UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





x
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
quarterly period ended September 30, 2010





 ̈
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from ___________________ to ___________________





Commission
file no. 001-33143





AmTrust
Financial Services, Inc.


(Exact
name of registrant as specified in its charter)





Delaware
              
              04-3106389(State
      or other jurisdiction of
              
              (IRS
      Employer Identification No.)incorporation
      or organization)59
      Maiden Lane, 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    ̈





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




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





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





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





As of
November 1, 2010, the Registrant had one class of Common Stock ($.01 par value),
of which 59,517,527 shares were issued and outstanding.





INDEX





PagePART
      I
                              
                              FINANCIAL
      INFORMATIONItem
      1.
                              
                              Unaudited
      Financial Statements:Condensed
      Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009
      (audited)
                              
                              3Condensed
      Consolidated Statements of Income
                              
                              4—
      Three and nine months ended September 30, 2010 and 2009Condensed
      Consolidated Statements of Cash Flows
                              
                              5—
      Three and nine months ended September 30, 2010 and 2009Notes
      to Condensed Consolidated Financial Statements
                              
                              6Item
      2.
                              
                              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                              
                              29Item
      3.
                              
                              Quantitative
      and Qualitative Disclosures About Market Risk
                              
                              49Item
      4.
                              
                              Controls
      and Procedures
                              
                              51PART
      II
                              
                              OTHER
      INFORMATIONItem
      1.
                              
                              Legal
      Proceedings
                              
                              51Item
      1A.
                              
                              Risk
      Factors
                              
                              51Item
      2.
                              
                              Unregistered
      Sales of Equity Securities and Use of Proceeds
                              
                              51Item
      3.
                              
                              Defaults
      Upon Senior Securities
                              
                              51Item
      4.
                              
                              (Removed
      and Reserved)
                              
                              51Item
      5.
                              
                              Other
      Information
                              
                              52Item
      6.
                              
                              Exhibits
                              
                              53Signatures
                              
                              54





2


PART 1 -
FINANCIAL INFORMATION





Item 1.
Financial Statements





AMTRUST
FINANCIAL SERVICES, INC. AND SUBSIDIARIES


Condensed
Consolidated Balance Sheets


(in
thousands, except par value)





September 30,
                                                            2010
                                                          
                                                          
                                                          December 31,
                                                            2009(Unaudited)
                                                          
                                                          
                                                          (Audited)ASSETSInvestments:Fixed
      maturities, available-for-sale, at market value (amortized cost
      $1,013,255; $1,080,914)
                                                          
                                                          $
                                                          1,045,200
                                                          
                                                          
                                                          $
                                                          1,085,362Equity
      securities, available-for-sale, at market value (cost $31,607;
      $60,639)
                                                          
                                                          
                                                          30,579
                                                          
                                                          
                                                          
                                                          50,355Short-term
      investments
                                                          
                                                          
                                                          30,065
                                                          
                                                          
                                                          
                                                          31,265Equity
      investment in unconsolidated subsidiaries – related party
                                                          
                                                          
                                                          78,694
                                                          
                                                          
                                                          
                                                          1,288Other
      investments
                                                          
                                                          
                                                          15,680
                                                          
                                                          
                                                          
                                                          12,746Total
      investments
                                                          
                                                          
                                                          1,200,218
                                                          
                                                          
                                                          
                                                          1,181,016Cash
      and cash equivalents
                                                          
                                                          
                                                          303,528
                                                          
                                                          
                                                          
                                                          233,810Accrued
      interest and dividends
                                                          
                                                          
                                                          6,344
                                                          
                                                          
                                                          
                                                          7,617Premiums
      receivable, net
                                                          
                                                          
                                                          605,192
                                                          
                                                          
                                                          
                                                          495,871Note
      receivable – related party
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          23,224Reinsurance
      recoverable
                                                          
                                                          
                                                          402,622
                                                          
                                                          
                                                          
                                                          349,695Reinsurance
      recoverable – related party
                                                          
                                                          
                                                          363,711
                                                          
                                                          
                                                          
                                                          293,626Prepaid
      reinsurance premium
                                                          
                                                          
                                                          159,961
                                                          
                                                          
                                                          
                                                          148,425Prepaid
      reinsurance premium – related party
                                                          
                                                          
                                                          268,860
                                                          
                                                          
                                                          
                                                          262,128Prepaid
      expenses and other assets
                                                          
                                                          
                                                          162,586
                                                          
                                                          
                                                          
                                                          85,108Federal
      income tax receivable
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          364Deferred
      policy acquisition costs
                                                          
                                                          
                                                          212,889
                                                          
                                                          
                                                          
                                                          180,179Deferred
      income taxes
                                                          
                                                          
                                                          1,770
                                                          
                                                          
                                                          
                                                          7,615Property
      and equipment, net
                                                          
                                                          
                                                          23,416
                                                          
                                                          
                                                          
                                                          15,858Goodwill
                                                          
                                                          
                                                          115,671
                                                          
                                                          
                                                          
                                                          53,156Intangible
      assets
                                                          
                                                          
                                                          67,910
                                                          
                                                          
                                                          
                                                          62,672$
                                                          3,894,678
                                                          
                                                          
                                                          $
                                                          3,400,364LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Loss
      and loss expense reserves
                                                          
                                                          $
                                                          1,210,616
                                                          
                                                          
                                                          $
                                                          1,091,944Unearned
      premiums
                                                          
                                                          
                                                          939,990
                                                          
                                                          
                                                          
                                                          871,779Ceded
      reinsurance premiums payable
                                                          
                                                          
                                                          133,281
                                                          
                                                          
                                                          
                                                          75,032Ceded
      reinsurance premium payable – related party
                                                          
                                                          
                                                          95,295
                                                          
                                                          
                                                          
                                                          86,165Reinsurance
      payable on paid losses
                                                          
                                                          
                                                          9,620
                                                          
                                                          
                                                          
                                                          1,238Funds
      held under reinsurance treaties
                                                          
                                                          
                                                          1,489
                                                          
                                                          
                                                          
                                                          690Securities
      sold but not yet purchased, at market
                                                          
                                                          
                                                          65,643
                                                          
                                                          
                                                          
                                                          16,315Securities
      sold under agreements to repurchase, at contract value
                                                          
                                                          
                                                          238,455
                                                          
                                                          
                                                          
                                                          172,774Accrued
      expenses and other current liabilities
                                                          
                                                          
                                                          173,371
                                                          
                                                          
                                                          
                                                          180,325Federal
      tax payable
                                                          
                                                          
                                                          3,466
                                                          
                                                          
                                                          
                                                          —Derivatives
      liabilities
                                                          
                                                          
                                                          284
                                                          
                                                          
                                                          
                                                          1,893Note
      payable on collateral loan – related party
                                                          
                                                          
                                                          167,975
                                                          
                                                          
                                                          
                                                          167,975Non
      interest bearing note payable – net of unamortized discount of
      $762; $1,372
                                                          
                                                          
                                                          14,238
                                                          
                                                          
                                                          
                                                          21,128Term
      loan
                                                          
                                                          
                                                          10,000
                                                          
                                                          
                                                          
                                                          20,000Junior
      subordinated debt
                                                          
                                                          
                                                          123,714
                                                          
                                                          
                                                          
                                                          123,714Total
      liabilities
                                                          
                                                          
                                                          3,187,437
                                                          
                                                          
                                                          
                                                          2,830,972Commitments
      and contingenciesRedeemable
      non-controlling interest
                                                          
                                                          
                                                          997
                                                          
                                                          
                                                          
                                                          —Stockholders’
      equity:Common
      stock, $.01 par value; 100,000 shares authorized, 84,314 and  84,179
      issued in 2010 and 2009, respectively; 59,499 and 59,314 outstanding in
      2010 and 2009, respectively
                                                          
                                                          
                                                          843
                                                          
                                                          
                                                          
                                                          842Preferred
      stock, $.01 par value; 10,000 shares authorized
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —Additional
      paid-in capital
                                                          
                                                          
                                                          547,073
                                                          
                                                          
                                                          
                                                          543,977Treasury
      stock at cost; 24,816 and 24,866 shares in 2010 and 2009,
      respectively
                                                          
                                                          
                                                          (300,180
                                                          )
                                                          
                                                          
                                                          (300,889
                                                          )Accumulated
      other comprehensive gain (loss)
                                                          
                                                          
                                                          10,802
                                                          
                                                          
                                                          
                                                          (17,020
                                                          )Retained
      earnings
                                                          
                                                          
                                                          438,009
                                                          
                                                          
                                                          
                                                          342,482Total
      AmTrust Financial Services, Inc. equity
                                                          
                                                          
                                                          696,547
                                                          
                                                          
                                                          
                                                          569,392Non-controlling
      interest
                                                          
                                                          
                                                          9,697
                                                          
                                                          
                                                          
                                                          —Total
      stockholders’ equity
                                                          
                                                          
                                                          706,244
                                                          
                                                          
                                                          
                                                          569,392$
                                                          3,894,678
                                                          
                                                          
                                                          $
                                                          3,400,364




See accompanying notes to unaudited
condensed consolidated statements.


3


AmTrust Financial Services,
Inc.


Condensed
Consolidated Statements of Income


(Unaudited)


(in
thousands, except per share data)




Three Months Ended September 30,
                                                                      
                                                                      
                                                                      Nine Months Ended September 30,2010
                                                                      
                                                                      
                                                                      2009
                                                                      
                                                                      
                                                                      2010
                                                                      
                                                                      
                                                                      2009Revenues:Premium
      income:Net
      written premium
                                                                      
                                                                      $
                                                                      182,837
                                                                      
                                                                      
                                                                      $
                                                                      167,317
                                                                      
                                                                      
                                                                      $
                                                                      568,644
                                                                      
                                                                      
                                                                      $
                                                                      440,616Change
      in unearned premium
                                                                      
                                                                      
                                                                      8,048
                                                                      
                                                                      
                                                                      
                                                                      (22,025
                                                                      )
                                                                      
                                                                      
                                                                      (33,398
                                                                      )
                                                                      
                                                                      
                                                                      (26,098
                                                                      )Net
      earned premium
                                                                      
                                                                      
                                                                      190,885
                                                                      
                                                                      
                                                                      
                                                                      145,292
                                                                      
                                                                      
                                                                      
                                                                      535,246
                                                                      
                                                                      
                                                                      
                                                                      414,518Ceding
      commission – primarily related party
                                                                      
                                                                      
                                                                      37,903
                                                                      
                                                                      
                                                                      
                                                                      27,369
                                                                      
                                                                      
                                                                      
                                                                      103,109
                                                                      
                                                                      
                                                                      
                                                                      87,238Service
      and fee income
                                                                      
                                                                      
                                                                      19,095
                                                                      
                                                                      
                                                                      
                                                                      4,892
                                                                      
                                                                      
                                                                      
                                                                      30,634
                                                                      
                                                                      
                                                                      
                                                                      16,174Service
      and fee income – related party
                                                                      
                                                                      
                                                                      3,323
                                                                      
                                                                      
                                                                      
                                                                      2,059
                                                                      
                                                                      
                                                                      
                                                                      8,871
                                                                      
                                                                      
                                                                      
                                                                      5,838Net
      investment income
                                                                      
                                                                      
                                                                      10,952
                                                                      
                                                                      
                                                                      
                                                                      14,245
                                                                      
                                                                      
                                                                      
                                                                      39,237
                                                                      
                                                                      
                                                                      
                                                                      42,035Net
      realized gain (loss) on investments
                                                                      
                                                                      
                                                                      7,460
                                                                      
                                                                      
                                                                      
                                                                      (11,653
                                                                      )
                                                                      
                                                                      
                                                                      2,701
                                                                      
                                                                      
                                                                      
                                                                      (28,600
                                                                      )Total
      revenues
                                                                      
                                                                      
                                                                      269,618
                                                                      
                                                                      
                                                                      
                                                                      182,204
                                                                      
                                                                      
                                                                      
                                                                      719,798
                                                                      
                                                                      
                                                                      
                                                                      537,203Expenses:Loss
      and loss adjustment expense
                                                                      
                                                                      
                                                                      120,432
                                                                      
                                                                      
                                                                      
                                                                      77,531
                                                                      
                                                                      
                                                                      
                                                                      331,763
                                                                      
                                                                      
                                                                      
                                                                      229,031Acquisition
      costs and other underwriting expenses
                                                                      
                                                                      
                                                                      82,152
                                                                      
                                                                      
                                                                      
                                                                      63,154
                                                                      
                                                                      
                                                                      
                                                                      223,077
                                                                      
                                                                      
                                                                      
                                                                      185,895Other
                                                                      
                                                                      
                                                                      20,210
                                                                      
                                                                      
                                                                      
                                                                      5,764
                                                                      
                                                                      
                                                                      
                                                                      35,780
                                                                      
                                                                      
                                                                      
                                                                      16,732Total
      expenses
                                                                      
                                                                      
                                                                      222,794
                                                                      
                                                                      
                                                                      
                                                                      146,449
                                                                      
                                                                      
                                                                      
                                                                      590,620
                                                                      
                                                                      
                                                                      
                                                                      431,658Income
      before other income (expense), income taxes and equity in earnings (loss)
      of unconsolidated subsidiaries
                                                                      
                                                                      
                                                                      46,824
                                                                      
                                                                      
                                                                      
                                                                      35,755
                                                                      
                                                                      
                                                                      
                                                                      129,178
                                                                      
                                                                      
                                                                      
                                                                      105,545Other
      income (expenses):Foreign
      currency (loss) gain
                                                                      
                                                                      
                                                                      (141
                                                                      )
                                                                      
                                                                      
                                                                      552
                                                                      
                                                                      
                                                                      
                                                                      (103
                                                                      )
                                                                      
                                                                      
                                                                      1,196Interest
      expense
                                                                      
                                                                      
                                                                      (3,410
                                                                      )
                                                                      
                                                                      
                                                                      (3,813
                                                                      )
                                                                      
                                                                      
                                                                      (10,045
                                                                      )
                                                                      
                                                                      
                                                                      (11,991
                                                                      )Gain
      on acquisition of life settlement contracts
                                                                      
                                                                      
                                                                      10,592
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      10,592
                                                                      
                                                                      
                                                                      
                                                                      —Total
      other income (expenses)
                                                                      
                                                                      
                                                                      7,041
                                                                      
                                                                      
                                                                      
                                                                      (3,261
                                                                      )
                                                                      
                                                                      
                                                                      444
                                                                      
                                                                      
                                                                      
                                                                      (10,795
                                                                      )Income
      before income taxes and equity in earnings (loss) of unconsolidated
      subsidiaries
                                                                      
                                                                      
                                                                      53,865
                                                                      
                                                                      
                                                                      
                                                                      32,494
                                                                      
                                                                      
                                                                      
                                                                      129,622
                                                                      
                                                                      
                                                                      
                                                                      94,750Provision
      for income taxes
                                                                      
                                                                      
                                                                      15,567
                                                                      
                                                                      
                                                                      
                                                                      8,107
                                                                      
                                                                      
                                                                      
                                                                      39,574
                                                                      
                                                                      
                                                                      
                                                                      18,811Income
      before equity in earnings (loss) of unconsolidated
      subsidiaries
                                                                      
                                                                      
                                                                      38,298
                                                                      
                                                                      
                                                                      
                                                                      24,387
                                                                      
                                                                      
                                                                      
                                                                      90,048
                                                                      
                                                                      
                                                                      
                                                                      75,939Equity
      in earnings (loss) of unconsolidated subsidiaries – related
      party
                                                                      
                                                                      
                                                                      4,030
                                                                      
                                                                      
                                                                      
                                                                      (166
                                                                      )
                                                                      
                                                                      
                                                                      21,803
                                                                      
                                                                      
                                                                      
                                                                      (785
                                                                      )Net
      income
                                                                      
                                                                      
                                                                      42,328
                                                                      
                                                                      
                                                                      
                                                                      24,221
                                                                      
                                                                      
                                                                      
                                                                      111,851
                                                                      
                                                                      
                                                                      
                                                                      75,154Net
      income attributable to non-controlling interests of
      subsidiaries
                                                                      
                                                                      
                                                                      3,442
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      3,442
                                                                      
                                                                      
                                                                      
                                                                      —Net
      income attributable to AmTrust Financial Services, Inc.
                                                                      
                                                                      
                                                                      38,886
                                                                      
                                                                      
                                                                      
                                                                      24,221
                                                                      
                                                                      
                                                                      
                                                                      108,409
                                                                      
                                                                      
                                                                      
                                                                      75,154Earnings
      per common share:Basic
      earnings per common share
                                                                      
                                                                      $
                                                                      0.65
                                                                      
                                                                      
                                                                      $
                                                                      0.41
                                                                      
                                                                      
                                                                      $
                                                                      1.82
                                                                      
                                                                      
                                                                      $
                                                                      1.26Diluted
      earnings per common share
                                                                      
                                                                      $
                                                                      0.64
                                                                      
                                                                      
                                                                      $
                                                                      0.40
                                                                      
                                                                      
                                                                      $
                                                                      1.79
                                                                      
                                                                      
                                                                      $
                                                                      1.25Dividends
      declared per common share
                                                                      
                                                                      $
                                                                      0.07
                                                                      
                                                                      
                                                                      $
                                                                      0.06
                                                                      
                                                                      
                                                                      $
                                                                      0.21
                                                                      
                                                                      
                                                                      $
                                                                      0.17Net
      realized loss on investments:Total
      other-than-temporary impairment losses
                                                                      
                                                                      $
                                                                      (4,051
                                                                      )
                                                                      
                                                                      $
                                                                      (3,147
                                                                      )
                                                                      
                                                                      $
                                                                      (21,196
                                                                      )
                                                                      
                                                                      $
                                                                      (15,360
                                                                      )Portion
      of loss recognized in other comprehensive income
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —Net
      impairment losses recognized in earnings
                                                                      
                                                                      
                                                                      (4,051
                                                                      )
                                                                      
                                                                      
                                                                      (3,147
                                                                      )
                                                                      
                                                                      
                                                                      (21,196
                                                                      )
                                                                      
                                                                      
                                                                      (15,360
                                                                      )Other
      net realized gain (loss) on investments
                                                                      
                                                                      
                                                                      11,511
                                                                      
                                                                      
                                                                      
                                                                      (8,506
                                                                      )
                                                                      
                                                                      
                                                                      23,897
                                                                      
                                                                      
                                                                      
                                                                      (13,240
                                                                      )Net
      realized investment gain (loss)
                                                                      
                                                                      $
                                                                      7,460
                                                                      
                                                                      
                                                                      $
                                                                      (11,653
                                                                      )
                                                                      
                                                                      $
                                                                      2,701
                                                                      
                                                                      
                                                                      $
                                                                      (28,600
                                                                      )





See
accompanying notes to unaudited condensed consolidated financial
statements.


4


AmTrust Financial Services,
Inc.


Consolidated
Statements of Cash Flows


(Unaudited)




Nine&a
mp;#
      160;Months Ended September 30,(in
      thousands)
                                                                        
                                                                        2010
                                                                        
                                                                        
                                                                        2009Cash
      flows from operating activities:Net
      income
                                                                        
                                                                        $
                                                                        111,851
                                                                        
                                                                        
                                                                        $
                                                                        75,154Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                                                                        
                                                                        
                                                                        12,632
                                                                        
                                                                        
                                                                        
                                                                        6,650Equity
      earnings and (gain) loss on investment in unconsolidated
      subsidiaries
                                                                        
                                                                        
                                                                        (21,803
                                                                        )
                                                                        
                                                                        
                                                                        785Gain
      on acquisition of life settlement contracts
                                                                        
                                                                        
                                                                        (10,592
                                                                        )
                                                                        
                                                                        
                                                                        -Realized
      loss (gain) on marketable securities
                                                                        
                                                                        
                                                                        (23,897
                                                                        )
                                                                        
                                                                        
                                                                        15,360Non-cash
      write-down of marketable securities
                                                                        
                                                                        
                                                                        21,196
                                                                        
                                                                        
                                                                        
                                                                        13,240Discount
      on notes payable
                                                                        
                                                                        
                                                                        610
                                                                        
                                                                        
                                                                        
                                                                        830Stock
      compensation expense
                                                                        
                                                                        
                                                                        2,682
                                                                        
                                                                        
                                                                        
                                                                        3,024Bad
      debt expense
                                                                        
                                                                        
                                                                        4,532
                                                                        
                                                                        
                                                                        
                                                                        1,950Premiums
      on life settlement contracts
                                                                        
                                                                        
                                                                        (538
                                                                        )
                                                                        
                                                                        
                                                                        -Foreign
      currency (gain) loss
                                                                        
                                                                        
                                                                        103
                                                                        
                                                                        
                                                                        
                                                                        (1,196
                                                                        )Changes
      in assets - (increase) decrease:Premium
      and notes receivable
                                                                        
                                                                        
                                                                        (98,621
                                                                        )
                                                                        
                                                                        
                                                                        8,240Reinsurance
      recoverable
                                                                        
                                                                        
                                                                        (52,927
                                                                        )
                                                                        
                                                                        
                                                                        23,713Reinsurance
      recoverable – related party
                                                                        
                                                                        
                                                                        (70,085
                                                                        )
                                                                        
                                                                        
                                                                        (63,874
                                                                        )Deferred
      policy acquisition costs, net
                                                                        
                                                                        
                                                                        (32,710
                                                                        )
                                                                        
                                                                        
                                                                        (62,724
                                                                        )Prepaid
      reinsurance premiums
                                                                        
                                                                        
                                                                        (11,536
                                                                        )
                                                                        
                                                                        
                                                                        (8,689
                                                                        )Prepaid
      reinsurance premiums – related party
                                                                        
                                                                        
                                                                        (6,732
                                                                        )
                                                                        
                                                                        
                                                                        5,190Prepaid
      expenses and other assets
                                                                        
                                                                        
                                                                        (32,712
                                                                        )
                                                                        
                                                                        
                                                                        7,992Deferred
      tax asset
                                                                        
                                                                        
                                                                        8,263
                                                                        
                                                                        
                                                                        
                                                                        38,540Changes
      in liabilities - increase (decrease):Reinsurance
      premium payable
                                                                        
                                                                        
                                                                        58,249
                                                                        
                                                                        
                                                                        
                                                                        (6,021
                                                                        )Reinsurance
      premium payable – related party
                                                                        
                                                                        
                                                                        26,916
                                                                        
                                                                        
                                                                        
                                                                        (9,500
                                                                        )Loss
      and loss expense reserve
                                                                        
                                                                        
                                                                        118,672
                                                                        
                                                                        
                                                                        
                                                                        46,000Unearned
      premiums
                                                                        
                                                                        
                                                                        68,211
                                                                        
                                                                        
                                                                        
                                                                        30,537Funds
      held under reinsurance treaties
                                                                        
                                                                        
                                                                        799
                                                                        
                                                                        
                                                                        
                                                                        730Accrued
      expenses and other current liabilities
                                                                        
                                                                        
                                                                        (76,767
                                                                        )
                                                                        
                                                                        
                                                                        2,462Net
      cash (used in) provided by operating activities
                                                                        
                                                                        
                                                                        (4,204
                                                                        )
                                                                        
                                                                        
                                                                        128,393Cash
      flows from investing activities:Net
      sales (purchases) of securities with fixed maturities
                                                                        
                                                                        
                                                                        96,429
                                                                        
                                                                        
                                                                        
                                                                        2,445Net
      (purchases) sales of equity securities
                                                                        
                                                                        
                                                                        23,654
                                                                        
                                                                        
                                                                        
                                                                        6,682Net
      sales of other investments
                                                                        
                                                                        
                                                                        (1,646
                                                                        )
                                                                        
                                                                        
                                                                        1,216Investment
      in ACAC
                                                                        
                                                                        
                                                                        (53,055
                                                                        )
                                                                        
                                                                        
                                                                        -Acquisition
      of life settlement contracts
                                                                        
                                                                        
                                                                        (11,972
                                                                        )
                                                                        
                                                                        
                                                                        -Acquisition
      of subsidiaries, net of cash obtained
                                                                        
                                                                        
                                                                        (11,125
                                                                        )
                                                                        
                                                                        
                                                                        -Acquisition
      of renewal rights and goodwill
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (6,404
                                                                        )Purchase
      of property and equipment
                                                                        
                                                                        
                                                                        (9,315
                                                                        )
                                                                        
                                                                        
                                                                        (2,334
                                                                        )Net
      cash provided by investing activities
                                                                        
                                                                        
                                                                        32,970
                                                                        
                                                                        
                                                                        
                                                                        1,605Cash
      flows from financing activities:Repurchase
      agreements, net
                                                                        
                                                                        
                                                                        65,682
                                                                        
                                                                        
                                                                        
                                                                        (27,615
                                                                        )Term
      loan payment
                                                                        
                                                                        
                                                                        (10,000
                                                                        )
                                                                        
                                                                        
                                                                        (10,000
                                                                        )Non-interest
      bearing note payment
                                                                        
                                                                        
                                                                        (7,500
                                                                        )
                                                                        
                                                                        
                                                                        (7,500
                                                                        )Repurchase
      of common stock
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (6,086
                                                                        )Capital
      contribution to subsidiary
                                                                        
                                                                        
                                                                        6,255
                                                                        
                                                                        
                                                                        
                                                                        -Stock
      option exercise and other
                                                                        
                                                                        
                                                                        1,124
                                                                        
                                                                        
                                                                        
                                                                        183Dividends
      distributed on common stock
                                                                        
                                                                        
                                                                        (11,879
                                                                        )
                                                                        
                                                                        
                                                                        (9,530
                                                                        )Net
      cash provided by (used in) financing activities
                                                                        
                                                                        
                                                                        43,682
                                                                        
                                                                        
                                                                        
                                                                        (60,548
                                                                        )Effect
      of exchange rate changes on cash
                                                                        
                                                                        
                                                                        (2,730
                                                                        )
                                                                        
                                                                        
                                                                        1,657Net increase
      (decrease) in cash and cash equivalents
                                                                        
                                                                        
                                                                        69,718
                                                                        
                                                                        
                                                                        
                                                                        71,107Cash
      and cash equivalents, beginning of the period
                                                                        
                                                                        
                                                                        233,810
                                                                        
                                                                        
                                                                        
                                                                        192,053Cash
      and cash equivalents, end of the period
                                                                        
                                                                        $
                                                                        303,528
                                                                        
                                                                        
                                                                        $
                                                                        263,160Supplemental
      Cash Flow Information:Income
      tax payments
                                                                        
                                                                        $
                                                                        24,457
                                                                        
                                                                        
                                                                        $
                                                                        9,298Interest
      payments on debt
                                                                        
                                                                        
                                                                        8,672
                                                                        
                                                                        
                                                                        
                                                                        13,718





See
accompanying notes to unaudited condensed consolidated financial
statements.


5


Notes to Unaudited
Condensed Consolidated Financial Statements


(Unaudited)


(dollars
in thousands, except share data)




1.
            Basis of
      Reporting





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




These
interim consolidated financial statements reflect all adjustments that are, in
the opinion of management, necessary for a fair presentation of the results for
the interim period and all such adjustments are of a normal recurring nature.
The results of operations for the interim period are not necessarily indicative,
if annualized, of those to be expected for the full year. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.





A
detailed description of the Company’s significant accounting policies and
management judgments is located in the audited consolidated financial statements
for the year ended December 31, 2009, included in the Company’s Form 10-K filed
with the SEC.





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





2.
            Recent Accounting
      Pronouncements




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





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





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


6


On
January 1, 2010, the Company adopted FASB ASU 2009-16 and ASU 2009-17,
codified within ASC 860 and ASC 810, respectively. Under ASC 860, the concept of
a qualifying special-purpose entity (“QSPE”) has been eliminated and
accordingly, any existing QSPE must be evaluated for consolidation. The
appropriateness of derecognition is evaluated based on whether or not the
transferor has surrendered control of the transferred assets. The evaluation
must consider any continuing involvement by the transferor. The Company does not
have any entities that were considered a QSPE under guidance prior to ASC 860.
ASC 810 clarifies the application of consolidation accounting for entities for
which the controlling financial interest might not be solely identified through
voting rights. The guidance under ASC 810 still requires a reporting entity to
perform an analysis to determine if its variable interests give it a controlling
financial interest in a variable interest entity (“VIE”). The primary
beneficiary of a VIE is the entity having both of the following:





·
            the
      power to direct the activities of a VIE that most significantly impact the
      entity’s economic performance; and


·
            the
      obligation to absorb losses of the entity that could potentially be
      significant to the VIE or the right to receive benefits from the entity
      that could potentially be significant to the
  VIE.







In
addition, a reporting entity must assess whether it has an implicit financial
responsibility to ensure that a VIE operates as designed when determining if it
has the power to direct the activities of the VIE that most significantly affect
the entity’s economic performance. The concept of a reconsideration event is
retained and an ongoing reassessment of whether a reporting entity is the
primary beneficiary of a VIE is required. Specifically, the list of
reconsideration events includes a change in facts and circumstances where the
holders of an equity investment at risk as a group lose the power from voting or
similar rights to direct the activities of the entity that most significantly
affect the entity’s economic performance. In addition, a troubled
debt-restructuring is now defined as a reconsideration event. Both statements
expand required disclosures and are effective as of the beginning of the first
annual reporting period that begins after November 15, 2009. The adoption
of ASC 860 and ASC 810 required the Company to consolidate Tiger
Capital LLC (See Note 13. “Investment in Life Settlements”) upon its formation
during the three months ended September 30, 2010.





Prospective
Accounting Literature




In October 2010, the FASB issued Accounting Standards Update No. 2010-26, Accounting for Costs Associated with Acquiring or
Renewing Insurance Contracts (“ASU 2010-26”). ASU 2010-26 modifies
the types of costs that may be deferred, allowing insurance companies to only
defer costs directly related to a successful contract acquisition or renewal.
These costs include incremental direct costs of successful contracts, the
portion of employees’ salaries and benefits related to time spent on acquisition
activities for successful contracts and other costs incurred in the acquisition
of a contract. Additional disclosure of the type of acquisition costs
capitalized is also required. ASU 2010-26 is effective on a prospective basis
for interim and annual reporting periods beginning after December 15, 2011, with
early adoption permitted as of the beginning of a company’s annual period. The
Company is currently evaluating the impact of the adoption of ASU 2010-26 on its
financial position.




7





3.
            Investments





(a)
Available-for-Sale Securities





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




(Amounts
      in thousands)
                          
                          Original or
                            amortized cost
                          
                          
                          Gross
                            unrealized
                            gains
                          
                          
                          Gross
                            unrealized
                            losses
                          
                          
                          Market
                            valuePreferred
      stock
                          
                          $
                          5,597
                          
                          
                          $
                          148
                          
                          
                          $
                          (68
                          )
                          
                          $
                          5,677Common
      stock
                          
                          
                          26,010
                          
                          
                          
                          2,599
                          
                          
                          
                          (3,707
                          )
                          
                          
                          24,902U.S.
      treasury securities
                          
                          
                          32,151
                          
                          
                          
                          2,294
                          
                          
                          
                          —
                          
                          
                          
                          34,445U.S.
      government agencies
                          
                          
                          6,540
                          
                          
                          
                          747
                          
                          
                          
                          —
                          
                          
                          
                          7,287Municipal
      bonds
                          
                          
                          38,056
                          
                          
                          
                          2,235
                          
                          
                          
                          (2
                          )
                          
                          
                          40,289Corporate
      bonds and other bonds:Finance
                          
                          
                          435,126
                          
                          
                          
                          14,249
                          
                          
                          
                          (15,233
                          )
                          
                          
                          434,142Industrial
                          
                          
                          58,474
                          
                          
                          
                          3,288
                          
                          
                          
                          (70
                          )
                          
                          
                          61,692Utilities
                          
                          
                          26,602
                          
                          
                          
                          1,916
                          
                          
                          
                          —
                          
                          
                          
                          28,518Commercial
      mortgage backed securities
                          
                          
                          2,066
                          
                          
                          
                          135
                          
                          
                          
                          —
                          
                          
                          
                          2,201Residential
      mortgage backed securities:Agency
      backed
                          
                          
                          403,457
                          
                          
                          
                          21,523
                          
                          
                          
                          —
                          
                          
                          
                          424,980Non-agency
      backed
                          
                          
                          7,988
                          
                          
                          
                          637
                          
                          
                          
                          (5
                          )
                          
                          
                          8,620Asset-backed
      securities
                          
                          
                          2,795
                          
                          
                          
                          231
                          
                          
                          
                          -
                          
                          
                          
                          3,026$
                          1,044,862
                          
                          
                          $
                          50,002
                          
                          
                          $
                          (19,085
                          )
                          
                          $
                          1,075,779





Proceeds
from the sale of investments during the nine months ended September 30, 2010
were approximately $2,826,479.





(b)
Investment Income





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





Three Months Ended
                                                September 30,
                                              
                                              
                                              Nine Months Ended
                                                September 30,(Amounts
      in thousands)
                                              
                                              2010
                                              
                                              
                                              2009
                                              
                                              
                                              2010
                                              
                                              
                                              2009Fixed
      maturities
                                              
                                              $
                                              9,462
                                              
                                              
                                              $
                                              11,647
                                              
                                              
                                              $
                                              32,832
                                              
                                              
                                              $
                                              35,111Equity
      securities
                                              
                                              
                                              51
                                              
                                              
                                              
                                              1,686
                                              
                                              
                                              
                                              410
                                              
                                              
                                              
                                              2,037Cash
      and cash equivalents
                                              
                                              
                                              1,102
                                              
                                              
                                              
                                              336
                                              
                                              
                                              
                                              3,857
                                              
                                              
                                              
                                              3,908Note
      receivable - related party
                                              
                                              
                                              563
                                              
                                              
                                              
                                              829
                                              
                                              
                                              
                                              2,612
                                              
                                              
                                              
                                              2,46211,178
                                              
                                              
                                              
                                              14,498
                                              
                                              
                                              
                                              39,711
                                              
                                              
                                              
                                              43,518Less:
      Investment expenses and interest expense on securities sold under
      agreement to repurchase
                                              
                                              
                                              226
                                              
                                              
                                              
                                              253
                                              
                                              
                                              
                                              474
                                              
                                              
                                              
                                              1,483$
                                              10,952
                                              
                                              
                                              $
                                              14,245
                                              
                                              
                                              $
                                              39,237
                                              
                                              
                                              $
                                              42,035





8


(c)
Other-Than-Temporary Impairment




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





Three Months Ended September 30,
                                              
                                              
                                              Nine Months Ended September 30,(Amounts
      in thousands)
                                              
                                              2010
                                              
                                              
                                              2009
                                              
                                              
                                              2010
                                              
                                              
                                              2009Equity
      securities
                                              
                                              $
                                              4,051
                                              
                                              
                                              $
                                              3,147
                                              
                                              
                                              $
                                              10,656
                                              
                                              
                                              $
                                              11,108Fixed
      maturities
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              10,540
                                              
                                              
                                              
                                              4,252$
                                              4,051
                                              
                                              
                                              $
                                              3,147
                                              
                                              
                                              $
                                              21,196
                                              
                                              
                                              $
                                              15,360





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




Less Than 12 Months
                                
                                
                                12 Months or More
                                
                                
                                Total(Amounts
      in  thousands)
                                
                                Fair
                                  Market
                                  Value
                                
                                
                                Unrealized
                                  Losses
                                
                                
                                No. of
                                  Positions
                                  Held
                                
                                
                                Fair
                                  Market
                                  Value
                                
                                
                                Unrealized
                                  Losses
                                
                                
                                No. of
                                  Positions
                                  Held
                                
                                
                                Fair
                                  Market
                                  Value
                                
                                
                                Unrealized
                                  LossesCommon
      and preferred stock
                                
                                $
                                6,557
                                
                                
                                $
                                (3,076
                                )
                                
                                
                                12
                                
                                
                                $
                                3,528
                                
                                
                                $
                                (699
                                )
                                
                                
                                46
                                
                                
                                $
                                10,085
                                
                                
                                $
                                (3,775
                                )Municipal
      bonds
                                
                                
                                239
                                
                                
                                
                                (1
                                )
                                
                                
                                1
                                
                                
                                
                                350
                                
                                
                                
                                (1
                                )
                                
                                
                                1
                                
                                
                                
                                589
                                
                                
                                
                                (2
                                )Corporate
      bonds:Finance
                                
                                
                                34,909
                                
                                
                                
                                (302
                                )
                                
                                
                                9
                                
                                
                                
                                148,673
                                
                                
                                
                                (14,931
                                )
                                
                                
                                30
                                
                                
                                
                                183,582
                                
                                
                                
                                (15,233
                                )Industrial
                                
                                
                                4,916
                                
                                
                                
                                (70
                                )
                                
                                
                                1
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                4,916
                                
                                
                                
                                (70
                                )Utilities
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —Residential
      mortgage backed securities:Non-agency
      backed
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                25
                                
                                
                                
                                (5
                                )
                                
                                
                                1
                                
                                
                                
                                25
                                
                                
                                
                                (5
                                )Total
      temporarily impaired
                                
                                $
                                46,621
                                
                                
                                $
                                (3,449
                                )
                                
                                
                                23
                                
                                
                                $
                                152,576
                                
                                
                                $
                                (15,636
                                )
                                
                                
                                78
                                
                                
                                $
                                199,197
                                
                                
                                $
                                (19,085
                                )





There are 101 securities at September
30, 2010 that account for the gross unrealized loss, none of which is deemed by
the Company to be OTTI. Significant factors influencing the Company’s
determination that unrealized losses were temporary included the magnitude of
the unrealized losses in relation to each security’s cost, the length of time
the security’s fair value has been below its amortized cost, the nature of the
investment and management’s intent to sell these securities and it being more
likely than not that the Company will not be required to sell these investments
before anticipated recovery of fair value to the Company’s cost
basis.





(d)
Derivatives





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




Remaining Life of Notional Amount (1)(Amounts in thousands)
                              
                              One Year
                              
                              
                              Two Through
                                Five Years
                              
                              
                              Six Through
                                Ten Years
                              
                              
                              After Ten
                                Years
                              
                              
                              TotalInterest
      rate swaps
                              
                              $
                              —
                              
                              
                              $
                              10,000
                              
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              10,000Credit
      default swaps
                              
                              
                              2,000
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              2,000$
                              2,000
                              
                              
                              $
                              10,000
                              
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              12,000





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


9


(e) Other





Securities sold but not yet purchased
represent obligations of the Company to deliver the specified security at the
contracted price and, thereby, create a liability to purchase the security in
the market at prevailing prices. The Company’s liability for securities to be
delivered is measured at their fair value and as of September 30, 2010 was
$65,187 for fixed maturity securities, which consisted of
U.S. treasuries and corporate bonds, and $456 for equity securities.
These transactions result in off-balance sheet risk, as the Company’s ultimate
cost to satisfy the delivery of securities sold but not yet purchased may
exceed the amount reflected at September 30, 2010. Subject to certain
limitations, all securities owned, to the extent required to cover the Company’s
obligations to sell or repledge the securities to others, are pledged to the
clearing broker.





The
Company enters into repurchase agreements. The agreements are accounted for as
collateralized borrowing transactions and are recorded at contract amounts. The
Company receives cash or securities that it invests or holds in short term or
fixed income securities. As of September 30, 2010, there were $238,455 principal
amount outstanding at interest rates between .30% and .37% per annum. Interest
expense associated with these repurchase agreements for the three months ended
September 30, 2010 and 2009 was $226 and $280, respectively, of which $158 was
accrued as of September 30, 2010. Interest expense associated with the
repurchase agreements for the nine months ended September 30, 2010 and 2009 was
$474 and $1,483, respectively. The Company has approximately $242,409 of
collateral pledged in support of these agreements.





4.
            Fair Value of Financial
      Instruments




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




(Amounts in thousands)
                              
                              Total
                              
                              
                              Level 1
                              
                              
                              Level 2
                              
                              
                              Level 3Assets:U.S.
      treasury securities
                              
                              $
                              34,445
                              
                              
                              $
                              34,445
                              
                              
                              $
                              -
                              
                              
                              $
                              -U.S.
      government agencies
                              
                              
                              7,287
                              
                              
                              
                              -
                              
                              
                              
                              7,287
                              
                              
                              
                              -Municipal
      bonds
                              
                              
                              40,289
                              
                              
                              
                              -
                              
                              
                              
                              40,289
                              
                              
                              
                              -Corporate
      bonds and other bonds:Finance
                              
                              
                              434,142
                              
                              
                              
                              -
                              
                              
                              
                              434,142
                              
                              
                              
                              -Industrial
                              
                              
                              61,692
                              
                              
                              
                              -
                              
                              
                              
                              61,692
                              
                              
                              
                              -Utilities
                              
                              
                              28,518
                              
                              
                              
                              -
                              
                              
                              
                              28,518
                              
                              
                              
                              -Commercial
      mortgage backed securities
                              
                              
                              2,201
                              
                              
                              
                              -
                              
                              
                              
                              2,201
                              
                              
                              
                              -Residential
      mortgage backed securities:Agency
      backed
                              
                              
                              424,980
                              
                              
                              
                              -
                              
                              
                              
                              424,980
                              
                              
                              
                              -Non-agency
      backed
                              
                              
                              8,620
                              
                              
                              
                              -
                              
                              
                              
                              8,620
                              
                              
                              
                              -Asset-backed
      securities
                              
                              
                              3,026
                              
                              
                              
                              -
                              
                              
                              
                              3,026
                              
                              
                              
                              -Equity
      securities
                              
                              
                              30,579
                              
                              
                              
                              30,579
                              
                              
                              
                              -
                              
                              
                              
                              -Short
      term investment
                              
                              
                              30,065
                              
                              
                              
                              30,065
                              
                              
                              
                              -
                              
                              
                              
                              -Other
      investments
                              
                              
                              15,680
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              15,680Loans
      on insurance policies
                              
                              
                              6,076
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              6,076Life
      settlement contracts
                              
                              
                              17,025
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              17,025$
                              1,144,625
                              
                              
                              $
                              95,089
                              
                              
                              $
                              1,010,755
                              
                              
                              $
                              38,781Liabilities:Equity
      securities sold but not yet purchased, market
                              
                              $
                              456
                              
                              
                              $
                              456
                              
                              
                              $
                              -
                              
                              
                              $
                              -Fixed
      maturity securities sold but not yet purchased, market
                              
                              
                              65,187
                              
                              
                              
                              54,274
                              
                              
                              
                              10,913
                              
                              
                              
                              -Securities
      sold under agreements to repurchase, at contract value
                              
                              
                              238,455
                              
                              
                              
                              -
                              
                              
                              
                              238,455
                              
                              
                              
                              -Derivatives
                              
                              
                              284
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              284$
                              304,382
                              
                              
                              $
                              54,730
                              
                              
                              $
                              249,368
                              
                              
                              $
                              284




10


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





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





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





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





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





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





(Amounts in thousands)
                                                  
                                                  Balance as of
                                                    July 1, 2010
                                                  
                                                  
                                                  Net income
                                                    (loss)
                                                  
                                                  
                                                  Other
                                                    comprehensive
                                                    income
                                                  
                                                  
                                                  Purchases
                                                    and
                                                    issuances
                                                  
                                                  
                                                  Sales and
                                                    settlements
                                                  
                                                  
                                                  Net transfers
                                                    into (out of)
                                                    Level 3
                                                  
                                                  
                                                  Balance as of
                                                    September 30,
                                                    2010Other
      investments
                                                  
                                                  $
                                                  13,323
                                                  
                                                  
                                                  $
                                                  6
                                                  
                                                  
                                                  $
                                                  —
                                                  
                                                  
                                                  $
                                                  2,432
                                                  
                                                  
                                                  $
                                                  (81
                                                  )
                                                  
                                                  $
                                                  —
                                                  
                                                  
                                                  $
                                                  15,680Life
      settlement contracts
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  10,592
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  6,433
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  17,025Loans
      on insurance policies
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  6,076
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  6,076Derivatives
                                                  
                                                  
                                                  (220
                                                  )
                                                  
                                                  
                                                  (64
                                                  )
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (284
                                                  )Total
                                                  
                                                  $
                                                  13,103
                                                  
                                                  
                                                  $
                                                  10,534
                                                  
                                                  
                                                  $
                                                  —
                                                  
                                                  
                                                  $
                                                  14,941
                                                  
                                                  
                                                  $
                                                  (81
                                                  )
                                                  
                                                  $
                                                  —
                                                  
                                                  
                                                  $
                                                  38,497





(Amounts in thousands)
                                                  
                                                  Balance as of
                                                    January 1,
                                                    2010
                                                  
                                                  
                                                  Net income
                                                    (loss)
                                                  
                                                  
                                                  Other
                                                    comprehensive
                                                    income
                                                  
                                                  
                                                  Purchases
                                                    and
                                                    issuances
                                                  
                                                  
                                                  Sales and
                                                    settlements
                                                  
                                                  
                                                  Net transfers
                                                    into (out of)
                                                    Level 3
                                                  
                                                  
                                                  Balance as of
                                                    September 30,
                                                    2010Other
      investments
                                                  
                                                  $
                                                  12,746
                                                  
                                                  
                                                  $
                                                  283
                                                  
                                                  
                                                  $
                                                  296
                                                  
                                                  
                                                  $
                                                  2,555
                                                  
                                                  
                                                  $
                                                  (200
                                                  )
                                                  
                                                  $
                                                  —
                                                  
                                                  
                                                  $
                                                  15,680Life
      settlement contracts
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  10,592
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  6,433
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  17,025Loans
      on insurance policies
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  6,076
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  6,076Derivatives
                                                  
                                                  
                                                  (1,893
                                                  )
                                                  
                                                  
                                                  1,609
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (284
                                                  )Total
                                                  
                                                  $
                                                  10,853
                                                  
                                                  
                                                  $
                                                  12,484
                                                  
                                                  
                                                  $
                                                  296
                                                  
                                                  
                                                  $
                                                  15,064
                                                  
                                                  
                                                  $
                                                  (200
                                                  )
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  38,497





(Amounts in thousands)
                                  
                                  Balance as of
                                    July 1, 2009
                                  
                                  
                                  Net income
                                    (loss)
                                  
                                  
                                  Other
                                    comprehensive
                                    income
                                  
                                  
                                  Purchases
                                    and
                                    issuances
                                  
                                  
                                  Sales and
                                    settlements
                                  
                                  
                                  Net transfers
                                    into (out of)
                                    Level 3
                                  
                                  
                                  Balance as of
                                    September 30,
                                    2009Fixed
      securities
                                  
                                  $
                                  5,740
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  (4,400
                                  )
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  1,340Other
      investments
                                  
                                  
                                  13,017
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  3
                                  
                                  
                                  
                                  (1,563
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  11,457Derivatives
                                  
                                  
                                  (2,320
                                  )
                                  
                                  
                                  (554
                                  )
                                  
                                  
                                  (548
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (3,422
                                  )Total
                                  
                                  $
                                  16,437
                                  
                                  
                                  $
                                  (554
                                  )
                                  
                                  $
                                  (548
                                  )
                                  
                                  $
                                  3
                                  
                                  
                                  $
                                  5,963
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  9,375





(Amounts in thousands)
                                  
                                  Balance as of
                                    January 1,
                                    2009
                                  
                                  
                                  Net income
                                    (loss)
                                  
                                  
                                  Other
                                    comprehensive
                                    income
                                  
                                  
                                  Purchases
                                    and
                                    issuances
                                  
                                  
                                  Sales and
                                    settlements
                                  
                                  
                                  Net transfers
                                    into (out of)
                                    Level 3
                                  
                                  
                                  Balance as of
                                    September 30,
                                    2009Fixed
      securities
                                  
                                  $
                                  7,895
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  (6,555
                                  )
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  1,340Other
      investments
                                  
                                  
                                  13,457
                                  
                                  
                                  
                                  (39
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  141
                                  
                                  
                                  
                                  (2,102
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  11,457Derivatives
                                  
                                  
                                  (1,439
                                  )
                                  
                                  
                                  (677
                                  )
                                  
                                  
                                  (1,306
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (3,422
                                  )Total
                                  
                                  $
                                  19,913
                                  
                                  
                                  $
                                  (716
                                  )
                                  
                                  $
                                  (1,306
                                  )
                                  
                                  $
                                  141
                                  
                                  
                                  $
                                  (8,657
                                  )
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  9,375





11


The
Company had no transfers between levels during the three and nine months ended
September 30, 2010.




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





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





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





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




5.
            Debt





Junior
Subordinated Debt





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





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





AggregateLiquidation
                                    
                                    
                                    Aggregate
                                    
                                    
                                    
                                    
                                    
                                    
                                    PerAmount of
                                    
                                    
                                    Liquidation
                                    
                                    
                                    Aggregate
                                    
                                    
                                    
                                    Annum(Amounts in thousands)
                                    
                                    Trust
                                    
                                    
                                    Amount of
                                    
                                    
                                    Principal
                                    
                                    Stated
                                    
                                    InterestPreferred
                                    
                                    
                                    Common
                                    
                                    
                                    Amount
                                    
                                    Maturity
                                    
                                    Rate ofName of Trust
                                    
                                    Securities
                                    
                                    
                                    Securities
                                    
                                    
                                    of Notes
                                    
                                    of Notes
                                    
                                    NotesAmTrust
      Capital Financing Trust I
                                    
                                    $
                                    25,000
                                    
                                    
                                    $
                                    774
                                    
                                    
                                    $
                                    25,774
                                    
                                    3/17/2035
                                    
                                    
                                    8.275
                                    %(1)AmTrust
      Capital Financing Trust II
                                    
                                    
                                    25,000
                                    
                                    
                                    
                                    774
                                    
                                    
                                    
                                    25,774
                                    
                                    6/15/2035
                                    
                                    
                                    7.710
                                    (1)AmTrust
      Capital Financing Trust III
                                    
                                    
                                    30,000
                                    
                                    
                                    
                                    928
                                    
                                    
                                    
                                    30,928
                                    
                                    9/15/2036
                                    
                                    
                                    8.830
                                    (2)AmTrust
      Capital Financing Trust IV
                                    
                                    
                                    40,000
                                    
                                    
                                    
                                    1,238
                                    
                                    
                                    
                                    41,238
                                    
                                    3/15/2037
                                    
                                    
                                    7.930
                                    (3)Total
      trust preferred securities
                                    
                                    $
                                    120,000
                                    
                                    
                                    $
                                    3,714
                                    
                                    
                                    $
                                    123,714





(1)
            The interest rate will change to
      three-month LIBOR plus 3.40% after the tenth anniversary in
      2015.


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


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





The
Company recorded $2,553 and $2,487 of interest expense for the three months
ended September 30, 2010 and 2009, respectively, and $7,657 and $7,591 of
interest expense for the nine months ended September 30, 2010 and 2009,
respectively, related to these trust preferred securities.


12


Term
Loan




On June
3, 2008, the Company entered into a term loan with JP Morgan Chase Bank, N.A. in
the aggregate amount of $40,000. The term of the loan is for a period of three
years and requires quarterly principal payments of $3,333, which began on
September 3, 2008 and end on June 3, 2011. As of September 30, 2010, the
principal balance was $10,000. The loan carries a variable interest rate and is
based on a Eurodollar rate plus an applicable margin. The Eurodollar rate is a
periodic fixed rate equal to the London Interbank Offered Rate (“LIBOR”) plus a
margin rate, which is 185 basis points. As of September 30, 2010, the interest
rate was 2.1%. The Company recorded $167 and $349 of interest expense for the
three months ended September 30, 2010 and 2009, respectively, and $630 and
$1,191 of interest expense for the nine months ended September 30, 2010 and
2009, respectively. The Company can prepay any amount without penalty upon prior
notice. The term loan contains affirmative and negative covenants, including
limitations on additional debt, limitations on investments and acquisitions
outside the Company’s normal course of business. The loan requires the Company
to maintain a debt to capital ratio of 0.35 to 1 or less. The Company incurred
financing fees of $52 related to the agreement.




On June
4, 2008, the Company entered into a fixed rate interest swap agreement with a
total notional amount of $40,000 to convert the term loan from a variable to a
fixed rate. Under this agreement, the Company pays a fixed rate of 3.47% plus a
margin of 185 basis points, or 5.32%, and receives a variable rate in return
based on LIBOR plus a margin rate, which is 185 basis points. The variable rate
is reset every three months, at which time the interest is settled and is
recognized as adjustments to interest expense. The Company recorded interest
expense of $32 and $159 for the three months ended September 30, 2010 and 2009,
respectively, and $97 and $598 for the nine months ended September 30, 2010 and
2009 related to this agreement.





Promissory
Note




In
connection with the stock and asset purchase agreement with a subsidiary of
Unitrin, Inc. (“Unitrin”), the Company, on June 1, 2008, issued a promissory
note to Unitrin in the amount of $30,000. The note is non-interest bearing and
requires four annual principal payments of $7,500. The first two were paid in
2009 and 2010, respectively, and the remaining principal payments are due on
June 1, 2011 and 2012. Upon entering into the promissory note, the Company
calculated imputed interest of $3,155 based on interest rates available to the
Company, which was 4.5%. Accordingly, the note’s carrying balance was adjusted
to $26,845 at the acquisition. The note is required to be paid in full,
immediately, under certain circumstances including a default of payment or
change of control of the Company. The Company included $160 and $234 of
amortized discount on the note in its results of operations for the three months
ended September 30, 2010 and 2009, respectively, and $610 and $830 for the nine
months ended September 30, 2010 and 2009, respectively. The note’s carrying
value at September 30, 2010 was $14,238.





Line of
Credit




On June
30, 2010, the Company extended the term of its unsecured $30,000 line of credit
with JP Morgan Chase, N.A. to June 30, 2011. The line is used for collateral for
letters of credit. Interest payments are required to be paid monthly on any
unpaid principal and bears interest at a rate of LIBOR plus 150 basis points. As
of September 30, 2010, there was no outstanding balance on the line of credit.
At September 30, 2010, the Company had outstanding letters of credit in place
for $24,766 that reduced the availability on the line of credit to
$5,234.





Maturities
of Debt




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





(Amounts
      in thousands)
                                
                                2010
                                
                                
                                2011
                                
                                
                                2012
                                
                                
                                2013
                                
                                
                                2014
                                
                                
                                ThereafterJunior
      subordinated debt
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                123,714Term
      loan
                                
                                
                                3,333
                                
                                
                                
                                6,667
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —Promissory
      note
                                
                                
                                —
                                
                                
                                
                                6,876
                                
                                
                                
                                7,362
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —Total
                                
                                $
                                3,333
                                
                                
                                $
                                13,543
                                
                                
                                $
                                7,362
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                123,714


13





6.
            Acquisition Costs and Other
      Underwriting Expenses




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





Three Months Ended September 30,
                                  
                                  
                                  Nine Months Ended September 30,(Amounts
      in thousands)
                                  
                                  2010
                                  
                                  
                                  2009
                                  
                                  
                                  2010
                                  
                                  
                                  2009Policy
      acquisition expenses
                                  
                                  $
                                  52,761
                                  
                                  
                                  $
                                  27,572
                                  
                                  
                                  $
                                  128,174
                                  
                                  
                                  $
                                  91,596Salaries
      and benefits
                                  
                                  
                                  24,956
                                  
                                  
                                  
                                  20,299
                                  
                                  
                                  
                                  73,371
                                  
                                  
                                  
                                  60,240Other
      insurance general and administrative expense
                                  
                                  
                                  4,435
                                  
                                  
                                  
                                  15,283
                                  
                                  
                                  
                                  21,532
                                  
                                  
                                  
                                  34,059$
                                  82,152
                                  
                                  
                                  $
                                  63,154
                                  
                                  
                                  $
                                  223,077
                                  
                                  
                                  $
                                  185,895




7.
            Earnings Per
      Share





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





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





Three Months Ended September 30,
                                                          
                                                          
                                                          Nine Months Ended June 30,(Amounts
      in thousands except per share)
                                                          
                                                          2010
                                                          
                                                          
                                                          2009
                                                          
                                                          
                                                          2010
                                                          
                                                          
                                                          2009Basic
      earnings per share:Net
      income attributable to AmTrust Financial Services, Inc.
      shareholders
                                                          
                                                          $
                                                          38,886
                                                          
                                                          
                                                          $
                                                          24,221
                                                          
                                                          
                                                          $
                                                          108,409
                                                          
                                                          
                                                          $
                                                          75,154Less:
      Net income allocated to participating securities and redeemable
      non-controlling interest
                                                          
                                                          
                                                          427
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          454
                                                          
                                                          
                                                          
                                                          -Net
      income allocated to AmTrust Financial Services, Inc. common
      shareholders
                                                          
                                                          $
                                                          38,459
                                                          
                                                          
                                                          $
                                                          24,221
                                                          
                                                          
                                                          $
                                                          107,955
                                                          
                                                          
                                                          $
                                                          75,154Weighted
      average shares outstanding – basic
                                                          
                                                          
                                                          59,540
                                                          
                                                          
                                                          
                                                          59,324
                                                          
                                                          
                                                          
                                                          59,455
                                                          
                                                          
                                                          
                                                          59,475Less:
      Weighted average participating shares outstanding
                                                          
                                                          
                                                          50
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          35
                                                          
                                                          
                                                          
                                                          -Weighted
      average common shares outstanding – basic
                                                          
                                                          
                                                          59,490
                                                          
                                                          
                                                          
                                                          59,324
                                                          
                                                          
                                                          
                                                          59,420
                                                          
                                                          
                                                          
                                                          59,475Net
      income per AmTrust Financial Services, Inc. common shares -
      basic
                                                          
                                                          $
                                                          0.65
                                                          
                                                          
                                                          $
                                                          0.41
                                                          
                                                          
                                                          $
                                                          1.82
                                                          
                                                          
                                                          $
                                                          1.26Diluted
      earnings per share:Net
      income attributable to AmTrust Financial Services, Inc.
      shareholders
                                                          
                                                          $
                                                          38,886
                                                          
                                                          
                                                          $
                                                          24,221
                                                          
                                                          
                                                          $
                                                          108,409
                                                          
                                                          
                                                          $
                                                          75,154Less:
      Net income allocated to participating securities and redeemable
      non-controlling interest
                                                          
                                                          
                                                          427
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          454
                                                          
                                                          
                                                          
                                                          -Net
      income allocated to AmTrust Financial Services, Inc. common
      shareholders
                                                          
                                                          $
                                                          38,459
                                                          
                                                          
                                                          $
                                                          24,221
                                                          
                                                          
                                                          $
                                                          107,955
                                                          
                                                          
                                                          $
                                                          75,154Weighted
      average common shares outstanding – basic
                                                          
                                                          
                                                          59,490
                                                          
                                                          
                                                          
                                                          59,324
                                                          
                                                          
                                                          
                                                          59,420
                                                          
                                                          
                                                          
                                                          59,475Plus:
      Dilutive effect of stock options, other
                                                          
                                                          
                                                          885
                                                          
                                                          
                                                          
                                                          664
                                                          
                                                          
                                                          
                                                          850
                                                          
                                                          
                                                          
                                                          436Weighted
      average common shares outstanding – dilutive
                                                          
                                                          
                                                          60,375
                                                          
                                                          
                                                          
                                                          59,988
                                                          
                                                          
                                                          
                                                          60,270
                                                          
                                                          
                                                          
                                                          59,911Net
      income per AmTrust Financial Services, Inc. common share -
      diluted
                                                          
                                                          $
                                                          0.64
                                                          
                                                          
                                                          $
                                                          0.40
                                                          
                                                          
                                                          $
                                                          1.79
                                                          
                                                          
                                                          $
                                                          1.25









14




8.
            Share Based
      Compensation





During
2010, the Company adopted the 2010 Omnibus Incentive Plan (the “Plan”), which
permits the Company to grant to officers, employees and non-employee directors
of the Company incentive compensation directly linked to the price of the
Company’s stock. The Plan authorizes up to an aggregate of 6,045,511 shares of
Company stock for awards of options to purchase shares of the Company’s common
stock, restricted stock, restricted stock units (“RSU”) or appreciation rights.
Shares used may be either newly issued shares or treasury shares or both. The
aggregate number of shares of common stock for which awards may be issued may
not exceed 6,045,511 shares, subject to the authority of the Company’s board of
directors to adjust this amount in the event of a consolidation, reorganization,
stock dividend, stock split, recapitalization or similar transaction affecting
the Company’s common stock. All remaining unissued shares related to the
Company’s previously existing 2005 and Equity and Incentive Plan were absorbed
into the Plan. As of September 30, 2010, approximately 5,900,000 shares of
Company common stock remained available for grants under the Plan.





The Company recognizes compensation expense under FASB ASC
718-10-25 for its share-based payments based on the fair value of the awards.
The Company grants stock options at prices equal to the closing stock price of
the Company’s stock on the dates the options are granted. The options have a
term of ten years from the date of grant and vest primarily in equal annual
installments over the four-year period following the date of grant for employee
options. Employees have three months after the employment relationship ends to
exercise all vested options. The fair value of each option grant is separately
estimated for each vesting date. The fair value of each option is amortized into
compensation expense on a straight-line basis between the grant date for the
award and each vesting date. The Company has estimated the fair value of all
stock option awards as of the date of the grant by applying the
Black-Scholes-Merton multiple-option pricing valuation model. The application of
this valuation model involves assumptions that are judgmental and highly
sensitive in the determination of compensation expense.





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




2010
                                          
                                          
                                          2009(Amounts
      in thousands except per share)
                                          
                                          Number of
                                            Shares
                                          
                                          Amount per
                                            Share
                                          
                                          
                                          Number of
                                            Shares
                                          
                                          Amount per
                                            ShareOutstanding
      beginning of period
                                          
                                          
                                          4,168
                                          
                                          
                                          $
                                          7.00-15.02
                                          
                                          
                                          
                                          3,728
                                          
                                          
                                          $
                                          7.00-15.02Granted
                                          
                                          
                                          241
                                          
                                          
                                          
                                          12.82-14.33
                                          
                                          
                                          
                                          543
                                          
                                          
                                          
                                          8.99-11.40Exercised
                                          
                                          
                                          (135
                                          )
                                          
                                          
                                          7.50-11.72
                                          
                                          
                                          
                                          (24
                                          )
                                          
                                          
                                          7.50Cancelled
      or terminated
                                          
                                          
                                          (96
                                          )
                                          
                                          
                                          7.50-14.55
                                          
                                          
                                          
                                          (87
                                          )
                                          
                                          
                                          7.50-14.55Outstanding
      end of period
                                          
                                          
                                          4,178
                                          
                                          
                                          $
                                          7.00-15.02
                                          
                                          
                                          
                                          4,160
                                          
                                          
                                          $
                                          7.00-15.02




The
weighted average grant date fair value of options granted during the nine months
ended September 30, 2010 and 2009 was $3.69 and $3.02,
respectively.





During
the first nine months of 2010, the Company issued 50,000 shares of restricted
stock with a market value of approximately $700. The Board has set a four year
vesting period for the outstanding restricted shares. The fair value of each
restricted share grant is equal to the market price of the Company’s common
stock at the date of grant. Expense relating to restricted shares is amortized
ratably over the vesting period. The Company recorded compensation expense of
approximately $44 and $93 related to this grant during the three and nine months
ended September 30, 2010, respectively.





During
the first nine months of 2010, the Company issued approximately 90,000 RSUs with
a market value of approximately $1,250. The Board has set a four year vesting
period for RSUs. The fair value of each RSU is equal to the market price of the
Company’s common stock at the date of grant. Expense relating to the RSU grant
is amortized ratably over the vesting period. The Company recorded compensation
expense of approximately $78 and $117 related to RSU grants during the three and
nine months ended September 30, 2010, respectively.





Compensation
expense for all share-based payments under ASC 718-10-30 was approximately $822
and $1,212 for the three months ended September 30, 2010 and 2009, respectively
and $2,682 and $3,024 for the nine months ended September 30, 2010 and 2009,
respectively.





15




9.
            Comprehensive
      Income





The
following table summarizes the components of comprehensive income:





Three Months Ended September 30,
                                            
                                            
                                            Nine Months Ended September 30,(Amounts
      in thousands)
                                            
                                            2010
                                            
                                            
                                            2009
                                            
                                            
                                            2010
                                            
                                            
                                            2009Net
      income attributable to AmTrust Financial Services, Inc.
      shareholders
                                            
                                            $
                                            38,886
                                            
                                            
                                            $
                                            24,221
                                            
                                            
                                            $
                                            108,409
                                            
                                            
                                            $
                                            75,154Unrealized
      holding gain (loss)
                                            
                                            
                                            7,649
                                            
                                            
                                            
                                            25,441
                                            
                                            
                                            
                                            9,882
                                            
                                            
                                            
                                            51,438Reclassification
      adjustment
                                            
                                            
                                            7,521
                                            
                                            
                                            
                                            11,336
                                            
                                            
                                            
                                            19,439
                                            
                                            
                                            
                                            25,743Foreign
      currency translation
                                            
                                            
                                            7,348
                                            
                                            
                                            
                                            582
                                            
                                            
                                            
                                            (1,499
                                            )
                                            
                                            
                                            3,705Comprehensive
      income
                                            
                                            $
                                            61,404
                                            
                                            
                                            $
                                            61,580
                                            
                                            
                                            $
                                            136,231
                                            
                                            
                                            
                                            156,040





10.
            Income
    Taxes





Income
tax expense for the three months ended September 30, 2010 and 2009 was $15,567
and $8,107, respectively, and $39,574 and $18,811 for the nine months ended
September 30, 2010 and 2009, respectively. The following table reconciles the
Company’s statutory federal income tax rate to its effective tax
rate.




Three Months Ended September 30,
                                
                                
                                Nine Months Ended September 30,(Amounts
      in thousands)
                                
                                2010
                                
                                
                                2009
                                
                                
                                2010
                                
                                
                                2009Income
      before provision for income taxes, equity in earnings of unconsolidated
      subsidiaries and non-controlling interest
                                
                                $
                                53,865
                                
                                
                                $
                                32,494
                                
                                
                                $
                                129,622
                                
                                
                                $
                                94,750Equity
      in earnings (loss) of unconsolidated subsidiaries
                                
                                
                                4,030
                                
                                
                                
                                (166
                                )
                                
                                
                                21,803
                                
                                
                                
                                (785
                                )Non-controlling
      interest
                                
                                
                                (3,442
                                )
                                
                                
                                —
                                
                                
                                
                                (3,442
                                )
                                
                                
                                —$
                                54,453
                                
                                
                                $
                                32,328
                                
                                
                                $
                                147,983
                                
                                
                                $
                                93,965Income
      taxes at statutory rates
                                
                                $
                                19,059
                                
                                
                                $
                                11,315
                                
                                
                                $
                                51,794
                                
                                
                                $
                                32,888Effect
      of income not subject to U.S. taxation
                                
                                
                                (2,499
                                )
                                
                                
                                (3,791
                                )
                                
                                
                                (11,468
                                )
                                
                                
                                (13,679
                                )Other,
      net
                                
                                
                                (993
                                )
                                
                                
                                583
                                
                                
                                
                                (752
                                )
                                
                                
                                (398
                                )Provision
      for income taxes as shown on the Condensed Consolidated Statements of
      Income
                                
                                $
                                15,567
                                
                                
                                $
                                8,107
                                
                                
                                $
                                39,574
                                
                                
                                $
                                18,811GAAP
      effective tax rate
                                
                                
                                28.6
                                %
                                
                                
                                25.1
                                %
                                
                                
                                26.7
                                %
                                
                                
                                20.0
                                %





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, statutes of limitation are open for tax
years ended December 31, 2005 and forward. As permitted by FASB ASC 740-10, the
Company adopted an accounting policy to prospectively classify accrued interest
and penalties related to any unrecognized tax benefits in its income tax
provision. Previously, the Company’s policy was to classify interest and
penalties as an operating expense in arriving at pre-tax income. At September
30, 2010, the Company has approximately $1,583 of accrued interest and penalties
related to unrecognized tax benefits in accordance with FASB ASC
740-10.




16


During
2007, the Company, while performing a review of the income tax return filed with
the Internal Revenue Service (“IRS”) for calendar year ending December 31, 2006,
determined an issue existed per FASB ASC 740-10 guidelines concerning its
position related to accrued market discount. The Company reverses accrued market
discount income recognized for book purposes when calculating taxable income.
The reversal results from the accrued market discount income recognized by the
insurance subsidiaries for bonds and other investments. The Company
inadvertently reversed the amount related to commercial paper investments on the
2006 income tax return. The Company has estimated the potential liability to be
approximately $1,005 (including $188 for penalties and interest) and has
reflected this position, per FASB ASC 740-10 guidelines, in the consolidated
financial statements.





11.
            Related Party
      Transactions





Reinsurance
Agreement — Maiden





Maiden
Holdings, Ltd. (“Maiden”) is a publicly-held Bermuda insurance holding company
(Nasdaq: MHLD) formed by Michael Karfunkel, George Karfunkel and Barry Zyskind,
the principal shareholders, and, respectively, the chairman of the board of
directors, a director, and the chief executive officer and director of the
Company. As of September 30, 2010, assuming full exercise of outstanding
warrants, Michael Karfunkel owns or controls approximately 13.9% of the issued
and outstanding capital stock of Maiden, George Karfunkel owns or controls
approximately 9.4% of the issued and outstanding capital stock of Maiden and Mr.
Zyskind owns or controls approximately 4.8% of the issued and outstanding stock
of Maiden. Mr. Zyskind serves as the non-executive chairman of the board of
Maiden’s board of directors. Maiden Insurance Company, Ltd (“Maiden Insurance”),
a wholly-owned subsidiary of Maiden, is a Bermuda reinsurer.





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




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





The
Maiden Quota Share, as amended, further provides that AII receives a ceding
commission of 31% of ceded written premiums with respect to Covered Business,
except retail commercial package business, for which the ceding commission is
34.375%. The Maiden Quota Share, which had an initial term of three years, has
been renewed for a successive three year term effective July 1, 2010 and will
automatically renew for successive three year terms, unless either AII or Maiden
Insurance notifies the other of its election not to renew not less than nine
months prior to the end of any such three year term. In addition, either party
is entitled to terminate on thirty day’s notice or less upon the occurrence of
certain early termination events, which include a default in payment,
insolvency, change in control of AII or Maiden Insurance, run-off, or a
reduction of 50% or more of the shareholders’ equity of Maiden Insurance or the
combined shareholders’ equity of AII and the AmTrust Ceding
Insurers.





The
following is the effect on the Company’s balance sheet as of September 30, 2010
and December 31, 2009 and the results of operations for the three and nine
months ended September 30, 2010 and 2009 related to the Maiden Quota Share
agreement:




(Amounts
      in thousands)
                      
                      As of September 30, 2010
                      
                      
                      As of December 31, 2009Assets
      and liabilities:Reinsurance
      recoverable
                      
                      $
                      363,711
                      
                      
                      $
                      293,626Prepaid
      reinsurance premium
                      
                      
                      268,860
                      
                      
                      
                      262,128Ceded
      reinsurance premiums payable
                      
                      
                      (95,295
                      )
                      
                      
                      (86,165
                      )Note
      payable
                      
                      
                      (167,975
                      )
                      
                      
                      (167,975
                      )





17





Three Months Ended September 30,
                                      
                                      
                                      Nine Months Ended September 30,(Amounts
      in thousands)
                                      
                                      2010
                                      
                                      
                                      2009
                                      
                                      
                                      2010
                                      
                                      
                                      2009Results
      of operations:Premium
      written - ceded
                                      
                                      $
                                      (109,457
                                      )
                                      
                                      $
                                      (92,168
                                      )
                                      
                                      $
                                      (336,014
                                      )
                                      
                                      $
                                      (269,727
                                      )Change
      in unearned premium - ceded
                                      
                                      
                                      (11,122
                                      )
                                      
                                      
                                      2,694
                                      
                                      
                                      
                                      6,733
                                      
                                      
                                      
                                      (2,059
                                      )Earned
      premium - ceded
                                      
                                      $
                                      (120,579
                                      )
                                      
                                      $
                                      (89,474
                                      )
                                      
                                      $
                                      (329,281
                                      )
                                      
                                      $
                                      (271,786
                                      )Ceding
      commission on premium written
                                      
                                      $
                                      33,855
                                      
                                      
                                      $
                                      29,462
                                      
                                      
                                      $
                                      104,959
                                      
                                      
                                      $
                                      84,585Ceding
      commission – deferred
                                      
                                      
                                      4,048
                                      
                                      
                                      
                                      (575
                                      )
                                      
                                      
                                      (1,851
                                      )
                                      
                                      
                                      2,950Ceding
      commission - earned
                                      
                                      $
                                      37,903
                                      
                                      
                                      $
                                      28,887
                                      
                                      
                                      $
                                      103,108
                                      
                                      
                                      $
                                      87,535Incurred
      loss and loss adjustment expense - ceded
                                      
                                      $
                                      78,694
                                      
                                      
                                      $
                                      61,712
                                      
                                      
                                      $
                                      214,140
                                      
                                      
                                      $
                                      199,825Interest
      expense
                                      
                                      
                                      475
                                      
                                      
                                      
                                      499
                                      
                                      
                                      
                                      982
                                      
                                      
                                      
                                      1,623





The
Maiden Quota Share requires that Maiden Insurance provide to AII sufficient
collateral to secure its proportional share of AII’s obligations to the U.S.
AmTrust Ceding Insurers. AII is required to return to Maiden Insurance any
assets of Maiden Insurance in excess of the amount required to secure its
proportional share of AII’s collateral requirements, subject to certain
deductions. In order to secure its proportional share of AII’s obligation to the
AmTrust Ceding Insurers domiciled in the U.S., AII currently holds a collateral
loan with Maiden Insurance in the amount of $167,975. Effective December 1,
2008, AII and Maiden Insurance entered into a Reinsurer Trust Assets Collateral
agreement whereby Maiden Insurance is required to provide AII the assets
required to secure Maiden’s proportional share of the Company’s obligations to
its U.S. subsidiaries. The amount of this collateral as of September 30, 2010
was $335,618. Maiden retains ownership of $335,618, which is deposited in
reinsurance trust accounts.




Reinsurance
Brokerage Agreement




Effective
July 1, 2007, the Company, through a subsidiary, entered into a reinsurance
brokerage agreement with Maiden. Pursuant to the brokerage agreement, the
Company 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 $1,398 and $1,348 of brokerage commission during the three months ended
September 30, 2010 and 2009, respectively and $4,253 and $3,577 during the nine
months ended September 30, 2010 and 2009, respectively.




Asset
Management Agreement




Effective
July 1, 2007, the Company, 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, the
Company earned an annual fee equal to 0.35% per annum of average invested assets
plus all costs incurred. Effective April 1, 2008, the investment management
services fee was reduced to 0.20% per annum and was further reduced to 0.15% per
annum once the average invested assets exceed $1,000,000. As a result of this
agreement, the Company recorded approximately $677 and $616 of investment
management fees for the three months ended September 30, 2010 and 2009,
respectively, and $2,018 and $1,831 for the nine months ended September 30, 2010
and 2009, respectively.





Services
Agreement





The
Company, 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, the Company earns a fee equal to
the amount required to reimburse the Company for its costs plus 8%. As a result
of this agreement, the Company recorded approximately $0 and $48 for the three
months ended September 30, 2010 and 2009, respectively, and $38 and $383 for the
nine months ended September 30, 2010 and 2009, respectively.




18


Note Payable — Collateral for Proportionate Share of Reinsurance
Obligation





In
conjunction with the Maiden Quota Share, AII entered into a loan agreement with
Maiden Insurance during the fourth quarter of 2007, whereby, Maiden Insurance
agreed to lend to AII from time to time the amount of the obligation of the
AmTrust Ceding Insurers that AII is obligated to secure, not to exceed an amount
equal to Maiden Insurance’s proportionate share of such obligations to such
AmTrust Ceding Insurers in accordance with the Maiden Quota Share. AII is
required to deposit all proceeds from the advances into a sub-account of each
trust account that has been established for each AmTrust Ceding Insurer. To the
extent of the loans, Maiden Insurance is discharged from providing security for
its proportionate share of the obligations as contemplated by the Maiden Quota
Share. If an AmTrust Ceding Insurer withdraws loan proceeds from the trust
account for the purpose of reimbursing such AmTrust Ceding Insurer for an
ultimate net loss, the outstanding principal balance of the loan shall be
reduced by the amount of such withdrawal. The loan agreement was amended in
February 2008 to provide for interest at a rate of LIBOR plus 90 basis points
and is payable on a quarterly basis. Each advance under the loan is secured by a
promissory note. Advances totaled $167,975 as of September 30, 2010. The Company
recorded $475 and $499 of interest expense during the three months ended
September 30, 2010 and 2009, respectively, and $982 and $1,623 during the nine
months ended September 30, 2010 and 2009, respectively.




Other
Reinsurance Agreements




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





As of
January 1, 2008, Maiden Insurance had a participation in a $4,000 in excess of
$1,000 specialty transportation program written by the Company. For calendar
year 2008, Maiden Insurance’s participation was 50% and for calendar year 2009,
Maiden Insurance’s participation was 30%. This program provided primarily,
commercial auto coverage and, to a lesser extent, general liability coverage to
private non-emergency para-transit and school bus service operators. The
participations were sourced through a reinsurance intermediary via open market
placement in which competitive bids were solicited by an independent broker.
Several other broker market reinsurers hold the other 50% participation for 2008
and 70% participation for 2009. The agreement terminated January 1,
2010.





Effective September 1, 2010, the
Company, through TIC, entered into a 90% quota share reinsurance agreement with
Maiden Specialty Insurance Company (“Maiden Specialty”) by which TIC assumes 90%
of premiums and losses with respect to certain surplus lines programs written by
Maiden Specialty on behalf of the Company (the “Surplus Lines
Facility”).  The Surplus Lines Facility will enable the Company to
write business on a surplus lines basis throughout the United States, which it
cannot, at present, do through its insurance subsidiaries.  Currently,
the Company is utilizing the Surplus Lines Facility for one program for which
Maiden Specialty receives a five percent ceding commission on all premiums ceded
by Maiden Specialty to TIC.  The Surplus Lines Facility shall remain
continuously in force until terminated.  The Company did not enter
into any material transactions related to this agreement during the three months
ended September 30, 2010.




Leap
Tide Capital Management




In December 2006, the Company formed a
wholly-owned subsidiary now named Leap Tide Capital Management, Inc. (LTCMI).
LTCMI currently manages approximately $23,000 of the Company’s investment
portfolio. Concurrently with the formation of LTCMI, the Company formed Leap
Tide Partners, L.P. (“LTP”), a domestic partnership, and Leap Tide Offshore,
Ltd. (“LTO”), a Cayman exempted company, both of which were formed for the
purpose of providing qualified third-party investors the opportunity to invest
funds in vehicles managed by LTCMI (the “Hedge Funds”). The Company also is a
member of Leap Tide Capital Management G.P., LLC (“LTGP”), which is the general
partner of LTP. LTCMI earns a management fee equal to 1% of LTP’s and LTO’s
assets. LTCMI earns an incentive fee of 20% of the cumulative profits of the
LTO. LTGP earns an incentive fee of 20% of the cumulative profits of each
limited partner of LTP, 50% of which is allocated to the Company’s membership
interest. As of September 30, 2010, the current value of the invested funds in
the Hedge Funds was approximately $25,000. The majority of funds invested in the
Hedge Funds were provided by members of the Karfunkel family. The Company’s
Audit Committee has reviewed the Leap Tide transactions and determined that they
were entered into at arm’s-length. A majority of the limited partners have the
right to liquidate the limited partnership. In addition, the Company is not the
managing member of LTGP. As such, in accordance with FASB ASC 810-20-25, the
Company does not consolidate LTP. LTCMI earned fees of approximately $157 and
$47 under the agreement during the three months ended September 30, 2010 and
2009, respectively, and $234 and $47 during the nine months ended September 30,
2010 and 2009, respectively.




19


Lease
Agreements





In 2002,
the Company entered into a lease for approximately 9,000 square feet of office
space at 59 Maiden Lane in downtown Manhattan from 59 Maiden Lane Associates,
LLC, an entity that is wholly-owned by Michael Karfunkel and George Karfunkel.
Effective January 1, 2008, the Company entered into an amended lease to increase
its leased space to 14,807 square feet and extend the lease through December 31,
2017. The Audit Committee reviewed and approved the amended lease agreement. The
Company paid approximately $226 and $168 for the lease for the three months
ended September 30, 2010 and 2009, respectively and $554 and $493 for the nine
months ended September 30, 2010 and 2009, 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 that is wholly-owned by Michael Karfunkel and George Karfunkel.
The Audit Committee reviewed and approved the lease agreement. Effective May 1,
2009, the Company entered into an amended lease to increase its leased space to
7,156 feet and extend the lease through October 31, 2012. The Company paid
approximately $54 and $48 for the lease for the three months ended September 30,
2010 and 2009, respectively and $179 and $139 for the nine months ended
September 30, 2010 and 2009, respectively.




Diversified





Diversified Construction Management,
LLC (“Diversified”) provided construction management and general contractor
services for a Company subsidiary in 2010 and 2009. The Company recorded a total
of $0 and $7 for the three months ended September 30, 2010 and 2009,
respectively, and $345 and $87 for the nine months ended September 30, 2010 and
2009, respectively, for its services in connection with the construction
project. Robert A. Saxon, Jr., a principal of Diversified, is the brother of
Michael J. Saxon, the Company’s Chief Operating Officer. During several prior
years, Diversified provided similar services to the Company. While the
arrangements were not pre-approved by the Audit Committee, upon subsequent
review, the Audit Committee determined that the contracts were not less
favorable to the Company than similar services provided at
arms-length.




Investment
in ACAC




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





Pursuant to the Amended Stock Purchase Agreement, ACAC issued and
sold to the Company for an initial purchase price of approximately $53,000,
which was equal to 25% of the capital required by ACAC, 53,054 shares of Series
A Preferred Stock, which provides for an 8% cumulative dividend, and is
non-redeemable and convertible, at the Company’s option, into 21.25% of the
issued and outstanding common stock of ACAC (the “Preferred Stock”). The Company
has pre-emptive rights with respect to any future issuances of securities by
ACAC and the Company’s conversion rights are subject to customary anti-dilution
protections. The Company has the right to appoint two members of ACAC’s board of
directors, which consists of six members. Subject to certain limitations, the
board of directors of ACAC may not take any action in the absence of the
Company’s appointees and ACAC may not take certain corporate actions without the
unanimous prior approval of its board of directors (including the Company’s
appointees). In accordance with ASC 323-10-15, Investments-Equity Method and Joint
Ventures, the Company accounts for its investment in ACAC under the
equity method. The Company recorded $4,172 and $12,641 of income during the
three and nine months ended September 30, 2010 related to its equity investment
in ACAC. Additionally, ACAC completed a portion of its purchase accounting
required under ASC 805, Business Combinations,
related to its acquisition of GMAC during the three months ended June 30, 2010.
As a result, the Company recorded a gain on its investment in acquired
unconsolidated subsidiary in the after tax amount of $10,450, which is included
in the income statement in equity in earnings of unconsolidated subsidiaries. In
accordance with ASC 805, the gain was applied retrospectively to the three
months ended March 31, 2010. ACAC expects to finalize its purchase price
accounting by the end of 2010. Upon completion, the Company may be required to
adjust its investment in ACAC for additional purchase price
adjustments.




20


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




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




In
connection with the Company’s investment:




(i)
            the Company provides ACAC and its
      affiliates information technology development services at a price of cost
      plus 20%. In addition, once a new system to be developed by the Company is
      implemented and ACAC or its affiliates begin using the system in its
      operations, the Company will be entitled to an additional fee for use of
      the systems in the amount of 1.25% of gross premiums of ACAC and its
      affiliates. The Company recorded approximately $685 and $1,307 of fee
      income for the three and nine months ended September 30, 2010,
      respectively, related to this agreement. The terms and conditions of the
      above are subject to regulatory
approval.


(ii)
            the Company manages the assets of
      ACAC and its subsidiaries for an annual fee equal to 0.20% of the average
      aggregate value of the assets under management for the preceding quarter
      if the average aggregate value for the preceding quarter is $1,000,000 or
      less and 0.15% of the average aggregate value of the assets under
      management for the preceding quarter if the average aggregate value for
      that quarter is more than $1,000,000. As a result of this agreement, the
      Company earned approximately $438 and $1,021 of investment management fees
      for the three and nine months ended September 30,
    2010.


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


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


(v)
            the Company, effective March 1,
      2010, reinsures 10% of the net premiums of the GMAC Business, pursuant to
      a 50% quota share reinsurance agreement (“Personal Lines Quota Share”)
      with the GMAC Insurers, as cedents, and the Company, MK Re, Ltd., a
      Bermuda reinsurer which is a wholly-owned indirect subsidiary of the
      Trust, and Maiden Insurance Company, Ltd., as reinsurers. The Company has
      a 20% participation in the Personal Lines Quota Share, by which it
      receives 10% of net premiums of the personal lines business. The Personal
      Lines Quota share provides that the reinsurers, severally, in accordance
      with their participation percentages, shall receive 50% of the net premium
      of the GMAC Insurers and assume 50% of the related net losses. The
      Personal Lines Quota Share has an initial term of three years and shall
      renew automatically for successive three year terms unless terminated by
      written notice not less than nine months prior to the expiration of the
      current term. Notwithstanding the foregoing, the Company’s participation
      in the Personal Lines Quota Share may be terminated by the GMAC Insurers
      on 60 days written notice in the event the Company becomes insolvent, is
      placed into receivership, its financial condition is impaired by 50% of
      the amount of its surplus at the inception of the Personal Lines Quota
      Share or latest anniversary, whichever is greater, is subject to a change
      of control, or ceases writing new and renewal business. The GMAC Insurers
      also may terminate the agreement on nine months written notice following
      the effective date of initial public offering or private placement of
      stock by ACAC or a subsidiary. The Company may terminate its participation
      in the Personal Lines Quota Share on 60 days written notice in the event
      the GMAC Insurers are subject to a change of control, cease
      writing new and renewal business, effect a reduction in their net
      retention without the Company’s consent or fail to remit premium as
      required by the terms of the Personal Lines Quota Share. The Personal
      Lines Quota Share provides that the reinsurers pay a provisional ceding
      commission equal to 32.5% of ceded earned premium, net of premiums ceded
      by the personal lines companies for inuring reinsurance, subject to
      adjustment. The ceding commission is subject to adjustment to a maximum of
      34.5% if the loss ratio for the reinsured business is 60.5% or less and a
      minimum of 30.5% if the loss ratio is 64.5% or higher. As a result of this
      agreement, the Company assumed $24,523 and $59,083 of business from the
      GMAC Insurers during the three and nine months ended September 30,
      2010.





As a
result of these service agreements with ACAC, the Company recorded fees totaling
approximately $1,123 and $2,328 for the three and nine months ended September
30, 2010. In addition, in the three months ended June 30, 2010, the Company
recorded an accrued liability of approximately $2,500 for advanced fees it
received from ACAC that will be applied against future fees owed by ACAC under
these service agreements. As of September 30, 2010, the outstanding balance
related to these service fees and reimbursable costs was approximately
$713.


21





12.
            Acquisitions





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
Corporation and its subsidiaries (“Warrantech”) in a cash merger. The Company
contributed $3,850 for a 27% equity interest (in the form of preferred units) in
WT Acquisition Holdings, LLC, the parent company of
Warrantech.  Warrantech is a Bedford, Texas-based developer, marketer
and third party administrator of service contracts and aftermarket warranty
products that largely serves the consumer products and automotive industries in
the U.S. and Canada.  Additionally in 2007, the Company provided
Warrantech with a $20,000 senior secured note due January 31, 2012 (note
receivable — related party). Interest on the note was 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 in a principal amount equal to the
interest not paid in cash on such date.





On August
20, 2010, the Company, through its wholly-owned subsidiary AMT Warranty Corp.,
acquired 100% of the issued and outstanding capital stock of Warrantech from WT
Acquisition Holdings, LLC for approximately $7,500 in cash and an earnout
payment to the sellers of a minimum of $2,000 and a maximum and
$3,000 based on AMT Warranty Corp.’s EBITDA over the three-year period from
January 1, 2011 through December 31, 2013.





Immediately
prior to  the consummation of this transaction, WT Acquisition
Holdings, LLC redeemed the Company’s preferred units that had represented the
Company’s 27% equity interest in that entity.  In
addition,  immediately following the transaction, AMT Warranty Corp.
was recapitalized and the Company contributed its note receivable from
Warrantech in the approximate amount of $24,100 to AMT Warranty Corp. in
exchange for Series A preferred stock, par value $0.01 per share (the “Series A
Preferred Stock”), of AMT Warranty Corp. valued at $24,100.  The
Company also received additional shares of Series A Preferred Stock such that
the total value of its 100% preferred share ownership in AMT Warranty Corp. is
equivalent to $50,700.  Lastly, AMT Warranty Corp. issued 20% of its
issued and outstanding common stock to the Chairman of
Warrantech.  Given its preference position, absent the Company’s
waiver, the Company will be paid distributions on its Series A Preferred Stock
before any common shareholder would be entitled to a distribution on the common
stock.





The
Company has included the results of operations of Warrantech since the
acquisition date in its Specialty Risk and Extended Warranty
segment.  The Company is currently in the process of determining the
acquisition date fair value of its 27% equity interest and completing its
purchase price allocation procedures.  The Company anticipates
completing its allocation by the end of 2010 and has preliminarily recorded
goodwill of approximately $60,000.  Upon finalization, the Company may
be required to record a gain or loss as a result of remeasuring to fair value
the Company’s acquisition date equity interest in Warrantech as well as allocate
a certain portion of goodwill to intangible assets with a finite
life.





Risk
Services





During the three months ended June 30,
2010, the Company completed the acquisition of eight direct and indirect
subsidiaries of RS Acquisition Holdings Corp., including Risk Services, LLC and
PBOA, Inc. (collectively, “Risk Services”). The entities acquired include
various risk retention and captive management companies, brokering entities and
workers’ compensation servicing entities. The acquired companies are held in a
newly created entity, RS Acquisition Holdco, LLC.  The Risk Services
entities have offices in Florida, Vermont, Nevada and the District of Columbia
and are broadly licensed.





The Company has a majority ownership
interest (80%) in Risk Acquisition Holdco, LLC, for which the Company’s total
consideration was $11,700.  As part of the purchase agreement, the
non-controlling interest has the option under certain circumstances to require
the Company to purchase the remaining ownership interest (20%) of Risk
Services.  In accordance with FASB ASC Topic 480, Distinguishing Liabilities from
Equity, and FASB ASC Topic 815, Derivatives and Hedging, the
Company has classified the remaining 20% ownership interest of Risk Services as
mezzanine equity on the Condensed Consolidated Balance Sheet.





The Company has included the results of
operations of Risk Services since the acquisition date in its Small Commercial
Business segment.  In accordance with FASB ASC 805, Business Combinations, the
Company’s total consideration paid for Risk Services was $11,700 which included
cash of $11,100 and a value of $600 which was assigned for the redeemable
non-controlling interest.  The Company assigned a value of
approximately $5,100 to intangible assets and $2,600 to goodwill.  The
intangible assets consisted of trade names, customer relationships, renewal
rights and non-compete agreements and have finite lives ranging from three years
to seventeen years.  During the three months ended September 30, 2010,
the value of the redeemable non-controlling interest increased to
$997.




22


ACHL




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




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





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




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





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





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





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





CyberComp




In
September 2009, the Company acquired from subsidiaries of Swiss Re America
Holding Corp. (“Swiss Re”) access to the distribution network of and renewal
rights to CyberComp (“CyberComp”), a Swiss Re web-based platform providing
workers’ compensation insurance to the small to medium-sized employer
market. The purchase price is equal to a percentage of gross written
premium through the third anniversary of the closing of the transaction. Upon
closing, the Company made an initial payment to Swiss Re in the amount of
$3,000, which represents an advance on the purchase price and the minimum amount
payable pursuant to the purchase agreement. In accordance with FASB ASC 805, the
Company recorded a purchase price of $6,300, which consisted of $2,800 of
renewal rights, $2,300 of distribution networks, $700 of trademarks and $500 of
goodwill as part of the Small Commercial Business segment. The intangible assets
were determined to have useful lives of between two years and 15 years. The
Company produced approximately $9,000 and $7,000 of gross written premium during
the three months ended September 30, 2010 and 2009, respectively and $34,000 and
$7,000 of gross written premium during the nine months ended September 30, 2010
and 2009, respectively, from this transaction.


23





13.
            Investment in Life
      Settlements





During
the third quarter of 2010, the Company formed Tiger Capital LLC (“Tiger”) with a
subsidiary of ACAC and a third-party administrator for the purposes of
acquiring certain life settlement
contracts. A life settlement contract is a contract between the policy owner of
a life insurance policy and a third-party investor who obtains the ownership and
beneficiary rights of the underlying life insurance policy. The
Company and ACAC each contributed approximately $6,000 for their respective
fifty percent ownership interest in Tiger.  The third
party serves as the administrator of the life settlement contract
portfolio, for which it receives an annual fee.  Under the terms
of the agreement, the third party administrator is eligible to receive
a percentage of profits after certain time and performance thresholds have been
met.  The Company is responsible for certain actuarial and
finance functions related to Tiger.  Additionally, in conjunction
with the Company’s 21.25% ownership percentage of ACAC, the
Company ultimately receives 60.6% of the profits and losses of
Tiger.  As such, in accordance with ASC 810-10, Consolidation, the Company
has been deemed the primary beneficiary and, therefore, consolidates this
entity.





During
the third quarter of 2010, Tiger acquired certain life insurance policies and
cash value loans for approximately $11,972.  The Company accounts for
investments in life settlements in accordance with ASC 325-30, Investments in Insurance
Contracts, which states that an investor shall elect to account for its
investments in life settlement contracts by using either the investment method
or the fair value method.  The election is made on an
instrument-by-instrument basis and is irrevocable.  The Company has
elected to account for these policies using the fair value
method.  The Company determines fair value on a discounted cash flow
basis of anticipated death benefits, incorporating current life expectancy
assumptions, premium payments, the credit exposure to the insurance company that
issued the life settlement contracts and the rate of return that a buyer would
require on the contracts as no comparable market pricing is
available.  The change in fair value, life insurance proceeds received
and periodic maintenance costs, such as premium, necessary to keep the
underlying policy in force, are recorded in Other revenues on the Consolidated
Statement of Income. The Company recorded a gain of approximately $10,592 upon
initial acquisition of the life insurance policies.  The Company’s
investments in life settlements and cash value loans were approximately $23,101
as of September 30, 2010 and are included in Prepaid expenses and other assets
on the Consolidated Balance Sheet.





The
following table describes the Company’s investment in life settlements as of
September 30, 2010:





(Amounts in thousands,
      except Life Settlement Contracts)
                                      
                                      Number of LifeRemaining life expectancy as of September 30, 2010
                                      
                                      Settlement
                                        Contracts
                                      
                                      
                                      Fair Value
                                      
                                      
                                      Face Value0-1
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —1-2
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —2-3
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —3-4
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —4-5
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Thereafter
                                      
                                      
                                      61
                                      
                                      
                                      $
                                      17,025
                                      
                                      
                                      $
                                      390,683Total
                                      
                                      
                                      61
                                      
                                      
                                      $
                                      17,025
                                      
                                      
                                      $
                                      390,683





Premiums
to be paid for each of the five succeeding fiscal years to keep the life
insurance policies in force as of September 30, 2010, are as
follows:





(Amounts in thousands)October
      1, 2010 through September 30 2011
                        
                        $
                        1,934October
      1, 2011 through September 30 2012
                        
                        
                        4,632October
      1, 2012 through September 30 2013
                        
                        
                        6,155October
      1, 2013 through September 30 2014
                        
                        
                        7,101October
      1, 2014 through September 30 2015
                        
                        
                        7,613Thereafter
                        
                        
                        244,699$
                        272,134


In
addition to the 61 policies disclosed in the table above, the Company acquired
174 premium finance loans, which are secured by life insurance policies and are
carried at a value of $6,076. The face value amount of these 174 life
insurance policies is $958,000.  If policyholders default on these loans,
the Company will become the beneficiary on the underlying life insurance policy,
at which point the Company has the option to make premium payments on the
policies or allow the policies to lapse.  If the policyholders do not
default on the loans, the Company will be repaid the amount of the premium
finance loans.


24





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.





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





15.
            Segments





The
Company currently operates four business segments, Small Commercial Business;
Specialty Risk and Extended Warranty; Specialty Program (formerly known as
Specialty Middle Market Business); and Personal Lines Reinsurance. The Company
formed the Personal Lines Reinsurance Segment in connection with the Personal
Lines Quota Share entered into with GMAC Insurers during the three months ended
March 31, 2010. The “Corporate & Other” segment represents fee revenue
earned primarily through agreements with Maiden and ACAC as well as the equity
in earnings of unconsolidated subsidiaries in ACAC and Warrantech (before
acquisition of the remaining interest in Warrantech in third quarter of 2010).
In 2009, the Company classified its proportionate share of earnings from its
investment in Warrantech in investment income and realized gains, which was
allocated to the Company’s operating segments. In determining total assets
(excluding cash and invested assets) by segment, the Company identifies those
assets that are attributable to a particular segment, such as deferred
acquisition cost, reinsurance recoverable, goodwill and intangible assets and
prepaid reinsurance, while the remaining assets are allocated based on net
written premium by segment. In determining cash and invested assets by segment,
the Company matches certain identifiable liabilities, such as unearned premium
and loss and loss adjustment expense reserves, by segment. The remaining cash
and invested assets are then allocated based on net written premium by segment.
Investment income and realized gains (losses) are determined by calculating an
overall annual return on cash and invested assets and applying that overall
return to the cash and invested assets by segment. Ceding commission revenue is
allocated to each segment based on that segment’s proportionate share of the
Company’s overall acquisition costs. Interest expense is allocated based on net
written premium by segment. Income taxes are allocated on a pro rata basis based
on the Company’s effective tax rate. Additionally, management reviews the
performance of underwriting income in assessing the performance of and making
decisions regarding the allocation of resources to the segments. Underwriting
income excludes, primarily, service and fee revenue, investment income and other
revenues, other expenses, interest expense and income taxes. Management believes
that providing this information in this manner is essential to providing the
Company’s shareholders with an understanding of the Company’s business and
operating performance. The following tables summarize the results of the
operations of the business segments for the three and nine months ended
September 30, 2010 and 2009.


25





(Amounts in thousands)
                                            
                                            Small
                                              Commercial
                                              Business
                                            
                                            
                                            Specialty Risk
                                              and Extended
                                              Warranty
                                            
                                            
                                            Specialty
                                              Program
                                            
                                            
                                            Personal
                                              Lines
                                              Reinsurance
                                            
                                            
                                            Corporate
                                              and Other
                                            
                                            
                                            TotalThree
      months ended September 30,
    2010:Gross
      written premium
                                            
                                            $
                                            107,838
                                            
                                            
                                            $
                                            146,155
                                            
                                            
                                            $
                                            60,568
                                            
                                            
                                            $
                                            24,523
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            339,084Net
      written premium
                                            
                                            
                                            56,386
                                            
                                            
                                            
                                            78,377
                                            
                                            
                                            
                                            23,551
                                            
                                            
                                            
                                            24,523
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            182,837Change
      in unearned premium
                                            
                                            
                                            8,029
                                            
                                            
                                            
                                            2,524
                                            
                                            
                                            
                                            3,828
                                            
                                            
                                            
                                            (6,333
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            8,048Net
      earned premium
                                            
                                            
                                            64,415
                                            
                                            
                                            
                                            80,901
                                            
                                            
                                            
                                            27,379
                                            
                                            
                                            
                                            18,190
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            190,885Ceding
      commission - primarily related party
                                            
                                            
                                            16,400
                                            
                                            
                                            
                                            14,578
                                            
                                            
                                            
                                            6,925
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            37,903Loss
      and loss adjustment expense
                                            
                                            
                                            (39,245
                                            )
                                            
                                            
                                            (50,584
                                            )
                                            
                                            
                                            (19,235
                                            )
                                            
                                            
                                            (11,368
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (120,432
                                            )Acquisition
      costs and other underwriting expenses
                                            
                                            
                                            (32,899
                                            )
                                            
                                            
                                            (29,482
                                            )
                                            
                                            
                                            (13,860
                                            )
                                            
                                            
                                            (5,911
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (82,152
                                            )(72,144
                                            )
                                            
                                            
                                            (80,066
                                            )
                                            
                                            
                                            (33,095
                                            )
                                            
                                            
                                            (17,279
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (202,584
                                            )Underwriting
      income
                                            
                                            
                                            8,671
                                            
                                            
                                            
                                            15,413
                                            
                                            
                                            
                                            1,209
                                            
                                            
                                            
                                            911
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            26,204Service
      and fee income
                                            
                                            
                                            9,124
                                            
                                            
                                            
                                            9,971
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            3,323
                                            
                                            
                                            
                                            22,418Investment
      income and realized gain (loss)
                                            
                                            
                                            7,390
                                            
                                            
                                            
                                            6,356
                                            
                                            
                                            
                                            3,645
                                            
                                            
                                            
                                            1,021
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            18,412Other
      expenses
                                            
                                            
                                            (6,515
                                            )
                                            
                                            
                                            (8,456
                                            )
                                            
                                            
                                            (3,781
                                            )
                                            
                                            
                                            (1,458
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (20,210
                                            )Interest
      expense
                                            
                                            
                                            (1,083
                                            )
                                            
                                            
                                            (1,417
                                            )
                                            
                                            
                                            (628
                                            )
                                            
                                            
                                            (282
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (3,410
                                            )Foreign
      currency loss
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (141
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (141
                                            )Gain
      on life settlement contracts
                                            
                                            
                                            3,446
                                            
                                            
                                            
                                            4,452
                                            
                                            
                                            
                                            2,002
                                            
                                            
                                            
                                            692
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            10,592Provision
      for income taxes
                                            
                                            
                                            (6,099
                                            )
                                            
                                            
                                            (7,593
                                            )
                                            
                                            
                                            (655
                                            )
                                            
                                            
                                            (270
                                            )
                                            
                                            
                                            (950
                                            )
                                            
                                            
                                            (15,567
                                            )Equity
      in earnings of unconsolidated subsidiaries – related party
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            4,030
                                            
                                            
                                            
                                            4,030Non-controlling interest
                                            
                                            
                                            (1,119
                                            )
                                            
                                            
                                            (1,447
                                            )
                                            
                                            
                                            (651
                                            )
                                            
                                            
                                            (225
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (3,442
                                            )Net
      income attributable to AmTrust Financial Services, Inc.
                                            
                                            $
                                            13,815
                                            
                                            
                                            $
                                            17,138
                                            
                                            
                                            $
                                            1,141
                                            
                                            
                                            $
                                            389
                                            
                                            
                                            $
                                            6,403
                                            
                                            
                                            
                                            38,886





(Amounts in thousands)
                                          
                                          Small
                                            Commercial
                                            Business
                                          
                                          
                                          Specialty Risk
                                            and Extended
                                            Warranty
                                          
                                          
                                          Specialty
                                            Program
                                          
                                          
                                          Corporate
                                            and Other
                                          
                                          
                                          TotalThree months ended September 30,
      2009:Gross
      written premium
                                          
                                          $
                                          85,810
                                          
                                          
                                          $
                                          138,917
                                          
                                          
                                          $
                                          71,214
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          295,941Net
      written premium
                                          
                                          
                                          47,408
                                          
                                          
                                          
                                          76,793
                                          
                                          
                                          
                                          43,116
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          167,317Change
      in unearned premium
                                          
                                          
                                          8,377
                                          
                                          
                                          
                                          (29,673
                                          )
                                          
                                          
                                          (729
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (22,025
                                          )Net
      Earned Premium
                                          
                                          
                                          55,785
                                          
                                          
                                          
                                          47,120
                                          
                                          
                                          
                                          42,387
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          145,292Ceding
      commission – primarily related party
                                          
                                          
                                          10,311
                                          
                                          
                                          
                                          8,031
                                          
                                          
                                          
                                          9,027
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          27,369Loss
      and loss adjustment expense
                                          
                                          
                                          (28,098
                                          )
                                          
                                          
                                          (24,746
                                          )
                                          
                                          
                                          (24,687
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (77,531
                                          )Acquisition
      costs and other underwriting expenses
                                          
                                          
                                          (24,661
                                          )
                                          
                                          
                                          (18,099
                                          )
                                          
                                          
                                          (20,394
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (63,154
                                          )(52,759
                                          )
                                          
                                          
                                          (42,845
                                          )
                                          
                                          
                                          (45,081
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (140,685
                                          )Underwriting
      income
                                          
                                          
                                          13,337
                                          
                                          
                                          
                                          12,306
                                          
                                          
                                          
                                          6,333
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          31,976Service
      and fee income
                                          
                                          
                                          2,943
                                          
                                          
                                          
                                          2,625
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          1,383
                                          
                                          
                                          
                                          6,951Investment
      income and realized gain (loss)
                                          
                                          
                                          430
                                          
                                          
                                          
                                          1,306
                                          
                                          
                                          
                                          856
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          2,592Other
      expense
                                          
                                          
                                          (2,228
                                          )
                                          
                                          
                                          (2,761
                                          )
                                          
                                          
                                          (775
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (5,764
                                          )Interest
      expense
                                          
                                          
                                          (1,451
                                          )
                                          
                                          
                                          (1,880
                                          )
                                          
                                          
                                          (482
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (3,813
                                          )Foreign
      currency gain
                                          
                                          
                                          —
                                          
                                          
                                          
                                          552
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          552Provision
      for income taxes
                                          
                                          
                                          (3,365
                                          )
                                          
                                          
                                          (3,479
                                          )
                                          
                                          
                                          (1,040
                                          )
                                          
                                          
                                          (223
                                          )
                                          
                                          
                                          (8,107
                                          )Equity
      in earnings of unconsolidated subsidiary – related party
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (166
                                          )
                                          
                                          
                                          (166
                                          )Net
      income attributable to AmTrust Financial Services, Inc.
                                          
                                          $
                                          9,666
                                          
                                          
                                          $
                                          8,669
                                          
                                          
                                          $
                                          4,892
                                          
                                          
                                          $
                                          994
                                          
                                          
                                          $
                                          24,221




26





(Amounts in thousands)
                                            
                                            Small
                                              Commercial
                                              Business
                                            
                                            
                                            Specialty Risk
                                              and Extended
                                              Warranty
                                            
                                            
                                            Specialty
                                              Program
                                            
                                            
                                            Personal
                                              Lines
                                              Reinsurance
                                            
                                            
                                            Corporate
                                              and Other
                                            
                                            
                                            TotalNine
      months ended September 30,
    2010:Gross
      written premium
                                            
                                            $
                                            338,140
                                            
                                            
                                            $
                                            495,799
                                            
                                            
                                            $
                                            192,935
                                            
                                            
                                            $
                                            59,083
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            1,085,957Net
      written premium
                                            
                                            
                                            173,875
                                            
                                            
                                            
                                            238,642
                                            
                                            
                                            
                                            97,044
                                            
                                            
                                            
                                            59,083
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            568,644Change
      in unearned premium
                                            
                                            
                                            15,404
                                            
                                            
                                            
                                            (19,390
                                            )
                                            
                                            
                                            2,128
                                            
                                            
                                            
                                            (31,540
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (33,398
                                            )Net
      earned premium
                                            
                                            
                                            189,279
                                            
                                            
                                            
                                            219,252
                                            
                                            
                                            
                                            99,172
                                            
                                            
                                            
                                            27,543
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            535,246Ceding
      commission - primarily related party
                                            
                                            
                                            50,580
                                            
                                            
                                            
                                            35,408
                                            
                                            
                                            
                                            17,121
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            103,109Loss
      and loss adjustment expense
                                            
                                            
                                            (113,680
                                            )
                                            
                                            
                                            (135,808
                                            )
                                            
                                            
                                            (65,061
                                            )
                                            
                                            
                                            (17,214
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (331,763
                                            )Acquisition
      costs and other underwriting expenses
                                            
                                            
                                            (97,621
                                            )
                                            
                                            
                                            (73,531
                                            )
                                            
                                            
                                            (42,974
                                            )
                                            
                                            
                                            (8,951
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (223,077
                                            )(211,301
                                            )
                                            
                                            
                                            (209,339
                                            )
                                            
                                            
                                            (108,035
                                            )
                                            
                                            
                                            (26,165
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (554,840
                                            )Underwriting
      income
                                            
                                            
                                            28,558
                                            
                                            
                                            
                                            45,321
                                            
                                            
                                            
                                            8,258
                                            
                                            
                                            
                                            1,378
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            83,515Service
      and fee income
                                            
                                            
                                            14,676
                                            
                                            
                                            
                                            15,958
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            8,871
                                            
                                            
                                            
                                            39,505Investment
      income and realized gain (loss)
                                            
                                            
                                            17,142
                                            
                                            
                                            
                                            14,223
                                            
                                            
                                            
                                            8,747
                                            
                                            
                                            
                                            1,826
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            41,938Other
      expenses
                                            
                                            
                                            (11,640
                                            )
                                            
                                            
                                            (15,039
                                            )
                                            
                                            
                                            (6,764
                                            )
                                            
                                            
                                            (2,337
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (35,780
                                            )Interest
      expense
                                            
                                            
                                            (3,268
                                            )
                                            
                                            
                                            (4,222
                                            )
                                            
                                            
                                            (1,899
                                            )
                                            
                                            
                                            (656
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (10,045
                                            )Foreign
      currency loss
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (103
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (103
                                            )Gain
      on life settlement contracts
                                            
                                            
                                            3,446
                                            
                                            
                                            
                                            4,452
                                            
                                            
                                            
                                            2,002
                                            
                                            
                                            
                                            692
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            10,592Provision
      for income taxes
                                            
                                            
                                            (14,934
                                            )
                                            
                                            
                                            (18,498
                                            )
                                            
                                            
                                            (3,158
                                            )
                                            
                                            
                                            (276
                                            )
                                            
                                            
                                            (2,708
                                            )
                                            
                                            
                                            (39,574
                                            )Equity
      in earnings of unconsolidated subsidiaries – related party
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            21,803
                                            
                                            
                                            
                                            21,803Non-controlling interest
                                            
                                            
                                            (1,119
                                            )
                                            
                                            
                                            (1,447
                                            )
                                            
                                            
                                            (651
                                            )
                                            
                                            
                                            (225
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (3,442
                                            )Net
      income attributable to AmTrust Financial Services, Inc.
                                            
                                            $
                                            32,861
                                            
                                            
                                            $
                                            40,645
                                            
                                            
                                            $
                                            6,535
                                            
                                            
                                            $
                                            402
                                            
                                            
                                            $
                                            27,966
                                            
                                            
                                            
                                            108,409





(Amounts in thousands)
                                              
                                              Small
                                                Commercial
                                                Business
                                              
                                              
                                              Specialty Risk
                                                and Extended
                                                Warranty
                                              
                                              
                                              Specialty
                                                Program
                                              
                                              
                                              Corporate and
                                                Other
                                              
                                              
                                              TotalNine months ended September 30,
      2009:Gross
      written premium
                                              
                                              $
                                              322,421
                                              
                                              
                                              $
                                              314,260
                                              
                                              
                                              $
                                              197,016
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              833,697Net
      Written Premium
                                              
                                              
                                              172,199
                                              
                                              
                                              
                                              162,306
                                              
                                              
                                              
                                              106,111
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              440,616Change
      in unearned premium
                                              
                                              
                                              3,174
                                              
                                              
                                              
                                              (30,567
                                              )
                                              
                                              
                                              1,295
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (26,098
                                              )Net
      Earned Premium
                                              
                                              
                                              175,373
                                              
                                              
                                              
                                              131,739
                                              
                                              
                                              
                                              107,406
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              414,518Ceding
      commission – primarily related party
                                              
                                              
                                              47,178
                                              
                                              
                                              
                                              20,233
                                              
                                              
                                              
                                              19,827
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              87,238Loss
      and loss adjustment expense
                                              
                                              
                                              (100,582
                                              )
                                              
                                              
                                              (62,089
                                              )
                                              
                                              
                                              (66,360
                                              )
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (229,031
                                              )Acquisition
      costs and other underwriting expenses
                                              
                                              
                                              (92,920
                                              )
                                              
                                              
                                              (43,116
                                              )
                                              
                                              
                                              (49,859
                                              )
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (185,895
                                              )(193,502
                                              )
                                              
                                              
                                              (105,205
                                              )
                                              
                                              
                                              (116,219
                                              )
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (414,926
                                              )Underwriting
      income
                                              
                                              
                                              29,049
                                              
                                              
                                              
                                              46,767
                                              
                                              
                                              
                                              11,014
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              86,830Service
      and fee income
                                              
                                              
                                              9,639
                                              
                                              
                                              
                                              7,310
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              5,063
                                              
                                              
                                              
                                              22,012Investment
      income and realized gain (loss)
                                              
                                              
                                              5,879
                                              
                                              
                                              
                                              4,492
                                              
                                              
                                              
                                              3,064
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              13,435Other
      expenses
                                              
                                              
                                              (7,245
                                              )
                                              
                                              
                                              (6,162
                                              )
                                              
                                              
                                              (3,325
                                              )
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (16,732
                                              )Interest
      expense
                                              
                                              
                                              (5,192
                                              )
                                              
                                              
                                              (4,416
                                              )
                                              
                                              
                                              (2,383
                                              )
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (11,991
                                              )Foreign
      currency gain
                                              
                                              
                                              —
                                              
                                              
                                              
                                              1,196
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              1,196Provision
      for income taxes
                                              
                                              
                                              (6,649
                                              )
                                              
                                              
                                              (9,847
                                              )
                                              
                                              
                                              (1,459
                                              )
                                              
                                              
                                              (856
                                              )
                                              
                                              
                                              (18,811
                                              )Equity
      in earnings of unconsolidated subsidiary – related party
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (785
                                              )
                                              
                                              
                                              (785
                                              )Net
      income attributable to AmTrust Financial Services, Inc.
                                              
                                              $
                                              25,481
                                              
                                              
                                              $
                                              39,340
                                              
                                              
                                              $
                                              6,911
                                              
                                              
                                              $
                                              3,422
                                              
                                              
                                              $
                                              75,154




27


The following table summarizes long lived and total assets of the
business segments as follows as of September 30, 2010 and December 31,
2009:





(Amounts in thousands)
                                            
                                            Small
                                              Commercial
                                              Business
                                            
                                            
                                            Specialty Risk
                                              and Extended
                                              Warranty
                                            
                                            
                                            Specialty
                                              Program
                                            
                                            
                                            Personal Lines
                                              Reinsurance
                                            
                                            
                                            Corporate and
                                              other
                                            
                                            
                                            TotalAs of September 30, 2010:Fixed
      assets
                                            
                                            $
                                            7,618
                                            
                                            
                                            $
                                            9,842
                                            
                                            
                                            $
                                            4,427
                                            
                                            
                                            $
                                            1,529
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            23,416Goodwill
      and intangible assets
                                            
                                            
                                            78,412
                                            
                                            
                                            
                                            89,939
                                            
                                            
                                            
                                            15,230
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            183,581Total
      assets
                                            
                                            
                                            1,534,689
                                            
                                            
                                            
                                            1,524,312
                                            
                                            
                                            
                                            705,870
                                            
                                            
                                            
                                            129,807
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            3,894,678As of December 31, 2009:Fixed
      assets
                                            
                                            $
                                            6,471
                                            
                                            
                                            $
                                            5,788
                                            
                                            
                                            $
                                            3,599
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            15,858Goodwill
      and intangible assets
                                            
                                            
                                            80,849
                                            
                                            
                                            
                                            19,319
                                            
                                            
                                            
                                            15,660
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            115,828Total
      assets
                                            
                                            
                                            1,582,247
                                            
                                            
                                            
                                            1,001,347
                                            
                                            
                                            
                                            816,770
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            3,400,364





The
following table summarizes results of operations for the Company’s
unconsolidated equity method investment in ACAC for the three and nine months
ended September 30, 2010:





(Amounts in thousands)
                      
                      Three Months Ended
                        September 30, 2010
                      
                      
                      Nine Months Ended
                        September 30, 2010Gross
      written premium
                      
                      $
                      276,595
                      
                      
                      
                      643,724Net
      earned premium
                      
                      
                      151,582
                      
                      
                      
                      430,037Income
      from continuing operations
                      
                      
                      19,634
                      
                      
                      
                      59,487Net
      income
                      
                      
                      19,634
                      
                      
                      
                      108,664




28


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





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





Note
on Forward-Looking Statements





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





Overview





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





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


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


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


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




29




We
transact business primarily through eleven insurance company
subsidiaries:





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





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


30





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





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





Net Earned Premium. Net
earned premium is the earned portion of our net written premiums. Insurance
premiums are earned on a pro-rata basis over the term of the policy. At the end
of each reporting period, premiums written that are not earned are classified as
unearned premiums and are earned in subsequent periods over the remaining term
of the policy. Our workers’ compensation insurance and commercial package
policies typically have a term of one year. Thus, for a one-year policy written
on July 1, 2010 for an employer with a constant payroll during the term of the
policy, we would earn half of the premiums in 2010 and the other half in 2011.
Our specialty risk and extended warranty coverages are earned over the estimated
exposure time period. The terms vary depending on the risk and have an average
duration of approximately 35 months, but range in duration from one month to 120
months.





Ceding Commission. Ceding
commission is a commission we receive from ceding gross written premium to
third-party reinsurers. In connection with the Maiden Quota Share, which is our
primary source of ceding commission, we receive
a ceding commission of 31% or 34.375%, based on the business ceded. 
We allocate earned ceding commissions to our segments based on each segment’s
proportionate share of total acquisition costs and other underwriting expenses
recognized during the period.




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





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





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





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




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





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


31


Annualized Return on Equity. Return on
equity is calculated by dividing net income by the average of shareholders’
equity.





One of
the key financial measures that we use to evaluate our operating performance is
return on average equity. Our return on average equity was 23.3% and 19.1% for
the three months ended September 30, 2010 and 2009, respectively and 21.7% and
21.6% for the nine months ended September 30, 2010 and 2009, respectively. In
addition, we target a net combined ratio of 95.0% or lower over the long term,
while seeking to maintain optimal operating leverage in our insurance
subsidiaries commensurate with our A.M. Best rating objectives. Our net combined
ratio was 86.3% and 78.0% for the three months ended September 30, 2010 and
2009, respectively and 84.4% and 79.1% for the nine months ended September 30,
2010 and 2009, respectively.





Critical
Accounting Policies





Our
discussion and analysis of our results of operations, financial condition and
liquidity are based upon our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the amounts of assets and liabilities, revenues and
expenses and disclosure of contingent assets and liabilities as of the date of
the financial statements. As more information becomes known, these estimates and
assumptions could change, which would have an impact on actual results that may
differ materially from these estimates and judgments under different
assumptions. We have not made any changes in estimates or judgments that have
had a significant effect on the reported amounts as previously disclosed in our
Annual Report on Form 10-K for the fiscal period ended December 31,
2009.





During
the third quarter of 2010, we acquired certain life insurance contracts and
premium finance loans secured by life insurance contracts for investment
purposes.  Our accounting policy regarding these life settlement
contracts is as follows:





Life
Settlements





When we become the owner of a life
insurance policy either by direct purchase or following a default on a premium
finance loan, the life insurance premium for such policy is accounted for as an
investment in life settlements.  Investments in life settlements are
accounted for in accordance with ASC 325-30, Investments in Insurance
Contracts, which states that an investor shall elect to account for its
investments in life settlement contracts using either the investment
method or the fair value method.  The election is made on an
instrument-by-instrument basis and is irrevocable.  We have elected to
account for these investments using the fair value method.





Investment
in ACAC




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




Pursuant
to the Amended Stock Purchase Agreement, ACAC issued and sold to us for an
initial purchase price of $53 million, which was equal to 25% of the capital
required by ACAC, 53,054 shares of Series A Preferred Stock, which provides for
an 8% cumulative dividend, and is non-redeemable and convertible, at our option,
into 21.25% of the issued and outstanding Common Stock of ACAC (the “Preferred
Stock”). We have pre-emptive rights with respect to any future issuances of
securities by ACAC and our conversion rights are subject to customary
anti-dilution protections. We have the right to appoint two members of ACAC’s
board of directors, which consists of six members. Subject to certain
limitations, the board of directors of ACAC may not take any action in the
absence of our appointees and ACAC may not take certain corporate actions
without the unanimous prior approval of its board of directors (including our
appointees). In accordance with ASC 323-10-15, Investments-Equity Method and Joint
Ventures, we account for our investment in ACAC under the equity method.
We recorded $4.1 million and $12.6 million of income during the three and nine
months ended September 30, 2010 related to our equity investment in ACAC.
Additionally, ACAC completed a portion of its purchase accounting required under
ASC 805, Business
Combinations, related to its acquisition of GMAC during the three months
ended June 30, 2010. As a result, we recorded a retrospective gain on our equity
investment in ACAC of $10.4 million that is included in the income statement in
equity in earnings of unconsolidated subsidiaries. ACAC expects to finalize its
purchase price accounting by the end of 2010. Upon completion, we may be
required to adjust our investment in ACAC for additional purchase price
adjustments.


32





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





Results
of Operations





Consolidated
Results of Operations (Unaudited)




Three Months Ended September 30,
                                        
                                        
                                        Nine Months Ended September 30,(Amounts in thousands)
                                        
                                        2010
                                        
                                        
                                        2009
                                        
                                        
                                        2010
                                        
                                        
                                        2009Gross
      written premium
                                        
                                        $
                                        339,084
                                        
                                        
                                        $
                                        295,942
                                        
                                        
                                        $
                                        1,085,957
                                        
                                        
                                        $
                                        833,698Net
      written premium
                                        
                                        $
                                        182,837
                                        
                                        
                                        $
                                        167,317
                                        
                                        
                                        $
                                        568,644
                                        
                                        
                                        $
                                        440,616Change
      in unearned premium
                                        
                                        
                                        8,048
                                        
                                        
                                        
                                        (22,025
                                        )
                                        
                                        
                                        (33,398
                                        )
                                        
                                        
                                        (26,098
                                        )Net
      earned premium
                                        
                                        
                                        190,885
                                        
                                        
                                        
                                        145,292
                                        
                                        
                                        
                                        535,246
                                        
                                        
                                        
                                        414,518Ceding
      commission – primarily related party
                                        
                                        
                                        37,903
                                        
                                        
                                        
                                        27,369
                                        
                                        
                                        
                                        103,109
                                        
                                        
                                        
                                        87,238Service
      and fee income
                                        
                                        
                                        19,095
                                        
                                        
                                        
                                        4,892
                                        
                                        
                                        
                                        30,634
                                        
                                        
                                        
                                        16,174Service
      and fee income – related parties
                                        
                                        
                                        3,323
                                        
                                        
                                        
                                        2,059
                                        
                                        
                                        
                                        8,871
                                        
                                        
                                        
                                        5,838Net
      investment income
                                        
                                        
                                        10,952
                                        
                                        
                                        
                                        14,245
                                        
                                        
                                        
                                        39,237
                                        
                                        
                                        
                                        42,035Net
      realized gain (loss) on investments
                                        
                                        
                                        7,460
                                        
                                        
                                        
                                        (11,653
                                        )
                                        
                                        
                                        2,701
                                        
                                        
                                        
                                        (28,600
                                        )Total
      revenues
                                        
                                        
                                        269,618
                                        
                                        
                                        
                                        182,204
                                        
                                        
                                        
                                        719,798
                                        
                                        
                                        
                                        537,203Loss
      and loss adjustment expense
                                        
                                        
                                        120,432
                                        
                                        
                                        
                                        77,531
                                        
                                        
                                        
                                        331,763
                                        
                                        
                                        
                                        229,031Acquisition
      costs and other underwriting expenses
                                        
                                        
                                        82,152
                                        
                                        
                                        
                                        63,154
                                        
                                        
                                        
                                        223,077
                                        
                                        
                                        
                                        185,895Other
                                        
                                        
                                        20,210
                                        
                                        
                                        
                                        5,764
                                        
                                        
                                        
                                        35,780
                                        
                                        
                                        
                                        16,732Total
      expenses
                                        
                                        
                                        222,794
                                        
                                        
                                        
                                        146,449
                                        
                                        
                                        
                                        590,620
                                        
                                        
                                        
                                        431,658Income
      before other income (expense), income taxes and equity in earnings (loss)
      of unconsolidated subsidiaries
                                        
                                        
                                        46,824
                                        
                                        
                                        
                                        35,755
                                        
                                        
                                        
                                        129,178
                                        
                                        
                                        
                                        105,545Other
      income (expense):Foreign
      currency (loss) gain
                                        
                                        
                                        (141
                                        )
                                        
                                        
                                        552
                                        
                                        
                                        
                                        (103
                                        )
                                        
                                        
                                        1,196Interest
      expense
                                        
                                        
                                        (3,410
                                        )
                                        
                                        
                                        (3,813
                                        )
                                        
                                        
                                        (10,045
                                        )
                                        
                                        
                                        (11,991
                                        )Gain
      on acquisition of life settlement contracts
                                        
                                        
                                        10,592
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        10,592
                                        
                                        
                                        
                                        -Total
      other income (expense)
                                        
                                        
                                        7,041
                                        
                                        
                                        
                                        (3,261
                                        )
                                        
                                        
                                        444
                                        
                                        
                                        
                                        (10,795
                                        )Income
      before income taxes and equity in earnings (loss) of unconsolidated
      subsidiaries
                                        
                                        
                                        53,865
                                        
                                        
                                        
                                        32,494
                                        
                                        
                                        
                                        129,622
                                        
                                        
                                        
                                        94,750Provision
      for income taxes
                                        
                                        
                                        15,567
                                        
                                        
                                        
                                        8,107
                                        
                                        
                                        
                                        39,574
                                        
                                        
                                        
                                        18,811Income
      before equity in earnings (loss) of unconsolidated subsidiaries and
      minority interest
                                        
                                        
                                        38,298
                                        
                                        
                                        
                                        24,387
                                        
                                        
                                        
                                        90,048
                                        
                                        
                                        
                                        75,939Equity
      in earnings (loss) of unconsolidated subsidiaries – related
      party
                                        
                                        
                                        4,030
                                        
                                        
                                        
                                        (166
                                        )
                                        
                                        
                                        21,803
                                        
                                        
                                        
                                        (785
                                        )Net
      income
                                        
                                        
                                        42,328
                                        
                                        
                                        
                                        24,221
                                        
                                        
                                        
                                        111,851
                                        
                                        
                                        
                                        75,154Non-controlling
      interest
                                        
                                        
                                        (3,442
                                        )
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (3,442
                                        )
                                        
                                        
                                        —Net
      income attributable to AmTrust Financial Services, Inc.
                                        
                                        
                                        38,886
                                        
                                        
                                        
                                        24,221
                                        
                                        
                                        
                                        108,409
                                        
                                        
                                        
                                        75,154Key
      Measures:Net
      loss ratio
                                        
                                        
                                        63.1
                                        %
                                        
                                        
                                        53.4
                                        %
                                        
                                        
                                        62.0
                                        %
                                        
                                        
                                        55.3
                                        %Net
      expense ratio
                                        
                                        
                                        23.2
                                        %
                                        
                                        
                                        24.6
                                        %
                                        
                                        
                                        22.4
                                        %
                                        
                                        
                                        23.8
                                        %Net
      combined ratio
                                        
                                        
                                        86.3
                                        %
                                        
                                        
                                        78.0
                                        %
                                        
                                        
                                        84.4
                                        %
                                        
                                        
                                        79.1
                                        %Net
      realized loss on investments:Total
      other-than-temporary impairment losses
                                        
                                        $
                                        (4,051
                                        )
                                        
                                        $
                                        (3,147
                                        )
                                        
                                        $
                                        (21,196
                                        )
                                        
                                        $
                                        (15,360
                                        )Portion
      of loss recognized in other comprehensive income
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Net
      impairment losses recognized in earnings
                                        
                                        
                                        (4,051
                                        )
                                        
                                        
                                        (3,147
                                        )
                                        
                                        
                                        (21,196
                                        )
                                        
                                        
                                        (15,360
                                        )Other
      net realized gain (loss) on investments
                                        
                                        
                                        11,511
                                        
                                        
                                        
                                        (8,056
                                        )
                                        
                                        
                                        23,897
                                        
                                        
                                        
                                        (13,240
                                        )Net
      realized investment gain (loss)
                                        
                                        $
                                        7,460
                                        
                                        
                                        $
                                        (11,653
                                        )
                                        
                                        $
                                        2,701
                                        
                                        
                                        $
                                        (28,600
                                        )


33




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





Gross Written Premium. Gross
written premium increased $43.2 million, or 14.6%, to $339.1 million from $295.9
million for the three months ended September 30, 2010 and 2009, respectively.
The increase of $43.2 million was primarily attributable to growth in our Small
Commercial Business segment of $22.0 million. The increase in Small Commercial
Business resulted primarily from growth in policies written in workers’
compensation, while premiums in commercial package were relatively flat.
Additionally, gross written premium increased by $24.5 million in the three
months ended September 30, 2010 as a result of business assumed from the GMAC
Insurers pursuant to the Personal Lines Quota Share.





Net Written Premium. Net
written premium increased $15.5 million, or 9.3%, to $182.8 million from $167.3
million for the three months ended September 30, 2010 and 2009, respectively.
The increase (decrease) by segment was: Small Commercial Business - $9.0
million; Specialty Risk and Extended Warranty - $1.6 million; Specialty Program
- $(19.6) million and Personal Lines - $24.5 million. Net written premium
increased during the three months ended September 30, 2010 compared to the
equivalent period in 2009 due to the increase in gross written premium and
higher retention of premium writings in the three months ended September 30,
2010 compared to the same period in 2009.





Net Earned Premium. Net
earned premium increased $45.6 million, or 31.4%, to $190.9 million from $145.3
million for the three months ended September 30, 2010 and 2009. The increase
(decrease) by segment, was: Small Commercial Business - $8.6 million; Specialty
Risk and Extended Warranty - $33.8 million; Specialty Program - $(15.0) million
and Personal Lines - $18.2 million.





Ceding
Commission. Ceding commission earned during the three months ended
September 30, 2010 and 2009 was $37.9 million and $27.4 million, respectively.
Ceding commission earned increased as a result of higher net earned premium
period over period.





Service and Fee Income. Service and fee
income increased $15.5 million, or 222%, to $22.4 million from $7.0 million for
the three months ended September 30, 2010 and 2009, respectively. The increase
was attributable primarily to fees of approximately $12.9 million generated from
Warrantech and Risk Services, which were acquired in 2010.





Net Investment Income. Net
investment income decreased $3.2 million, or 23.1%, to $11.0 million from $14.2
million for the three months ended September 30, 2010 and 2009, respectively.
The change period over period related primarily to a decrease in the yields on
our fixed maturities to 3.2% from 4.0% in 2010 from 2009.





Net Realized Gains (Losses) on
Investments. Net realized gains on investments for the three months ended
September 30, 2010 were $7.5 million, compared to net realized losses of $11.7
million for the same period in 2009. The improvement period over period related
to the continued recovery of our equity portfolio and the timing of certain
sales within our equity and fixed income portfolio. The net realized gain and
loss included non-cash write-downs of $4.1 million and $3.2 million during the
three months ended September 30, 2010 and 2009, respectively, for securities
that we determined to be other-than-temporarily-impaired.





Loss and Loss
Adjustment Expenses; Loss Ratio. Loss and loss adjustment expenses
increased $42.9 million, or 55.3%, to $120.4 million for the three months ended
September 30, 2010 from $77.5 million for the three months ended September 30,
2009. Our loss ratio for the three months ended September 30, 2010 and 2009 was
63.1% and 53.4%, respectively.  The increase in the loss and loss
adjustment expense ratio in the three months ended September 30, 2010 resulted
primarily from higher actuarial estimates based on current year actual
losses.




Acquisition Costs and Other
Underwriting Expenses; Expense Ratio. Acquisition costs and other
underwriting expenses increased $19.0 million, or 30.1%, to $82.2 million for
the three months ended September 30, 2010 from $63.2 million for the three
months ended September 30, 2009. The expense ratio was 23.2% and 24.6% for the
three months ended September 30, 2010 and 2009, respectively.  The
decrease was due to higher earned ceding commissions in 2010.





Income Before Other Income
(Expense), Income Taxes and Equity Earnings of Unconsolidated
Subsidiaries. Income before other income (expense), income taxes and
equity earnings of unconsolidated subsidiaries increased $11.1 million, or
31.0%, to $46.8 million from $35.8 million for the three months ended September
30, 2010 and 2009, respectively. The change in income from the three months
ended September 30, 2009 to the same period in 2010 resulted primarily from
realized gains recognized on the investment portfolio in 2010 compared to
realized losses recognized in 2009 partially offset by a higher loss and loss
adjustment expense ratio.


34





Interest Expense. Interest
expense for the three months ended September 30, 2010 was $3.4 million, compared
to $3.8 million for the same period in 2009. The decrease was attributable to
lower outstanding debt balances on our $40 million term loan and $30 million
promissory note as well as lower expenses on an interest rate swap
agreement.




Gain on Acquisition of Life
Settlement Contracts.During the three months ended September 30, 2010,
we recorded a gain of $10.6 million upon acquisition of life settlement
contracts by Tiger Capital LLC, a company we formed in the third quarter of 2010
with ACAC and a third party administrator. ACAC received a 50% share of this
gain (net of tax, $3.4 million), which we report as non-controlling interest in
our results of operations.




Income Tax Expense. Income
tax expense for the three months ended September 30, 2010 was $15.6 million,
which resulted in an effective tax rate of 28.6%. Income tax expense for the
three months ended September 30, 2009 was $8.1 million, which resulted in an
effective tax rate of 25.1%. The increase in our effective rate for the three
months ended September 30, 2010 resulted primarily from our subsidiaries
generating a higher percentage of pretax income subject to U.S.
taxation.




Equity in Earnings of Unconsolidated
Subsidiaries - Related Party. Equity in earnings of unconsolidated
subsidiaries - related party increased by $4.1 million for the three months
ended September 30, 2010 to $4.0 million. The increase related to our
proportionate share of equity investment in 2010 in ACAC for the three months
ended September 30, 2010. Additionally, prior to acquiring the remaining 73%
percent ownership percentage of Warrantech during the third quarter of 2010, our
proportionate share of equity loss in Warrantech was included in this line item.
We previously classified the equity earnings (loss) from Warrantech as a
component of investment income in prior years. This amount has been reclassified
in all periods presented.





Consolidated
Result of Operations for the Nine Months Ended September 30, 2010 and
2009





Gross Written Premium. Gross
written premium increased $252.3 million, or 30.3%, to $1,086.0 million from
$833.7 million for the nine months ended September 30, 2010 and 2009,
respectively. The increase of $252.3 million was primarily attributable to
growth in our Specialty Risk and Extended Warranty segment of $181.5 million.
The increase in Specialty Risk and Extended Warranty business resulted primarily
from new program writings in the U.S. and Europe. Additionally, gross written
premium increased by $59.1 million in the nine months ended September 30, 2010
as a result of business assumed from the GMAC Insurers pursuant to the Personal
Lines Quota share.




Net Written Premium. Net
written premium increased $128.0 million, or 29.1%, to $568.6 million from
$440.6 million for the nine months ended September 30, 2010 and 2009,
respectively. The increase (decrease), by segment, was: Small Commercial
Business - $1.7 million; Specialty Risk and Extended Warranty - $76.3 million;
Specialty Program - $(9.1) million and Personal Lines - $59.1 million. Net
written premium increased during the nine months ended September 30, 2010
compared to the equivalent period in 2009 due to the increase in gross written
premium and higher retention of premium writings in the nine months ended
September 30, 2010 compared to the equivalent period in 2009.





Net Earned Premium. Net
earned premium increased $120.7 million, or 29.1%, to $535.2 million from $414.5
million for the nine months ended September 30, 2010 and 2009, respectively. The
increase (decrease), by segment, was: Small Commercial Business - $13.9 million;
Specialty Risk and Extended Warranty - $87.5 million; Specialty Program - $(8.2)
million and Personal Lines - $27.5 million.




Ceding
Commission. Ceding commission earned during the nine months ended
September 30, 2010 and 2009 was $103.1 million and $87.2 million, respectively.
Ceding commission increased period over period as a result of increased premium
writings, which were partially offset by an increase in the percentage of
business ceded at 31%.





Service and Fee Income. Service and fee
income increased $17.5 million, or 80%, to $39.5 million from $22.0 million for
the nine months ended September 30, 2010 and 2009, respectively. The increase
was attributable primarily to fees of approximately $12.9 million generated from
Warrantech and Risk Services which were acquired in 2010.





Net Investment Income. Net
investment income decreased $2.8 million, or 6.7%, to $39.2 million from $42.0
million for the nine months ended September 30, 2010 and 2009, respectively. The
change period over period related primarily to a decrease in the yields on our
fixed maturities to 3.8% in the nine months ended September 30, 2010 from 4.0%
in the same period in 2009.





Net Realized Gains (Losses) on
Investments. Net realized gains on investments for the nine months ended
September 30, 2010 were $2.7 million, compared to net realized losses of $28.6
million for the same period in 2009. The increase period over period related to
the continued recovery of our equity portfolio and the timing of certain sales
within our equity and fixed income portfolio.  The net realized gain
and loss included non-cash write-downs of $21.2 million and $13.1 million during
the nine months ended September 30, 2010 and 2009, respectively, for securities
that we determined to be other-than-temporarily-impaired.





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses increased $102.7 million,
or 44.9%, to $331.8 million for the nine months ended September 30, 2010 from
$229.0 million for the nine months ended September 30, 2009. Our loss ratio for
the nine months ended September 30, 2010 and 2009 was 62.0% and 55.3%,
respectively. The increase in the loss ratio resulted primarily from the effect
in 2009 of a one-time $11.8 million benefit to the Specialty Risk and Extended
Warranty segment related to the 2009 acquisition of ACHL.


35





Acquisition Costs and Other
Underwriting Expenses; Expense Ratio. Acquisition costs and other
underwriting expenses increased $37.2 million, or 20.0%, to $223.1 million for
the nine months ended September 30, 2010 from $185.9 million for the nine months
ended September 30, 2009. The expense ratio decreased to 22.4% from 23.8% for
the nine months ended September 30, 2010 and 2009, respectively. The decrease in
the expense ratio in 2010 resulted primarily from a decline in other
underwriting expenses, which resulted from a change in product mix from the
Small Commercial Business segment to the Specialty Risk and Extended
Warranty segment.




Income Before Other Income, Income
Taxes and Equity Earnings of Unconsolidated Subsidiaries. Income before
other income (expense), income taxes and equity earnings of unconsolidated
subsidiaries increased $23.7 million, or 22.5%, to $129.2 million from $105.5
million for the nine months ended September 30, 2010 and 2009, respectively. The
increase related primarily to improvement in the overall performance of our
investment portfolio, and a gain on the acquisition of life settlement contracts
recognized in the three months ended September 30, 2010 partially offset by a
higher loss and loss adjustments expense ratio.





Interest Expense. Interest
expense for the nine months ended September 30, 2010 was $10.0 million, compared
to $12.0 million for the same period in 2009. The decrease was attributable to
lower outstanding debt balances on our $40 million term loan and $30 million
promissory note as well as lower expenses on an interest rate swap
agreement.




Gain on Acquisition of Life
Settlement Contracts.During the nine months ended September 30, 2010, we
recorded a gain of $10.6 million upon acquisition of life settlement contracts
by Tiger Capital LLC, a company we formed in the third quarter of 2010 with ACAC
and a third party administrator. ACAC received a 50% share of this gain (net of
tax, $3.4 million), which we report as non-controlling interest in our results
of operations.




Income Tax Expense (Benefit).
Income tax expense for the nine months ended September 30, 2010 was $39.6
million, which resulted in an effective tax rate of 26.7%. Income tax expense
for the nine months ended September 30, 2009 was $18.8 million, which resulted
in an effective tax rate of 20.0%. The increase in our effective rate for the
nine months ended September 30, 2010 resulted primarily from a one-time benefit
in 2009 related to the acquisition of ACHL in the first quarter of
2009.





Equity in Earnings of Unconsolidated
Subsidiaries - Related Party. Equity in earnings of unconsolidated
subsidiaries - related parties increased by $22.6 million for the nine months
ended September 30, 2010 to $21.8 million. The increase related to our
proportionate share of equity investment in 2010 in ACAC for the nine months
ended September 30, 2010 of $11.4 million and a gain on acquisition in ACAC of
$10.4 million.  Additionally, prior to acquiring the remaining 73%
percent ownership percentage of Warrantech during the third quarter of 2010, our
proportionate share of equity loss in Warrantech was included in this line item.
We previously classified the equity earnings (loss) from Warrantech as a
component of investment income in prior years. This amount has been reclassified
in all periods presented.


36





Small
Commercial Business Segment (Unaudited)




Three Months Ended September 30,
                    
                    
                    Nine Months Ended September 30,(Amounts in thousands)
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Gross
      written premium
                    
                    $
                    107,838
                    
                    
                    $
                    85,810
                    
                    
                    $
                    338,140
                    
                    
                    $
                    322,421Net
      written premium
                    
                    
                    56,386
                    
                    
                    
                    47,408
                    
                    
                    
                    173,875
                    
                    
                    
                    172,199Change
      in unearned premium
                    
                    
                    8,029
                    
                    
                    
                    8,377
                    
                    
                    
                    15,404
                    
                    
                    
                    (3,174
                    )Net
      earned premium
                    
                    
                    64,415
                    
                    
                    
                    55,785
                    
                    
                    
                    189,279
                    
                    
                    
                    175,373Ceding
      commission revenue – primarily related party
                    
                    
                    16,400
                    
                    
                    
                    10,311
                    
                    
                    
                    50,580
                    
                    
                    
                    47,178Loss
      and loss adjustment expense
                    
                    
                    39,245
                    
                    
                    
                    28,098
                    
                    
                    
                    113,680
                    
                    
                    
                    100,582Acquisition
      costs and other underwriting expenses
                    
                    
                    32,899
                    
                    
                    
                    24,661
                    
                    
                    
                    97,621
                    
                    
                    
                    92,92072,144
                    
                    
                    
                    52,759
                    
                    
                    
                    211,301
                    
                    
                    
                    193,502Net
      premiums earned less expenses included in combined ratio (Underwriting
      income)
                    
                    $
                    8,671
                    
                    
                    $
                    13,337
                    
                    
                    $
                    28,558
                    
                    
                    $
                    29,049Key
      Measures:Net
      loss ratio
                    
                    
                    60.9
                    %
                    
                    
                    50.4
                    %
                    
                    
                    60.1
                    %
                    
                    
                    57.4
                    %Net
      expense ratio
                    
                    
                    25.6
                    %
                    
                    
                    25.7
                    %
                    
                    
                    24.9
                    %
                    
                    
                    26.1
                    %Net
      combined ratio
                    
                    
                    86.5
                    %
                    
                    
                    76.1
                    %
                    
                    
                    84.9
                    %
                    
                    
                    83.5
                    %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                    
                    
                    32,899
                    
                    
                    
                    24,661
                    
                    
                    
                    97,621
                    
                    
                    
                    92,920Less:
      ceding commission revenue – primarily related party
                    
                    
                    16,400
                    
                    
                    
                    10,311
                    
                    
                    
                    50,580
                    
                    
                    
                    47,17816,499
                    
                    
                    
                    14,347
                    
                    
                    
                    47,041
                    
                    
                    
                    45,742Net
      earned premium
                    
                    
                    64,415
                    
                    
                    
                    55,785
                    
                    
                    
                    189,279
                    
                    
                    
                    175,373Net
      expense ratio
                    
                    
                    25.6
                    %
                    
                    
                    25.7
                    %
                    
                    
                    24.9
                    %
                    
                    
                    26.1
                    %





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





Gross Written Premium. Gross
written premium increased $22.0 million, or 25.6%, to $107.8 million for the
three months ended September 30, 2010 from $85.8 million for the three months
ended September 30, 2009. The increase in Small Commercial Business resulted
primarily from an overall increase in written polices as well as additional
premium related to Cybercomp, our fronting relationship with Majestic, which
began in the second quarter of 2010, and assigned risk business.





Net Written Premium. Net
written premium increased $9.0 million, or 19.0%, to $56.4 million for the three
months ended September 30, 2010 from $47.4 million for the three months ended
September 30, 2009. The increase in net premium written resulted from a change
in our reinsurance programs by which we retain a higher percentage of our direct
premium writings.  The increase was partially offset by the cession of
certain gross written premium in 2010 at a higher rate than the rate in effect
in 2009.





Net Earned
Premium. Net earned premium increased $8.6 million, or 15.5%, to $64.4
million for the three months ended September 30, 2010 from $55.8 million for the
three months ended September 30, 2009. As premiums written earn ratably over a
twelve month period, the increase in net written premium resulted from higher
net written premium for the twelve months ended September 30, 2010 compared to
the twelve months ended September 30, 2009.





Ceding Commission. Ceding
commission earned during the three months ended September 30, 2010 and 2009 was
$16.4 million and $10.3 million, respectively. The increase related to the
allocation to this segment of its proportionate share of our overall policy
acquisition expense.


37





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses increased $11.1 million, or
39.7%, to $39.2 million for the three months ended September 30, 2010 from $28.1
million for the three months ended September 30, 2009. Our loss ratio for the
segment for the three months ended September 30, 2010 and September 30, 2009
were 60.9% and 50.4%, respectively.  The increase in the loss and loss
adjustment expense ratio in the three months ended September 30, 2010 resulted
primarily from higher actuarial estimates based on current year actual
losses.





Acquisition Costs and Other
Underwriting Expenses; Expense Ratio. Acquisition costs and other
underwriting expenses increased $8.2 million, or 33.2%, to $32.9 million for the
three months ended September 30, 2010 from $24.7 million for the three months
ended September 30, 2009. The expense ratio was primarily flat and was 25.6% and
25.7% for the three months ended September 30, 2010 and 2009,
respectively.





Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income). Net premiums earned
less expenses included in combined ratio decreased $4.6 million, or 34.6%, to
$8.7 million for the three months ended September 30, 2010 from $13.3 million
for the three months ended September 30, 2009. This decrease resulted primarily
from a higher loss and loss adjustment expense ratio.





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





Gross Written Premium. Gross
written premium increased $15.8 million, or 4.9%, to $338.2 million for the nine
months ended September 30, 2010 from $322.4 million for the nine months ended
September 30, 2009.  The increase resulted from $34 million of
incremental gross written premium in the nine months ended September 30, 2010
related to the Cybercomp acquisition.  The increase was partially
offset by our continued reunderwriting of our commercial package business, a six
percent mandated rate reduction in the state of Florida’s workers’ compensation
rates and a decrease in assigned risk business.





Net Written Premium. Net
written premium increased $1.7 million, or 1.0%, to $173.9 million from $172.2
million for the nine months ended September 30, 2010 and 2009, respectively. The
increase in net premium resulted from an increase in gross written premium for
the nine months ended September 30, 2010 compared to gross written premium for
the nine months ended September 30, 2009.  The increase was partially
offset by the cession of certain gross written premium to a new reinsurer in
2010 at a higher rate than the rate in effect in 2009.





Net Earned Premium. Net
earned premium increased $13.9 million, or 7.9%, to $189.3 million for the nine
months ended September 30, 2010 from $175.4 million for the nine months ended
September 30, 2009. As premiums written earn ratably over a twelve month period,
the increase in net written premium resulted from higher net written premium for
the twelve months ended September 30, 2010 compared to the twelve months ended
September 30, 2009.





Ceding Commission. Ceding
commission earned during the nine months ended September 30, 2010 and 2009 was
$50.9 million and $47.2 million, respectively. The increase related to the
allocation to this segment of its proportionate share of our overall policy
acquisition expense.





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses increased $13.1 million, or
13.0%, to $113.7 million for the nine months ended September 30, 2010 from
$100.6 million for the nine months ended September 30, 2009. Our loss ratio for
the segment was 60.1% and 57.4% for the nine months ended September 30, 2010 and
2009, respectively.  The increase in the loss and loss adjustment
expense ratio in the nine months ended September 30, 2010 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 $4.7 million, or 5.0%, to $97.6 million for the
nine months ended September 30, 2010 from $92.9 million for the nine months
ended September 30, 2009. The expense ratio decreased to 24.9% for the nine
months ended September 30, 2010 from 26.1% for the nine months ended September
30, 2009. The decrease in expense ratio resulted primarily from a decrease in
the segment’s proportionate share of allocated salary expense and other
underwriting expenses during the nine months ended September 30,
2010.





Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income). Net premiums earned
less expenses included in combined ratio decreased $0.4 million, or 1.4%, to
$28.6 million for the nine months ended September 30, 2010 from $29.0 million
for the nine months ended September 30, 2009. The decrease resulted primarily
from an increase in the loss ratio.


38


Specialty Risk and Extended Warranty Segment
(Unaudited)




Three Months Ended September 30,
                    
                    
                    Nine Months Ended September 30,(Amounts in thousands)
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Gross
      written premium
                    
                    $
                    146,155
                    
                    
                    $
                    138,917
                    
                    
                    $
                    495,799
                    
                    
                    $
                    314,260Net
      written premium
                    
                    
                    78,377
                    
                    
                    
                    76,793
                    
                    
                    
                    238,642
                    
                    
                    
                    162,306Change
      in unearned premium
                    
                    
                    2,524
                    
                    
                    
                    (29,673
                    )
                    
                    
                    (19,390
                    )
                    
                    
                    (30,567
                    )Net
      premiums earned
                    
                    
                    80,901
                    
                    
                    
                    47,120
                    
                    
                    
                    219,252
                    
                    
                    
                    131,739Ceding
      commission revenue – primarily related party
                    
                    
                    14,578
                    
                    
                    
                    8,031
                    
                    
                    
                    35,408
                    
                    
                    
                    20,233Loss
      and loss adjustment expense
                    
                    
                    50,584
                    
                    
                    
                    24,746
                    
                    
                    
                    135,808
                    
                    
                    
                    62,089Acquisition
      costs and other underwriting expenses
                    
                    
                    29,482
                    
                    
                    
                    18,099
                    
                    
                    
                    73,531
                    
                    
                    
                    43,11680,066
                    
                    
                    
                    42,845
                    
                    
                    
                    209,339
                    
                    
                    
                    105,205Net
      premiums earned less expenses included in combined ratio (Underwriting
      income)
                    
                    $
                    15,413
                    
                    
                    $
                    12,306
                    
                    
                    $
                    45,321
                    
                    
                    $
                    46,767Key
      Measures:Net
      loss ratio
                    
                    
                    62.5
                    %
                    
                    
                    52.5
                    %
                    
                    
                    61.9
                    %
                    
                    
                    47.1
                    %Net
      expense ratio
                    
                    
                    18.4
                    %
                    
                    
                    21.4
                    %
                    
                    
                    17.4
                    %
                    
                    
                    17.4
                    %Net
      combined ratio
                    
                    
                    80.9
                    %
                    
                    
                    73.9
                    %
                    
                    
                    79.3
                    %
                    
                    
                    64.5
                    %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                    
                    
                    29,482
                    
                    
                    
                    18,099
                    
                    
                    
                    73,531
                    
                    
                    
                    43,116Less:
      ceding commission revenue – primarily related party
                    
                    
                    14,578
                    
                    
                    
                    8,031
                    
                    
                    
                    35,408
                    
                    
                    
                    20,23314,904
                    
                    
                    
                    10,068
                    
                    
                    
                    38,123
                    
                    
                    
                    22,883Net
      earned premium
                    
                    
                    80,901
                    
                    
                    
                    47,120
                    
                    
                    
                    219,252
                    
                    
                    
                    131,739Net
      expense ratio
                    
                    
                    18.4
                    %
                    
                    
                    21.4
                    %
                    
                    
                    17.4
                    %
                    
                    
                    17.4
                    %





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




Gross Written Premium. Gross
written premium increased $7.3 million, or 5.3%, to $146.2 million for the three
months ended September 30, 2010 from $138.9 million for the three months ended
September 30, 2009. The increase related primarily to the underwriting of new
coverage plans in the U.S. and Europe, as well as additional premiums from
growth in our European business related to general liability, employers’
liability and professional and medical liability generated by new underwriting
teams who joined us in 2009 and 2010. The segment also was affected from the
strengthening of the U.S. dollar in 2010, which negatively impacted the European
business by approximately $3 million.





Net Written Premium. Net
written premium increased $1.6 million, or 2.1%, to $78.4 million from $76.8
million for the three months ended September 30, 2010 and 2009, respectively.
The increase in net written premium resulted from an increase of gross written
premium for the nine months ended September 30, 2010 compared to gross written
premium for the nine months ended September 30, 2009.





Net Earned Premium. Net
earned premium increased $33.8 million, or 71.8%, to $80.9 million for the three
months ended September 30, 2010 from $47.1 million for the three months ended
September 30, 2009. Because net written premium is earned over the term of the
policy, the growth in net written premium period over period resulted in an
increase to net earned premium.





Ceding Commission. Ceding
commission earned during the three months ended September 30, 2010 and 2009 was
$14.6 million and $8.0 million, respectively. The increase related to the
allocation to the segment of its proportionate share of our overall policy
acquisition expense.


39





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses were $50.6 million and
$24.7 million for the three months ended September 30, 2010 and 2009,
respectively. Our loss ratio for the segment for the three months ended
September 30, 2010 increased to 62.5% from 52.5% for the three months ended
September 30, 2009.  The increase in the loss and loss adjustment
expense ratio in the three months ended September 30, 2010 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 $11.4 million, or 62.9%, to $29.5 million for
the three months ended September 30, 2010 from $18.1 million for the three
months ended September 30, 2009. The expense ratio decreased to 18.4% for the
three months ended September 30, 2010 from 21.4% for the three months ended
September 30, 2009. The decrease in the expense ratio resulted, primarily, from
lower allocated salary expense and other underwriting expense in the three
months ended September 30, 2010 compared to the same period in
2009.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income). Net premiums earned
less expenses included in combined ratio increased $3.1 million, or 25.2%, to
$15.4 million for the three months ended September 30, 2010 from $12.3 million
for the three months ended September 30, 2009.  The increase related
to higher net premiums earned partially offset by a higher loss
ratio.





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





Gross Written Premium. Gross
written premium increased $181.5 million, or 57.7%, to $495.8 million for the
nine months ended September 30, 2010 from $314.3 million for the nine months
ended September 30, 2009. The increase related primarily to the underwriting of
new coverage plans in the U.S. and Europe, as well as additional premiums from
growth in our European business related to general liability, employers’
liability and professional and medical liability generated by new underwriting
teams who joined us in 2009 and 2010. The segment was also affected from the
strengthening of the U.S. dollar in 2010, which negatively impacted the European
business by approximately $5 million.





Net Written
Premium. Net written premium increased $76.3 million, or 47.0%, to $238.6
million from $162.3 million for the nine months ended September 30, 2010 and
2009, respectively. The increase in net written premium resulted from an
increase of gross written premium for the nine months ended September 30, 2010
compared to gross written premium for the nine months ended September 30,
2009.





Net Earned Premium. Net
earned premium increased $87.5 million, or 66.4%, to $219.2 million for the nine
months ended September 30, 2010 from $131.7 million for the nine months ended
September 30, 2009. Because net written premium is earned over the term of the
policy, the growth in net written premium period over period resulted in an
increase to net earned premium.




Ceding Commission. Ceding
commission earned during the nine months ended September 30, 2010 and 2009 was
$35.4 million and $20.2 million, respectively. The increase related to the
allocation to this segment of its proportionate share of our overall policy
acquisition expense.





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses were $135.8 million and
$62.1 million for the nine months ended September 30, 2010 and 2009,
respectively. Our loss ratio for the segment for the nine months ended September
30, 2010 increased to 61.9% from 47.1% for the nine months ended September 30,
2009. The increase in the loss ratio resulted primarily from a one-time benefit
of $11.8 million in 2009, which was recognized over the first half of 2009,
related to the acquisition of ACHL in 2009. Absent the one-time benefit, the
loss ratio would have been 56.1% for the nine months ended September 30,
2009.  The increase in the loss and loss adjustment expense ratio in
the nine months ended September 30, 2010 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 $30.4 million, or 70.5%, to $73.5 million for
the nine months ended September 30, 2010 from $43.1 million for the nine months
ended September 30, 2009. The expense ratio remained flat at 17.4% for the nine
months ended September 30, 2010 and 2009.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income). Net premiums earned
less expenses included in combined ratio decreased $1.5 million, or 3.2%, to
$45.3 million for the nine months ended September 30, 2010 from $46.8 million
for the nine months ended September 30, 2009. This decrease is attributable
primarily to a one-time benefit of $11.8 million in 2009 related to the
acquisition of ACHL partially offset by higher premiums earned in
2010.


40





Specialty
Program Segment Results of Operations





Three Months Ended September 30,
                      
                      
                      Nine Months Ended September 30,(Amounts in thousands)
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Gross
      written premium
                      
                      $
                      60,568
                      
                      
                      $
                      71,214
                      
                      
                      $
                      192,935
                      
                      
                      $
                      197,016Net
      written premium
                      
                      
                      23,551
                      
                      
                      
                      43,116
                      
                      
                      
                      97,044
                      
                      
                      
                      106,111Change
      in unearned premium
                      
                      
                      3,828
                      
                      
                      
                      (729
                      )
                      
                      
                      2,128
                      
                      
                      
                      1,295Net
      premiums earned
                      
                      
                      27,379
                      
                      
                      
                      42,387
                      
                      
                      
                      99,172
                      
                      
                      
                      107,406Ceding
      commission revenue – primarily related party
                      
                      
                      6,925
                      
                      
                      
                      9,027
                      
                      
                      
                      17,121
                      
                      
                      
                      19,827Loss
      and loss adjustment expense
                      
                      
                      19,235
                      
                      
                      
                      24,687
                      
                      
                      
                      65,061
                      
                      
                      
                      66,360Acquisition
      costs and other underwriting expenses
                      
                      
                      13,860
                      
                      
                      
                      20,394
                      
                      
                      
                      42,974
                      
                      
                      
                      49,85933,095
                      
                      
                      
                      45,081
                      
                      
                      
                      108,035
                      
                      
                      
                      116,219Net
      premiums earned less expenses included in combined ratio (Underwriting
      income)
                      
                      $
                      1,209
                      
                      
                      $
                      6,333
                      
                      
                      $
                      8,258
                      
                      
                      $
                      11,014Key
      Measures:Net
      loss ratio
                      
                      
                      70.3
                      %
                      
                      
                      58.2
                      %
                      
                      
                      65.6
                      %
                      
                      
                      61.8
                      %Net
      expense ratio
                      
                      
                      25.3
                      %
                      
                      
                      26.8
                      %
                      
                      
                      26.1
                      %
                      
                      
                      28.0
                      %Net
      combined ratio
                      
                      
                      95.6
                      %
                      
                      
                      85.1
                      %
                      
                      
                      91.7
                      %
                      
                      
                      89.7
                      %Reconciliation
      of net expense ratio:Acquisition
      costs and other underwriting expenses
                      
                      
                      13,860
                      
                      
                      
                      20,394
                      
                      
                      
                      42,974
                      
                      
                      
                      49,859Less:
      ceding commission revenue – primarily related party
                      
                      
                      6,925
                      
                      
                      
                      9,027
                      
                      
                      
                      17,121
                      
                      
                      
                      19,8276,935
                      
                      
                      
                      11,367
                      
                      
                      
                      25,853
                      
                      
                      
                      30,032Net
      earned premium
                      
                      
                      27,379
                      
                      
                      
                      42,387
                      
                      
                      
                      99,172
                      
                      
                      
                      107,406Net
      expense ratio
                      
                      
                      25.3
                      %
                      
                      
                      26.8
                      %
                      
                      
                      26.1
                      %
                      
                      
                      28.0
                      %





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





Gross Written Premium. Gross
written premium decreased $10.6 million, or 14.9%, to $60.6 million for the
three months ended September 30, 2010 from $71.2 million for the three months
ended September 30, 2009. The decrease in Specialty Program related primarily to
declines in gross written premium because of our maintenance of our pricing and
administrative discipline, which resulted in the termination of two
programs.  Additionally we experienced a decline from business we
wrote on behalf of HSBC Insurance Company of Delaware pursuant to a 100%
fronting arrangement that was entered into as an accommodation to the seller in
connection with our acquisition of WIC and is now in run-off.





Net Written Premium. Net
written premium decreased $19.6 million, or 45.5%, to $23.5 million for the
three months ended September 30, 2010 from $43.1 million for the three months
ended September 30, 2009. The decrease in net written premium resulted from a
decrease of gross written premium for the three months ended September 30, 2010
compared to gross written premium for the three months ended September 30,
2009.  Additionally, the decline in net written premium was
impacted by declines in gross written premium for which the Company has a
higher retention rate.





Net Earned Premium. Net
earned premium decreased $15.0 million, or 35.4%, to $27.4 million for the three
months ended September 30, 2010 from $42.4 million for the three months ended
September 30, 2009. As a majority of premiums written earn ratably over a twelve
month period, the decrease was a result of lower net written premium for the
twelve months ended September 30, 2010 compared to the twelve months ended
September 30, 2009.





Ceding
Commission. Ceding commission earned during the three months ended
September 30, 2010 and 2009 was $6.9 million and $9.0 million, respectively. The
decrease related to the allocation to the segment of its proportionate share of
our overall policy acquisition expense.


41





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses decreased $5.5 million, or
22.1%, to $19.2 million for the three months ended September 30, 2010 compared
to $24.7 million for the three months ended September 30, 2009. The loss ratio
increased to 70.3% for the three months ended September 30, 2010 compared to
58.2% for the three months ended September 30, 2009.  The increase in
the loss and loss adjustment expense ratio in the three months ended September
30, 2010 resulted primarily from higher actuarial estimates based on actual
losses.





Acquisition Costs and Other
Underwriting Expenses; Expense Ratio. Acquisition costs and other
underwriting expenses decreased $6.5 million, or 32.0%, to $13.9 million for the
three months ended September 30, 2010 from $20.4 million for the three months
ended September 30, 2009. The expense ratio decreased to 25.3% for the three
months ended September 30, 2010 from 26.8% for the three months ended September
30, 2009. The decrease resulted primarily from lower allocated other
underwriting expenses in the three months ended September 30, 2010 compared to
the same period in 2009.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income). Net premiums earned
less expenses included in combined ratio were $1.2 million and $6.3 million for
the three months ended September 30, 2010 and 2009, respectively. The decrease
of $5.2 million resulted primarily from an increase to the loss ratio period
over period.





Specialty
Program Segment Results of Operations for the Nine Months Ended September 30,
2010 and 2009





Gross Written Premium. Gross
written premium decreased $4.1 million, or 2.1%, to $192.4 million for the nine
months ended September 30, 2010 from $197.0 million for the nine months ended
September 30, 2009.  The decrease in Specialty Program related
primarily to declines in gross written premium because of our maintenance of our
pricing and administrative discipline, which resulted in the termination of two
programs.  Additionally we experienced a decline from business we
wrote on behalf of HSBC Insurance Company of Delaware pursuant to a 100%
fronting arrangement that was entered into as an accommodation to the seller in
connection with our acquisition of WIC and is now in run-off.





Net Written Premium. Net
written premium decreased $9.1 million, or 8.6%, to $97.0 million for the nine
months ended September 30, 2010 from $106.1 million for the nine months ended
September 30, 2009. The decrease in net written premium resulted from a decrease
of gross written premium for the nine months ended September 30, 2010 compared
to gross written premium for the nine months ended September 30,
2009.





Net Earned Premium. Net
earned premium decreased $8.2 million, or 7.6%, to $99.2 million for the nine
months ended September 30, 2010 from $107.4 million for the nine months ended
September 30, 2009. As premiums written earn ratably primarily over a twelve
month period, the decrease was a result of lower net written premium for the
twelve months ended September 30, 2010 compared to the twelve months ended
September 30, 2009.





Ceding Commission. Ceding
commission earned during the nine months ended September 30, 2010 and 2009 was
$17.1 million and $19.8 million, respectively. The decrease related to the
allocation to the segment of its proportionate share of our overall policy
acquisition expense.





Loss and Loss Adjustment Expenses;
Loss Ratio. Loss and loss adjustment expenses decreased $1.3 million, or
2.0%, to $65.1 million for the nine months ended September 30, 2010 compared to
$66.4 million for the nine months ended September 30, 2009. The loss ratio for
the segment increased for the nine months ended September 30, 2010 to 65.6% from
61.8% for the nine months ended September 30, 2009. The increase in the loss and
loss adjustment expense ratio in the nine months ended September 30, 2010
resulted primarily from higher actuarial estimates based on actual
losses.





Acquisition
Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs
and other underwriting expenses decreased $6.9 million, or 13.8%, to $43.0
million for the nine months ended September 30, 2010 from $49.9 million for the
nine months ended September 30, 2009. The expense ratio was 26.1% for the nine
months ended September 30, 2010 compared to 28.0% for the nine months ended
September 30, 2009. The decrease in the expense ratio related primarily to
a decrease in allocated other underwriting expenses.




Net Premiums Earned less Expenses
Included in Combined Ratio (Underwriting Income). Net premiums earned
less expenses included in combined ratio were $8.3 million and $11.0 million for
the nine months ended September 30, 2010 and 2009, respectively. The decrease of
$2.7 million resulted primarily from an increase in the loss
ratio.


42





Personal
Lines Reinsurance Segment Results of Operations





Three Months Ended September 30,
                      
                      
                      Nine Months Ended September 30,(Amounts in thousands)
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Gross
      written premium
                      
                      $
                      24,523
                      
                      
                      $
                      —
                      
                      
                      $
                      59,083
                      
                      
                      $
                      —Net
      written premium
                      
                      
                      24,523
                      
                      
                      
                      —
                      
                      
                      
                      59,083
                      
                      
                      
                      —Change
      in unearned premium
                      
                      
                      (6,333
                      )
                      
                      
                      —
                      
                      
                      
                      (31,540
                      )
                      
                      
                      —Net
      premiums earned
                      
                      
                      18,190
                      
                      
                      
                      —
                      
                      
                      
                      27,543Loss
      and loss adjustment expense
                      
                      
                      11,368
                      
                      
                      
                      —
                      
                      
                      
                      17,214
                      
                      
                      
                      —Acquisition
      costs and other underwriting expenses
                      
                      
                      5,911
                      
                      
                      
                      —
                      
                      
                      
                      8,951
                      
                      
                      
                      —17,279
                      
                      
                      
                      —
                      
                      
                      
                      26,165
                      
                      
                      
                      —Net
      premiums earned less expenses included in combined ratio (Underwriting
      income)
                      
                      $
                      911
                      
                      
                      $
                      —
                      
                      
                      $
                      1,378
                      
                      
                      $
                      —Key
      Measures:Net
      loss ratio
                      
                      
                      62.5
                      %
                      
                      
                      —
                      
                      
                      
                      62.5
                      %
                      
                      
                      —Net
      expense ratio
                      
                      
                      32.5
                      %
                      
                      
                      —
                      
                      
                      
                      32.5
                      %
                      
                      
                      —Net
      combined ratio
                      
                      
                      95.0
                      %
                      
                      
                      —
                      
                      
                      
                      95.0
                      %
                      
                      
                      —




We began
assuming commercial auto business from the GMAC Insurers effective March 1,
2010 pursuant to the Personal Lines Quota Share with the GMAC Insurers. We
assumed $24.5 million and $59.1 million of premium from the GMAC Insurers
for the three and nine months ended September 30, 2010. See “Investment in ACAC”
discussed on page 32 of our Management Discussion and Analysis for further
description of this transaction.


43





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 $302 million and $232 million in the nine
months ended September 30, 2010 and 2009, respectively. We expect cash flow from
operations should be sufficient to meet our anticipated claim obligations. We
further expect that projected cash flow from operations should provide us
sufficient liquidity to fund our current operations and service our debt
instruments and anticipated growth for at least the next twelve
months.





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





Nine Months Ended September 30,(Amounts in thousands)
                    
                    2010
                    
                    
                    2009Cash
      and cash equivalents provided by (used in):Operating
      activities
                    
                    $
                    (4,204
                    )
                    
                    $
                    128,393Investing
      activities
                    
                    
                    32,970
                    
                    
                    
                    1,605Financing
      activities
                    
                    
                    43,682
                    
                    
                    
                    (60,548
                    )





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




Cash
provided by investing activities during the period represents, primarily, the
net sales (sales less purchases) of investments. For the nine months ended
September 30, 2010, our investing activities related primarily to net sales of
fixed securities of $96 million, net sales of equity securities of $24 million
offset, partially, by investments in ACAC and other subsidiaries of
approximately $64 million. For the nine months ended September 30, 2009, our
investing activities related primarily to the net sales of fixed maturities of
$2 million, net sales of equity securities of $7 million, capital expenditures
of $2 million and purchases of $6 million of intangibles primarily related to a
renewal rights transaction in the third quarter 2009.





Cash
provided by financing activities for the nine months ended September 30, 2010
consisted primarily of $66 million received from entering repurchase agreements
offset, partially, by $18 million of principal payments on existing debt and $13
million of dividend payments. Cash used in financing activities for the nine
months ended September 30, 2009 consisted primarily of $28 million paid in
connection with the settlement of repurchase agreements, $18 million of
principal payments on existing debt, $10 million of dividend payments and $6
million related to stock repurchases.





Term
Loan





On June
3, 2008, we entered into a term loan with JP Morgan Chase Bank, N.A. in the
aggregate amount of $40 million. The term of the loan is for a period of three
years and requires quarterly principal payments of $3.3 million, which began on
September 3, 2008 and end on June 3, 2011. The loan carries a variable rate and
is based on a Eurodollar rate plus an applicable margin. The Eurodollar rate is
a periodic fixed rate equal to the London Interbank Offered Rate (“LIBOR”) and
had a margin rate of 185 basis points and was 2.1% as of September 30, 2010. We
can prepay any amount of the loan after the first anniversary date without
penalty upon prior notice. The term loan contains affirmative and negative
covenants, including limitations on additional debt, limitations on investments
and acquisitions outside our normal course of business. The loan requires us to
maintain a debt to equity ratio of 0.35 to 1 or less. We reduced the outstanding
balance on the note during the nine months ended September 30, 2010 from $20
million to $10 million.


44





Promissory
Note





In
connection with the stock and asset purchase agreement with a subsidiary of
Unitrin, Inc. (“Unitrin”), we, on June 1, 2008, issued a promissory note to
Unitrin in the amount of $30 million. The note is non-interest bearing and
requires four annual principal payments of $7.5 million. The first two were paid
in 2009 and 2010, respectively, and the remaining principal payments are due on
June 1, 2011 and 2012. Upon entering into the promissory note, we calculated
imputed interest of $3.2 million based on interest rates available to us, which
was 4.5%. Accordingly, the note’s carrying balance was adjusted to $26.8 million
at the acquisition. The note is required to be paid in full, immediately, under
certain circumstances including a default of payment or change of control of the
Company. We recorded $0.6 million of interest expense during the nine months
ended September 30, 2010 and the note’s carrying value at September 30, 2010 was
$14.2 million.





Line
of Credit





On June
30, 2010, we extended our unsecured line of credit with JP Morgan Chase Bank,
N.A. in the aggregate amount of $30 million to June 30, 2011. The line is used
for collateral for letters of credit. Interest payments are required to be paid
monthly on any unpaid principal at a rate of LIBOR plus 150 basis points. As of
September 30, 2010, there was no outstanding balance on the line of credit. At
September 30, 2010, we had outstanding letters of credit in place for $24.8
million that reduced the availability on the line of credit to $5.2 million as
of September 30, 2010.





Securities
Sold Under Agreements to Repurchase, at Contract Value




We enter
into repurchase agreements. The agreements are accounted for as collateralized
borrowing transactions and are recorded at contract amounts. We receive cash or
securities, that we invest or hold in short term or fixed income securities. As
of September 30, 2010, there were $238.5 million principal amount outstanding at
interest rates between 0.30% and 0.37% per annum. Interest expense associated
with these repurchase agreements for the nine months ended September 30, 2010
was $0.2 million of which $0.2 million was accrued as of September 30, 2010. We
have approximately $242.4 million of collateral pledged in support of these
agreements.




Note
Payable — Collateral for Proportionate Share of Reinsurance
Obligation





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





Reinsurance




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


45





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




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




We have
excess of loss reinsurance coverage for international general liability and
professional and medical liability business underwritten by our U.K. offices.
The agreements cover losses in excess of £1.0 million per occurrence up to a
maximum of £10.0 million. We also purchase quota share reinsurance for our
European medical liability business.  In addition, we purchase various
pro-rata and excess reinsurance relating to specific foreign insurance programs
and/or specialty lines of business.
 
 We have
coverage for our U.S. property lines of business under an excess of loss
reinsurance agreement. The agreement covers losses in excess of $2 million per
location up to a maximum $20 million. In addition, we have a property
catastrophe excess of loss agreement, which covers losses in excess of $5
million per occurrence up to a maximum $65 million.  We have coverage
for our U.K. property lines of business under an excess of loss reinsurance
agreement. The agreement covers losses in excess of £0.3 million per risk (or in
certain instances £1 million per risk) up to a maximum £3 million. In addition,
we have a property catastrophe excess of loss agreement, which covers losses in
excess of £1 million per occurrence up to a maximum £30 million.


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




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




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





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





The Maiden Quota Share, as amended, further provides that AII
receives a ceding commission of 31% of ceded written premiums with respect to
Covered Business, except retail commercial package business, for which the
ceding commission is 34.375%. The Maiden Quota Share, which had an initial term
of three years, has been renewed for a successive three-year term effective July
1, 2010 and will automatically renew for successive three year terms, unless
either AII or Maiden Insurance notifies the other of its election not to renew
not less than nine months prior to the end of any such three year term. In
addition, either party is entitled to terminate on thirty day’s notice or less
upon the occurrence of certain early termination events, which include a default
in payment, insolvency, change in control of AII or Maiden Insurance, run-off,
or a reduction of 50% or more of the shareholders’ equity of Maiden Insurance or
the combined shareholders’ equity of AII and the AmTrust Ceding
Insurers.


46





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




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




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




In
conjunction with our strategic investment in ACAC and ACAC’s acquisition from
GMACI and MIC’s of GMAC’s U.S. consumer property and casualty insurance
business, which was completed on March 1, 2010 (the “Acquisition”), our
subsidiary TIC has entered into a quota share reinsurance agreement (the
“Personal Lines Quota Share”) with the acquired GMAC personal lines
insurance companies (“GMAC Insurers”) by which TIC assumes an amount equal to
10% of the premium written by the GMAC Insurers, net of the cost of unaffiliated
insuring reinsurance. The Personal Lines Quota Share further provides that the
GMAC Insurers receive a provisional ceding commission of 32.5% of ceded written
premiums. The provisional premium is subject to adjustment based on results for
the period March 1, 2010 through December 31, 2010 and for each 12 month period
thereafter based on the ratio of ceded losses to ceded premium, with a maximum
commission of 34.5% at loss ratios at or below of 60.5% decreasing dollar for
dollar to a minimum commission of 30.5% at a loss ratio at or above 64.5%. The
Personal Lines Quota Share has an initial term of three years, which will
automatically renew for successive three-year terms thereafter, unless either
TIC or the GMAC Insurers notifies the other of its election not to renew not
less than nine months prior to the end of any such three-year term. In addition,
either party is entitled to terminate on 30 day’s notice or less upon the
occurrence of certain early termination events, which include a default in
payment, insolvency, change in control of TIC or GMAC Insurers, run-off, or a
reduction of 50% or more of the shareholders’ equity. The GMAC Insurers also may
terminate on nine months written notice following the effective date of an
initial public offering or private placement of stock by ACAC or a subsidiary.
The Personal Lines Quota Share is subject to a premium cap which limits the
premium that can be ceded by the GMAC Insurers to TIC to $220.0 million during
calendar year 2010. The premium cap increases by 10% per annum
thereafter.


47


Investment Portfolio





Our
investment portfolio, including cash and cash equivalents, increased $8.6
million, or 0.6%, to $1,409.4 million as of September 30, 2010 from $1,400.8
million as of December 31, 2009. Our fixed maturity securities, gross, are
classified as available-for-sale and had a fair value of $1,045.2 million and an
amortized cost of $1,013.3 million as of September 30, 2010. Our equity
securities are classified as available-for-sale. These securities are reported
at fair value or $30.6 million with a cost of $31.6 million as of September 30,
2010. Securities sold but not yet purchased, which was $65.6 million as of
September 30, 2010, represent our obligation to deliver the specified security
at the contracted price and thereby create a liability to purchase the security
in the market at prevailing rates. Sales of securities under repurchase
agreements, which were $238.5 million as of September 30, 2010, are accounted
for as collateralized borrowing transactions and are recorded at their
contracted amounts. Our investment portfolio is summarized in the table below by
type of investment:




September 30, 2010
                                    
                                    
                                    December 31, 2009(Amounts in thousands)
                                    
                                    Carrying
                                      Value
                                    
                                    
                                    Percentage of
                                      Portfolio
                                    
                                    
                                    Carrying
                                      Value
                                    
                                    
                                    Percentage of
                                      PortfolioCash
      and cash equivalents
                                    
                                    $
                                    303,528
                                    
                                    
                                    
                                    21.5
                                    %
                                    
                                    $
                                    233,810
                                    
                                    
                                    
                                    16.7
                                    %Time
      and short-term deposits
                                    
                                    
                                    30,065
                                    
                                    
                                    
                                    2.1
                                    
                                    
                                    
                                    31,265
                                    
                                    
                                    
                                    2.2U.S.
      treasury securities
                                    
                                    
                                    34,445
                                    
                                    
                                    
                                    2.4
                                    
                                    
                                    
                                    124,143
                                    
                                    
                                    
                                    8.9U.S.
      government agencies
                                    
                                    
                                    7,287
                                    
                                    
                                    
                                    0.5
                                    
                                    
                                    
                                    47,424
                                    
                                    
                                    
                                    3.4Municipals
                                    
                                    
                                    40,289
                                    
                                    
                                    
                                    2.9
                                    
                                    
                                    
                                    27,268
                                    
                                    
                                    
                                    1.9Commercial
      mortgage back securities
                                    
                                    
                                    2,201
                                    
                                    
                                    
                                    0.2
                                    
                                    
                                    
                                    3,359
                                    
                                    
                                    
                                    0.2Residential
      mortgage backed securities:Agency
      backed
                                    
                                    
                                    424,980
                                    
                                    
                                    
                                    30.2
                                    
                                    
                                    
                                    481,731
                                    
                                    
                                    
                                    34.4Non-agency
      backed
                                    
                                    
                                    8,620
                                    
                                    
                                    
                                    0.6
                                    
                                    
                                    
                                    8,632
                                    
                                    
                                    
                                    0.6Asset
      backed securities
                                    
                                    
                                    3,026
                                    
                                    
                                    
                                    0.2
                                    
                                    
                                    
                                    3,619
                                    
                                    
                                    
                                    0.3Corporate
      bonds
                                    
                                    
                                    524,352
                                    
                                    
                                    
                                    37.2
                                    
                                    
                                    
                                    389,186
                                    
                                    
                                    
                                    27.8Preferred
      stocks
                                    
                                    
                                    5,677
                                    
                                    
                                    
                                    0.4
                                    
                                    
                                    
                                    5,110
                                    
                                    
                                    
                                    0.4Common
      stocks
                                    
                                    
                                    24,902
                                    
                                    
                                    
                                    1.8
                                    
                                    
                                    
                                    45,245
                                    
                                    
                                    
                                    3.2$
                                    1,409,372
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    $
                                    1,400,792
                                    
                                    
                                    
                                    100.0
                                    %




As of
September 30, 2010, the weighted average duration of our fixed income securities
was 3.1 years and had a yield of approximately 3.9%.




Quarterly, our
Investment Committee (“Committee”) evaluates each security that has an
unrealized loss as of the end of the subject reporting period for
other-than-temporary-impairment (“OTTI”).  We generally consider an
investment to be impaired when it has been in a significant unrealized loss
position (in excess of 35% of cost if the issuer has a market capitalization of
under $1 billion and in excess of 25% of cost if the issuer has a market
capitalization of $1 billion or more) for over 24 months.  In
addition, 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. The criteria the Committee primarily considers
include:





•
            the current fair value compared
      to amortized cost;


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


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


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


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


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


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





Impairment of investment securities results in a charge to
operations when a market decline below cost is deemed to be
other-than-temporary.   We write down investments immediately
that we consider to be impaired based on the above criteria
collectively.


48





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




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




(Amounts
      in thousands)
                    
                    2010
                    
                    
                    2009Equity
      securities
                    
                    $
                    10,656
                    
                    
                    $
                    11,108Fixed
      maturity securities
                    
                    
                    10,540
                    
                    
                    
                    4,252$
                    21,196
                    
                    
                    $
                    15,360





In
addition to the other-than-temporary impairment of $21.2 million recorded during
the nine months ended September 30, 2010, at September 30, 2010, we had $3.8
million of gross unrealized losses related to marketable equity securities. Our
investment in marketable equity securities consists of investments in preferred
and common stock across a wide range of sectors. We evaluated the near-term
prospects for recovery of fair value in relation to the severity and duration of
the impairment and have determined in each case that the probability of recovery
is reasonable. Within our portfolio of equity securities, 10 common stocks
comprised $2.8 million, or 75% of the unrealized loss. Four securities in the
consumer products sector represent approximately 14% of the total fair value and
20% of our unrealized loss. Five common stocks in the health care, industrial
and technology sectors that have fair values of approximately 19%, 6% and 1%,
respectively, and approximately 35%, 17% and 3%, respectively, of our unrealized
losses. The duration of these impairments ranges from one to nine months.
The remaining securities in a loss position are not considered individually
significant and accounted for 25% of our unrealized losses. We believe these
securities will recover and that we have the ability and intent to hold them
until recovery.





At
September 30, 2010, we had $15.3 million of gross unrealized losses related to
available-for-sale fixed income securities. Corporate bonds represent 50% of the
fair value of our fixed maturities and 99% of the total unrealized losses of our
fixed maturities. We own 139 corporate bonds in the industrial, bank and
financial and other sectors, which have a fair value of approximately 4%, 41%
and 5%, respectively, and 0%, 99% and 1% of total unrealized losses,
respectively, of our fixed maturities. We believe that the unrealized losses in
these securities are the result, primarily, of general economic conditions and
not the condition of the issuers, which we believe are solvent and have the
ability to meet their obligations. Therefore, we expect that the market price
for these securities should recover within a reasonable time.





Item 3. Quantitative and Qualitative
Disclosures About Market Risk





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





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





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





We are
subject to credit risk with respect to our third party reinsurers. Although our
third party reinsurers are obligated to reimburse us to the extent we cede risk
to them, we are ultimately liable to our policyholders on all risks that
we have ceded. As a result, reinsurance contracts do not limit our ultimate
obligations to pay claims covered under the insurance policies we issue, and we
might not collect amounts recoverable from our reinsurers. We address this
credit risk by selecting reinsurers that have an A.M. Best rating of “A”
(Excellent) or better at the time we enter into the agreement and by performing,
along with our reinsurance brokers, periodic credit reviews of our reinsurers.
If one of our reinsurers suffers a credit downgrade, we may consider various
options to lessen the risk of asset impairment, including commutation, novation
and letters of credit. See the “Reinsurance” Section of our Management’s
Discussion and Analysis.


49





Interest Rate Risk. We had
fixed maturity securities (excluding $30.1 million of time and short-term
deposits) with a fair value and a carrying value of $1,045.2 million as of
September 30, 2010 that are subject to interest rate risk. Interest rate risk is
the risk that we may incur losses due to adverse changes in interest rates.
Fluctuations in interest rates have a direct impact on the market valuation of
our fixed maturity securities. We manage our exposure to interest rate risk
through a disciplined asset and liability matching and capital management
process. In the management of this risk, the characteristics of duration, credit
and variability of cash flows are critical elements. These risks are assessed
regularly and balanced within the context of our liability and capital
position.




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





Hypothetical Change in Interest Rates
                  
                  Fair Value
                  
                  
                  Estimated
                    Change in
                    Fair Value
                  
                  
                  Hypothetical
                    Percentage
                    (Increase)
                    Decrease in
                    Shareholders’
                    Equity(Amounts in thousands)200
      basis point increase
                  
                  $
                  968,457
                  
                  
                  $
                  (76,743
                  )
                  
                  
                  (7.2
                  )%100
      basis point increase
                  
                  
                  1,007,360
                  
                  
                  
                  (37,840
                  )
                  
                  
                  (3.5
                  )No
      change
                  
                  
                  1,045,200
                  
                  
                  
                  —
                  
                  
                  
                  —100
      basis point decrease
                  
                  
                  1,078,507
                  
                  
                  
                  33,307
                  
                  
                  
                  3.1200
      basis point decrease
                  
                  
                  1,102,852
                  
                  
                  
                  57,652
                  
                  
                  
                  5.4





Foreign Currency Risk. We
write insurance in the United Kingdom and certain other European Union member
countries through AIU and AEL. While the functional currency of AIU and AEL are,
respectively, the Euro and the British Pound, we write coverages that are
settled in local currencies, including, primarily, the Euro and British Pound.
We attempt to maintain sufficient local currency assets on deposit to minimize
our exposure to realized currency losses. Assuming a 5% increase in the exchange
rate of the local currency in which the claims will be paid and that we do not
hold that local currency, we would recognize a $4.4 million after tax realized
currency loss based on our outstanding foreign denominated reserves of $136.5
million at September 30, 2010.





Equity Price Risk. Equity
price risk is the risk that we may incur losses due to adverse changes in the
market prices of the equity securities we hold in our investment portfolio,
which include common stocks, non-redeemable preferred stocks and master limited
partnerships. We classify our portfolio of equity securities as
available-for-sale and carry these securities on our balance sheet at fair
value. Accordingly, adverse changes in the market prices of our equity
securities result in a decrease in the value of our total assets and a decrease
in our shareholders’ equity. As of September 30, 2010, the equity securities in
our investment portfolio had a fair value of $30.6 million, representing
approximately 2.8% of our total invested assets on that date. The table below
illustrates the impact on our equity portfolio and financial position given a
hypothetical movement in the broader equity markets. The selected scenarios in
the table below are not predictions of future events, but rather are intended to
illustrate the effect such events may have on the carrying value of our equity
portfolio and on shareholders’ equity as of September 30, 2010.





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




Hypothetical Change in Interest Rates
                  
                  Fair Value
                  
                  
                  Estimated
                    Change in
                    Fair Value
                  
                  
                  Hypothetical
                    Percentage
                    (Increase)
                    Decrease in
                    Shareholders’
                    Equity(Amounts
      in thousands)5%
      increase
                  
                  $
                  32,108
                  
                  
                  $
                  1,529
                  
                  
                  
                  0.1.
                  %No
      change
                  
                  
                  30,579
                  
                  
                  
                  —
                  
                  
                  
                  —5 %
      decrease
                  
                  
                  29,050
                  
                  
                  
                  (1,529
                  )
                  
                  
                  (0.1.
                  )%





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


50





Item
4. Controls and Procedures





Our
management, with the participation and under the supervision of our principal
executive officer and principal financial officer, has evaluated our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) and has
concluded that, as of the end of the period covered by this report, such
disclosure controls and procedures were effective in ensuring that information
required to be disclosed by us in the reports we file or submit under the
Exchange Act is timely recorded, processed, summarized and reported, and
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. During the most recent fiscal
quarter, there have been no changes in our internal controls over financial
reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.





PART II -
OTHER INFORMATION





Item
1. Legal Proceedings





As
described in our Form 10-Q filed on August 9, 2010, on or about April 13, 2010,
the defendants in the derivative action against our directors, certain officers
and Maiden Holdings, Ltd. and Maiden Insurance Company, Ltd. that was filed in
the Supreme Court of the State of New York, County of New York entitled “Erk
Erginer, Derivatively on Behalf of Nominal Defendant AmTrust Financial Services,
Inc., Plaintiff, v. Michael Karfunkel, George Karfunkel, Barry D. Zyskind,
Donald T. DeCarlo, Abraham Gulkowitz, Isaac M. Neuberger, Jay J. Miller, Max G.
Caviet, Ronald E. Pipoly, Jr., Maiden Holdings, Ltd., Maiden Insurance Company,
Ltd., Defendants and AmTrust Financial Services, Inc., Nominal Defendant” moved
for summary judgment on the grounds that it was undisputed that the plaintiff,
who did not acquire his AmTrust shares until after the transactions that are the
subject of his complaint, did not have standing to maintain the
action.




On September 13, 2010, the Supreme
Court of the State of New York, County of New York granted summary judgment in
favor of the defendants, dismissing all claims against the defendants
except one claim, which the plaintiff agreed to discontinue on October
14, 2010.




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





Item
1A. Risk Factors





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





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





None.





Item
3. Defaults Upon Senior Securities





None.





Item
4. (Removed and Reserved)


51


Item 5. Other Information





Amendments
to Employment Agreements with Michael J. Saxon and Christopher M.
Longo




On
November 3, 2010, we entered into amendments to each of Michael J. Saxon’s and
Christopher M. Longo’s Employment Agreements dated March 1, 2010 (collectively,
the “Original Agreements”).




The
primary purpose of amending the Original Agreements was to ensure that
performance-based compensation elements (annual bonus and performance-based
equity awards) comply with Section 162(m) of the Internal Revenue Code of
1986, as amended (the “Code”). Specifically,
the amendments to each of the Original Agreements were designed to comply with
Code Section 162(m) rules and regulations regarding deductibility of
executive compensation in excess of $1 million and to preserve meaningful cost
savings for the Company. All of the other provisions of the Original Agreements
remain unchanged.




The
description of the amendments is qualified in its entirety by reference to the
full text of the amendments, which are filed as Exhibits 10.2 and 10.3 to this
Form 10-Q and incorporated herein by reference.


52





Item
6.  Exhibits




Exhibit
                Number
              
              Description10.1
              
              Amendment
      to Employment Agreement, dated October 6, 2010, by and between the Company
      and Barry D. Zyskind (incorporated by reference to Exhibit 10.1 to the
      Company’s Current Report on Form 8-K filed on October 7,
      2010).10.2
              
              Amendment
      No. 1 to Employment Agreement, dated November 3, 2010, by and between the
      Company and Michael J. Saxon.10.3
              
              Amendment
      No. 1 to Employment Agreement, dated November 3, 2010, by and between the
      Company and Christopher M. Longo.31.1
              
              Certification
      of the Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
      for the quarter ended September 30, 2010.31.2
              
              Certification
      of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
      for the quarter ended September 30, 2010.32.1
              
              Certification
      of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, for
      the quarter ended September 30, 2010.32.2
              
              Certification
      of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, for
      the quarter ended September 30,
2010.


53




SIGNATURES





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





AmTrust
      Financial Services, Inc.(Registrant)Date:
      November 9, 2010
                  
                  /s/ Barry D.
ZyskindBarry
      D. Zyskind
                    President
      and Chief Executive Officer/s/ Ronald E. Pipoly,
    Jr.Ronald
      E. Pipoly, Jr.
                    Chief
      Financial
Officer





54