Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2009

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

For the transition period from ___________________ to ___________________

Commission file no. 001-33143

AmTrust Financial Services, Inc.

(Exact name of registrant as specified in its charter)

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

59 Maiden Lane, 6 th Floor, New York, New York	10038
(Address of principal executive offices)	(Zip Code)

(212) 220-7120

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated Filer x Non-accelerated filer o

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

As of May 1, 2009, the Registrant had one class of Common Stock ($.01 par value), of which 59,330,836 shares were issued and outstanding.

INDEX

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Unaudited Financial Statements:

	Condensed Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008	3

	Condensed Consolidated Statements of Income	4
	— Three months ended March 31, 2009 and 2008

	Condensed Consolidated Statements of Cash Flows	5
	— Three months ended March 31, 2009 and 2008

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	40

PART II	OTHER INFORMATION

Item 6.	Exhibits	41

	Signatures	42

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

AMTRUST FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

	March 31, 2009			December 31, 2008
	(Unaudited)
ASSETS
Investments:
Fixed maturities, held-to-maturity, at amortized cost (fair value $45,490; $50,242)	$	43,763		$	48,881
Fixed maturities, available-for-sale, at market value (amortized cost $1,011,526; $988,779)		920,949			910,376
Equity securities, available-for-sale, at market value (cost $82,787; $84,090)		25,687			28,828
Short-term investments		187,512			167,845
Other investments		12,607			13,457
Total investments		1,190,518			1,169,387
Cash and cash equivalents		165,287			192,053
Funds held with reinsurance companies		110			110
Accrued interest and dividends		8,246			9,028
Premiums receivable, net		390,338			419,577
Note receivable – related party		21,808			21,591
Reinsurance recoverable		399,758			363,608
Reinsurance recoverable – related party		244,940			221,214
Prepaid reinsurance premium		130,069			128,519
Prepaid reinsurance premium – related party		233,633			243,511
Federal income tax receivable		600			4,677
Prepaid expenses and other assets		57,869			72,221
Deferred policy acquisition costs		121,876			103,965
Deferred income taxes		79,937			76,910
Property and equipment, net		15,035			15,107
Goodwill		52,414			49,794
Intangible assets		51,585			52,631
	$	3,164,023		$	3,143,893
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Loss and loss expense reserves	$	1,094,401		$	1,014,059
Unearned premiums		754,273			759,915
Ceded reinsurance premiums payable		53,203			59,990
Ceded reinsurance premium payable – related party		99,296			102,907
Reinsurance payable on paid losses		3,266			8,820
Funds held under reinsurance treaties		875			228
Securities sold but not yet purchased, market		12,665			22,608
Securities sold under agreements to repurchase, at contract value		248,352			284,492
Accrued expenses and other current liabilities		145,659			144,304
Derivatives liabilities		982			1,439
Note payable – related party		167,975			167,975
Non interest bearing note – net of unamortized discount of $2,126		27,874			27,561
Term loan		30,000			33,333
Junior subordinated debt		123,714			123,714
Total liabilities		2,762,535			2,751,345
Commitments and contingencies
Stockholders’ equity:
Common stock, $.01 par value; 100,000 shares authorized, 84,146 issued in March 31, 2009 and December 31, 2008, respectively; 59,331 and 60,033 outstanding as of March 31, 2009 and December 31, 2008, respectively		842			842
Preferred stock, $.01 par value; 10,000,000 shares authorized		—			—
Additional paid-in capital		540,092			539,421
Treasury stock at cost; 24,815 shares and 24,113 shares as of March 31, 2009 and December 31, 2008, respectively		(300,295	)		(294,803	)
Accumulated other comprehensive income (loss)		(113,211	)		(105,815	)
Retained earnings		274,060			252,903
Total stockholders’ equity		401,488			392,548
	$	3,164,023		$	3,143,893

See accompanying notes to unaudited condensed consolidated statements.

AmTrust Financial Services, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(in thousands, except per share data)

	Three Months Ended March 31,
	2009			2008
Revenues:
Premium income:
Net premium written	$	136,179		$	117,442
Change in unearned premium		(3,756	)		(20,029	)
Net earned premium		132,423			97,413
Ceding commission – primarily related party		27,591			20,875
Commission and fee income		7,454			6,287
Net investment income		13,589			13,531
Net realized loss on investments		(9,238	)		(5,220	)
Other investment loss on managed assets		—			(2,900	)
Total revenues		171,819			129,986
Expenses:
Loss and loss adjustment expense		74,915			55,165
Acquisition costs and other underwriting expenses		58,154			40,877
Other		5,194			4,794
Total expenses		138,263			100,836
Operating income from continuing operations		33,556			29,150
Other income (expenses):
Foreign currency gain		33			159
Interest expense		(4,171	)		(2,629	)
Total other expenses		(4,138	)		(2,470	)
Income from continuing operations before provision for income taxes and minority interest		29,418			26,680
Provision for income taxes		5,256			7,317
Minority interest in net loss of subsidiary		—			(2,900	)
Net income	$	24,162		$	22,263

Earnings per common share:
Basic - EPS	$	0.40		$	0.37
Diluted - EPS		0.40			0.37
Dividends Declared Per Share	$	0.05		$	0.04

See accompanying notes unaudited to condensed consolidated financial statements.

AmTrust Financial Services, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	Three Months Ended March 31,
	2009			2008
Cash flows from operating activities:
Net income from continuing operations	$	24,162		$	22,263
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities of continuing operations:
Depreciation and amortization		3,120			1,614
Realized loss marketable securities		7,811			4,478
Non-cash write-down of marketable securities		1,427			742
Discount on notes payable		313			-
Stock compensation expense		671			758
Bad debt expense		1,005			475
Foreign currency (gain)		(33	)		(159	)
Changes in assets - (increase) decrease:
Premiums receivable		28,234			(37,525	)
Reinsurance recoverable		(36,150	)		(7,253	)
Reinsurance recoverable – related party		(23,726	)		(31,077	)
Deferred policy acquisition costs, net		(17,911	)		(2,102	)
Prepaid reinsurance premiums		(1,550	)		(1,330	)
Prepaid reinsurance premiums – related party		9,878			(19,159	)
Prepaid expenses and other assets		18,984			(4,337	)
Deferred tax asset		(3,027	)		(9,065	)
Changes in liabilities - increase (decrease):
Reinsurance premium payable		(6,787	)		28,843
Reinsurance premium payable – related party		(3,611	)		46,760
Loss and loss expense reserve		80,342			10,659
Unearned premiums		(5,642	)		42,509
Funds held under reinsurance treaties		647			(1,314	)
Accrued expenses and other current liabilities		(2,680	)		(983	)
Net cash provided in operating activities		75,477			44,797
Cash flows from investing activities:
Net (purchases) sales of securities with fixed maturities		(46,090	)		139,499
Net (purchases) sales of equity securities		(1,628	)		(10,839	)
Net sales (purchases) of other investments		850			5,296
Note receivable - related party		-			(2,000	)
Acquisition of renewal rights and goodwill		(2,462	)		(296	)
Purchase of property and equipment		(2,107	)		(2,275	)
Net cash (used in) provided by investing activities		(51,437	)		129,385
Cash flows from financing activities:
Repurchase agreements, net		(36,140	)		(153,775	)
Repayment of note payable		(3,333	)		-
Repurchase of shares		(5,492	)		-
Option exercise		-			241
Dividends distributed on common stock		(3,005	)		(2,400	)
Net cash provided by financing activities		(47,970	)		(155,934	)
Effect of exchange rate changes on cash		(2,836	)		5,192
Net (decrease) increase in cash and cash equivalents		(26,766	)		23,440
Cash and cash equivalents, beginning of the period		192,053			145,337
Cash and cash equivalents, end of the period	$	165,287		$	168,777
Supplemental Cash Flow Information
Income tax payments	$	952		$	574
Interest payments on debt		4,428			2,530

See accompanying notes to unaudited condensed consolidated financial statements

Notes to Unaudited Condensed Consolidated Financial Statements

(Unaudited)

(dollars in thousands, except share data)

1.	Basis of Reporting

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements. These interim statements should be read in conjunction with the financial statements and notes thereto included in the AmTrust Financial Services, Inc. (“AmTrust” or the “Company”) Annual Report on Form 10-K for the year ended December 31, 2008, previously filed with the Securities and Exchange Commission (“SEC”) on March 16, 2009. The balance sheet at December 31, 2008 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

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

A detailed description of the Company’s significant accounting policies and management judgments is located in the audited consolidated financial statements for the year ended December 31, 2008, included in the Company’s Form 10-K filed with the SEC.

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

2.	Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2009, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, that are of significance, or potential significance, to us.

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

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

The provisions of FSP FAS 115-2 are effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company will adopt FSP FAS 115-2 on April 1, 2009. The Company does not believe the adoption will have a material impact on its financial condition or results of operations.

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

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

The provisions of FSP FAS 157-4 are effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company will adopt FSP FAS 157-4 on April 1, 2009 and does not expect the adoption will have a material effect on its results of operations, financial position or liquidity.

In April 2009, the FASB issued FSP 107-1 and APB 28-1, “ Interim Disclosures about Fair Value of Financial Instruments ” (“FSP 107-1 and APB 28-1”). FSP 107-1 and APB 28-1 require disclosures about fair value of financial instruments in interim and annual financial statements. FSP FAS 107-1 and APB 28-1 are effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company does not believe the adoption will have a material impact on the Company’s financial condition or results of operations.

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

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

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

In December 2007, the FASB issued SFAS No. 160, “ Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 ”. SFAS No. 160 amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. In addition, it clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated statements. SFAS 160 is effective on a prospective basis beginning January 1, 2009, except for presentation and disclosure requirements which are applied on a retrospective basis for all periods presented. SFAS 160 did not have a material impact its consolidated financial position, results of operations or cash flows.

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

In September 2006, the FASB issued SFAS No. 157, “ Fair Value Measurements ,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements and is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB FSP 157-2 which delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. The Company applied the provisions of SFAS 157 to the nonfinancial assets, nonfinancial liabilities and reporting units within the scope of SFAS 157 on January 1, 2009. The Company’s adoption of FAS 157 did not materially impact the fair values of nonfinancial assets, nonfinancial liabilities and reporting units within the scope of this FSP.

3.	Investments

(a) Available-for-Sale Securities

The original cost, estimated market value and gross unrealized appreciation and depreciation of available-for-sale securities as of March 31, 2009, are presented in the table below:

	Original or amortized cost		Gross unrealized gains		Gross unrealized losses			Market value
Preferred stock	$	6,765	$	-	$	(4,262	)	$	2,503
Common stock		76,022		870		(53,708	)		23,184
U.S. treasury securities		15,086		1,432		(6	)		16,512
U.S. government agencies		11,020		984		-			12,004
U.S. agency - collateralized mortgage obligations		189,604		411		(2,754	)		187,261
U.S. agency - mortgage backed securities		258,868		13,654		(638	)		271,884
Other mortgage backed securities		3,750		-		(379	)		3,371
Municipal bonds		45,760		1,767		(694	)		46,833
Asset backed securities		4,237		104		(273	)		4,068
Corporate bonds		483,201		2,180		(106,365	)		379,016
	$	1,094,313	$	21,402	$	(169,079	)	$	946,636

(b) Held-to-Maturity Securities

The amortized cost, estimated market value and gross unrealized appreciation and depreciation of held to maturity securities as of March 31, 2009 are presented in the table below:

	Amortized cost		Unrealized gains		Unrealized losses			Fair value
U.S. treasury securities	$	2,141	$	118	$	-		$	2,259
U.S. government agencies		1,116		151		-			1,267
U.S. agency - collateralized mortgage obligations		144		4		-			148
U.S. agency - mortgage backed securities		40,362		1,542		(88	)		41,816
	$	43,763	$	1,842	$	(88	)	$	45,490

Net investment income for the three months ended March 31, 2009 and 2008 was derived from the following sources:

	2009			2008
Cash and short term investments	$	1,804		$	3,336
Fixed maturities		11,882			10,883
Equity securities		188			531
Equity investment in Warrantech		(402	)		—
Note receivable - related party		812			589
		14,284			15,339
Less:
Investment expenses and interest expense on securities sold under agreement to repurchase		695			1,808
	$	13,589		$	13,531

(d) Other-Than-Temporary Impairment

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

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

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

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

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

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

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

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

Other-than-temporary impairment charges of our fixed-maturities and equity securities for the three months ended March 31, 2009 and 2008 are presented in the table below:

	2009		2008
Equity securities	$	1,427	$	742
Fixed maturity securities		—		—
	$	1,427	$	742

The tables below summarize the gross unrealized losses of our fixed maturity and equity securities as of March 31, 2009:

	Less Than 12 Months							12 Months or More							Total
	Fair Market Value		Unrealized Losses			No. of Positions Held		Fair Market Value		Unrealized Losses			No. of Positions Held		Fair Market Value		Unrealized Losses
Available-for-sale securities:
Common and preferred stock	$	10,489	$	(13,204	)		96	$	10,990	$	(44,766	)		290	$	21,479	$	(57,192	)
U.S. treasury securities		863		(6	)		1		—		—			—		863		(6	)
U.S. agency - collateralized mortgage obligations		10,367		(161	)		2		155,311		(2,593	)		—		165,678		(2,754	)
U.S. agency - mortgage backed securities		5,811		(120	)		1		25,036		(518	)		1		30,847		(638	)
Other mortgage backed securities		1,878		(225	)		3		1,492		(154	)		4		3,370		(379	)
Municipal bonds		18,299		(694	)		17		—		—			—		18,299		(694	)
Asset backed securities		1,236		(41	)		2		761		(232	)		3		1,997		(273	)
Corporate bonds		145,116		(35,798	)		83		170,192		(70,567	)		82		315,308		(106,365	)
Total temporarily impaired -available-for-sale securities	$	194,059	$	(50,249	)		205	$	363,782	$	(118,830	)		391	$	557,841	$	(168,301	)

	Less Than 12 Months						12 Months or More							Total
	Fair Market Value		Unrealized Losses		No. of Positions Held		Fair Market Value		Unrealized Losses			No. of Positions Held		Fair Market Value		Unrealized Losses
Held-to-maturity securities:
U.S. agency – mortgage backed securities	$	—	$	—		—	$	3,738	$	(88	)		15	$	3,738	$	(88	)
Total temporarily impaired – held-to-maturity securities	$	—	$	—		—	$	3,738	$	(88	)		15	$	3,738	$	(88	)

(e) Derivatives

The following table presents the notional amounts by remaining maturity of the Company’s Interest Rate Swaps and Contracts for Differences as of March 31, 2009:

	Remaining Life of Notional Amount (1)
	One Year			Two Through Five Years			Six Through Ten Years			After Ten Years			Total
Interest rate swaps		$	—		$	30,000		$	—		$	—		$	30,000
Contracts for differences			—			—			2,066			—			2,066
		$	—		$	30,000		$	2,066		$	—		$	32,066

(1)

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

The Company records changes in valuation on its derivative positions as a component of net realized gains and losses. The Company records changes in valuation on its interest rate swap related to its term loan as a component of interest expense.

(f) Other

Securities sold but not yet purchased, represent obligations of the Company to deliver the specified security at the contracted price and thereby, create a liability to purchase the security in the market at prevailing prices. The Company’s liability for securities to be delivered is measured at their fair value and as of March 31, 2009 was $12,665 for corporate bonds and $0 and for equity securities. These transactions result in off-balance sheet risk, as the Company’s ultimate cost to satisfy the delivery of securities sold, not yet purchased, may exceed the amount reflected at March 31, 2009. Subject to certain limitations, all securities owned, to the extent to cover the Company’s obligations to sell or repledge the securities to others, are pledged to the clearing broker.

The Company enters into repurchase agreements. The agreements are accounted for as collateralized borrowing transactions and are recorded at contract amounts. The Company receives cash or securities, that it invests or hold in short term or fixed income securities. As of March 31, 2009, there were $248,360 principal amount outstanding at interest rates between 0.85% and 1.00%. Interest expense associated with these repurchase agreements for the three months ended March 31, 2009 and 2008 was $694 and $1,784, respectively, of which $261 was accrued as of March 31, 2009. The Company has approximately $255,000 of collateral pledged in support of these agreements.

4.	Fair Value of Financial Instruments

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

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

Fixed Maturities (Held to Maturity and Available for Sale). The Company utilized a pricing service to estimate fair value measurements for approximately 99% of its fixed maturities. The pricing service utilizes market quotations for fixed maturity securities that have quoted market prices in active markets. Since fixed maturities other than U.S. treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing. The pricing service utilized by the Company has indicated they will only produce an estimate of fair value if there is verifiable information to produce a valuation. As the fair value estimates of most fixed maturity investments are based on observable market information rather than market quotes, the estimates of fair value other than U.S. Treasury securities are included in Level 2 of the hierarchy. U.S. Treasury securities are included in the amount disclosed in Level 1 as the estimates are based on unadjusted prices. The Company’s Level 2 investments include obligations of U.S. government agencies, municipal bonds, corporate debt securities and other mortgage backed securities. While a vast majority of the Company’s fixed maturities are included in Level 1 or Level 2, the Company holds a small percentage, approximately 0.6%, of investments which were not valued by a pricing service. Typically, the Company estimates the fair value of these fixed maturities using a pricing matrix with some unobservable inputs that are significant to the valuation. Due to the limited amount of unobservable market information, the Company includes the fair value estimates for these investments in Level 3. At March, 31, 2009 the Company held certain fixed maturity investments, which included corporate and bank debt, that were not suitable for matrix pricing. For these assets, a quote is obtained from a market maker broker. Due to the disclaimers on the quotes that indicate that the price is indicative only, the Company includes these fair value estimates in Level 3.

Equity Securities . For public common and preferred stocks, the Company receives estimates from a pricing service that are based on observable market transactions and includes these estimates in Level 1 hierarchy.

Other Investments . The Company has approximately 1% of its investment portfolio, in limited partnerships or hedge funds where the fair value estimate is determined by a fund a manager based on recent filings, operating results, balance sheet stability, growth and other business and market sector fundamentals. Due to the significant unobservable inputs in these valuations, the Company includes the estimate in the amount disclosed in Level 3 hierarchy. The Company has determined that its investments in Level 3 securities are not material to its financial position or results of operations.

Derivatives . The Company from time to time invests in a limited amount of derivatives and other financial instruments as part of its investment portfolio. Derivatives, as defined in SFAS 133, are financial arrangements among two or more parties with returns linked to an underlying equity, debt, commodity, asset, liability, foreign exchange rate or other index. Unless subject to a scope exclusion, the Company carries all derivatives on the consolidated balance sheet at fair value. The changes in fair value of the derivative are presented as a component of operating income. The Company primarily utilizes the following types of derivatives at any one time:

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

Interest rate swaps (“IS”), which are valued in terms of the contract between the Company and the issuer of the swaps, are based on the difference between the stated floating rate of the underlying indebtedness, in this case LIBOR, and a predetermined fixed rate for such indebtedness with the result that the indebtedness carries a net fixed interest rate; and

Contracts for difference contracts (“CFD”), which, are valued based on the market price of the underlying stock. The Company may be required to deposit collateral with the counterparty if the market values of the contract fall below a stipulated amount in the contract.

The Company estimates fair value using information provided by the portfolio manager for IS and CDS and the counterparty for CFD and classifies derivative as Level 3 hierarchy.

Fair Value Hierarchy

The following table presents the level within the fair value hierarchy at which the Company’s financial assets and financial liabilities are measured on a recurring basis as of March 31, 2009:

	Total		Level 1		Level 2		Level 3
Assets:
Held-to-maturity securities	$	45,490	$	2,258	$	43,232	$	-
Available-for-sale fixed securities		920,950		16,512		897,900		6,538
Equity securities		25,687		25,687		-		-
Other investments		12,607		-		-		12,607
	$	1,004,734	$	44,457	$	941,132	$	19,145
Liabilities:
Securities sold but not yet purchased, market	$	12,665	$	-	$	12,665	$	-
Securities sold under agreements to repurchase, at contract value		248,352		-		248,352		-
Derivatives		982		-		-		982
	$	261,999	$	-	$	261,017	$	982

The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets as of March 31, 2009:

	Other investments			Derivatives			Total
Beginning balance as of January 1, 2009	$	21,352		$	(1,439	)	$	19,913
Total net losses for the quarter include in:
Net income		(36	)		457			421
Other comprehensive loss		-			-			-
Purchases, sales, issuances and settlements, net		(2,171	)		-			(2,171	)
Net transfers into (out of) Level 3		-			-			-
Ending balance as of March 31, 2009	$	19,145		$	(982	)	$	18,163

Debt

Junior Subordinated Debt

The Company established four special purpose trusts for the purpose of issuing trust preferred securities. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts, were invested by the trusts in junior subordinated debentures issued by the Company. As a result of FIN 46, the Company does not consolidate such special purpose trusts, as the Company is not considered to be the primary beneficiary under this accounting standard. The equity investment, totaling $3,714 as of March 31, 2009 on the Company’s consolidated balance sheet, represents the Company’s ownership of common securities issued by the trusts. The debentures require interest-only payments to be made on a quarterly basis, with principal due at maturity. The Company incurred $2,605 of placement fees in connection with these issuances which is being amortized over thirty years.

The table below summarizes the Company’s trust preferred securities as of March 31, 2009:

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

(1)

The interest rate will change to three-month LIBOR plus 3.40% after the tenth anniversary.

(2)

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

(3)

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

Term Loan

On June 3, 2008, the Company entered into a term loan with JP Morgan Chase Bank, N.A. in the aggregate amount of $40,000. The term of loan is for a period of three years and requires quarterly principal payments of $3,333, which began on September 3, 2008 and end on June 3, 2011. The loan carries a variable rate and is based on a Eurodollar rate plus an applicable margin. The Eurodollar rate is a periodic fixed rate equal to the London Interbank Offered Rate “LIBOR” plus a margin rate, which was 185 basis points. As of March 31, 2009 the interest rate was 3.07%. The Company recorded $457 and $0 of interest expense for the three months ended March 31, 2009 and 2008, respectively. The Company can prepay any amount after the first anniversary date without penalty upon prior notice. The term loan contains affirmative and negative covenants, including limitations on additional debt, limitations on investments and acquisitions outside the Company’s normal course of business. The loan requires the Company to maintain a debt to capital ratio of 0.35 to 1 or less. The Company incurred financing fees of $52 related to the agreement.

On June 4, 2008, the Company entered into a fixed rate interest swap agreement with a total notional amount of $40,000 to convert the term loan from variable to fixed rate. Under this agreement, the Company pays a fixed rate of 3.47% plus a margin of 185 basis points or 5.32% and receives a variable rate in return based on LIBOR plus a margin rate, which is 185 basis points. The variable rate is reset every three months, at which time the interest will be settled and will be recognized as adjustments to interest expense. The Company recorded interest expense of $275 and $0 for the three months ended March 31, 2009 and 2008, respectively, related to this agreement.

Promissory Note

In connection with the stock and asset purchase agreement with a subsidiary of Unitrin, Inc., the Company issued a promissory note to Unitrin in the amount of $30,000. The note is non interest bearing and requires four annual principal payments of $7,500 beginning on June 1, 2009 through June 1, 2012. The Company calculated imputed interest of $3,155 based on interest rates available to the Company at the date of acquisition which was 4.5%. Accordingly, the note’s carrying balance was adjusted to $26,845 at the acquisition. The note is required to be paid in full, immediately, under certain circumstances involving default of payment or change of control of the Company. The Company included $313 and $0 of amortized discount on the note in its results of operations for the three months ended March 31, 2009 and 2008, respectively. The note’s carrying value at March 31, 2009 was $27,784.

Line of Credit

On June 3, 2008, the Company entered into an agreement for an unsecured line of credit with JP Morgan Chase Bank, N.A. in the aggregate amount of $25,000. The line is being used for collateral for letters of credit. The line will expire on June 30, 2009. Interest payments are required to be paid monthly on any unpaid principal and bears interest at a rate of LIBOR plus 150 basis points. As of March 31, 2009 there was no outstanding balance on the line of credit. The Company has outstanding letters of credit in place at March 31, 2009 for $24,084 that reduced the availability on the line of credit to $916 as of March 31, 2009.

Maturities of Debt

Maturities of the Company’s debt for the five years subsequent to March 31, 2009 are as follows:

	2009		2010		2011		2012		2013		Thereafter
Junior subordinated debt	$	—	$	—	$	—	$	—	$	—	$	123,714
Term loan		10,000		13,333		6,667		—		—		—
Promissory note		6,746		6,729		7,037		7,362		—		—
Total	$	16,746	$	20,062	$	13,704	$	7,362	$	—	$	123,714

6.	Acquisition Costs and Other Underwriting Expenses

The following table summarizes the components of acquisition costs and other underwriting expenses for the three months ended March 31, 2009 and 2008:

	2009		2008
Policy acquisition expenses	$	29,248	$	18,999
Salaries and benefits		19,281		12,044
Other insurance general and administrative expense		9,625		9,834
	$	58,154	$	40,877

7.	Earnings Per Share

The following, is a summary of the elements used in calculating basic and diluted earnings per share for the three months ended March 31, 2009 and 2008:

	2009		2008
Net income available to common shareholders	$	24,162	$	22,263

Weighted average number of common shares outstanding - basic		59,767		59,969
Potentially dilutive shares:
Dilutive shares from stock-based compensation		233		956
Weighted average number of common shares outstanding - dilutive		60,000		60,925

Net income - basic and diluted earnings per share	$	0.40	$	0.37

As of March 31, 2009, there were approximately 1.4 million anti-dilutive securities excluded from diluted earnings per share.

During the three months ended March 31, 2009, the Company repurchased approximately 700 of its common shares for approximately $5,400. The effect of the purchase, reduced the weighted average shares outstanding by approximately 300 shares for the three months ended March 31, 2009.

8.	Share Based Compensation

The Company’s 2005 Equity and Incentive Plan (“2005 Plan”) permits the Company to grant to officers, employees and non-employee directors of the Company incentive compensation directly linked to the price of the Company’s stock. The Company grants options at prices equal to the closing stock price of the Company’s stock on the dates the options were granted. The Company recognizes compensation expense under SFAS No. 123(R) “Share-Based Payment” for its share-based payments based on the fair value of the awards. The fair value of each option grant is separately estimated for each vesting date. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the award and each vesting date. The Company has estimated the fair value of all stock option awards as of the date of the grant by applying the Black-Scholes-Merton multiple-option pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense. SFAS 123(R)’s fair value valuation method resulted in share-based expense (a component of salaries and benefits) in the amount of approximately $671 and $758 related to stock options for the three months ended March 31, 2009 and 2008, respectively.

The following schedule shows all options granted, exercised, expired and exchanged under the 2005 Plan for the three months ended March 31, 2009 and 2008:

	2009						2008
Amounts in thousands except per share	Number of Shares			Amount per Share			Number of Shares			Amount per Share

Outstanding beginning of period		3,728			$	7.00-15.02		3,126			$	7.00-14.55
Granted		85				9.65		50				15.02
Exercised		—				—		(32	)			7.50
Cancelled or terminated		(8	)			7.50		(6	)			7.50
Outstanding end of period		3,805			$	7.00-15.02		3,138			$	7.00-15.02

The weighted average grant date fair value of options granted during the three months ended March 31, 2008 and 2009 was $4.84 and $2.85, respectively. As of March 31, 2009 there was approximately $6.4 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements.

9.	Comprehensive Income

The following table summarizes the components of comprehensive income:

	Three Months Ended March 31,
	2009			2008
Net Income	$	24,162		$	22,263
Unrealized holding loss		(14,970	)		(17,087	)
Reclassification adjustment		8,414			(135	)
Foreign currency translation		(840	)		888
Comprehensive Income	$	16,766		$	5,929

10.	Income Taxes

Income tax expense for the three months ended March 31, 2009 and 2008 was $5,256 and $7,317, respectively. The following table reconciles the Company’s statutory federal income tax rate to its effective tax rate.

	Three Months Ended March 31,
	2009			2008
Income from continuing operations before provision for income taxes and minority interest	$	29,418		$	26,680
Less: minority interest		-			(2,900	)
Income from continuing operations after minority interest before provision for income taxes		29,418			29,580

Income taxes at statutory rates		10,296			10,231
Effect of Income not subject to US taxation		(5,213	)		(2,992	)
Other, net		172			78
Provision for income taxes as shown on the Consolidated Statements of Income	$	5,256		$	7,317
GAAP effective tax rate		17.9	%		27.1	%

The Company’s management believes that it will realize the benefits of its deferred tax asset and, accordingly, no valuation allowance has been recorded for the periods presented. The Company does not provide for income taxes on the unremitted earnings of foreign subsidiaries where, in management’s opinion, such earnings have been indefinitely reinvested. It is not practical to determine the amount of unrecognized deferred tax liabilities for temporary differences related to these investments.

The Company’s major taxing jurisdictions include the U.S. (federal and state), the United Kingdom and Ireland. The years subject to potential audit vary depending on the tax jurisdiction. Generally, the Company’s statute of limitation is open for tax years ended December 31, 2004 and forward. At March 31, 2009, the Company has approximately $1,500 of accrued interest and penalties related to FIN 48 unrecognized tax benefits.

During 2007, the Company, while performing a review of the income tax return filed with the IRS for calendar year ending December 31, 2006, determined an issue existed per FIN 48 guidelines concerning its position related to accrued market discount. The Company reverses accrued market discount income recognized for book purposes when calculating taxable income. The reversal results from the accrued market discount income recognized by the insurance subsidiaries for bonds and other investments. The Company inadvertently reversed the amount related to commercial paper investments on the 2006 income tax return. The Company has estimated the potential liability to be approximately $915 (including $98 for penalties and interest) and has reflected this position, per FIN 48 guidelines, in the consolidated financial statements.

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

11.	Related Party Transactions

Reinsurance Agreement

Maiden Holdings, Inc. (“Maiden”) is a Bermuda insurance holding company formed by Michael Karfunkel, George Karfunkel and Barry Zyskind, the principal shareholders, and, respectively, the Chairman of the Board of Directors, a Director, and the Chief Executive Officer and Director of AmTrust. Messrs. Karfunkel and Mr. Zyskind contributed $50,000 to Maiden Insurance. In July 2007, Maiden raised approximately $480,600 in a private placement. Maiden Insurance Company, Ltd. (“Maiden Insurance”), a wholly-owned subsidiary of Maiden, is a Bermuda reinsurer.

During the third quarter of 2007, the Company and Maiden entered into master agreement, as amended, by which they caused the Company’s Bermuda affiliate, AmTrust International Insurance, Ltd. (“AII”) and Maiden Insurance to enter into a quota share reinsurance agreement (the “Maiden Quota Share”) by which (a) AII retrocedes to Maiden Insurance an amount equal to 40% of the premium written by AmTrust’s U.S., Irish and U.K. insurance companies (the “AmTrust Ceding Insurers”), net of the cost of unaffiliated inuring reinsurance (and in the case of AmTrust’s U.K. insurance subsidiary IGI, net of commissions) and 40% of losses and (b) AII transferred to Maiden Insurance 40% of the AmTrust Ceding Insurer’s unearned premium reserves, effective as of July 1, 2007, with respect to the Company's then current lines of business, excluding risks for which the AmTrust Ceding Insurers’ net retention exceeds $5,000 (“Covered Business”). AmTrust also has agreed to cause AII, subject to regulatory requirements, to reinsure any insurance company which writes Covered Business in which AmTrust acquires a majority interest to the extent required to enable AII to cede to Maiden Insurance 40% of the premiums and losses related to such Covered Business. The Maiden Quota Share further provides that AII receives a ceding commission of 31% of ceded written premiums. The Maiden Quota Share has an initial term of three years and will automatically renew for successive three year terms thereafter, unless either AII or Maiden Insurance notifies the other of its election not to renew not less than nine months prior to the end of any such three year term. In addition, either party is entitled to terminate on thirty day’s notice or less upon the occurrence of certain early termination events, which include a default in payment, insolvency, change in control of AII or Maiden Insurance, run-off, or a reduction of 50% or more of the shareholders’ equity of Maiden Insurance or the combined shareholders’ equity of AII and the AmTrust Ceding Insurers.

Effective June 1, 2008 the Maiden Quota Share was amended such that AII agreed to cede and Maiden Insurance agreed to accept and reinsure Retail Commercial Package Business, which the Company, through Affiliates, commenced writing effective June 1, 2008, in connection with its acquisition of UBI. AII ceded 100% of the unearned premium related to in-force Retail Commercial Package Business and losses related thereto at the acquisition date and 40% the Company’s net written premium and losses on Retail Commercial Package Business written or renewed on or after the effective date. The $2,000 maximum liability for a single loss provided in the Quota Share Reinsurance Agreement shall not be applicable to Retail Commercial Package Business. AmTrust receives a ceding commission of 34.375% for Retail Commercial Package Business. The Company recorded approximately $27,118 and $20,184 of ceding commission income during the three months ended March 31, 2009 and 2008, respectively, as a result of this agreement.

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

	March 31, 2009			December 31, 2008
Assets and liabilities:
Reinsurance recoverable	$	244,940		$	221,214
Prepaid reinsurance premium		233,633			243,511
Ceded reinsurance premiums payable		(99,296	)		(102,907	)
Note payable		(167,975	)		(167,975	)

	Three Months Ended March 31,
	2009			2008
Results of operations:
Premium written – ceded	$	(87,480	)	$	(82,948	)
Change in unearned premium – ceded		(6,971	)		19,160
Earned premium – ceded	$	(94,451	)	$	(63,788	)

Ceding commission on premium written	$	27,553		$	25,992
Ceding commission – deferred		(435	)		(5,808	)
Ceding commission – earned	$	27,118		$	20,184
Incurred loss and loss adjustment expense – ceded	$	71,205		$	41,472
Interest expense on collateral loan		570			—

The Maiden Quota Share requires that Maiden Insurance provide to AII sufficient collateral to secure its proportional share of AII’s obligations to the U.S. AmTrust Ceding Insurers. AII is required to return to Maiden Insurance any assets of Maiden Insurance in excess of the amount required to secure its proportional share of AII’s collateral requirements, subject to certain deductions. In order to secure its proportional share of AII’s obligation to the AmTrust Ceding Insurers, domiciled in the U.S., AII currently holds a collateral loan with Maiden Insurance in the amount of $167,975. Effective December 1, 2008, AII and Maiden Insurance entered into a Reinsurer Trust Assets Collateral agreement whereby Maiden Insurance is required to provide AII the assets required to secure Maiden’s proportional share of the Company’s obligations to its U.S. subsidiaries. The amount of this collateral as of March 31, 2009 was $152,911. Maiden retains ownership of $152,911 in the trust account.

Reinsurance Brokerage Agreement

Effective July 1, 2007, AmTrust, through a subsidiary, entered into a reinsurance brokerage agreement with Maiden. Pursuant to the brokerage agreement, AmTrust provides brokerage services relating to the Reinsurance Agreement for a fee equal to 1.25% of reinsured premium. The brokerage fee is payable in consideration of AII Reinsurance Broker Ltd.’s brokerage services. The Company recorded $1,133 and $1,036 of brokerage commission during the three months ended March 31, 2009 and 2008, respectively.

Asset Management Agreement

Effective July 1, 2007, AmTrust, through a subsidiary, entered into an asset management agreement with Maiden, pursuant to which it provides investment management services to Maiden. Pursuant to the asset management agreement, AmTrust earned an annual fee equal to 0.35% per annum of average invested assets plus all costs incurred. Effective April 1, 2008, the investment management services fee was reduced to 0.20% per annum and was further reduced to 0.15% per annum once the average invested assets exceed $1,000,000. As a result of this agreement, the Company recorded approximately $597 and $460 of investment management fees for the three months ended March 31, 2009 and 2008, respectively.

Services Agreement

AmTrust, through its subsidiaries, entered into services agreements in 2008, pursuant to which it provides certain marketing and back office services to Maiden. Pursuant to the services agreements, AmTrust earns a fee equal to reimburse AmTrust for its costs plus 8%. The Company recorded approximately $153 and $0 for the three months ended March 31, 2009 and 2008, respectively, as a result of this agreement.

Note Payable — Collateral for Proportionate Share of Reinsurance Obligation

In conjunction with the Maiden Quota Share, AII entered into a loan agreement with Maiden Insurance during the fourth quarter of 2007, whereby, Maiden Insurance agreed to lend to AII from time to time for the amount of the obligation of the AmTrust Ceding Insurers that AII is obligated to secure, not to exceed an amount equal to Maiden Insurance’s proportionate share of such obligations to such AmTrust Ceding Insurers in accordance with the Maiden Quota Share. AII is required to deposit all proceeds from the advances into a sub-account of each trust account that has been established for each AmTrust Ceding Insurer. To the extent of the loans, Maiden Insurance is discharged from providing security for its proportionate share of the obligations as contemplated by the Maiden Quota Share. If an AmTrust Ceding Insurer withdraws loan proceeds from the trust account for the purpose of reimbursing such AmTrust Ceding Insurer, for an ultimate net loss, the outstanding principal balance of the loan shall be reduced by the amount of such withdrawal. The loan agreement was amended in February 2008 to provide for interest at a rate of LIBOR plus 90 basis points and is payable on a quarterly basis. Each advance under the loan is secured by a promissory note. Advances totaled $167,975 as of December 31, 2008. The Company recorded $570 of interest expense during the three months ended March 31, 2009.

Other Reinsurance Agreement

Effective January 1, 2008, Maiden became a participating reinsurer in the first layer of the Company’s workers’ compensation excess of loss program, which provides coverage in the amount of $9 million per occurrence in excess of $1 million, subject to an annual aggregate deductible of $1.25 million. Maiden, which is one of two participating reinsurers in the layer, has a 45% participation. Maiden participates in the first layer of the excess of loss program on the same market terms and conditions as the other participant.

Leap Tide Capital Management

Leap Tide Capital Management, Inc. (“LTCMI”), our wholly owned subsidiary, currently manages approximately $27,000 of our assets. LTCMI also serves as the Investment Manager of Leap Tide Partners, L.P., a domestic partnership and Leap Tide Offshore, Ltd., a Cayman exempted company, both of which were formed for the purpose of providing qualified third-party investors the opportunity to invest funds in a vehicle managed by LTCMI (the “Hedge Funds”). As of March 31, 2009, the current value of the invested funds in the Hedge funds was less than $1,000. The majority of funds invested in the hedge funds were provided by members of the Karfunkel family. The Company’s Audit Committee has reviewed the Leap Tide transactions and determined that they were entered into at arm’s-length and did violate the Company’s Code of Business Conduct and Ethics. The management company earned approximately $0 and $63 of fees under the agreement during the three months ended March 31, 2009 and 2008, respectively.

Lease Agreements

In 2002, we entered into a lease for approximately 9,000 square feet of office space at 59 Maiden Lane in downtown Manhattan from 59 Maiden Lane Associates, LLC, an entity which is wholly owned by Michael Karfunkel and George Karfunkel. Effective January 1, 2008, we entered into an amended lease whereby we increased our leased space to 14,807 square feet and extended the lease through December 31, 2017. The Audit Committee reviewed and approved the amended lease agreement. The Company paid approximately $166 and $83 for the lease for the three months ended March 31, 2009 and 2008, respectively.

In 2008, the Company entered into a lease for approximately 5,000 square feet of office space in Chicago, Illinois from 33 West Monroe Associates, LLC, an entity which is wholly owned by Michael Karfunkel and George Karfunkel. The audit committee reviewed and approved the lease agreement. The Company paid approximately $41 and $51 for the lease for the three months ended March 31, 2009 and 2008, respectively.

Employment Relationship

Barry Karfunkel, was an analyst with a Company subsidiary through January 31, 2009, earned approximately $21 and $63 for the three months ended March 31, 2009 and 2008, respectively. Barry Karfunkel is the son of Michael Karfunkel and the brother-in-law of Barry Zyskind.

Warrantech

In February of 2007, the Company participated with H.I.G. Capital, a Miami-based private equity firm, in financing H.I.G. Capital’s acquisition of Warrantech in a cash merger. The Company contributed $3,850 for a 27% equity interest Warrantech. Warrantech is an independent developer, marketer and third party administrator of service contracts and after-market warranty primarily for the motor vehicle and consumer product industries. The Company currently insures a majority of Warrantech’s business, which produced gross premium written of approximately $23,000 and $17,700 during the three months ended 2009 and 2008, respectively. The Company recorded investment loss of approximately $402 and $0 from its equity investment for the three months ended March 31, 2009 and 2008, respectively. As of March 31, 2009 the Company’s equity interest was approximately $1,708. Additionally in 2007, the Company provided Warrantech with a $20,000 senior secured note due January 31, 2012 (note receivable — related party). Interest on the notes is payable monthly at a rate of 15% per annum and consisted of a cash component at 11% per annum and 4% per annum for the issuance of additional notes (“PIK Notes”) in a principle amount equal to the interest not paid in cash on such date. As of March 31, 2009 the carrying value of the note receivable was $21,808 (note receivable — related party).

12.	Acquisition

During the three months ended March 31, 2009, the Company, through a subsidiary acquired all the issued and outstanding stock of Imagine Captive Holdings Limited (“ICHL”), a Luxembourg holding company, which owned all of the issued and outstanding stock of Imagine Re Beta SA, Imagine Re (Luxembourg) 2007 SA and Imagine Re SA (collectively, the “Captives”), each of which is a Luxembourg domiciled captive insurance company from Imagine Finance SARL (“SARL”). ICHL subsequently changed its name to AmTrust Captive Holdings Limited (“ACHL”). The purchase price of ACHL was $20 which represented the capital of ACHL. The acquisition allows the Company to obtain the benefit of the Captives’ utilization of their equalization reserves. In accordance with SFAS No 141(R), the Company recorded approximately $12,500 of cash, $66,500 of receivables and $79,000 of equalization reserves. The results of operations have been included since acquisition date.

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

13.	Contingent Liabilities

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

14.	Assets Under Management

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

Through March 31, 2008, we allocated an equivalent portion of the limited partners’ income or loss to minority interest. For the three months ended March 31, 2009 and 2008, LTP had an investment loss of $0 and $2,900, respectively and resulted in an allocation to minority interest of $0 and $2,900. The management companies earned approximately $0 and $43 of fees under the agreement during the three months ended March 31, 2009 and 2008, respectively.

Net investment income for the three months ended March 31, 2009 and 2008 for LTCM was derived from the following sources:

	2009		2008
Equity securities:
Dividends	$	-	$	8
Realized gain (loss)		-		431
Unrealized gain (loss)		-		(3,297	)
Cash and cash equivalents		-		6
		-		(2,852	)
Less: Investment expenses		-		(48	)
	$	-	$	(2,900	)

15.

Segments

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

The following tables summarize business segments as follows for the three months ended March 31, 2009 and 2008:

	Small commercial business			Specialty risk and extended warranty			Specialty middle- market property and casualty insurance			Corporate and other			Total
Three months ended March 31, 2009:
Gross premium written	$	127,470		$	82,708		$	57,349		$	—		$	267,527

Net premium written		70,459			38,259			27,461			—			136,179
Change in unearned premium		(12,368	)		(2,416	)		6,196			—			(3,756	)
Net earned premium		58,091			40,675			33,657			—			132,423

Ceding commission - primarily related party		19,776			6,027			1,788			—			27,591

Loss and loss adjustment expense		(35,394	)		(17,818	)		(21,703	)		—			(74,915	)
Acquisition costs and other underwriting expenses		(34,154	)		(12,703	)		(11,297	)		—			(58,154	)
		(69,548	)		(30,521	)		(33,000	)		—			(133,069	)

Underwriting income		8,319			16,181			2,445			—			26,945

Commission and fee income		3,489			2,138			—			1,827			7,454
Investment income and realized gain (loss)		2,168			1,340			842			—			4,351
Other expenses		(2,661	)		(1,427	)		(1,106	)		—			(5,194	)
Interest expense		(2,137	)		(1,146	)		(888	)		—			(4,171	)
Foreign currency gain		—			33			—			—			33
Provision for income taxes		(1,640	)		(3,058	)		(231	)		(326	)		(5,256	)
Net income	$	7,538		$	14,061		$	1,062		$	1,501		$	24,162

	Small c ommercial business			Specialty risk and extended warranty			Specialty middle- market property and casualty insurance			Corporate and other			Total
Three months ended March 31, 2008:
Gross premium written	$	89,621		$	87,769		$	57,726		$	—		$	234,756

Net premium written		51,332			38,085			28,025			—			117,442
Change in unearned premium		(5,027	)		(8,489	)		(6,513	)		—			(20,029	)
Net earned premium		46,305			29,596			21,512			—			97,413

Ceding commission – primarily related party		12,600			3,431			4,844			—			20,875

Loss and loss adjustment expense		(24,567	)		(17,914	)		(12,684	)		—			(55,165	)
Acquisition costs and other underwriting expenses		(23,352	)		(6,785	)		(10,740	)		—			(40,877	)
		(47,919	)		(24,699	)		(23,424	)		—			(96,042	)

Underwriting income		10,986			8,328			2,932			—			22,246

Commission and fee income		2,759			1,796			—			1,732			6,287
Investment income, realized gain (loss) and loss on managed assets		4,303			2,583			1,425			(2,900	)		5,411
Other expenses		(1,940	)		(7,186	)		4,332			—			(4,794	)
Interest expense		(1,100	)		(925	)		(604	)		—			(2,629	)
Foreign currency gain		—			159			—			—			159
Provision for income taxes		(3,713	)		(1,176	)		(2,000	)		(428	)		(7,317	)
Minority interest in net loss of subsidiary		—			—			—			2,900			2,900
Net income	$	11,295		$	3,579		$	6,085		$	1,304		$	22,263

The following tables summarize business segments as follows as of March 31, 2009 and December 31, 2008:

	Small commercial business		Specialty risk and extended warranty		Specialty middle- market property and casualty insurance		Corporate and other		Total
As of March 31, 2009:
Fixed assets	$	7,703	$	4,130	$	3,202	$	—	$	15,035
Goodwill and intangible assets		78,776		11,131		14,092		—		103,999
Total assets		1,752,967		947,961		463,095		—		3,164,023

As of December 31, 2008:
Fixed assets	$	6,942	$	5,528	$	2,637	$	—	$	15,107
Goodwill and intangible assets		79,199		10,821		12,405		—		102,425
Total assets		1,718,020		933,035		492,838		—		3,143,893

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

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

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

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

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

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

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

The Company transacts business through eleven insurance company subsidiaries:

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

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

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

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

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

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

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

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

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

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

One of the key financial measures that we use to evaluate our operating performance is return on average equity. Our return on average equity was 24.9% and 22.7% for the three months ended March 31, 2009 and 2008. In addition, we target a net combined ratio of 95.0% or lower over the long term, while seeking to maintain optimal operating leverage in our insurance subsidiaries commensurate with our A.M. Best rating objectives. Our net combined ratio was 79.7% and 77.2% for the three months ended March 31, 2009 and 2008, respectively. The increase in the combined ratio period over period resulted primarily from higher policy acquisition expenses resulting as a function of having a larger percentage of gross written premium attributable to our small commercial business segment in 2009 as well as higher salary expense as a result of the UBI acquisition in the second quarter of 2008. We plan to write additional premiums without a proportional increase in expenses and further reduce the expense component of our net combined ratio over time.

Critical Accounting Policies

The Company’s discussion and analysis of its results of operations, financial condition and liquidity are based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities as of the date of the financial statements. As more information becomes known, these estimates and assumptions could change, which would have an impact on actual results that may differ materially from these estimates and judgments under different assumptions. The Company has not made any changes in estimates or judgments that have had a significant effect on the reported amounts as previously disclosed in our Annual Report on Form 10-K for the fiscal period ended December 31, 2008.

Results of Operations

Consolidated Results of Operations (Unaudited)

	Three Months Ended March 31,
	2009			2008
	($ amounts in thousands)
Gross written premium	$	267,527		$	234,756

Net premium written	$	136,179		$	117,442
Change in unearned premium		(3,756	)		(20,029	)
Net earned premium		132,423			97,413
Ceding commission – primarily related party		27,591			20,875
Commission and fee income		7,454			6,287
Net investment income		13,589			13,531
Net realized (loss) gain on investments		(9,238	)		(5,220	)
Other investment income (loss) on managed assets		—			(2,900	)
Total revenue		171,819			129,986

Loss and loss adjustment expense