Edgar Filing: Amtrust Financial Services, Inc.

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, 2012

¨	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, 6th 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 x 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 x

Non-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 May 2, 2012, the Registrant had one class of Common Stock ($.01 par value), of which 60,535,070 shares were issued and outstanding.

INDEX

		Page
PART I	FINANCIAL INFORMATION	3

Item 1.	Unaudited Financial Statements:	3

	Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 (audited)	3

	Condensed Consolidated Statements of Income — Three months ended March 31, 2012 and 2011	4

	Condensed Consolidated Statements of Comprehensive Income – Three months ended March 31, 2012 and 2011	5

	Condensed Consolidated Statements of Cash Flows — Three months ended March 31, 2012 and 2011	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	48

PART II	OTHER INFORMATION	49

Item 1.	Legal Proceedings	49

Item 1A.	Risk Factors	49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3.	Defaults Upon Senior Securities	50

Item 4.	Mine Safety Disclosures	50

Item 5.	Other Information	50

Item 6.	Exhibits	51

	Signatures	52

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

AMTRUST FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands, Except Par Value)

	March 31, 2012			December 31, 2011
	(Unaudited)			(Audited)
ASSETS
Investments:
Fixed maturities, available-for-sale, at market value (amortized cost $1,637,870; $1,382,863)	$	1,685,022		$	1,394,243
Equity securities, available-for-sale, at market value (cost $29,749; $34,041)		30,752			35,600
Short-term investments		84,571			128,565
Equity investment in unconsolidated subsidiaries – related parties		87,117			83,691
Other investments		14,865			14,588
Total investments		1,902,327			1,656,687
Cash and cash equivalents		277,183			406,847
Restricted cash and cash equivalents		59,236			23,104
Accrued interest and dividends		14,437			12,644
Premiums receivable, net		1,004,951			932,992
Reinsurance recoverable (related party $646,659; $597,525)		1,142,147			1,098,569
Prepaid reinsurance premium (related party $453,752; $429,124)		620,989			584,871
Prepaid expenses and other assets (recorded at fair value $142,575; $131,387)		338,144			292,849
Federal income tax receivable		8,264			13,024
Deferred policy acquisition costs		295,397			280,991
Property and equipment, net		63,801			61,553
Goodwill		173,023			147,654
Intangible assets		195,489			166,962
	$	6,095,388		$	5,678,747
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Loss and loss expense reserves	$	1,968,319		$	1,879,175
Unearned premiums		1,453,008			1,366,170
Ceded reinsurance premiums payable (related party $264,934; $222,408)		375,189			337,508
Reinsurance payable on paid losses		17,775			14,731
Funds held under reinsurance treaties		42,624			49,249
Note payable on collateral loan – related party		167,975			167,975
Securities sold but not yet purchased, at market		54,507			55,942
Securities sold under agreements to repurchase, at contract value		200,915			191,718
Accrued expenses and other current liabilities (recorded at fair value $12,050; $12,022)		337,723			267,643
Deferred income taxes		138,001			108,775
Debt		302,550			279,600
Total liabilities		5,058,586			4,718,486
Commitments and contingencies
Redeemable non-controlling interest		600			600
Stockholders’ equity:
Common stock, $.01 par value; 100,000 shares authorized, 85,013 and 84,906 issued in 2012 and 2011, respectively; 60,463 and 60,106 outstanding in 2012 and 2011, respectively		850			849
Preferred stock, $.01 par value; 10,000 shares authorized		—			—
Additional paid-in capital		585,623			582,321
Treasury stock at cost; 24,550 and 24,800 shares in 2012 and 2011, respectively		(298,260	)		(300,365	)
Accumulated other comprehensive income (loss)		22,456			(9,999	)
Retained earnings		651,373			617,757
Total AmTrust Financial Services, Inc. equity		962,042			890,563
Non-controlling interest		74,160			69,098
Total stockholders’ equity		1,036,202			959,661
	$	6,095,388		$	5,678,747

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,
	2012			2011
Revenues:
Premium income:
Net written premium	$	359,777		$	234,019
Change in unearned premium		(45,753	)		(33,681	)
Net earned premium		314,024			200,338
Ceding commission – primarily from related party		46,274			35,684
Service and fee income (related parties $6,092; $3,439)		40,538			25,189
Net investment income		14,518			14,192
Net realized gain (loss) on investments		(1,148	)		415
Total revenues		414,206			275,818
Expenses:
Loss and loss adjustment expense		199,929			128,696
Acquisition costs and other underwriting expenses		124,025			81,234
Other		35,639			20,196
Total expenses		359,593			230,126
Income before other income (expense), income taxes and equity in earnings of unconsolidated subsidiaries		54,613			45,692
Other income (expenses):
Interest expense		(7,091	)		(3,754	)
Foreign currency gain (loss)		421			(284	)
Gain on investment in life settlement contracts net of profit commission		90			18,886
Total other income (expenses)		(6,580	)		14,848
Income before income taxes and equity in earnings of unconsolidated subsidiaries		48,033			60,540
Provision for income taxes		11,177			9,037
Income before equity in earnings of unconsolidated subsidiaries		36,856			51,503
Equity in earnings of unconsolidated subsidiaries – related party		2,364			1,819
Net income		39,220			53,322
Net income attributable to non-controlling interest of subsidiaries		(134	)		(8,139	)
Net income attributable to AmTrust Financial Services, Inc.	$	39,086		$	45,183

Earnings per common share:
Basic earnings per share	$	0.65		$	0.76
Diluted earnings per share		0.63			0.74
Dividends declared per common share	$	0.09		$	0.08

Net realized gain (loss) on investments:
Total other-than-temporary impairment losses	$	—		$	—
Portion of loss recognized in other comprehensive income		—			—
Net impairment losses recognized in earnings		—			—
Other net realized gain (loss) on investments		(1,148	)		415
Net realized investment gain (loss)	$	(1,148	)	$	415

See accompanying notes to unaudited condensed consolidated financial statements.

AmTrust Financial Services, Inc.

Condensed Consolidated Statement of Comprehensive Income

(Unaudited)

(In Thousands)

	Three Months Ended March, 31
	2012			2011
Other comprehensive income, net of tax:
Net income	$	39,220		$	51,321
Foreign currency translation adjustments		4,197			3,840
Change in fair value of interest rate swap		(57	)		—
Unrealized gains on securities:
Unrealized holding gains arising during period		30,759			3,272
Less: Reclassification adjustment for gains included in net income		(2,444	)		1,253
Other comprehensive income, net of tax	$	32,455		$	8,365
Comprehensive income		71,675			59,686
Less: Comprehensive income attributable to non-controlling interest		134			8,139
Comprehensive income attributable to AmTrust Financial Services, Inc.	$	71,541		$	51,547

See accompanying notes to unaudited condensed consolidated financial statements.

AmTrust Financial Services, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In Thousands)

	Three Months Ended March 31,
	2012			2011
Cash flows from operating activities:
Net income	$	39,220		$	51,321
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		8,746			6,071
Equity earnings and gain on investment in unconsolidated subsidiaries		(2,364	)		(3,123	)
Gain on investment in life settlement contracts		(90	)		(18,886	)
Realized (gain) loss on marketable securities		1,148			(415	)
Discount on notes payable		968			163
Stock based compensation		1,180			1,459
Bad debt expense		1,994			1,147
Foreign currency (gain) loss		(421	)		284
Changes in assets - (increase) decrease:
Premiums and note receivables		(73,953	)		(61,425	)
Reinsurance recoverable		(43,578	)		(47,114	)
Deferred policy acquisition costs, net		(14,406	)		(12,343	)
Prepaid reinsurance premiums		(36,118	)		(22,677	)
Prepaid expenses and other assets		(34,589	)		(9,018	)
Changes in liabilities - increase (decrease):
Reinsurance premium payable		37,681			51,523
Loss and loss expense reserve		89,144			48,085
Unearned premiums		86,838			60,458
Funds held under reinsurance treaties		(6,625	)		(179	)
Accrued expenses and other current liabilities		29,084			(86	)
Deferred tax liability		4,575			10,086
Net cash provided by operating activities		88,434			55,331
Cash flows from investing activities:
Net (purchases) sales of securities with fixed maturities		(212,243	)		7,157
Net (purchases) sales of equity securities		7,509			1,447
Net (purchases) sales of other investments		(309	)		161
Acquisition of and capitalized premiums for life settlement contracts		(7,961	)		(17,453	)
Acquisition of intangible assets and subsidiaries, net of cash obtained		(2,222	)		—
Increase in restricted cash and cash equivalents		(36,132	)		(23,402	)
Purchase of property and equipment		(5,014	)		(15,402	)
Net cash used in investing activities		(256,372	)		(47,492	)
Cash flows from financing activities:
Repurchase agreements, net		9,197			(95,251	)
Revolving credit facility borrowing		—			98,200
Convertible senior notes proceeds		25,000			—
Secured loan agreement borrowings		—			10,800
Secured loan agreements payments		(240	)		—
Promissory note		2,500			—
Term loan payment		—			(6,667	)
Debt financing fees		(750	)		(1,394	)
Capital contribution to subsidiaries		4,928			8,965
Stock option exercise and other		922			857
Dividends distributed on common stock		(5,533	)		(4,761	)
Net cash provided by financing activities		36,024			10,749
Effect of exchange rate changes on cash		2,250			2,119
Net decrease in cash and cash equivalents		(129,664	)		(20,707	)
Cash and cash equivalents, beginning of the period		406,847			184,819
Cash and cash equivalents, end of the period	$	277,183		$	205,526
Supplemental Cash Flow Information
Income tax payments	$	46		$	57
Interest payments on debt		2,880			3,151

See accompanying notes to unaudited condensed consolidated financial statements.

Notes to Unaudited Condensed Consolidated Financial Statements

(Unaudited)

(In Thousands, Except Per Share Data)

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, 2011, previously filed with the Securities and Exchange Commission (“SEC”) on March 15, 2012. The balance sheet at December 31, 2011 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, 2011, 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. The Company and American Capital Acquisition Corporation (“ACAC”) currently each have a 50% ownership interest in Tiger Capital LLC (“Tiger”) and AMT Capital Alpha, LLC (“AMT Alpha”). The Company also has a 21.25% ownership share of ACAC. As a result, the Company ultimately receives 60.625% of the income and losses related to Tiger and AMT Alpha and therefore consolidates Tiger and AMT Alpha. Prior to January 1, 2012, the Company reported Tiger’s and AMT Alpha’s income and losses attributable to its 10.625% indirect ownership as a component of Equity in Earnings of Unconsolidated Subsidiaries. This amount was offset by reporting an equal amount as a component of Non-controlling interest. Effective January 1, 2012, the Company presents the impact of the 10.625% indirect ownership of Tiger and AMT Alpha on a net basis and excludes this amount from both Equity in Earnings of Unconsolidated Subsidiaries and Non-controlling Interest. All prior periods presented have been reclassed to conform to the current presentation. There was no impact on prior period Net Income Attributable to AmTrust Financial Services, Inc. The Company’s equity investment in ACAC and non-controlling interest were reduced by $3,807 as of December 31, 2011.

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, 2012, as compared to those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, that are of significance, or potential significance, to the Company.

In December 2011, the Financial Accounting Standards Board (“FASB”) issued a new standard which indefinitely defers certain provisions of a previously issued standard, Accounting Standards Update (“ASU”) No. 2011-05 Comprehensive Income (Topic 220) that revised the manner in which companies present comprehensive income in financial statements. One of the ASU provisions required companies to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. Accordingly, this requirement is indefinitely deferred and will be further deliberated by the FASB at a future date. The amendment is effective for fiscal years and interim periods within those years that begin after December 15, 2011. The Company adopted this standard on January 1, 2012. The adoption of the new standard did not have a material impact on the Company’s results of operations, financial position or liquidity.

In June 2011, the FASB issued ASU No. 2011-05 Comprehensive Income (Topic 220). This update required that all non-owner charges in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-step approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The updated guidance was effective for fiscal years and interim periods beginning on or after December 15, 2011 and was to be applied on a retrospective basis to the beginning of the annual period of adoption. The new standard does not change the items that must be reported in other comprehensive income and was effective for fiscal years and interim periods within those years that begin after December 15, 2011. The Company adopted this standard on January 1, 2012. The adoption of the new standard did not have a material impact on the Company’s results of operations, financial position or liquidity.

In September 2011, the FASB issued ASU No. 2011-08 Intangibles-Goodwill and Other (Topic 350). The updated guidance is intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment, using factors such as changes in management, key personnel, business strategy, technology or customers, to determine whether it should calculate the fair value of a reporting unit. Previous accounting literature required an entity to test goodwill for impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any. In the second step, the implied fair value of the reporting unit’s goodwill is determined in the same manner as goodwill is measured in a business combination (by measuring the fair value of the reporting unit’s assets, liabilities and unrecognized intangible assets and determining the remaining amount ascribed to goodwill) and comparing the amount of the implied goodwill to the carrying amount of the goodwill. Under the updated guidance, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that is more likely than not that its fair value is less than its carrying amount. This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 31, 2011. The Company adopted this standard January 1, 2012 and it did not have any material impact on its results of operations, financial position or liquidity.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820). The ASU generally aligns the principles for fair value measurements and the related disclosure requirements under GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements, particularly for Level 3 fair value measurements. The amendment is effective on a prospective basis for interim and annual reporting periods beginning after December 15, 2011 and early adoption is not permitted. The Company adopted this standard on January 1, 2012 and adoption of the standard did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB amended its guidance on accounting for repurchase agreements. The amendments eliminate the criteria to assess whether a transferor must have the ability to repurchase or redeem the financial assets in order to demonstrate effective control over the transferred asset. Under the amended guidance, a transferor maintains effective control over transferred financial assets (and thus accounts for the transfer as a secured borrowing) if there is an agreement that both entitles and obligates the transferor to repurchase the financial assets before maturity and if all of the following conditions previously required are met: (i) financial assets to be repurchased or redeemed are the same or substantially the same as those transferred; (ii) repurchase or redemption date before maturity at a fixed or determinable price; and (iii) the agreement is entered into contemporaneously with, or in contemplation of, the transfer. As a result, more arrangements could be accounted for as secured borrowings rather than sales. The updated guidance is effective on a prospective basis for interim and annual reporting periods beginning on or after December 15, 2011. The Company adopted this standard January 1, 2012 and it did not have a material impact on the Company’s results of operations, financial position or liquidity.

In October 2010, the FASB issued ASU 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.

The Company adopted ASU 2010-26 prospectively. During 2012, the Company estimates that pre-tax expenses will increase by approximately $8,000 to $10,000 as a lower amount of acquisition costs will be capitalized and existing costs that no longer meet the criteria for deferral under ASU 2010-26 will be recognized in expense over the original amortization periods. For the three months ended March 31, 2012, the Company recognized approximately $3,258 of expense related to such previously deferrable costs. If the Company had adopted ASU 2010-26 retrospectively, approximately $4,647 of acquisition costs that were deferred would have been recognized in expense for the three month period ended March 31, 2011.

Investments

(a) Available-for-Sale Securities

The amortized cost, estimated market value and gross unrealized appreciation and depreciation of available-for-sale securities as of March 31, 2012, are presented in the table below:

(Amounts in Thousands)	Original or amortized cost		Gross unrealized gains		Gross unrealized losses			Market value
Preferred stock	$	5,091	$	97	$	(408	)	$	4,780
Common stock		24,658		3,783		(2,469	)		25,972
U.S. treasury securities		50,086		2,729		(24	)		52,791
U.S. government agencies		60,126		515		(37	)		60,604
Municipal bonds		260,344		9,060		(354	)		269,050
Corporate bonds:
Finance		631,638		24,319		(14,674	)		641,283
Industrial		181,903		7,667		(1,192	)		188,378
Utilities		38,331		2,422		(1,199	)		39,554
Commercial mortgage backed securities		29,951		205		(283	)		29,873
Residential mortgage backed securities:
Agency backed		377,604		18,425		(55	)		395,974
Non-agency backed		7,887		—		(372	)		7,515
	$	1,667,619	$	69,222	$	(21,067	)	$	1,715,774

Proceeds from the sale of investments in available-for-sale securities during the three months ended March 31, 2012 and 2011 were approximately $203,183 and $286,240, respectively.

A summary of the Company’s available-for-sale fixed securities as of March 31, 2012, by contractual maturity, is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Amounts in Thousands)	Amortized Cost		Fair Value
Due in one year or less	$	11,470	$	11,556
Due after one through five years		311,083		309,337
Due after five through ten years		634,872		658,937
Due after ten years		264,988		271,830
Mortgage backed securities		415,457		433,362
Total fixed maturities	$	1,637,870	$	1,685,022

(b) Investment Income

Net investment income for the three months ended March 31, 2012 and 2011 was derived from the following sources:

(Amounts in Thousands)	2012		2011
Fixed maturity securities	$	13,529	$	13,674
Equity securities		398		166
Cash and short term investments		591		606
		14,518		14,446
Less:
Investment expenses and interest expense on securities sold under agreement to repurchase		—		254
	$	14,518	$	14,192

(c) Other-Than-Temporary Impairment

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 position as of March 31, 2012:

	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 Losses
Common and preferred stock	$	5,174	$	(1,572	)		18	$	2,079	$	(1,305	)		4	$	7,253	$	(2,877	)
U.S. treasury securities		4,920		(24	)		11		—		—			—		4,920		(24	)
U.S. government agencies		45,275		(37	)		1									45,275		(37	)
Municipal bonds		39,003		(354	)		10		—		—			—		39,003		(354	)
Corporate bonds:
Finance		183,460		(4,490	)		54		92,554		(10,184	)		13		276,014		(14,674	)
Industrial		21,631		(1,192	)		5		1		—			2		21,632		(1,192	)
Utilities		10,918		(599	)		2		5,593		(600	)		1		16,511		(1,199	)
Commercial Mortgage backed securities		19,464		(283	)		1		—		—			—		19,464		(283	)
Residential mortgage backed securities:
Agency backed		30,231		(55	)		9		—		—			—		30,231		(55	)
Non-agency backed		7,491		(368	)		1		24		(4	)		1		7,515		(372	)
Total temporarily impaired securities	$	367,567	$	(8,974	)		112	$	100,251	$	(12,093	)		21	$	467,818	$	(21,067	)

There are 133 securities at March 31, 2012 that account for the gross unrealized loss, none of which is deemed by the Company to be OTTI. Significant factors influencing the Company’s determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent not to sell these securities and it being not more likely than not that the Company will be required to sell these investments before anticipated recovery of fair value to the Company’s cost basis.

(d) Derivatives

The Company from time to time invests in a limited amount of derivatives and other financial instruments as part of its investment portfolio to manage interest rate changes or other exposures to a particular financial market. The Company records changes in valuation on its derivative positions not designated as a hedge as a component of net realized gains and losses.

The Company records changes in valuation on its hedge positions as a component of other comprehensive income. As of March 31, 2012, the Company had two interest rate swaps designated as a hedge and were recorded as a liability amount of $3,595 and were included as a component of accrued expenses and other liabilities.

The following table presents the notional amounts by remaining maturity of the Company’s interest rate swaps as of March 31, 2012:

	Remaining Life of Notional Amount ⁽¹⁾
(Amounts in Thousands)	One Year		Two Through Five Years		Six Through Ten Years		After Ten years		Total
Interest rate swaps	$	—	$	30,000	$	40,000	$	—	$	70,000

⁽¹⁾

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

(e) Restricted Cash and Investments

The Company, in order to conduct business in certain states, is required to maintain letters of credit or assets on deposit to support state mandated regulatory requirements and certain third party agreements. The Company also utilizes trust accounts to collateralize business with its reinsurance counterparties. These assets held are primarily in the form of cash or certain high grade securities. The fair values of our restricted assets as of March 31, 2012 and December 31, 2011 are as follows:

(Amounts in Thousands)	2012		2011
Restricted cash	$	59,236	$	23,104
Restricted investments		182,446		187,227
Total restricted cash and investments	$	241,682	$	210,331

(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, 2012 was $54,420 for corporate bonds and $87 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 March 31, 2012. 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, which 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 March 31, 2012, there were $200,915 principal amount outstanding at interest rates between 0.4% and 0.45%. Interest expense associated with these repurchase agreements for the three months ended March 31, 2012 and 2011 was $0 and $254, respectively, of which $0 was accrued as of March 31, 2012. The Company has approximately $214,219 of collateral pledged in support of these agreements. Additionally, during the three months ended March 31, 2012, the Company entered into a reverse repurchase agreement in the amount of $56,187 that is included in short term investments as of March 31, 2012. The Company retains collateral of $54,420 related to this agreement.

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 March 31, 2012:

(Amounts in Thousands)	Total		Level 1		Level 2		Level 3
Assets:
U.S. treasury securities	$	52,791	$	52,791	$	—	$	—
U.S. government agencies		60,604		—		60,604		—
Municipal bonds		269,050		—		269,050		—
Corporate bonds and other bonds:
Finance		641,283		—		641,283		—
Industrial		188,378		—		188,378		—
Utilities		39,554		—		39,554		—
Commercial mortgage backed securities		29,873		—		29,873		—
Residential mortgage backed securities:
Agency backed		395,974		—		395,974		—
Non-agency backed		7,515		—		7,515		—
Equity securities		30,752		30,752		—		—
Short term investments		84,571		84,571		—		—
Other investments		14,865		—		—		14,865
Life settlement contracts		142,575		—		—		142,575
	$	1,957,785	$	168,114	$	1,632,231	$	157,440
Liabilities:
Equity securities sold but not yet purchased, market	$	87	$	87	$	—	$	—
Fixed maturity securities sold but not yet purchased, market		54,420		—		54,420		—
Securities sold under agreements to repurchase, at contract value		200,915		—		200,915		—
Life settlement contract profit commission		12,050		—		—		12,050
Derivatives		3,595		—		—		3,595
	$	271,067	$	87	$	255,335	$	15,645

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 2011 Form 10-K.

The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets and liabilities for the three months ended March 31, 2012 and 2011:

(Amounts in Thousands)	Balance as of December 31, 2011			Net income			Other comprehensive income			Purchases and issuances		Sales and settlements			Net transfers into (out of) Level 3		Balance as of March 31, 2012
Other investments	$	14,588		$	(3,949	)	$	4,535		$	70	$	(379	)	$	—	$	14,865
Life settlement contracts		131,387			7,961			—			3,227		—			—		142,575
Life settlement contract profit commission		(12,022	)		(28	)		—			—		—			—		(12,050	)
Derivatives		(3,508	)		—			(87	)		—		—			—		(3,595	)
Total	$	130.445		$	3,984		$	4,448		$	3,297	$	(379	)	$	—	$	141,795

(Amounts in Thousands)	Balance as of December 31, 2010			Net income			Other comprehensive income		Purchases and issuances		Sales and settlements			Net transfers into (out of) Level 3		Balance as of March 31, 2011
Other investments	$	21,514		$	661		$	498	$	80	$	(241	)	$	—	$	22,512
Life settlement contracts		22,155			24,120			—		17,411		—			—		63,686
Life settlement contract profit commission		(4,711	)		(878	)		—		—		—			—		(5,589	)
Total	$	38,958		$	23,903		$	498	$	17,491	$	(241	)	$	—	$	80,609

The Company had no transfers between levels during the three months ended March 31, 2012 and 2011.

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;

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.

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

Derivatives. The Company estimates fair value using information provided by the portfolio manager for interest rate swaps and credit default swaps and the counterparty for contracts for differences and classifies each as Level 3 hierarchy.

The fair value of life settlement contracts is based on information available to the Company at the end of the reporting period. The Company considers the following factors in its fair value estimates: cost at date of purchase, recent purchases and sales of similar investments, financial standing of the issuer, and changes in economic conditions affecting the issuer, maintenance cost, premiums, benefits, standard actuarially developed mortality tables and industry life expectancy reports. The fair value of a life insurance policy is estimated using present value calculations based on the data specific to each individual life insurance policy. The following summarizes data utilized in estimating the fair value of the portfolio of life insurance policies for the three months ended March 31, 2012 and December 31, 2011:

	March 31, 2012			December 31, 2011
Average age of insured		77			77
Average life expectancy, months ⁽¹⁾		155			155
Average face amount per policy	$	6,635,000		$	6,703,000
Fair value discount rate		7.5	%		7.5	%

⁽¹⁾

Mortality rates: standard life expectancy as adjusted for insured’s specific circumstances

These assumptions are, by their nature, inherently uncertain and the effect of changes in estimates may be significant. The fair value measurements used in estimating the present value calculation are derived from valuation techniques generally used in the industry that include inputs for the asset that are not based on observable market data. The extent to which the fair value could reasonable vary in the near term has been quantified by evaluating the effect of changes in significant underlying assumptions used to estimate the fair value amount. If the life expectancies were increased or decreased by 4 months and the discount factors were increased or decreased by 1% while all other variables are held constant, the carrying value of the investment in life insurance policies would increase or (decrease) by the unaudited amounts summarized below for the three months ended March 31, 2012 and December 31, 2011:

	Change in life expectancy
	Plus 4 Months			Minus 4 Months
Investment in life policies:
March 31, 2012	$	(21,335	)	$	23, 702
December 31, 2011	$	(18,778	)	$	20,785

	Change in discount rate
	Plus 1%			Minus 1%
Investment in life policies:
March 31, 2012	$	(15,266	)	$	17,495
December 31, 2011	$	(13,802	)	$	15,804

Investment in Life Settlements

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. During 2010, the Company formed Tiger Capital LLC (“Tiger”) with a subsidiary of ACAC for the purposes of acquiring certain life settlement contracts. In 2011, the Company formed AMT Capital Alpha, LLC (“AMT Alpha”) with a subsidiary of ACAC and AMT Capital Holdings, S.A. (“AMTCH”) with ACP Re, Ltd., an entity controlled by Michael Karfunkel, for the purposes of acquiring additional life settlement contracts. The Company has a fifty percent ownership interest in each of Tiger, AMT Alpha and AMTCH (collectively, the “LSC entities”). The LSC entities may also acquire premium finance loans made in connection with the borrowers’ purchase of life insurance policies that are secured by the policies, which are in default at the time of purchase. The LSC entities acquire the underlying policies through the borrowers’ voluntary surrender of the policy in satisfaction of the loan or foreclosure. A third party serves as the administrator of the Tiger life settlement contract portfolio, for which it receives an annual fee. Under the terms of an agreement for Tiger, the third party administrator is eligible to receive a percentage of profits after certain time and performance thresholds have been met. The Company provides for certain actuarial and finance functions related to the LSC entities. Additionally, in conjunction with the Company’s 21.25% ownership percentage of ACAC, the Company ultimately receives 60.625% of the profits and losses of Tiger and AMT Alpha. As such, in accordance with ASC 810-10, Consolidation, we have been deemed the primary beneficiary and, therefore, consolidate the LSC entities.

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.

Total capital contributions of approximately $9,855 and $17,000 were made to the LSC entities during the three months ended March 31, 2012 and 2011, respectively, for which the Company contributed its fifty percent ownership share of approximately $4,927 and $8,600 in those same periods. The Company’s investments in life settlements and cash value loans were approximately $145,700 and $136,800 as of March 31, 2012 and December 31, 2011, respectively and are included in Prepaid expenses and other assets on the Consolidated Balance Sheet. The Company recorded other income for the three months ended March 31, 2012 and 2011 of approximately $90 and $18,886, respectively, related to the life settlement contracts.

In addition to the 241 policies disclosed in the table below as of March 31, 2012, Tiger owned 22 premium finance loans as of the three months ended March 31, 2012, which were secured by life insurance policies and were carried at a value of $3,096. As of March 31, 2012, the face value amount of the related 241 life insurance policies and 22 premium finance loans were approximately $1,543,000 and $131,000 respectively. All of the premium finance loans are in default and Tiger is enforcing its rights in the collateral. Upon the voluntary surrender of the underlying life insurance policy in satisfaction of the loan or foreclosure, Tiger will become the owner of and beneficiary under the underlying life insurance policy and will have the option to continue to make premium payments on the policies or allow the policies to lapse. If a policyholder wishes to cure his or her default and repay the loan, Tiger will be repaid the total amount due under the premium finance loans, including all premium payments made by Tiger to maintain the policy in force since its acquisition of the loan.

The following table describes the Company’s investment in life settlements as of March 31, 2012:

(Amounts in Thousands, except Life Settlement Contracts) Expected Maturity Term in Years	Number of Life Settlement Contracts		Fair Value		Face Value
0-1		—		—		—
1-2		—		—		—
2-3		1		6,684		10,000
3-4		1		2,789		5,000
4-5		2		9,723		20,000
Thereafter		237	$	123,379	$	1,508,013
Total		241	$	142,575	$	1,543,013

Premiums to be paid for each of the five succeeding fiscal years to keep the life insurance policies in force as of March 31, 2012, are as follows:

(Amounts in Thousands)	Premiums Due on Life Settlement Contracts		Premiums Due on Premium Finance Loans		Total
2012	$	23,322	$	1,296	$	24,618
2013		25,043		1,193		26,236
2014		27,203		1,440		28,643
2015		28,782		1,653		30,435
2016		46,420		2,413		48,833
Thereafter		506,151		48,334		554,485
Total	$	656,921	$	56,329	$	713,250

Debt

The Company’s borrowings consisted of the following at March 31, 2012 and December 31, 2011:

(Amounts in Thousands)	2012		2011
Revolving credit facility	$	—	$	—
Subordinated debentures		123,714		123,714
Convertible senior notes		159,113		138,506
Secured loan agreements		9,778		10,018
Promissory notes		9,945		7,362
	$	302,550	$	279,600

Aggregate scheduled maturities of the Company’s borrowings at March 31, 2012 are:

(Amounts in Thousands)
2012	$	10,682	⁽¹⁾
2013		1,021
2014		1,068
2015		1,116
2016		1,167
Thereafter		287,496	⁽²⁾

⁽¹⁾

Amount reflected in balance sheet for promissory notes is net of unamortized original issue discount of $55 for one of the notes.

⁽²⁾

Amount reflected in balance sheet for convertible senior notes is net of unamortized original issue discount of $40,887.

Revolving Credit Agreement

On January 28, 2011, the Company entered into a three-year, $150,000 credit agreement (the “Credit Agreement”), among JPMorgan Chase Bank, N.A., as Administrative Agent, The Bank of Nova Scotia, as Syndication Agent, SunTrust Bank, as Documentation Agent, and the various lending institutions party thereto. The credit facility is a revolving credit facility with a letter of credit sublimit of $50,000 and an expansion feature not to exceed $50,000. The Credit Agreement contains certain restrictive covenants customary for facilities of this type (subject to negotiated exceptions and baskets), including restrictions on indebtedness, liens, acquisitions and investments, restricted payments and dispositions. There are also financial covenants that require the Company to maintain a minimum consolidated net worth, a maximum consolidated leverage ratio, a minimum fixed charge coverage ratio, a minimum risk-based capital and a minimum statutory surplus. The Company was in compliance with all covenants as of March 31, 2012.

As of March 31, 2012, the Company had no outstanding borrowings under this Credit Agreement. The Company had outstanding letters of credit in place under this Credit Agreement at March 31, 2012 for $49,371, which reduced the availability for letters of credit to $629 as of March 31, 2012 and the availability under the facility to $100,629 as of March 31, 2012.

Borrowings under the Credit Agreement bear interest at (x) the greatest of (a) the Administrative Agent’s prime rate, (b) the federal funds effective rate plus 0.5 percent or (c) the adjusted LIBO rate for a one month interest period on such day plus 1 percent, plus (y) a margin that is adjusted on the basis of the Company’s consolidated leverage ratio. Eurodollar borrowings under the Credit Agreement will bear interest at the adjusted LIBO rate for the interest period in effect plus a margin that is adjusted on the basis of the Company’s consolidated leverage ratio. The interest rate on the credit facility as of March 31, 2012 and 2011 was 2.50%. The Company recorded interest expense of approximately $510 and $395 for the three months ended March 31, 2012 and 2011, respectively, under the Credit Agreement.

Fees payable by the Company under the Credit Agreement include a letter of credit participation fee (which is the margin applicable to Eurodollar borrowings and was 2.25% at March 31, 2012), a letter of credit fronting fee with respect to each letter of credit (.125%) and a commitment fee on the available commitments of the lenders (a range of .35% to .45% based on the Company’s consolidated leverage ratio and was .40% at March 31, 2012).

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 March 31, 2012 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 Company recorded $2,191 and $2,552 of interest expense for the three months ended March 31, 2012 and 2011, respectively, related to these trust preferred securities.

The table below summarizes the Company’s trust preferred securities as of March 31, 2012:

Aggregate

Liquidation

Aggregate

Per

Amount of

Liquidation

Aggregate

Annum

(Amounts in Thousands)

Trust

Amount of

Principal

Stated

Interest

Preferred

Common

Amount

Maturity

Rate of

Name of Trust

Securities

of Notes

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

3.774

⁽²⁾

AmTrust Capital Financing Trust IV

40,000

1,238

41,238

3/15/2037

3.474

⁽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 is LIBOR plus 3.30%.
	⁽³⁾	The interest rate changed from 7.93% to LIBOR plus 3.00% on March 15, 2012.

The Company entered into two interest rate swap agreements related to these junior subordinated debentures, which effectively convert the interest rate on the trust preferred securities from a variable rate to a fixed rate. Each agreement is for a period of five years and commenced on September 15, 2011 for tranche III and March 15, 2012 for tranche IV.

Convertible Senior Notes

In December 2011, the Company issued $175,000 aggregate principal amount of its 5.5% convertible senior notes due 2021 (the “Notes”) to certain initial purchasers in a private placement. In January 2012, the Company issued an additional $25,000 of the Notes to cover the initial purchasers’ overallotment option. The Notes will bear interest at a rate equal to 5.5% per year, payable semiannually in arrears on June 15^th and December 15^th of each year, beginning on June 15, 2012.

The Notes will mature on December 15, 2021 (the “Maturity Date”), unless earlier purchased by the Company or converted into shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”). Prior to September 15, 2021, the Notes will be convertible only upon satisfaction of certain conditions, and thereafter, at any time prior to the close of business on the second scheduled trading day immediately preceding the Maturity Date. The conversion rate will initially equal 31.4218 shares of Common Stock per $1,000 principal amount of Notes, which corresponds to an initial conversion price of approximately $31.83 per share of Common Stock, representing a conversion premium of 25.0% over $25.46 per share, which was the last reported sale price of the Common Stock on the NASDAQ on December 15, 2011. The conversion rate will be subject to adjustment upon the occurrence of certain events as set forth in the indenture governing the notes. Upon conversion of the Notes, the Company will, at its election, pay or deliver, as the case may be, cash, shares of Common Stock, or a combination of cash and shares of Common Stock.

Upon the occurrence of a fundamental change (as defined in the indenture governing the notes) involving the Company, holders of the Notes will have the right to require the Company to repurchase their Notes for cash, in whole or in part, at 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date.

The Company separately allocated the proceeds for the issuance of the Notes to a liability component and an equity component, which is the embedded conversion option. The equity component was reported as an adjustment to paid-in-capital, net of tax, and is reflected as an original issue discount (“OID”). The OID of $41,679 and deferred origination costs relating to the liability component of $4,750 will be amortized into interest expense over the term of the loan of the Notes. After considering the contractual interest payments and amortization of the original discount, the Notes effective interest rate was 8.57%. Transaction costs of $1,250 associated with the equity component were netted in paid-in-capital. Interest expense, including amortization of deferred origination costs, recognized on the Notes was $3,544 for the three months ended March 31, 2012.

The following table shows the amounts recorded for the Notes as of March 31, 2012 and December 31, 2011:

(Amounts in Thousands)	March 31, 2012			December 31, 2011
Liability component
Outstanding principal	$	200,000		$	175,000
Unamortized OID		(40,887	)		(36,494	)
Liability component		159,113			138,506
Equity component, net of tax		27,092			23,785

Secured Loan Agreement

During February 2011, the Company, through a wholly-owned subsidiary, entered into a seven-year secured loan agreement with Bank of America Leasing & Capital, LLC in the aggregate amount of $10,800 to finance the purchase of an aircraft. The loan bears interest at a fixed rate of 4.45%, requires monthly installment payments of approximately $117 commencing on March 25, 2011 and ending on February 25, 2018, and a balloon payment of $3,240 at the maturity date. The Company recorded interest expense of approximately $112 and $51 for the three months ended March 31, 2012 and 2011, respectively, related to this agreement. The loan is secured by an aircraft that the subsidiary acquired in February 2011.

The agreement contains certain covenants that are similar to the Company’s revolving credit facility. Additionally, subsequent to February 25, 2012, but prior to payment in full, if the outstanding balance of this loan exceeds 90% of the fair value of the aircraft, the Company is required to pay the lender the entire amount necessary to reduce the outstanding principal balance to be equal to or less than 90% of the fair value of the aircraft. The agreement allows the Company, under certain conditions, to repay the entire outstanding principal balance of this loan without penalty.

Promissory Notes

In connection with the stock and asset purchase agreement with a subsidiary of Unitrin, Inc. (now called Kemper Corporation), the Company, on June 1, 2008, issued a promissory note to Unitrin, Inc. in the amount of $30,000. The note is non-interest bearing and requires four annual principal payments of $7,500. The first three annual principal payments were paid between 2009 and 2011, and the remaining principal payment is due on June 1, 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 $83 and $163 of amortized discount on the note in its results of operations for the three months ended March 31, 2012 and 2011, respectively. The note’s carrying value was $7,445 and $7,362 as of March 31, 2012 and December 31, 2011, respectively.

In March 2012, 800 Superior LLC entered into a promissory note with ACP Re, Ltd in the amount of $2,500. 800 Superior LLC is an entity the Company and ACAC have a 50% ownership interest in. The note matures in July 2012 and bears interest at a rate of 2.00% per annum, which resulted in $3 of interest expense for the three months ended March 31, 2012. For more information regarding this promissory note, see Note 11. “Related Party Transactions.”

Comerica Letter of Credit Facility

In connection with the Majestic acquisition discussed in Note 12 “Acquisitions,” the Company, through one of its subsidiaries, entered into a secured letter of credit facility with Comerica Bank during the three months ended September 30, 2011. The Company utilizes this letter of credit facility to comply with the deposit requirements of the State of California and the U.S. Department of Labor as security for the Company’s obligations to workers’ compensation and federal Longshore and Harbor Workers’ Compensation Act policyholders. The credit limit is for $75,000 and was utilized for $49,801 as of March 31, 2012. The Company is required to pay a letter of credit participation fee for each letter of credit in the amount of 0.40%.

Other Letter of Credit

The Company, through certain subsidiaries, has an additional existing stand-by letter of credit as of March 31, 2012 in the amount of $1,311.

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, 2012 and 2011:

(Amounts in Thousands)	2012		2011
Policy acquisition expenses	$	85,192	$	46,817
Salaries and benefits		35,785		27,922
Other insurance general and administrative expense		3,048		6,495
	$	124,025	$	81,234

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 following table is a summary of the elements used in calculating basic and diluted earnings per share for the three months ended March 31, 2012 and 2011:

(Amounts in Thousands except per share)	2012		2011
Basic earnings per share:
Net income attributable to AmTrust Financial Services, Inc. shareholders	$	39,086	$	45,183
Less: Net income allocated to participating securities and redeemable non-controlling interest		58		25
Net income allocated to AmTrust Financial Services, Inc. common shareholders	$	39,028	$	45,158

Weighted average common shares outstanding – basic		60,375		59,603
Less: Weighted average participating shares outstanding		89		38
Weighted average common shares outstanding – basic		60,286		59,565
Net income per AmTrust Financial Services, Inc. common shares - basic	$	0.65	$	0.76

Diluted earnings per share:
Net income attributable to AmTrust Financial Services, Inc. shareholders	$	39,086	$	45,183
Less: Net income allocated to participating securities and redeemable non-controlling interest		58		25
Net income allocated to AmTrust Financial Services, Inc. common shareholders	$	39,028	$	45,158

Weighted average common shares outstanding – basic		60,286		59,565
Plus: Dilutive effect of stock options, other		2,033		1,167
Weighted average common shares outstanding – dilutive		62,319		60,732
Net income per AmTrust Financial Services, Inc. common shares - diluted	$	0.63	$	0.74

As of March 31, 2012, there were less than 100,000 anti-dilutive securities excluded from diluted earnings per share.

Share Based Compensation

The Company’s 2010 Omnibus Incentive Plan (the “Plan”) permits the Company to grant to its officers, employees and non-employee directors 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”), performance shares 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. As of March 31, 2012, approximately 5,225,000 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 Company grants restricted shares and RSUs with a grant date value equal to the closing stock price of the Company’s stock on the dates the shares or units are granted.

The following schedule shows all options granted, exercised, and expired under the Plan for the three months ended March 31, 2012 and 2011:

	2012					2011
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding at beginning of period		3,771,788		$	10.96		4,126,926		$	10.46
Granted		—			—		175,000			14.98
Exercised		(93,083	)		8.71		(75,736	)		10.93
Cancelled or terminated		(55,622	)		13.19		(24,065	)		12.41
Outstanding end of period		3,623,083		$	10.98		4,202,125		$	10.63

During the period ended March 31, 2012, no options were granted. During the period ended March 31, 2011, the weighted average grant date fair value of options granted was approximately $7.24.

A summary of the Company’s restricted stock and RSU activity for the three months ended March 31, 2012 and 2011 is shown below:

	2012					2011
	Shares or Units			Weighted Average Grant Date Fair Value		Shares or Units			Weighted Average Grant Date Fair Value
Non-vested at beginning of year		291,230		$	18.32		139,388		$	14.04
Granted		342,428			27.25		75,884			19.14
Vested		(22,097	)		18.45		(12,500	)		14.25
Forfeited		—			—		—			—
Non-vested at end of period		611,561		$	23.31		202,772		$	15.93

Compensation expense for all share-based payments under ASC 718-10-30 was approximately $1,181 and $1,459 for the three months ended March 31, 2012 and 2011, respectively.

As of March 31, 2012, there was approximately $13,757 of total unrecognized compensation cost related to non-vested share-based compensation arrangements.

10.

Income Taxes

Income tax expense for the three months ended March 31, 2012 and 2011 was $11,177 and $9,037, respectively. The following table is a reconciliation of the Company’s statutory income tax expense to its effective tax rate for the three months ended March 31, 2012 and 2011:

(Amounts in Thousands)	2012			2011
Income before equity in earnings (loss) of unconsolidated subsidiaries	$	48,033		$	60,540
Tax at federal statutory rate of 35%	$	16,812		$	21,189
Tax effects resulting from:
Net income of non-includible foreign subsidiaries		(4,568	)		(7,643	)
Other, net		(1,067	)		(4,509	)
		11,177			9,037
Effective tax rate		23.3	%		14.9	%

The Company’s management believes that it will realize the benefits of its deferred tax assets, which is included as a component of the Company’s net deferred tax liability, 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, 2007 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 March 31, 2012, the Company does not have any accrued interest and penalties related to unrecognized tax benefits in accordance with FASB ASC 740-10.

The earnings of certain of the Company’s foreign subsidiaries have been indefinitely reinvested in foreign operations. Therefore, no provision has been made for any U.S. taxes or foreign withholding taxes that may be applicable upon any repatriation or sale. The determination of any unrecognized deferred tax liability for temporary differences related to investments in certain of the Company’s foreign subsidiaries is not practicable. As of March 31, 2012 and December 31, 2011, the financial reporting basis in excess of the tax basis for which no deferred taxes have been recognized was approximately $235,900 and $223,300, respectively.

11.

Related Party Transactions

Maiden

The Company has various reinsurance and service agreements with Maiden Holdings, Ltd. (“Maiden”). 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 March 31, 2012, Michael Karfunkel owns or controls approximately 13.8% 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 5.1% 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. The following section describes the agreements in place between the Company and its subsidiaries and Maiden and its subsidiaries.

Reinsurance Agreements with Maiden Holdings, Ltd.

In 2007, the Company and Maiden entered into a master agreement, as amended, by which the parties caused the Company’s Bermuda subsidiary, AmTrust International Insurance, Ltd. (“AII”) and Maiden Insurance to enter 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 the Company’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 the Company’s U.K. insurance subsidiary, AmTrust Europe Ltd., net of commissions) and 40% of losses excluding certain specialty risk programs that the Company commenced writing after the effective date, including the Company’s European medical liability business discussed below, and risks, other than workers’ compensation risks and certain business written by the Company’s Irish subsidiary, AmTrust International Underwriters Limited (“AIU”), for which the AmTrust Ceding Insurers’ net retention exceeds $5,000 (“Covered Business”).

The Maiden Quota Share, which had an initial term of three years, was renewed through June 30, 2014 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 days’ 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 Maiden Quota Share, as amended, further provides that AII receives a ceding commission based on a percentage of ceded written premiums with respect to all Covered Business. Commencing January 1, 2012, the ceding commission with respect to all Covered Business other than the retail commercial package business is adjusted on a quarterly basis to (a) 30% of ceded premium, if the Specialty Risk and Extended Warranty subject premium, excluding ceded premium related to our medical liability business discussed below, is greater than or equal to 42% of the total subject premium, (b) 30.5% of ceded premium, if the Specialty Risk and Extended Warranty subject premium is less than 42% but greater than or equal to 38%, or (c) 31% of ceded premium, if the Specialty Risk and Extended Warranty subject premium is less than 38% of the total subject premium. The ceding commission for the retail commercial package business is 34.375% of ceded premium. From April 1, 2011 until December 31, 2011, AII received a ceding commission of 30% of ceded written premium with respect to all Covered Business other than the retail commercial package business, for which the ceding commission was 34.375%. Prior to April 1, 2011, AII received a ceding commission of 31% of ceded premiums with respect to all Covered Business other than the retail commercial package business, for which the ceding commission was 34.375%.

Effective April 1, 2011, the Company, through its subsidiaries AEL and AIU, entered into a reinsurance agreement with Maiden Insurance by which the Company cedes to Maiden Insurance 40% of its European medical liability business, including business in force at April 1, 2011. The quota share has an initial term of one year, automatically renews for one-year terms and can be terminated by either party on four months’ prior written notice. Maiden Insurance pays the Company a 5% ceding commission, and the Company will earn a profit commission of 50% of the amount by which the ceded loss ratio is lower than 65%.

Effective September 1, 2010, the Company, through its subsidiary, Security National Insurance Company (“SNIC”), entered into a reinsurance agreement with Maiden Reinsurance Company and an unrelated third party. Under the agreement, which had an initial term of one year and has been extended to August 31, 2012, SNIC cedes 80% of the gross liabilities produced under the Southern General Agency program to Maiden Reinsurance Company and 20% of the gross liabilities produced to the unrelated third party. SNIC receives a five percent commission on ceded written premiums.

The following is the effect on the Company’s results of operations for the three months ended March 31, 2012 and 2011 related to Maiden Reinsurance agreements:

(Amounts in Thousands)	2012			2011
Results of operations:
Premium written – ceded	$	(190,901	)	$	(126,722	)
Change in unearned premium – ceded		24,583			12,786
Earned premium – ceded	$	(166,318	)	$	(113,936	)

Ceding commission on premium written	$	54,411		$	39,725
Ceding commission – deferred		(8,137	)		(3,916	)
Ceding commission – earned	$	46,274		$	35,809

Incurred loss and loss adjustment expense – ceded	$	122,810		$	82,107
Interest expense on collateral loan		628			486

Fronting Arrangement with Maiden Specialty Insurance Company

Effective September 1, 2010, the Company, through its subsidiary Technology Insurance Company, Inc. (“TIC”), entered into a quota share reinsurance agreement with Maiden Specialty Insurance Company (“Maiden Specialty”) by which TIC assumes a portion (generally 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 enables the Company to write business on a surplus lines basis throughout the United States in states in which the Company is unauthorized to write such business through its own insurance subsidiaries. Currently, the Company is utilizing the Surplus Lines Facility for two programs 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 has surplus lines authority for two of its insurance company subsidiaries, which has significantly decreased the need for the Surplus Lines Facility. As a result of this agreement, we assumed approximately $404 of written premium for which we earned approximately $3,400 and incurred losses of approximately $2,100 for the three months ended March 31, 2012.

Note Payable to Maiden – Collateral for Proportionate Share of Reinsurance Obligations

In conjunction with the Maiden Quota Share, as described above, AII entered into a loan agreement with Maiden Insurance during the fourth quarter of 2007, whereby Maiden Insurance loaned to AII the amount equal to its quota share of the obligations of the AmTrust Ceding Insurers that AII was then obligated to secure. The loan agreement provides for interest at a rate of LIBOR plus 90 basis points and is payable on a quarterly basis. Advances under the loan are secured by a promissory note and totaled $167,975 as of March 31, 2012. The Company recorded $628 and $486 of interest expense during the three months ended March 31, 2012 and 2011, respectively. 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, 2012 was approximately $639,242. Maiden retains ownership of the collateral in the trust account.

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 Maiden Quota Share for a fee equal to 1.25% of reinsured premium. The Company recorded $2,194 and $1,584 of brokerage commission (recorded as a component of service and fee income) during the three months ended March 31, 2012 and 2011, respectively.

Asset Management Agreement

Effective July 1, 2007, the Company, through a subsidiary, entered into an asset management agreement with Maiden, pursuant to which the Company provides investment management services to Maiden and its affiliates. As of March 31, 2012, the Company managed approximately $2,200,000 of assets related to this agreement. The investment management services fee is 0.20% per annum for periods in which average invested assets are $1,000,000 or less and 0.15% per annum for periods in which the average invested assets exceeds $1,000,000. As a result of this agreement, the Company earned approximately $830 and $725 of investment management fees (recorded as a component of service and fee income) for the three months ended March 31, 2012 and 2011, respectively.

Senior Notes

In June 2011, the Company, through a subsidiary, participated as a purchaser in a registered public offering by Maiden Holdings North America, Ltd., a subsidiary of Maiden, for $12,500 of an aggregate $107,500 principal amount of 8.25% Senior Notes due 2041 (the “Notes”) that are fully and unconditionally guaranteed by Maiden. The Notes are redeemable for cash, in whole or in part, on or after June 15, 2016, at 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to, but not including, the redemption date. The fair value of the notes as of March 31, 2012 was 12,775.

American Capital Acquisition Corporation

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. and Motor Insurance Corporation (“MIC”, together with GMAC Insurance Holdings, Inc., “GMACI”), GMACI’s U.S. consumer property and casualty insurance business (the “GMACI Business”), a writer of automobile coverages through independent agents in the United States. Its coverages include standard/preferred auto, RVs, non-standard auto and commercial auto. The acquisition included ten statutory insurance companies (the “GMACI Insurers”). 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 initially required by ACAC, 53,054 shares of Series A Preferred Stock, which provides an 8% cumulative dividend, is non-redeemable and is 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).

The Company, the Trust and Michael Karfunkel, individually, each shall be required to make its or his proportionate share of deferred payments payable by ACAC to GMACI pursuant to the GMACI Securities Purchase Agreement, which are payable, annually on March 1 through March 1, 2013, to the extent that ACAC is unable to otherwise provide for such payments. The Company’s proportionate share of such deferred payments as of March 31, 2012 will not exceed $7,500. In addition, in connection with the Company’s investment, ACAC will grant the Company a right of first refusal to purchase or to reinsure commercial auto insurance business acquired from GMACI.

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 $2,364 and $1,819 of income during the three months ended March 31, 2012 and 2011, respectively, related to its equity investment in ACAC.

Personal Lines Quota Share

The Company, effective March 1, 2010, reinsures 10% of the net premiums of the GMACI Business, pursuant to a 50% quota share reinsurance agreement (“Personal Lines Quota Share”) among Integon National Insurance Company, lead insurance company on behalf of the GMACI Insurers, as cedents, and the Company, ACP Re, Ltd., a Bermuda reinsurer that is a wholly-owned indirect subsidiary of the Trust, and Maiden Insurance Company, Ltd., as reinsurers. The Personal Lines Quota Share provides that the reinsurers, severally, in accordance with their participation percentages, receive 50% of the net premium of the GMACI Insurers and assume 50% of the related net losses. The Company has a 20% participation in the Personal Lines Quota Share, by which it receives 10% of the net premiums of the personal lines business and assumes 10% of the related net losses. The Personal Lines Quota Share has an initial term of three years and will 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. In addition, either party is entitled to terminate on 60 days’ written notice or less upon the occurrence of certain early termination events, which include a default in payment, insolvency, change in control of the Company or the GMACI Insurers, run-off, or a reduction of 50% or more of the shareholders’ equity. The GMACI 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 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 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. The Personal Lines Quota Share is subject to a premium cap that limits the premium that could be ceded by the GMACI Insurers to TIC to $133,100 during calendar year 2012 to the extent TIC was to determine, in good faith, that it could not assume additional premium. The premium cap increases by 10% per annum thereafter. As a result of this agreement, the Company assumed $30,609 and $25,587 of business from the GMACI Insurers during the three months ended March 31, 2012 and 2011, respectively.

Information Technology Service Agreement

The Company provides ACAC and its affiliates information technology development services in connection with the development and licensing of a policy management system which is currently 1.25% of gross written premium of ACAC and its affiliates plus the Company’s costs for development and support services. The Company recorded approximately $2,462 and $731 of fee income for the three months ended March 31, 2012 and 2011, respectively, related to this agreement.

Asset Management Agreement

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. The Company currently manages approximately $700,000 of assets as of March 31, 2012 related to this agreement. As a result of this agreement, the Company earned approximately $373 and $399 of investment management fees for the three months ended March 31, 2012 and 2011, respectively.

As a result of the above service agreements with ACAC, the Company recorded fees totaling approximately $2,835 and $1,130 for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, the outstanding balance payable by ACAC related to these service fees and reimbursable costs was approximately $3,108.

800 Superior

In August 2011, the Company formed 800 Superior, LLC with a subsidiary of ACAC for the purposes of acquiring an office building in Cleveland, Ohio. The Company and ACAC each have a fifty percent ownership interest in 800 Superior, LLC. The cost of the building was approximately $7,500. The Company has been appointed managing member of the LLC. 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 the LLC. As such, in accordance with ASC 810-10, Consolidation, the Company has been deemed the primary beneficiary and, therefore, consolidates this entity. In March 2012, 800 Superior LLC entered into a promissory note with ACP Re, Ltd in the amount of $2,500. The proceeds from the note will be used for leasehold improvements on the office building. The note matures in July 2012 and bears interest at a rate of 2.00% per annum, which resulted in $3 of interest expense for the three months ended March 31, 2012.

Lease Agreements

In January 2008, the Company entered into an amended agreement for 14,807 square feet of office space at 59 Maiden Lane in New York, New York from 59 Maiden Lane Associates, LLC, an entity that is wholly-owned by Michael Karfunkel and George Karfunkel. The Company paid approximately $182 and $179 for the lease for the three months ended March 31, 2012 and 2011, respectively.

In January 2011, the Company entered into an amended agreement to lease 9,030 square feet of office space in Chicago, Illinois from 33 West Monroe Associates, LLC, an entity that is wholly-owned by entities controlled by Michael Karfunkel and George Karfunkel. The Company paid approximately $67 and $47 for the three months ended March 31, 2012 and 2011, respectively.

Management Agreement with ACP Re, Ltd.

The Company provides investment management services and accounting and administrative services to ACP Re, Ltd. for a monthly fee of $10 and (i) a quarterly rate of 0.05% of the average value of ACP Re, Ltd.’s invested assets for a monthly fee of 10,000 and (i) a quarterly rate of 0.05% of the average value of ACP Re, Ltd.’s invested assets for the preceding calendar quarter if the average value of such assets for the quarter was $1,000,000 or less, or (ii) a quarterly rate of 0.0375% of the average value of ACP Re, Ltd.’s invested assets for the preceding calendar quarter if the average value of such assets for the quarter was greater than $1,000,000. The Company currently manages approximately $100,000 of assets as of March 31, 2012. The Company entered into this management agreement in March 2012, and it covers all services rendered prior to the execution of the agreement. The Company recorded approximately $233 for these services for the three months ended March 31, 2012.

Use of the Company Aircraft

The Company’s wholly-owned subsidiary, AmTrust Underwriters, Inc. (“AUI”), is a party to an aircraft time share agreement with each of Maiden and ACAC. The agreements provide for payment to AUI for usage of its company-owned aircraft and covers actual expenses incurred and permissible under federal aviation regulations, including travel and lodging expenses of the crew, in-flight catering, flight planning and weather contract services, ground transportation, fuel, landing and hanger fees, airport taxes, among others. AUI does not charge Maiden or ACAC for the fixed costs that would be incurred in any event to operate the aircraft (for example, aircraft purchase costs, insurance and flight crew salaries). During the three months ended March 31, 2012, Maiden and ACAC paid AUI $20 and $43, respectively, for the use of AUI’s aircraft under these agreements.

In addition, for personal travel, Mr. Zyskind, the Company’s President and Chief Executive Officer and Michael Karfunkel, the Chairman of the Board, each entered into an aircraft reimbursement agreement with AUI and, since entering into such agreement, has fully reimbursed AUI for the incremental cost billed by AUI for their personal use of AUI’s aircraft. During the three months ended March 31, 2012 Mr. Zyskind reimbursed the Company $36. Michael Karfunkel did not use the aircraft for personal use during the three months ended March 31, 2012.

12.

Acquisitions

BTIS

In December 2011, the Company acquired the California-based Builders & Tradesmen’s Insurance Services, Inc. (“BTIS”), an insurance wholesaler and general agent specializing in insurance policies and bonds for small artisan contractors. The purchase agreement required the Company to make an initial payment of $5,000 on the acquisition date and pay future incentives measured primarily on the overall profitability of the business for a period of approximately four years. In accordance with FASB ASC 805, Business Combinations, the Company recorded a preliminary purchase price of approximately $47,000, which included goodwill and intangibles of approximately $46,000. The intangible assets included renewal rights, distribution networks and trademarks. The trademarks were determined to have an indefinite life while the renewal rights and distribution networks were determined to have lives of 11 and 17 years, respectively. The Company expects to complete its purchase price accounting during the three months ended June 30, 2012. BTIS’s revenues are included within the Company’s Small Business segment as a component of service and fee income. The Company recorded approximately $7,000 of fee revenue as a result of this acquisition during the three months ended March 31, 2012.

Majestic

The Company, through certain of its subsidiaries and the Insurance Commissioner of the State of California acting solely in the capacity as the statutory conservator (the “Conservator”) of Majestic Insurance Company (“Majestic”), entered into a Rehabilitation Agreement that set forth a plan for the rehabilitation of Majestic (the “Rehabilitation Plan”) by which the Company acquired the business of Majestic through a Renewal Rights and Asset Purchase Agreement (the “Purchase Agreement”), and a Loss Portfolio Transfer and Quota Share Reinsurance Agreement (the “Reinsurance Agreement”). On July 1, 2011, the Company, through one of its subsidiaries, entered into the Reinsurance Agreement, which was effective June 1, 2011, and assumed all of Majestic’s liability for losses and loss adjustment expenses under workers’ compensation insurance policies of approximately $331,660, without any aggregate limit, and certain contracts related to Majestic’s workers” compensation business, including leases for Majestic’s California office space. In addition, the Company assumed 100% of the unearned premium reserve of approximately $25,997 on all in-force Majestic policies. In connection with this transaction, the Company received approximately $224,532 of cash and investments, which included $26,000 for a reserve deficiency and also included the assignment of Majestic’s reinsurance recoverables of approximately $51,715. The Reinsurance Agreement also contains a profit sharing provision whereby the Company pays Majestic up to 3% of net earned premium related to current Majestic policies that are renewed by the Company in the three year period commencing on the closing date should the loss ratio on such policies for the three year period be 65% or less. The insurance premiums, which are included in the Company’s Small Commercial Business segment, have been recorded since the acquisition date and were approximately $19,000 for the year three months ended March 31, 2012.

As a result of entering into the Purchase Agreement, the Company, in accordance with FASB ASC 805, Business Combinations, recorded $3,870 of intangible assets related to distribution networks and trademarks. The distribution networks have a life of 13 years and the trademarks have a life of two years. Additionally, the Company recorded a liability for approximately $390 related to an unfavorable lease assumed in the transaction and a liability for approximately $815 related to the above-mentioned profit sharing provision. In accordance with FASB ASC 944-805, Business Combinations, the Company adjusted to fair value Majestic’s loss and LAE reserves by taking the acquired loss reserves recorded and discounting them based on expected reserve payout patterns using a current risk-free rate of interest. This risk-free interest rate was then adjusted based on different cash flow scenarios that use different payout and ultimate reserve assumptions deemed to be reasonably possible based upon the inherent uncertainties present in determining the amount and timing of payment of such reserves. The difference between the acquired loss and LAE reserves and the Company’s best estimate of the fair value of such reserves at acquisition date is amortized ratably over the payout period of the acquired loss and LAE reserves. The Company determined the fair value of the loss reserves to be $328,905. Accordingly, the amortization will be recorded as an expense on the Company’s income statement until fully amortized.

13.

Shareholder Equity

The following table summarizes the ownership components of total equity for the three months ended March 31, 2012:

(Amounts in Thousands)	AmTrust			Non-Controlling Interests		Total
Beginning Balance, January 1, 2012	$	890,563		$	69,098	$	959,661
Net income		39,086			134		39,220
Unrealized holding gains and reclassification		28,315			—		28,315
Foreign currency translation		4,197			—		4,197
Unrealized loss on interest rate swap		(57	)		—		(57	)
Equity component of convertible senior notes, net of income tax and issue costs		3,306			—		3,306
Capital contribution		—			4,928		4,928
Dividends		(5,470	)		—		(5,470	)
Share exercises and compensation, other		2,102			—		2,102
Ending Balance, March 31, 2012	$	962,042		$	74,160	$	1,036,202

There were no distributions to non-controlling interests or changes in ownership percentages during the three months ended March 31, 2012.

14.

Contingent Liabilities

Litigation

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 will not have a material adverse effect on the Company’s financial position or results of operations.

Vehicle service contract industry inquiry and related proceedings

As previously described in the Company’s Annual Report on Form 10-K, the Company’s subsidiary Warrantech Corporation (“Warrantech”) is involved in a number of disputes that relate to U.S. Fidelis, a direct marketer of vehicle service contracts that filed a petition for Chapter 11 bankruptcy protection in February 2010 in the United States Bankruptcy Court for the Eastern District of Missouri (the “Bankruptcy Proceeding”).

On April 27, 2012, the parties to the various disputes reached agreement on a comprehensive settlement, the terms of which are incorporated into the plan of liquidation for U.S. Fidelis, which was filed in the Bankruptcy Proceeding on May 1, 2012 (the “Plan”). In connection with the Plan, Warrantech, the Unsecured Creditors Committee of U.S. Fidelis, Mepco Finance Corporation (“Mepco”), and the States of Missouri, Texas, Washington and Ohio, by and through the offices of their respective Attorneys General entered into a plan support agreement (the “PSA”). Pursuant to the PSA, provided that the Plan has not been modified in such a manner that would materially adversely affect the rights, recoveries, or obligations of the parties and subject to an opt-out right in favor of Warrantech and Mepco, each of the parties agreed to support the Plan throughout the Bankruptcy Proceeding and to cooperate to the fullest extent in obtaining confirmation of the Plan by no later than July 30, 2012. On the effective date of the Plan, Warrantech will become obligated to pay $4.8 million to Mepco, $1.4 million to the liquidating trustee and $1.1 million to the U.S. Fidelis Consumer Restitution Plan (as described in the Plan).

As part of the overall settlement, Warrantech also entered into assurances of voluntary compliance with the states of Ohio, Missouri, Texas and Washington (the “AVCs”) that do not become binding until the effective date of the Plan. The AVCs require Warrantech to adhere to certain compliance terms in connection with the marketing and sale of vehicle service contracts through authorized telemarketers, pay certain funds to consumers in connection with vehicle service contracts that were marketed and sold by U.S. Fidelis and administered by Warrantech and contribute the funds referenced above to the U.S. Fidelis Consumer Restitution Fund.

Investment in ACAC

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 $7,500.

15.

Segments

The Company currently operates four business segments, Small Commercial Business; Specialty Risk and Extended Warranty; Specialty Program and Personal Lines Reinsurance. The “Corporate & Other” segment represents the activities of the holding company as well as a portion of service and 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 deferred acquisition cost, reinsurance recoverable, goodwill, 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 Company’s shareholders with an understanding of the Company’s business and operating performance.

During the three months ended March 31, 2012, the Company derived over ten percent of gross premium in its Specialty Risk and Extended Warranty segment from one broker of approximately $35,000. During the three months ended March 31, 2012, the Company derived ten percent of gross premium in its Specialty Program segment from two individual programs for an aggregate of approximately $20,400.

The following tables summarize the results of operations of the business segments for the three months ended March 31, 2012 and 2011:

(Amounts in Thousands)	Small Commercial Business			Specialty Risk and Extended Warranty			Specialty Program			Personal Lines Reinsurance			Corporate and Other			Total
Three months ended March 31, 2012:
Gross written premium	$	232,351		$	234,089		$	104,638		$	30,609		$	—		$	601,687

Net written premium		118,890			141,161			69,117			30,609			—			359,777
Change in unearned premium		(26,562	)		(5,588	)		(9,456	)		(4,147	)		—			(45,753	)
Net earned premium		92,328			135,573			59,661			26,462			—			314,024

Ceding commission - primarily related party		17,132			17,194			11,948			—			—			46,274

Loss and loss adjustment expense		(59,224	)		(83,443	)		(40,194	)		(17,068	)		—			(199,929	)
Acquisition costs and other underwriting expenses		(42,930	)		(43,085	)		(29,939	)		(8,071	)		—			(124,025	)
		(102,154	)		(126,528	)		(70,133	)		(25,139	)		—			(323,954	)
Underwriting income		7,306			26,239			1,476			1,323			—			36,344

Service and fee income		15,435			18,218			9			6,876			—			40,538
Investment income and realized gain (loss)		5,493			5,041			2,333			503			—			13,370
Other expenses		(14,123	)		(14,035	)		(6,105	)		(1,376	)		—			(35,639	)
Interest expense		(2,810	)		(2,792	)		(1,215	)		(274	)		—			(7,091	)
Foreign currency gain		—			421			—			—			—			421
Gain on life settlement contracts		37			35			15			3			—			90
Provision for income taxes		(2,514	)		(7,347	)		773			(1,565	)		(524	)		(11,177	)
Equity in earnings of unconsolidated subsidiaries – related party		—			—			—			—			2,364			2,364
Non-controlling interest		(53	)		(53	)		(23	)		(5	)		—			(134	)
Net income attributable to AmTrust Financial Services, Inc.	$	8,771		$	25,727		$	(2,737	)	$	5,485		$	1,840		$	39,086

(Amounts in Thousands)	Small Commercial Business			Specialty Risk and Extended Warranty			Specialty Program			Personal Lines Reinsurance			Corporate and Other			Total
Three months ended March 31, 2011:
Gross written premium	$	140,716		$	227,748		$	49,976		$	25,587		$	—		$	444,027

Net written premium		77,651			104,547			26,234			25,587			—			234,019
Change in unearned premium		(15,790	)		(19,970	)		4,536			(2,457	)		—			(33,681	)
Net earned premium		61,861			84,577			30,770			23,130			—			200,338

Ceding commission - primarily related party		18,325			12,899			4,460			—			—			35,684

Loss and loss adjustment expense		(36,763	)		(57,424	)		(19,705	)		(14,804	)		—			(128,696	)
Acquisition costs and other underwriting expenses		(34,756	)		(26,648	)		(12,312	)		(7,518	)		—			(81,234	)
		(71,519	)		(84,072	)		(32,017	)		(22,322	)		—			(209,930	)

Underwriting income		8,667			13,404			3,213			808						26,092
Service and fee income		5,241			16,506			4			—			3,438			25,189
Investment income and realized gain (loss)		5,750			5,515			2,603			739			—			14,607
Other expenses		(7,312	)		(9,021	)		(2,431	)		(1,432	)		—			(20,196	)
Interest expense		(1,359	)		(1,677	)		(452	)		(266	)		—			(3,754	)
Foreign currency loss		—			(284	)		—			—			—			(284	)
Gain on life settlement contracts		6,837			8,436			2,273			1,340			—			18,886
Provision for income taxes		(2,661	)		(4,908	)		(778	)		(177	)		(513	)		(9,037	)
Equity in earnings of unconsolidated investment – related parties		—			—			—			—			1,819			1,819
Non-controlling interest		(2,947	)		(3,635	)		(980	)		(577	)		—			(8,139	)
Net income attributable to AmTrust Financial Services, Inc.	$	12,216		$	24,336		$	3,452		$	435		$	4,744		$	45,183

The following tables summarize long lived assets and total assets of the business segments as of March 31, 2012 and December 31, 2011:

(Amounts in Thousands)	Small Commercial Business		Specialty Risk and Extended Warranty		Specialty Program		Personal Lines Reinsurance		Corporate and other		Total
As of March 31, 2012:
Property and equipment, net	$	25,283	$	25,125	$	10,929	$	2,464	$	—	$	63,801
Goodwill and intangible assets		180,800		165,010		22,702		—		—		368,512
Total assets		2,523,163		2,462,815		957,172		152,238		—		6,095,388

As of December 31, 2011:
Property and equipment, net	$	17,767	$	30,811	$	10,762	$	2,213	$	—	$	61,553
Goodwill and intangible assets		123,976		167,782		22,858		—		—		314,616
Total assets		2,150,824		2,482,018		912,476		133,429		—		5,678,747

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 that are intended to be covered by the safe harbors created by The Private Securities Litigation Reform Act of 1995. 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 those relating to future growth of our business activities and availability of funds, and are based on current expectations that involve assumptions that 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 expressed or implied in these statements as a result of significant risks and uncertainties, including, but not limited to, non-receipt of expected payments from insureds or reinsurers, changes in interest rates, a downgrade in the financial strength ratings of our insurance subsidiaries, the effect of the performance of financial markets on our investment portfolio, our estimates of the fair value of our life settlement contracts, development of claims and the effect on loss reserves, accuracy in projecting loss reserves, the cost and availability of reinsurance coverage, the effects of emerging claim and coverage issues, changes in the demand for our products, successful integration of acquired businesses, the effect of general economic conditions, state and federal legislation, regulations and regulatory investigations into industry practices, risks associated with conducting business outside the United States, developments relating to existing agreements, disruptions to our business relationships with Maiden Holdings, Ltd., American Capital Acquisition Corporation, or third party agencies and warranty administrators, difficulties with technology or data security, 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 year ended December 31, 2011, 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 an 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 generally are underserved by the market. 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 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 GMACI personal lines business, pursuant to a quota share reinsurance agreement (“Personal Lines Quota Share”) with the GMACI personal lines insurance companies.

We transact business primarily through eleven insurance company subsidiaries:

Company	A.M. Best Rated	Coverage Type Offered	Coverage Market	Domiciled
Technology Insurance Company, Inc. (“TIC”)	A (Excellent)	Small Commercial Business, Specialty Program and Specialty Risk & Extended Warranty	United States	New Hampshire
Rochdale Insurance Company (“RIC”)	A (Excellent)	Small Commercial Business, Specialty Program and Specialty Risk & Extended Warranty	United States	New York
Wesco Insurance Company (“WIC”)	A (Excellent)	Small Commercial Business, Specialty Program and Specialty Risk & Extended Warranty	United States	Delaware
Associated Industries Insurance Company, Inc. (“AIIC”)	A (Excellent)	Workers’ Compensation	United States	Florida
Milwaukee Casualty Insurance Co. (“MCIC”)	A (Excellent)	Small Commercial Business	United States	Wisconsin
Security National Insurance Company (“SNIC”)	A (Excellent)	Small Commercial Business	United States	Texas
AmTrust Insurance Company of Kansas, Inc. (“AICK”)	A (Excellent)	Small Commercial Business	United States	Kansas
AmTrust Lloyd’s Insurance Company (“ALIC”)	A (Excellent)	Small Commercial Business	United States	Texas
AmTrust International Underwriters Limited (“AIU”)	A (Excellent)	Specialty Risk and Extended Warranty; Specialty Program	European Union and United States	Ireland
AmTrust Europe, Ltd. (“AEL”)	A (Excellent)	Specialty Risk and Extended Warranty	European Union	England
AmTrust International Insurance Ltd. (“AII”)	A (Excellent)	Reinsurance	United States and European Union	Bermuda

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 Program segments has not been significant. We believe that this is because we serve many small businesses in different geographic locations. In addition, we believe seasonality is 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 summary provides further explanation of the key measures that we use to evaluate our results:

Gross Written Premium. Gross written premium represents estimated premiums from each insurance policy that we write, including as part of an assigned risk 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. We earn insurance premiums 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, 2011 for an employer with a constant payroll during the term of the policy, we would earn half of the premiums in 2011 and the other half in 2012. We earn our specialty risk and extended warranty coverages over the estimated exposure time period. The terms vary depending on the risk and have an average duration of approximately 23 months, but range in duration from one month to 120 months.

Ceding Commission Revenues. Ceding commission is a commission we receive from ceding gross written premium to third party reinsurers. We earn commissions on reinsurance premiums ceded in a manner consistent with the recognition of the direct acquisition costs of the underlying insurance policies, generally on a pro-rata basis over the terms of the policies reinsured. In connection with the Maiden Quota Share, which is our primary source of ceding commission, the amount we receive is a blended rate based on a contractual formula contained in the individual reinsurance agreements, and the rate may not correlate specifically to the cost structure of our individual segments. As such, 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.

Service and Fee Income. We currently generate service and fee income from the following sources:

	·	Product warranty registration and service — Our Specialty Risk and Extended Warranty business generates fee revenue for product warranty registration and claims handling services provided to unaffiliated third parties.
	·	Servicing carrier — We act as a servicing carrier for workers’ compensation assigned risk plans in eight states. In addition, we also offer claims adjusting and loss control services for fees to unaffiliated third parties.
	·	Management services — We provide services to insurance consumers, traditional insurers and insurance producers by offering flexible and cost effective alternatives to traditional insurance tools in the form of various risk retention groups and captive management companies, as well as management of workers’ compensation and commercial property programs.
	·	Installment and reinstatement fees — We recognize fee income associated with the issuance of workers’ compensation policies for installment fees, in jurisdictions where it is permitted and approved, and reinstatement fees, which are fees charged to reinstate a policy after it has been cancelled for non-payment, in jurisdictions where it is permitted and approved.
	·	Broker services — We provide brokerage services to Maiden in connection with our reinsurance agreement for which we receive a fee.
	·	Asset management services — We currently manage the investment portfolios of Maiden, ACAC and ACP Re, Ltd. for which we receive a management fee.
	·	Information technology services — We provide information technology services to ACAC and its affiliates for a fee.

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. We report net realized gains and losses on our investments separately from our net investment income. Net realized gains occur when we sell our investment securities for more than their costs or amortized costs, as applicable. Net realized losses occur when we sell our investment securities for less than their costs or amortized costs, as applicable, or we write down the investment securities as a result of other-than-temporary impairment. We classify equity securities and our fixed maturity securities as available-for-sale. We report net unrealized gains (losses) on those securities classified as available-for-sale separately within accumulated other comprehensive income on our balance sheet.

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.

Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses consist of policy acquisition expenses, salaries and benefits and general and administrative expenses. These items are described below:

	·	Policy acquisition expenses comprise commissions directly attributable to those agents, wholesalers or brokers that produce premiums written on our behalf. In most instances, we pay commissions based on collected premium, which reduces our credit risk exposure associated with producers in case a policyholder does not pay a premium. We pay state and local taxes, licenses and fees, assessments and contributions to various state guaranty funds based on our premiums or losses in each state. Surcharges that we may be required to charge and collect from insureds in certain jurisdictions are recorded as accrued liabilities, rather than expense.
	·	Salaries and benefits expenses are those salaries and benefits expenses for employees that are directly involved in the origination, issuance and maintenance of policies, claims adjustment and accounting for insurance transactions. We classify salaries and benefits associated with employees that are involved in fee generating activities as other expenses.
	·	General and administrative expenses are comprised of other costs associated with our insurance activities, such as federal excise tax, postage, telephones and internet access charges, as well as legal and auditing fees and board and bureau charges.

Gain on Investment in Life Settlement Contracts. The gain on investment in life settlement contracts includes the gain on acquisition of life settlement contracts, the gain realized upon a mortality event and the change in fair value of the investments in life settlements as evaluated at the end of each reporting period. We determine fair value based upon the discounted cash flow of the anticipated death benefits, incorporating a number of factors, such as current life expectancy assumptions, expected premium payment obligations and cost assumptions, credit exposure to the insurance companies that issued the life insurance policies and the rate of return that a buyer would require on the policies. The gain realized upon mortality event is the difference between the death benefit received and the recorded fair value of that particular policy. We allocate gain on investment in life settlement contracts to our segments based on net written premium by segment.

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 revenue 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.

Return on Equity. We calculate return on equity 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 annualized average equity was 16.9% and 24.4% for the three months ended March 31, 2012 and 2011, respectively. In addition, we target a net combined ratio of 95% 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 88.5% and 86.9% for the three months ended March 31, 2012 and 2011, 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, 2011.

Results of Operations

Consolidated Results of Operations for the Three Months Ended March 31, 2012 and 2011 (Unaudited)

	Three Months Ended March 31,
	2012			2011
	(Amounts in Thousands)
Gross written premium	$	601,687		$	444,027

Net written premium	$	359,777		$	234,019
Change in unearned premium		(45,753	)		(33,681	)
Net earned premium		314,024			200,338
Ceding commission – primarily related party		46,274			35,684
Service and fee income (related parties $6,092; $3,439)		40,538			25,189
Net investment income		14,518			14,192
Net realized gain on investments		(1,148	)		415
Total revenues		414,206			275,818

Loss and loss adjustment expense		199,929			128,696
Acquisition costs and other underwriting expenses		124,025			81,234
Other		35,639			20,196
Total expenses		359,593			230,126
Income before other income (expense), income taxes and equity earnings (loss) of unconsolidated subsidiaries		54,613			45,692

Other income (expense):
Interest expense		(7,091	)		(3,754	)
Foreign currency (loss) gain		421			(284	)
Net gain on investment in life settlement contracts		90			18,886
Total other income (expense)		(6,580	)		14,848
Income before income taxes and equity in earnings (loss) of unconsolidated subsidiaries		48,033			60,540
Provision for income taxes		11,177			9,037
Income before equity in earnings (loss) of unconsolidated subsidiaries and minority interest		36,856			51,503
Equity in earnings of unconsolidated subsidiaries - related parties		2,364			1,819
Net income		39,220			53,322
Non-controlling interest		(134	)		(8,139	)
Net income attributable to AmTrust Financial Services, Inc.	$	39,086		$	45,183

Net realized gain (loss) on investments:
Total other-than-temporary impairment losses	$	—		$	—
Portion of loss recognized in other comprehensive income		—			—
Net impairment losses recognized in earnings		—			—
Other net realized gain on investments		(1,148	)		415
Net realized investment gain (loss)	$	(1,148	)	$	415

Key measures:
Net loss ratio		63.7	%		64.2	%
Net expense ratio		24.8	%		22.7	%
Net combined ratio		88.5	%		86.9	%

Gross Written Premium. Gross written premium increased $157.7 million, or 35.5%, to $601.7 million from $444.0 million for the three months ended March 31, 2012 and 2011, respectively. The increase of $157.7 million was primarily attributable to growth in our Small Commercial Business and Specialty Program segments. The increase in Small Commercial Business resulted primarily from increases in workers’ compensation policy counts, acquisitions of Majestic and BTIS and rate increases in some of our key states. The increase in Specialty Program resulted primarily from programs developed from new underwriting teams we hired in 2010 and 2011.

Net Written Premium. Net written premium increased $125.8 million, or 53.7%, to $359.8 million from $234.0 million for the three months ended March 31, 2012 and 2011, respectively. The increase by segment was: Small Commercial Business - $41.2 million, Specialty Risk and Extended Warranty - $36.7 million, Specialty Program – $42.9 million and Personal Lines - $5.0 million. Net written premium increased for the three months ended March 31, 2012 compared to the same period in 2011 due to the increase in gross written premium in 2012 compared to 2011, as well as the reduction in the percentage of our European medical liability business ceded to reinsurers from 80% to 40%, which became effective April 1, 2011.

Net Earned Premium. Net earned premium increased $113.7 million, or 56.7%, to $314.0 million from $200.3 million for the three months ended March 31, 2012 and 2011, respectively. The increase by segment was: Small Commercial Business — $30.5 million, Specialty Risk and Extended Warranty — $51.0 million, Specialty Program — $28.9 million, and Personal Lines — $3.3 million.

Ceding Commission. Ceding commission represents commission earned primarily through the Maiden Quota Share, whereby AmTrust receives a 30.5% or 34.375% ceding commission, depending on the business ceded, on ceded written premiums to Maiden. The ceding commission earned during the three months ended March 31, 2012 and 2011 was $46.3 million and $35.7 million, respectively. Ceding commission increased period over period as a result of increased premium writings. Additionally, effective April 1, 2011, we entered into a 40% quota share reinsurance agreement with Maiden covering our European medical liability business for which we receive a five percent ceding commission. Prior to April 1, 2011, we ceded this business to another reinsurer.

Service and Fee Income. Service and fee income increased $15.3 million, or 60.7%, to $40.5 million from $25.2 million for the three months ended March 31, 2012 and 2011, respectively. The increase related to fee income of approximately $7.1 million produced from BTIS, which was acquired in December 2011, higher technology fee income from ACAC of approximately $1.8 million and fees generated by becoming a servicing carrier in three additional states for the National Council on Compensation Insurance, Inc. (“NCCI”).

Net Investment Income. Net investment income increased $0.3 million, or 2.1%, to $14.5 million from $14.2 million for the three months ended March 31, 2012 and 2011, respectively. The increase resulted primarily from having a higher average fixed security investment pool during the three months ended March 31, 2012 compared to the three months ended March 31, 2011, partially offset by lower investment yields in the first quarter of 2012 compared to the first quarter of 2011.

Net Realized Gains (Losses) on Investments. We incurred net realized losses on investments of $1.1 million and net realized gains on investments of $0.4 million for the three months ended March 31, 2012 and 2011, respectively. The decline related to the overall trading activity as we selectively pared back underperforming investments.

Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $71.2 million, or 55.3%, to $199.9 million from $128.7 million for the three months ended March 31, 2012 and 2011, respectively. Our loss ratio for the three months ended March 31, 2012 and 2011 was 63.7% and 64.2%, respectively. The decrease in the loss ratio in 2012 resulted from lower current accident year selected ultimate losses as compared to selected ultimate losses from the prior accident year.

Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses increased $42.8 million, or 52.7%, to $124.0 million from $81.2 million for the three months ended March 31, 2012 and 2011, respectively. The expense ratio for the same periods increased to 24.8% from 22.7%, respectively, and impacted all segments. The increase in policy acquisition costs was the largest contributor to the increase in the expense ratio during the three months ended March 31, 2012, which was the result of a change in business mix as well the adoption of a new accounting standard for deferred acquisition costs during the first quarter of 2012.

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 $8.9 million, or 19.5%, to $54.6 million from $45.7 million for the three months ended March 31, 2012 and 2011, respectively. The change in income from 2011 to 2012 resulted primarily from an increase in service and fee income partially offset by an increase in loss and loss adjustment expenses.

Interest Expense. Interest expense for the three months ended March 31, 2012 was $7.1 million, compared to $3.8 million for the same period in 2011. The increase was primarily related to the issuance of an aggregate of $200 million of convertible senior notes during December 2011 and January 2012.

Net Gain on Investment in Life Settlement Contracts. Gain on investment in life settlement contracts was $0.1 million compared to $18.9 million for the three months ended March 31, 2012 and 201. The gain in the first quarter of 2011 was generated by the purchase of a large pool of distressed life settlement contracts. During the first quarter of 2012, we purchased a minimal amount of contracts.

Provision for Income Tax. Income tax expense for the three months ended March 31, 2012 was $11.2 million, which resulted in an effective tax rate of 23.3%. Income tax expense for the three months ended March 31, 2011 was $9.0 million, which resulted in an effective tax rate of 14.9%. The increase in our effective rate for the three months ended March 31, 2011 resulted primarily from earning a higher percentage of pretax income in countries with higher effective rates.

Equity in Earnings of Unconsolidated Subsidiaries - Related Parties. Equity in earnings of unconsolidated subsidiaries - related parties increased by $0.6 million for the three months ended March 31, 2012 to $2.4 million compared to $1.8 million for the three months ended March 31, 2011. The increase period over period resulted from higher earned premium and service fees.

Small Commercial Business Segment Results of Operations for the Three Months Ended March 31, 2012 and 2011 (Unaudited)

	Three Months Ended March 31,
	2012			2011
	(Amounts in Thousands)
Gross written premium	$	232,351		$	140,716

Net written premium	$	118,890		$	77,651
Change in unearned premium		(26,562	)		(15,790	)
Net earned premium		92,328			61,861

Ceding commission revenue – primarily related party		17,132			18,325

Loss and loss adjustment expense		59,224			36,763
Acquisition costs and other underwriting expenses		42,930			34,756
		102,154			71,519
Underwriting income	$	7,306		$	8,667

Key Measures:
Net loss ratio		64.1	%		59.4	%
Net expense ratio		27.9	%		26.6	%
Net combined ratio		92.1	%		86.0	%

Reconciliation of net expense ratio:
Acquisition costs and other underwriting expenses	$	42,930		$	34,756
Less: ceding commission revenue – primarily related party		17,132			18,325
	$	25,798		$	16,431
Net earned premium	$	92,328		$	61,861
Net expense ratio		27.9	%		26.6	%

Gross Written Premium. Gross written premium increased $91.7 million, or 65.2%, to $232.4 million from $140.7 million for the three months ended March 31, 2012 and 2011, respectively. A majority of the increase related to a nine percent increase in policy issuances in the first quarter of 2012 as well as rate increases in certain key states. In addition, the segment’s gross written premium benefited by approximately $19 million as a result of the Majestic renewal right transaction in the third quarter of 2011 as well as approximately $16 million from other acquisitions.

Net Written Premium. Net written premium increased $41.2 million, or 53.0%, to $118.9 million from $77.7 million for the three months ended March 31, 2012 and 2011, respectively. The increase in net premium resulted from an increase in gross written premium for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

Net Earned Premium. Net earned premium increased $30.5 million, or 49.3%, to $92.4 million from $61.9 million for the three months ended March 31, 2012 and 2011, respectively. As premiums written earn ratably over a twelve month period, the increase in net premium earned resulted from higher net written premium for the twelve months ended March 31, 2012 compared to the twelve months ended March 31, 2011.

Ceding Commission. The ceding commission earned during the three months ended March 31, 2012 and 2011 was $17.1 million and $18.3 million, respectively. The decrease related to a decline in the allocation to this segment, which achieved proportionally less growth than other segments during the first quarter, of its proportionate share of our overall policy acquisition expense.

Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $22.4 million, or 61.0%, to $59.2 million from $36.8 million for the three months ended March 31, 2012 and 2011, respectively. Our loss ratio for the segment for the three months ended March 31, 2012 increased to 64.1% from 59.4% for the three months ended March 31, 2011. The increase in the loss ratio in the three months ended March 31, 2012 resulted primarily from higher current accident year selected ultimate losses as compared to selected ultimate losses in prior accident years.

Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses increased $8.1 million, or 23.3%, to $42.9 million from $34.8 million for the three months ended March 31, 2012 and 2011, respectively. The expense ratio increased to 27.9% for the three months ended March 31, 2012 from 26.6% for the three months ended March 31, 2011. The increase in the expense ratio resulted primarily from a lower allocation of ceding commission to the segment during the three months ended March 31, 2012 compared to the same period in 2011 as well as the recognition of higher policy acquisition expense due to changes in business mix and the adoption of a new accounting standard for deferred acquisition costs in 2012 on a prospective basis.

Net Earned Premiums less Expenses Included in Combined Ratio (Underwriting Income). Net premiums earned less expenses included in combined ratio decreased $1.4 million, or 16.1%, to 7.3 million from $8.7 million for the three months ended March 31, 2012 and 2011, respectively. This decrease resulted primarily from an increase to the segment’s loss ratio in the first quarter of 2012 compared to the first quarter of 2011.

Specialty Risk and Extended Warranty Segment Results of Operations for the Three Months Ended March 31, 2012 and 2011 (Unaudited)

	Three Months Ended March 31,
	2012			2011
	(Amounts in Thousands)
Gross written premium	$	234,089		$	227,748

Net written premium	$	141,161		$	104,547
Change in unearned premium		(5,588	)		(19,970	)
Net earned premiums		135,573			84,577

Ceding commission revenue		17,194			12,899

Loss and loss adjustment expense		83,443			57,424
Acquisition costs and other underwriting expenses		43,085			26,648
		126,528			84,072
Underwriting income	$	26,239		$	13,404

Key Measures:
Net loss ratio		61.5	%		67.9	%
Net expense ratio		19.1	%		16.3	%
Net combined ratio		80.6	%		84.2	%

Reconciliation of net expense ratio:
Acquisition costs and other underwriting expenses	$	43,085		$	26,648
Less: ceding commission revenue – primarily related party		17,194			12,899
	$	25,891		$	13,749
Net earned premium	$	135,573		$	84,577
Net expense ratio		19.1	%		16.3	%

Gross Written Premium. Gross written premium increased $6.4 million, or 2.8%, to $234.1 million from $227.7 million for the three months ended March 31, 2012 and 2011, respectively. The segment experienced growth both domestically and in Europe. Additionally, European gross written premium was negatively impacted by approximately three percent as a result of fluctuations in currency rates.

Net Written Premium. Net written premium increased $36.7 million, or 35.1%, to $141.2 million from $104.5 million for the three months ended March 31, 2012 and 2011, respectively. The increase in net written premium resulted from an increase of gross written premium for the three months ended March 31, 2012 compared to the three months ended March 31, 2011, as well as the reduction in the percentage of our European medical liability business ceded to reinsurers from 80% to 40% commencing in the second quarter of 2011.

Net Earned Premium. Net earned premium increased $51.0 million, or 60.3%, to $135.6 million from $84.6 million for the three months ended March 31, 2012 and 2011, respectively. As net premiums written are earned ratably over the term of a policy, which on average is 23 months, the increase resulted from growth in net written premium during 2010 and 2012 as well as our retention of a higher percentage of net written premium related to our European medical liability business.

Ceding Commission. The ceding commission earned during the three months ended March 31, 2012 and 2011 was $17.2 million and $12.9 million, respectively. The increase related to the allocation to this segment of its proportionate share of our overall policy acquisition expense. Additionally, during the three months ended March 31, 2012, we were party to a 40% quota share arrangement with Maiden covering our European medical liability business for which we receive a five percent ceding commission. During the three months ended March 31, 2011, we ceded this business to another reinsurer.

Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $26.0 million, or 45.3%, to $83.4 million from $57.4 million for the three months ended March 31, 2012 and 2011, respectively. Our loss ratio for the segment for the three months ended March 31, 2012 decreased to 61.5% from 67.9% for the three months ended March 31, 2011. The decrease in the loss ratio for the three months ended March 31, 2012 resulted primarily from lower current accident year selected ultimate losses as compared to selected ultimate losses in prior accident years.

Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses increased $16.5 million, or 62.0%, to $43.1 million from $26.6 million for the three months ended March 31, 2012 and 2011, respectively. The expense ratio increased to 19.1% for the three months ended March 31, 2012 from 16.3% for the three months ended March 31, 2011. The increase in the expense ratio resulted, primarily, from higher policy acquisition expense for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 related to changes in business mix and the adoption of a new accounting standard for deferred acquisition costs in 2012 on a prospective basis.

Net Earned Premiums less Expenses Included in Combined Ratio (Underwriting Income). Net earned premiums less expenses included in combined ratio increased $12.8 million, or 95.5%, to $26.2 million from $13.4 million for the three months ended March 31, 2012 and 2011, respectively. The increase was attributable primarily from an improvement in the segment’s loss ratio during the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

Specialty Program Segment Results of Operations for the Three Months Ended March 31, 2012 and 2011 (Unaudited)

	Three Months Ended March 31,
	2012			2011
	(Amounts in Thousands)
Gross written premium	$	104,638		$	49,976

Net written premium	$	69,117		$	26,234
Change in unearned premium		(9,456	)		4,536
Net earned premium		59,661			30,770

Ceding commission revenue		11,948			4,460

Loss and loss adjustment expense		40,194			19,705
Acquisition costs and other underwriting expenses		29,939			12,312
		70,133			32,017
Underwriting income	$	1,476		$	3,213

Key Measures:
Net loss ratio		67.4	%		64.0	%
Net expense ratio		30.2	%		25.5	%
Net combined ratio		97.5	%		89.6	%

Reconciliation of net expense ratio:
Acquisition costs and other underwriting expenses	$	29,939		$	12,312
Less: ceding commission revenue		11,948			4,460
	$	17,991		$	7,852
Net earned premium	$	59,661		$	30,770
Net expense ratio		30.2	%		25.5	%

Gross Written Premium. Gross premium increased $54.6 million, or 109.2%, to $104.6 million from $50.0 million for the three months ended March 31, 2012 and 2011, respectively. The increase in gross written premium related to new program offerings during the three months ended March 31, 2012 as well as incremental growth of gross written premium on existing programs. The additional product offerings resulted from new product offerings managed by new underwriting teams hired in 2010 and 2011.

Net Written Premium. Net written premium increased $42.9 million, or 163.7%, to $69.1 million from $26.2 million for the three months ended March 31, 2012 and 2011, respectively. The increase in net written premium resulted from an increase in gross written premium for the three months ended March 31, 2012 compared to for the three months ended March 31, 2011.

Net Earned Premium. Net earned premium increased $28.9 million, or 93.8%, to $59.7 million from $30.8 million for the three months ended March 31, 2012 and 2011, respectively. As premiums written earn ratably over a twelve month period, the increase in net premium earned resulted from higher net written premium for the twelve months ended March 31, 2012 compared to the twelve months ended March 31, 2011.

Ceding Commission. The ceding commission earned during the three months ended March 31, 2012 and 2011 was $11.9 million and $4.5 million, respectively. The increase in ceding commission related primarily to an increase in cessions of program business during the three months ended March 31, 2012 as well as a continuing shift in the mix of the programs written during the periods. For the three months ended March 31, 2012, we wrote certain programs that have a higher percentage of policy acquisition costs to earned premium than in the three months ended March 31, 2011 and, therefore, we allocated more ceding commission to the segment.

Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $20.5 million, or 104.0%, to $40.2 million for the three months ended March 31, 2012 compared to $19.7 million for the three months ended March 31, 2011. Our loss ratio for the segment for the three months ended March 31, 2012 increased to 67.4% from 64.0% for the three months ended March 31, 2011. The increase in the loss ratio in the three months ended March 31, 2012 resulted primarily from higher current accident year selected ultimate losses as compared to selected ultimate losses from prior years.

Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses increased $17.6 million, or 143.1%, to $29.9 million from $12.3 million for the three months ended March 31, 2012 and 2011, respectively. The expense ratio increased to 30.2% for the three months ended March 31, 2012 from 25.5% for the three months ended March 31, 2011. The increase in the expense ratio resulted, primarily, from higher policy acquisition expense for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. The increase resulted primarily from changes in business mix and the adoption of a new accounting standard for deferred acquisition costs in 2012 on a prospective basis. In addition, the increase in the expense ratio was attributable to the allocation to this segment of a higher proportion of our unallocated expenses as a result of the increase in premium compared to the three months ended March 31, 2011.

Net Earned Premiums less Expenses Included in Combined Ratio (Underwriting Income) Net earned premiums less expenses included in combined ratio decreased $1.7 million, or 53.1%, to $1.5 million from $3.2 million for the three months ended March 31, 2012 and 2011, respectively. The decrease of $1.7 million resulted primarily from an increase in both the loss ratio and expense ratio during the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

Personal Lines Reinsurance Segment Results of Operations for the Three Months Ended March 31, 2012 and 2011 (Unaudited)

	Three Months Ended March 31,
	2012			2011
	(Amounts in Thousands)
Gross written premium	$	30,609		$	25,587

Net written premium	$	30,609		$	25,587
Change in unearned premium		(4,147	)		(2,457	)
Net earned premium		26,462			23,130

Loss and loss adjustment expense		17,068			14,804
Acquisition costs and other underwriting expenses		8,071			7,518
		25,139			22,322
Underwriting income	$	1,323		$	808

Key Measures:
Net loss ratio		64.5	%		64.0	%
Net expense ratio		30.5	%		32.5	%
Net combined ratio		95.0	%		96.5	%

We assumed $30.6 million and $25.6 million of premium from the GMACI Insurers for the three months ended March 31, 2012 and 2011, respectively. The increase during the three months ended March 31, 2012 related primarily to a rise in the GMACI Insurers’ premium writings during the equivalent time periods. Net earned premium increased in 2012 compared to 2011 due to the earning cycle of assumed written premium in 2011 and earned in 2012. Loss and loss adjustment expense increased 15.3% in 2012 compared to 2011 and increased proportionally with net earned premium. The net loss ratio increased during the three months ended March 31, 2012 compared to the equivalent period in 2011 due to higher estimates based on actual losses. The decrease in the net expense ratio in 2012 compared to 2011 resulted from the sliding scale commission structure, by which the ceding commission payable to GMACI decreases as the loss ratio increases.

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 $172.7 million and $130.5 million in the three months ended March 31, 2012 and 2011, respectively. We expect cash flow from operations should be sufficient to meet our anticipated claim obligations, 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. If we cannot obtain adequate capital on favorable terms or at all, we may be unable to support future growth or operating requirements and, as a result, our business, financial condition and results of operations could be adversely affected.

The following table is summary of our statement of cash flows:

	Three Months Ended March 31,
(Amounts in Thousands)	2012			2011
Cash and cash equivalents provided by (used in):
Operating activities	$	88,434		$	55,331
Investing activities		(256,372	)		(47,492	)
Financing activities		36,024			10,749

Net cash provided by operating activities for the three months ended March 31, 2012 increased compared to cash provided by operating activities in the three months ended March 31, 2011. The increase in cash flow is the result, primarily, of an overall increase in our reinsurance payables, which are typically paid in arrears, thus providing us with a timing benefit on this cash we collected.

Cash used in investing activities during the three months ended March 31, 2012 was approximately $256 million and consisted of approximately $8 million for life settlement contracts, approximately $205 million for the purchase of fixed maturity and equity securities and an increase in restricted cash of $36 million. Cash used in investing activities in the three months ended March 31, 2011 was approximately $47 million and consisted of approximately $17 million for life settlement contracts, an increase in restricted cash of $23 million and approximately $12 million for the purchase of an aircraft partially offset by sales of fixed maturity and equity securities of approximately $7 million and $1 million, respectively.

Cash provided by financing activities for the three months ended March 31, 2012 was approximately $36 million and consisted primarily of debt proceeds of approximately $25 million, minority interest capital contributions to one of our subsidiaries of approximately $5 million and borrowings from securities sold under agreements to repurchase of $9 million. Cash provided by financing activities for the three months ended March 31, 2011 was approximately $11 million and consisted primarily of debt proceeds of approximately $109 million, minority interest capital contributions to one of our subsidiaries of approximately $9 million, offset partially by the repayment of $95 million of securities sold under agreements to repurchase, debt principal payments of approximately $7 million and dividends of approximately $5 million.

Revolving Credit Agreement

On January 28, 2011, we entered into a three-year, $150 million credit agreement (the “Credit Agreement”), among JPMorgan Chase Bank, N.A., as Administrative Agent, The Bank of Nova Scotia, as Syndication Agent, SunTrust Bank, as Documentation Agent, and the various lending institutions party thereto. The credit facility is a revolving credit facility with a letter of credit sublimit of $50 million and an expansion feature not to exceed $50 million. Proceeds of borrowings under the Credit Agreement may be used for working capital, acquisitions and general corporate purposes. The Credit Agreement contains certain restrictive covenants customary for facilities of this type (subject to negotiated exceptions and baskets), including restrictions on indebtedness, liens, acquisitions and investments, restricted payments and dispositions. There are also financial covenants that require us to maintain a minimum consolidated net worth, a maximum consolidated leverage ratio, a minimum fixed charge coverage ratio, a minimum risk-based capital and a minimum statutory surplus.

As of March 31, 2012, we had no outstanding borrowings under this Credit Agreement. We had outstanding letters of credit in place under this Credit Agreement at March 31, 2012 for $49.4 million, which reduced the availability for letters of credit to $0.6 million as of March 31, 2012 and the availability under the facility to $100.6 million as of March 31, 2012.

Borrowings under the Credit Agreement will bear interest at (x) the greatest of (a) the Administrative Agent’s prime rate, (b) the federal funds effective rate plus 0.5 percent or (c) the adjusted LIBO rate for a one month interest period on such day plus 1 percent, plus (y) a margin that is adjusted on the basis of our consolidated leverage ratio. Eurodollar borrowings under the Credit Agreement will bear interest at the adjusted LIBO rate for the interest period in effect plus a margin that is adjusted on the basis of our consolidated leverage ratio. The interest rate on our credit facility as of March 31, 2012 and 2011 was 2.50%. We recorded interest expense of approximately $0.5 million and $0.4 million for the three months ended March 31, 2012 and 2011, respectively, under the Credit Agreement.

Fees payable by us under the Credit Agreement include a letter of credit participation fee (which is the margin applicable to Eurodollar borrowings and was 2.25% at March 31, 2012), a letter of credit fronting fee with respect to each letter of credit (.125%) and a commitment fee on the available commitments of the lenders (a range of .35% to .45% based on our consolidated leverage ratio and was .40% at March 31, 2012).

Convertible Senior Notes

In December 2011, we issued $175 million aggregate principal amount of our 5.5% convertible senior notes due 2021 (the “Notes”) to certain initial purchasers in a private placement. In January 2012, the Company issued an additional $25 million of the Notes to cover the initial purchasers’ overallotment option, bringing the aggregate amount of Notes issued to $200 million. The Notes will bear interest at a rate equal to 5.50% per year, payable semiannually in arrears on June 15^th and December 15^th of each year, beginning on June 15, 2012.

The Notes will mature on December 15, 2021 (the “Maturity Date”), unless earlier purchased by us or converted into shares of our common stock, par value $0.01 per share (the “Common Stock”). Prior to September 15, 2021, the Notes will be convertible only upon satisfaction of certain conditions, and thereafter, at any time prior to the close of business on the second scheduled trading day immediately preceding the Maturity Date. The conversion rate will initially equal 31.4218 shares of Common Stock per $1,000 principal amount of Notes, which corresponds to an initial conversion price of approximately $31.83 per share of Common Stock, representing a conversion premium of 25.0% over $25.46 per share, which was the last reported sale price of the Common Stock on the NASDAQ on December 15, 2011. The conversion rate will be subject to adjustment upon the occurrence of certain events as set forth in the indenture governing the notes. Upon conversion of the Notes, we will, at its election, pay or deliver, as the case may be, cash, shares of Common Stock, or a combination of cash and shares of Common Stock.

Upon the occurrence of a fundamental change (as defined in the indenture governing the notes) involving our holders of the Notes will have the right to require us to repurchase their Notes for cash, in whole or in part, at 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date.

We separately allocated the proceeds for the issuance of the Notes to a liability component and an equity component, which is the embedded conversion option. The equity component was reported as an adjustment to paid-in-capital, net of tax, and is reflected as an original issue discount (“OID”). The OID of $41.6 million and deferred origination costs relating to the liability component of $4.7 million will be amortized into interest expense over the term of the loan of the Notes. After considering the contractual interest payments and amortization of the original discount, the Notes effective interest rate was 8.57%. Transaction costs of $1.3 million associated with the equity component were netted in paid-in-capital. Interest expense, including amortization of deferred origination costs, recognized on the Notes was $3.5 million for the three months ended March 31, 2012.

Secured Loan Agreement

During February 2011, through a wholly-owned subsidiary, we entered into a seven-year secured loan agreement with Bank of America Leasing & Capital, LLC in the aggregate amount of $10.8 million to finance the purchase of an aircraft. The loan bears interest at a fixed rate of 4.45%, requires monthly installment payments of approximately $0.1 million commencing on March 25, 2011 and ending on February 25, 2018, and a balloon payment of $3.2 million at the maturity date. We recorded interest expense of approximately $0.1 million and $0.05 million for the three months ended March 31, 2012 and 2011, respectively, related to this agreement. The loan is secured by an aircraft that our subsidiary acquired in February 2011.

The agreement contains certain covenants that are similar to our revolving credit facility. Additionally, subsequent to February 25, 2012, but prior to payment in full, if the outstanding balance of this loan exceeds 90% of the fair value of the aircraft, we are required to pay the lender the entire amount necessary to reduce the outstanding principal balance to be equal to or less than 90% of the fair value of the aircraft. The agreement allows us, under certain conditions, to repay the entire outstanding principal balance of this loan without penalty.

Promissory Note

In connection with the stock and asset purchase agreement with a subsidiary of Unitrin, Inc. (now called Kemper Corporation), we, on June 1, 2008, issued a promissory note to Unitrin Inc. in the amount of $30 million. The note is non-interest bearing and requires four annual principal payments of $7.5 million. The first three annual principal payments were paid between 2009 and 2011, and the remaining principal payment is due on June 1, 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 included $0.1 million and $0.2 million of amortized discount on the note in our results of operations for the three months ended March 31, 2012 and 2011, respectively. The note’s carrying value was $7.4 million as of March 31, 2012 and December 31, 2011.

Securities Sold (Purchased) Under Agreements to Repurchase (Sell), at Contract Value

We enter into repurchase agreements and reverse repurchase agreements. The agreements are accounted for as collateralized borrowing transactions and are recorded at contract amounts. In the case of repurchase agreements, we receive cash or securities, which we invest or hold in short term or fixed income securities. As of March 31, 2012, there were $200.9 million principal amount outstanding at interest rates between 0.4% and 0.45%. Interest expense associated with these repurchase agreements for the three months ended March 31, 2012 was $0 million, of which $0 million was accrued as of March 31, 2012. We have approximately $214.2 million of collateral pledged in support of these agreements. Under reverse repurchase agreements, we lend cash or securities for a short term. During the three months ended March 31, 2012, we entered into a collateralized lending transaction with a principal amount of $56.2 million that is included in short term investments as of March 31, 2012. We retain collateral of $54.4 million related to this agreement.

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 loaned to AII the amount equal to its quota share of the obligations of the AmTrust Ceding Insurers that AII was then obligated to secure. The loan agreement provides 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 million as of March 31, 2012 and December 31, 2011. Effective December 31, 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 proportionate share of the Company’s obligations to its U.S. subsidiaries. The amount of this collateral as of March 31, 2012 was approximately $639 million. Maiden retains ownership of the collateral in the trust account.

Comerica Letter of Credit Facility

In connection with the Majestic acquisition, we, through one of our subsidiaries, entered into a secured letter of credit facility with Comerica Bank during the three months ended September 30, 2011. We utilize the letter of credit facility to comply with the deposit requirements of the State of California and the U.S. Department of Labor as security for our obligations to workers’ compensation and federal Longshore and Harbor Workers’ Compensation Act policyholders. The credit limit is for $75 million and was utilized for $49.8 million as of March 31, 2012. We are required to pay a letter of credit participation fee for each letter of credit in the amount of 0.40%.

Reinsurance

Our insurance subsidiaries utilize reinsurance agreements to transfer portions of the underlying risk of the business we write to various affiliated and third-party reinsurance companies. Reinsurance does not discharge or diminish our obligation to pay claims covered by the insurance policies we issue; however, it does permit us to recover certain incurred losses from our reinsurers and our reinsurance recoveries reduce the maximum loss that we may incur as a result of a covered loss event. We believe it is important to ensure that our reinsurance partners are financially strong and they generally carry at least an A.M. Best rating of ‘‘A-’’ (Excellent) at the time we enter into our reinsurance agreements. We also enter reinsurance relationships with third-party captives formed by agents and other business partners as a mechanism for sharing risk and profit. All of our captive reinsurance arrangements are fully secured. The total amount, cost and limits relating to the reinsurance coverage we purchase may vary from year to year based upon a variety of factors, including the availability of quality reinsurance at an acceptable price and the level of risk that we choose to retain for our own account. We have not experienced any significant changes to our reinsurance programs since December 31, 2011. For a more detailed description of our reinsurance arrangements, including our reinsurance arrangements with Maiden Insurance Company Ltd. (‘‘Maiden Insurance’’), see ‘‘Reinsurance’’ in ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ in our Annual Report on Form 10-K for the year ended December 31, 2011.

Investment Portfolio

Our investment portfolio, including cash and cash equivalents but excluding life settlement contracts and other investments, increased $156.8 million, or 8.0%, to $2,137.0 million for the three months ended March 31, 2012 from $1,980.2 million as of December 31, 2011 (excluding $14.9 million and $14.6 million of other investments, respectively). Our investment portfolio is classified as available-for-sale, as defined by ASC 320, Investments — Debt and Equity Securities. Our fixed maturity securities, gross, had a fair value of $1,685.0 million and an amortized cost of $1,637.9 million as of March 31, 2012. Our equity securities are reported at fair value and totaled $30.8 million with a cost of $29.7 million as of March 31, 2012. Securities sold but not yet purchased, which was $54.5 million as of March 31, 2012, represent our obligations 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 $200.9 million as of March 31, 2012, are accounted for as collateralized borrowing transactions and are recorded at their contracted amounts. Our investment portfolio exclusive of life settlement contracts and other investments is summarized in the table below by type of investment:

	March 31, 2012					December 31, 2011
(Amounts in Thousands)	Carrying Value		Percentage of Portfolio			Carrying Value		Percentage of Portfolio
Cash, cash equivalents and restricted cash	$	336,419		15.7	%	$	421,837		21.3	%
Time and short-term deposits		84,571		4.0	%		128,565		6.5
U.S. treasury securities		52,791		2.5			53,274		2.7
U.S. government agencies		60,604		2.8			6,790		0.3
Municipals		269,050		12.6			275,017		13.9
Commercial mortgage back securities		29,873		1.4			150		—
Residential mortgage backed securities:
Agency backed		395,974		18.5			364,000		18.4
Non-agency backed		7,515		0.4			7,664		0.4
Corporate bonds		869,215		40.7			687,348		34.7
Preferred stocks		4,780		0.2			4,314		0.2
Common stocks		25,972		1.2			31,286		1.6
	$	2,136,764		100.0	%	$	1,980,245		100.0	%

The table below summarizes the credit quality of our fixed maturity securities as of March 31, 2012 and December 31, 2011, as rated by Standard and Poor’s.

	2012			2011
U.S. Treasury		2.6	%		3.2	%
AAA		10.6			12.5
AA		44.6			39.7
A		19.8			23.0
BBB, BBB+, BBB-		21.1			20.1
BB, BB+, BB-		1.3			0.8
B, B+, B-		—			0.4
Other		—			0.3
Total		100.0	%		100.0	%

The table below summarizes the average duration by type of fixed maturity as well as detailing the average yield as of March 31, 2012 and December 31, 2011:

	March 31, 2012				December 31, 2011
	Average Yield%		Average Duration in Years		Average Yield%		Average Duration in Years
U.S. treasury securities		1.98		3.0		2.31		3.3
U.S. government agencies		4.05		3.4		4.12		2.9
Foreign government		3.98		5.6		3.98		5.6
Corporate bonds		4.30		4.4		4.38		3.7
Municipals		4.54		5.7		4.18		5.4
Mortgage and asset backed		3.63		2.4		3.68		2.6

As of March 31, 2012, the weighted average duration of our fixed income securities was 4.0 years and had a yield of 4.1%.

Quarterly, our Investment Committee (“Committee”) evaluates each security that has an unrealized loss as of the end of the subject reporting period for 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 the Company will be required to sell the security before recovery of its amortized cost basis;

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

	·	the occurrence of a discrete credit event resulting in the issuer defaulting on material outstanding obligations 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.

Based on guidance in FASB ASC 320-10-65, 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.

During the three months ended March 31, 2012 and 2011, we had no impairment charges of our fixed and equity securities. During the three months ended March 31, 2012, we had $21.1 million of gross unrealized losses, of which $2.9 million related to marketable equity securities and $18.2 million related to fixed maturity securities.

Corporate bonds represent 52% of the fair value of our fixed maturities and 94% of the total unrealized losses of our fixed maturities. We own 276 corporate bonds in the industrial, bank and financial and other sectors, which have a fair value of approximately 11%, 38% and 2%, respectively, and 7%, 81% and 7% 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. Additionally, we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis.

Our investment in marketable equity securities consist 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 and we have the ability and intent to hold these investments until a recovery of fair value. Within our portfolio of equity securities, 9 common stocks comprised $2.7 million, or 92.2%, of the unrealized loss. We own 3 securities in the financial sector that represent 6% of the fair market value and 27% of our unrealized losses. We own 3 securities in the industrial sector that represent approximately 7% of the fair market value and approximately 44% our unrealized losses. We own 3 securities in the consumer products sector that have approximately 9% of the fair value and approximately 21% of the unrealized losses. The duration of these impairments ranges from 3 to 27 months. The remaining securities in a loss position are not considered individually significant and accounted for 8% of our unrealized losses. We believe these securities will recover and that we have the ability and intent to hold them to recovery.

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 have ceded. As a result, reinsurance contracts do not limit our ultimate obligations to pay claims covered under the insurance policies we issue and we might not collect amounts recoverable from our reinsurers. We address this credit risk by selecting reinsurers which have an A.M. Best rating of “A” (Excellent) or better at the time we enter into the agreement and by performing, along with our reinsurance brokers, periodic credit reviews of our reinsurers. If one of our reinsurers suffers a credit downgrade, we may consider various options to lessen the risk of asset impairment, including commutation, novation and letters of credit. See “—Reinsurance.”

Interest Rate Risk. We had fixed maturity securities (excluding $84.6 million of time and short-term deposits) with a fair value of $1.68 million and carrying value of $1.64 million as of March 31, 2012 that are subject to interest rate risk. Interest rate risk is the risk that we may incur losses due to adverse changes in interest rates. Fluctuations in interest rates have a direct impact on the market valuation of our fixed maturity securities. We manage our exposure to interest rate risk through a disciplined asset and liability matching and capital management process. In the management of this risk, the characteristics of duration, credit and variability of cash flows are critical elements. These risks are assessed regularly and balanced within the context of our liability and capital position.

The table below summarizes the interest rate risk associated with our fixed maturity securities by illustrating the sensitivity of the fair value and carrying value of our fixed maturity securities as of March 31, 2012 to selected hypothetical changes in interest rates, and the associated impact on our shareholders’ 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 March 31, 2012.

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	$	1,526,632	$	(158,390	)		(10.7	)%
100 basis point increase		1,604,564		(80,458	)		(5.4	)
No change		1,685,022		—			—
100 basis point decrease		1,760,930		75,908			5.1
200 basis point decrease		1,845,156		160,134			10.8

Changes in interest rates would affect the fair market value of our fixed rate debt instruments but would not have an impact on our earnings or cash flow. We currently have $470.5 million of debt instruments of which $302.5 million are fixed rate debt instruments. A fluctuation of 100 basis points in interest on our variable rate debt instruments, which are tied to LIBOR, would affect our earnings and cash flows by $1.7 million before income tax, on an annual basis, but would not affect the fair market value of the variable rate debt.

Foreign Currency Risk. We write insurance in the United Kingdom and certain other European Union member countries through AIU 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 $13.8 million after tax realized currency loss based on our outstanding foreign denominated reserves of $423.8 million at March 31, 2012.

Equity Price Risk. Equity price risk is the risk that we may incur losses due to adverse changes in the market prices of the equity securities we hold in our investment portfolio, which include common stocks, non-redeemable preferred stocks and master limited partnerships. We classify our portfolio of equity securities as available-for-sale and carry these securities on our balance sheet at fair value. Accordingly, adverse changes in the market prices of our equity securities result in a decrease in the value of our total assets and a decrease in our shareholders’ equity. As of March 31, 2012, the equity securities in our investment portfolio had a fair value of $30.8 million, representing approximately two percent of our total invested assets on that date. We are fundamental long buyers and short sellers, with a focus on value oriented stocks. The table below illustrates the impact on our equity portfolio and financial position given a hypothetical movement in the broader equity markets. The selected scenarios in the table below are not predictions of future events, but rather are intended to illustrate the effect such events may have on the carrying value of our equity portfolio and on shareholders’ equity as of March 31, 2012.

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	$	32,290	$	1,538			0.1	%
No change		30,752		—
5 % decrease		29,214		(1,538	)		(0.1	)

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

Item 4. Controls and Procedures

Our management, with the participation and under the supervision of our principal executive officer and principal financial officer, has evaluated the effectiveness of 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 of submit under the Exchange Act is timely recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, 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

Vehicle service contract industry inquiry and related proceedings

As previously described in our Annual Report on Form 10-K, our subsidiary Warrantech Corporation (“Warrantech”) is involved in a number of disputes that relate to U.S. Fidelis, a direct marketer of vehicle service contracts that filed a petition for Chapter 11 bankruptcy protection in February 2010 in the United States Bankruptcy Court for the Eastern District of Missouri (the “Bankruptcy Proceeding”).

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, 2011. For more information regarding such risk factors, refer to Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011.

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

During the three months ended March 31, 2012, we purchased 663 shares of our common stock from employees in connection with the vesting of restricted stock issued to certain employees in connection with our 2010 Omnibus Incentive Plan (the “Plan”). The shares were withheld at the direction of the employees as permitted under the Plan in order to pay the minimum amount of tax liability owed by the employee from the vesting of those shares. In addition, in November 2007, our board of directors authorized us to repurchase up to 3,000,000 shares of common stock in one or more transactions at prevailing prices in the open market or in privately negotiated transactions. We did not repurchase any shares pursuant to this authority during the three months ended March 31, 2012.

The following table summarizes the Company’s stock repurchases for the three-month period ended March 31, 2012:

Period	Total Number of Shares Purchased ⁽¹⁾		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publically Announced Plan or Program		Maximum number (or approximate dollar value) of Shares that May Yet be Purchased Under Plan or Program
January 1 – 31, 2012		—	$	—		—		2,223,713
February 1 – 29, 2012		—		—		—		2,223,713
March 1 – 31, 2012		663		26.31		—		2,223,713
Total		663	$	26.31		—		2,223,713

⁽¹⁾

Includes 663 shares that were withheld to satisfy tax withholding amounts due from employees upon the vesting of previously issued restricted shares.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Number		Description

31.1		Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a), for the quarter ended March 31, 2012.

31.2		Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a), for the quarter ended March 31, 2012.

32.1		Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, for the quarter ended March 31, 2012.

32.2		Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, for the quarter ended March 31, 2012.

101.1		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011; (ii) the Condensed Consolidated Statements of Income for the three months ended March 31, 2012 and 2011; (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011; (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011; and (v) the Notes to Unaudited Condensed Consolidated Financial Statements, tagged as blocks of text (submitted electronically herewith).

		In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101.1 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

SIGNATURES

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

	AmTrust Financial Services, Inc.
	(Registrant)

Date: May 10, 2012		/s/ Barry D. Zyskind
		Barry D. Zyskind
		President and Chief Executive Officer

		/s/ Ronald E. Pipoly, Jr.
		Ronald E. Pipoly, Jr.
		Chief Financial Officer