 million offset by net sales of  $14 million of
equity securities and $13 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 six months ended June 30, 2009 consisted of $54
million paid from settling repurchase agreements, a $7.5 million principal
payment on a promissory note, $6.7 million of principal payments on a term
loan, dividend payments of $6.0 million and the repurchase of
Company shares for $5.4 million.  Cash provided by financing
activities for the six months ended June 30, 2008 consisted of $40 million from
entering into a term loan, $186 million received from entering into repurchase
agreements offset by dividend payments of $4.8 million.





42





Term
Loan





On
June 3, 2008, the Company entered into a term loan with JP Morgan Chase Bank,
N.A. in the aggregate amount of $40 million. The term of the loan is for a
period of three years and requires quarterly principal payments, which began on
September 3, 2008 of $3.3 million and end on June 3, 2011. The loan carries a
variable rate and is based on a Eurodollar rate plus an applicable margin. The
Eurodollar rate is a periodic fixed rate equal to the London Inter bank Offered
Rate “LIBOR” and had a margin rate of 185 basis points and was 2.45% as of
June 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 $0.8 million of interest
expense during the six months ended June 30, 2009 related to this
agreement.  The Company reduced the outstanding balance on the note
during the six months ended June 30, 2009 from $33.3 million to $26.7
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 $0.6 million of interest expense during the six months ended June 30,
2009 and the note’s carrying value at June 30, 2009 was $20.6
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 June 30, 2009 there was no outstanding balance on the
line of credit. At June 30, 2009, The Company had outstanding letters of credit
in place for $24.1 million that reduced the availability on the line of credit
to $5.9 million as of June 30, 2009.





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 June 30, 2009, there were $230.6 million
principal amount outstanding at interest rates between 0.40% and 0.60%. Interest
expense associated with these repurchase agreements for the six months ended
June 30, 2009 was $1.2 million of which $0.1 million was accrued as of June 30,
2009. The Company has approximately $235 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 lends to AII from time to
time the amount of the obligations of the AmTrust Ceding Insurers that AII is
obligated to secure, not to exceed the amount equal to the Maiden Insurance’s
proportionate share of such obligations to such AmTrust Ceding Insurers in
accordance with the Maiden Quota Share agreement. The loan agreement was amended
in February 2008 to provide for interest at a rate of LIBOR plus 90 basis points
and is payable on a quarterly basis. Each advance under the loan is secured by a
promissory note. Advances totaled $168.0 million as of June 30,
2009.




43





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.




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.




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.





44





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 $5,000
(“Covered Business”).





AmTrust
also agreed to cause AII, subject to regulatory requirements, to reinsure any
insurance company which writes Covered Business in which AmTrust acquires a
majority interest to the extent required to enable AII to cede to Maiden
Insurance 40% of the premiums and losses related to such Covered Business. 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 $5,000 per loss (“Excess Retention
Business”).





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





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.




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.





45





Investment
Portfolio





Our
investment portfolio, including cash and cash equivalents, increased $49.8
million or 3.7% to $1,397.8 million at June 30, 2009 from $1,348.0 million as of
December 31, 2008 (excluding $13.0 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 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 securities by
approximately $1.0 million. Our fixed maturity securities, gross, as of this
date had a fair value of $912.5 million and an amortized cost of $952.5 million.
Our equity securities are classified as available-for-sale, as defined by SFAS
115. These securities are reported at fair value. The equity securities, gross,
carried at fair value were $38.3 million with a cost of $72.0 million as of June
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:





June 30, 2009
                                
                                
                                December 31, 2008(Amounts
      in thousands)
                                
                                Carrying
                                  Value
                                
                                
                                Percentage of
                                  Portfolio
                                
                                
                                Carrying
                                  Value
                                
                                
                                Percentage of
                                  PortfolioCash
      and cash equivalents
                                
                                $
                                257,872
                                
                                
                                
                                18.5
                                %
                                
                                $
                                192,053
                                
                                
                                
                                14.2
                                %Time
      and short-term deposits
                                
                                
                                189,088
                                
                                
                                
                                13.5
                                
                                
                                
                                167,845
                                
                                
                                
                                12.5U.S.
      treasury securities
                                
                                
                                15,208
                                
                                
                                
                                1.1
                                
                                
                                
                                17,851
                                
                                
                                
                                1.3U.S.
      government agencies
                                
                                
                                8,299
                                
                                
                                
                                0.6
                                
                                
                                
                                21,434
                                
                                
                                
                                1.6Municipals
                                
                                
                                28,271
                                
                                
                                
                                2.0
                                
                                
                                
                                45,208
                                
                                
                                
                                3.4Commercial
      mortgage back securities
                                
                                
                                3,362
                                
                                
                                
                                0.2
                                
                                
                                
                                3,390
                                
                                
                                
                                0.2Residential  mortgage
      backed securities - primarily agency backed
                                
                                
                                457,768
                                
                                
                                
                                32.7
                                
                                
                                
                                492,405
                                
                                
                                
                                36.6Asset
      backed securities
                                
                                
                                3,664
                                
                                
                                
                                0.3
                                
                                
                                
                                5,068
                                
                                
                                
                                0.4Corporate
      bonds
                                
                                
                                395,941
                                
                                
                                
                                28.3
                                
                                
                                
                                373,901
                                
                                
                                
                                27.7Preferred
      stocks
                                
                                
                                3,463
                                
                                
                                
                                0.3
                                
                                
                                
                                5,315
                                
                                
                                
                                0.4Common
      stocks
                                
                                
                                34,880
                                
                                
                                
                                2.5
                                
                                
                                
                                23,513
                                
                                
                                
                                1.7$
                                1,397,816
                                
                                
                                
                                100.0
                                %
                                
                                $
                                1,347,983
                                
                                
                                
                                100.0
                                %





As of
June 30, 2009, the weighted average duration of our fixed income securities was
5.2 years and had a yield of 4.49%.




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.





46





Impairment
of investment securities results in a charge to operations when a market decline
below cost is deemed to be other-than-temporary. The Company generally considers
investments subject to impairment testing when an asset is in an unrealized loss
position in excess of 25% of cost basis.





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




(Amounts in thousands)
                        
                        2009
                        
                        
                        2008Equity
      securities
                        
                        $
                        10,188
                        
                        
                        $
                        7,972Fixed
      maturity securities
                        
                        
                        2,025
                        
                        
                        
                        —$
                        12,213
                        
                        
                        $
                        7,972




In
addition to the other than temporary impairment of $10.2 million recorded during
the six months ended June 30, 2009, at June 30, 2009, the Company had $35.4
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, 30
equity securities comprised $29.3 million, or 82.8% of the unrealized
loss.  The Company holds 11 and 6 securities in the consumer products
sector and healthcare sector, respectively, which represents approximately 20.0%
and 21.0%, respectively, of the total fair value and 27.9% and 22.9%,
respectively, of the Company’s unrealized losses.  The Company also
holds 11 equity securities in the technology, industrial and financial sectors
which have fair values of approximately 7.0%, 10.0% and 9.0%, respectively, and
approximately 7.0%, 19.0% and 2.9%, respectively, of the Company’s unrealized
losses. Additionally, the Company owns 2 stocks in other sectors which accounts
for 3.8% 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 17.2% 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 June
30, 2009, the Company had $62.5 million of gross unrealized losses related to
available-for-sale fixed income securities as of June 30, 2009. Corporate bonds
represent approximately 43% of the fair value of our fixed maturities and
approximately 96% of the total unrealized losses of our fixed maturities. The
Company owns 195 corporate bonds in the industrial, financial  and
other sectors, which have a fair value of approximately 12%, 30% and 1%,
respectively, and 21%, 75% 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.




Item
3. Quantitative and Qualitative Disclosures About Market Risk





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




Liquidity Risk.
  Liquidity risk represents the potential inability of 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.





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





47





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 $189.1 million of time and short-term
deposits) with a fair value of $912.5 million and an amortized cost of $952.5
million as of June 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 June 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 June 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
                    
                    $
                    842,283
                    
                    
                    $
                    (70,231
                    )
                    
                    $
                    —
                    
                    
                    $
                    (70,231
                    )
                    
                    
                    (9.5
                    )%100
      basis point increase
                    
                    
                    872,836
                    
                    
                    
                    (39,678
                    )
                    
                    
                    —
                    
                    
                    
                    (39,678
                    )
                    
                    
                    (5.4
                    )No
      change
                    
                    
                    912,514
                    
                    
                    
                    —
                    
                    
                    
                    912,514
                    
                    
                    
                    —
                    
                    
                    
                    —100
      basis point decrease
                    
                    
                    941,802
                    
                    
                    
                    29,288
                    
                    
                    
                    —
                    
                    
                    
                    29,288
                    
                    
                    
                    6.1200
      basis point decrease
                    
                    
                    987,768
                    
                    
                    
                    75,254
                    
                    
                    
                    —
                    
                    
                    
                    75,254
                    
                    
                    
                    10.2




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 $339 million
of debt instruments of which $144 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.





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 $1.7 million after tax
realized currency loss based on our outstanding foreign denominated reserves of
$53.5 million at June 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 June 30, 2009, the equity securities in our
investment portfolio had a fair value of $38.3 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 June
30, 2009. The hypothetical scenarios below assume that the Company’s Beta is 1
when compared to the S&P 500 index.





48





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
                    
                    $
                    40,260
                    
                    
                    $
                    1,917
                    
                    
                    
                    
                    
                    $
                    1,917
                    
                    
                    
                    0.3
                    %No
      change
                    
                    
                    38,343
                    
                    
                    
                    
                    
                    
                    $
                    38,3435%
      decrease
                    
                    
                    36,426
                    
                    
                    
                    (1,917
                    )
                    
                    
                    
                    
                    
                    
                    (1,917
                    )
                    
                    
                    (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.





49





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.





See Item 1A. Risk Factors included in
the Company’s Annual Report Form 10-K for the period ended December 31, 2008 for
a description of the Company’s risk factors.





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





None.





Item
3. Defaults Upon Senior Securities.





None.





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




(a)
              The annual meeting of the
      shareholders was held on May 12,
2009.
  (b)
              All of the Company's director
      nominees, Barry D. Zyskind, Michael Karfunkel, George Karfunkel, Donald T.
      DeCarlo, Abraham Gulkowitz, Isaac Neuberger and Jay J. Miller, were
      elected. There was no solicitation in opposition to the Company's
      nominees.
  (c)
              Matters voted on at the meeting
      and the number of votes
cast:
  1.
              Election of directors to serve
      until the 2010 Annual Meeting of Shareholders or until their successors
      have been duly elected or appointed and
  qualified:




Director
                                    
                                    Voted For
                                    
                                    
                                    Withhold AuthorityBarry
      D. Zyskind
                                    
                                    
                                    51,995,780
                                    
                                    
                                    
                                    1,134,244Michael
      Karfunkel
                                    
                                    
                                    42,583,120
                                    
                                    
                                    
                                    10,546,904George
      Karfunkel
                                    
                                    
                                    51,900,627
                                    
                                    
                                    
                                    1,229,397Donald
      T. DeCarlo
                                    
                                    
                                    52,592,349
                                    
                                    
                                    
                                    537,675Abraham
      Gulkowitz
                                    
                                    
                                    52,592,674
                                    
                                    
                                    
                                    537,350Isaac
      Neuberger *
                                    
                                    
                                    52,591,130
                                    
                                    
                                    
                                    538,894Jay
      J. Miller
                                    
                                    
                                    52,400,561
                                    
                                    
                                    
                                    729,463




2.
              Ratification
      of the appointment of BDO Seidman, LLP as Independent Auditor for the year
      ended December 31, 2009:




Voted For
                      
                      Voted Against
                      
                      Abstentions52,763,135
                      
                      3,700
                      
                      7,764





* On May
18, 2009, Isaac M. Neuberger resigned from the Board of Directors of AmTrust
Financial Services, Inc.





50





Item
5. Other Information.





None.





Item 6.   Exhibits




Exhibit
                    Number
                  
                  Description10.1
                  
                  Amended
      Employment Agreement, dated as of March 27, 2009, by and between the
      Company and Michael J. Saxon.10.2
                  
                  Letter
      dated June 16, 2009 to director Isaac Neuberger.31.1
                  
                  Certification
      of the Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
      for the quarter ended June 30, 2009.31.2
                  
                  Certification
      of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
      for the quarter ended June 30, 2009.32.1
                  
                  Certification
      of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, for
      the quarter ended June 30, 2009.32.2
                  
                  Certification
      of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, for
      the quarter ended June 30,
2009.





51





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.





AmTrust
      Financial Services, Inc.(Registrant)Date:
      August 10, 2009
                  
                  /s/ Barry
      D. ZyskindBarry
      D. Zyskind
                    President
      and Chief Executive Officer/s/ Ronald
      E. Pipoly, Jr.Ronald
      E. Pipoly, Jr.
                    Chief
      Financial Officer




52