INN Blog

More Posts
 

AMTRUST FINANCIAL SERVICES, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Online, Inc.

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, 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, our degree of success in integrating 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 breaches in 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 any forward-looking statement,
whether as a result of new information, future developments or otherwise, except
as may be required by law.

Overview

We are a multinational specialty property and casualty insurer focused on
generating consistent underwriting profits. We provide insurance coverage for
small businesses and products with high volumes of insureds and loss profiles
that we believe are predictable. We target lines of insurance that we believe
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

Social Security changes you need to know now.

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.



                                       37
--------------------------------------------------------------------------------



We transact business primarily through eleven insurance company subsidiaries:

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


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.

Social Security changes you need to know now.


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 a servicing carrier for
assigned risk plans, 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, which 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, 2012 for an employer with a
constant payroll during the term of the policy, we would earn half of the
premiums in 2012 and the other half in 2013. 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.

                                       38
--------------------------------------------------------------------------------



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,

Social Security changes you need to know now.

          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, reinstatement and policy 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 canceled for non-payment, in jurisdictions where it

          is permitted and approved. Additionally, we recognize policy fees
          associated with general liability policies placed by Builders &
          Tradesmen's Insurance Services, Inc. ("BTIS").

• 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 and

          printing and mailing 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) 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.



                                       39
--------------------------------------------------------------------------------


•         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 16.7% and 17.9% for the three months ended September 30, 2012 and 2011,
respectively, and 16.6% and 22.7% for the nine months ended September 30, 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 90.2%% and 89.3% for the three months ended September
30, 2012 and 2011, respectively, and 89.2% and 89.0% for the nine months ended
September 30, 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.





                                       40
--------------------------------------------------------------------------------

Results of Operations

Consolidated Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)

                                    Three Months Ended September 30,          Nine Months Ended September 30,
(Amounts in Thousands)                  2012                 2011                 2012                 2011
Gross written premium            $       736,556       $       561,222     $      1,975,681       $  1,563,711

Net written premium              $       483,659       $       321,903     $      1,235,025       $    931,603
Change in unearned premium               (96,212 )             (33,055 )           (199,560 )         (194,135 )
Net earned premiums                      387,447               288,848            1,035,465            737,468
Ceding commission - primarily
related party                             49,860                40,732              140,684            111,830
Service and fee income (related
parties - three months $7,171;
$4,189 and nine months $20,195;
$12,089)                                  44,561                28,815              118,110             78,546
Net investment income                     18,429                14,456               49,291             41,815
Net realized gain on investments           2,213                   550                3,768              1,581
Total revenues                           502,510               373,401            1,347,318            971,240
Loss and loss adjustment expense        (255,646 )            (185,352 )           (667,362 )         (484,056 )
Acquisition costs and other
underwriting expenses                   (143,736 )            (113,270 )           (397,474 )         (284,084 )
Other                                    (42,337 )             (24,045 )           (110,296 )          (62,805 )
Total expenses                          (441,719 )            (322,667 )         (1,175,132 )         (830,945 )
Income before other income
(expense), income taxes and
equity in earnings (loss) of
unconsolidated subsidiary                 60,791                50,734              172,186            140,295
Other income (expense):
Interest expense                          (7,218 )              (3,946 )            (21,303 )          (12,034 )
Foreign currency (loss) gain                (951 )              (4,063 )             (2,985 )           (1,827 )
Bargain purchase on Majestic
transaction                                    -                 5,850                    -              5,850
Net gain on investment in life
settlement contracts                       3,251                 6,822                5,302             48,346
Total other income (expense)              (4,918 )               4,663              (18,986 )           40,335
Income before income taxes and
equity in earnings (loss) of
unconsolidated subsidiary                 55,873                55,397              153,200            180,630
Provision for income taxes               (13,187 )             (14,297 )            (36,106 )          (30,623 )
Income before equity in earnings
(loss) of unconsolidated
subsidiary and non-controlling
interest                                  42,686                41,100              117,094            150,007
Equity in earnings of
unconsolidated subsidiary -
related party                              3,207                  (918 )              8,659              3,415
Net income                                45,893                40,182              125,753            153,422
Non-controlling interest                  (2,663 )              (3,016 )             (3,079 )          (20,911 )
Net income attributable to
AmTrust Financial Services, Inc. $        43,230       $        37,166     $        122,674       $    132,511
Net realized gain (loss) on
investments:
Total other-than-temporary
impairment loss                  $             -       $             -     $         (1,208 )     $       (345 )
Portion of loss recognized in
other comprehensive income                     -                     -                    -                  -
Net impairment losses recognized
in earnings                                    -                     -               (1,208 )             (345 )
Other net realized gain on
investments                                2,213                   550                4,976              1,926
Net realized investment gain     $         2,213       $           550     $          3,768       $      1,581
Key measures:
Net loss ratio                              66.0 %                64.2 %               64.5 %             65.6 %
Net expense ratio                           24.2 %                25.1 %               24.8 %             23.4 %
Net combined ratio                          90.2 %                89.3 %               89.2 %             89.0 %



                                       41
--------------------------------------------------------------------------------

Consolidated Result of Operations for the Three Months Ended September 30, 2012 and 2011


Gross Written Premium. Gross written premium increased $175.4 million, or 31.3%,
to $736.6 million from $561.2 million for the three months ended September 30,
2012 and 2011, respectively. The increase of $175.4 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, the acquisitions of Majestic
and BTIS in 2011 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 $161.8 million, or 50.2%, to
$483.7 million from $321.9 million for the three months ended September 30, 2012
and 2011, respectively. The increase(decrease) by segment was: Small Commercial
Business - $54.4 million, Specialty Risk and Extended Warranty - $(12.1)
million, Specialty Program - $115.9 million and Personal Lines - $3.6 million.
Net written premium increased for the three months ended September 30, 2012
compared to the same period in 2011 due to the increase in gross written premium
in 2012 compared to 2011 as well as higher retention of gross written premiums
on programs we write that are not covered by the Maiden Quota Share.

Net Earned Premium. Net earned premium increased $98.6 million, or 34.1%, to
$387.4 million from $288.8 million for the three months ended September 30, 2012
and 2011, respectively. The increase(decrease) by segment was: Small Commercial
Business - $33.9 million, Specialty Risk and Extended Warranty - $(11.0)
million, Specialty Program - $72.3 million and Personal Lines - $3.4 million.

Ceding Commission. Ceding commission represents commission earned primarily
through the Maiden Quota Share, whereby AmTrust receives a ceding commission
between 30% and 31% (30.5% and 31% during the three months ended September 30,
2012 and 2011, respectively), depending on the mix of business ceded, for all
business except retail commercial package business, and 34.375% for retail
commercial package business, for written premiums ceded to Maiden. The ceding
commission earned during the three months ended September 30, 2012 and 2011 was
$49.9 million and $40.7 million, respectively. Ceding commission increased
period over period as a result of increased premium writings.

Service and Fee Income. Service and fee income increased 15.8 million, or 54.8%,
to $44.6 million from $28.8 million for the three months ended September 30,
2012 and 2011, respectively. The increase related to fee income of approximately
$3.6 million and $4.4 million produced from BTIS and CNH, respectively, which
were acquired in December 2011 and July 2012, respectively, higher technology
fee income from ACAC of approximately $3.9 million and fees generated by
becoming a servicing carrier for workers' compensation assigned risk plans in
three additional states.

 Net Investment Income. Net investment income increased $3.9 million, or 26.8%,
to $18.4 million from $14.5 million for the three months ended September 30,
2012 and 2011, respectively. The increase resulted primarily from having a
higher average balance of fixed security investment securities during the three
months ended September 30, 2012 compared to the three months ended September 30,
2011.

Net Realized Gains (Losses) on Investments. We incurred net realized gains on
investments of $2.2 million and $0.6 million for the three months ended
September 30, 2012 and 2011, respectively. The increase resulted from our
decision to sell certain positions that had market values that exceeded our cost
basis.

Loss and Loss Adjustment Expenses.  Loss and loss adjustment expenses increased
$70.3 million, or 37.9%, to $255.6 million from $185.4 million for the three
months ended September 30, 2012 and 2011, respectively. Our loss ratio for the
three months ended September 30, 2012 and 2011 was 66.0% and 64.2%,
respectively. The increase in the loss ratio in 2012 resulted from higher
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 $30.5 million, or 26.9%, to $143.7 million from
$113.3 million for the three months ended September 30, 2012 and 2011,
respectively. The expense ratio for the same periods decreased to 24.2% from
25.1%, respectively, and impacted three of our four segments. The decrease in
expense ratio related primarily from our ability to increase earned premium at a
rate that exceeded the growth rate of salaries, benefits and insurance general
and administrative expenses during the three months ended September 30, 2012
compared to the equivalent period in 2011. The decrease was partially offset by
the adoption of the new accounting standard for deferred acquisition costs
during the first quarter of 2012.



                                       42
--------------------------------------------------------------------------------


Income Before Other Income (Expense), Income Taxes and Equity Earnings of
Unconsolidated Subsidiary. Income before other income (expense), income taxes
and equity earnings of unconsolidated subsidiary increased $10.1 million, or
19.9%, to $60.8 million from $50.7 million for the three months ended
September 30, 2012 and 2011, respectively. The change in income from 2011 to
2012 resulted primarily from an increase in earned premium.

Interest Expense. Interest expense for the three months ended September 30, 2012
was $7.2 million, compared to $3.9 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 $3.3 million compared to $6.8 million for the three
months ended September 30, 2012 and 2011. The gain in the third quarter of 2011
resulted primarily from a gain of approximately $7.1 million realized upon a
mortality event.

Provision for Income Tax. Income tax expense for the three months ended
September 30, 2012 was $13.2 million, which resulted in an effective tax rate of
23.6%. Income tax expense for the three months ended September 30, 2011 was
$14.3 million, which resulted in an effective tax rate of 25.8%. The decrease in
our effective rate for the three months ended September 30, 2012 resulted
primarily from earning a lower percentage of pretax income in countries with
higher effective rates.

Equity in Earnings of Unconsolidated Subsidiary - Related Party. Equity in
earnings of unconsolidated subsidiary - related party increased by $4.1 million
for the three months ended September 30, 2012 to $3.2 million compared to a loss
of $0.9 million for the three months ended September 30, 2011. The increase
period over period resulted from ACAC's 2011 purchase price adjustment from its
2010 acquisition of GMACI's consumer property and casualty business for which
our proportionate share of the adjustment was a decline of $3.6 million.

Consolidated Result of Operations for the Nine Months Ended September 30, 2012 and 2011


Gross Written Premium. Gross written premium increased $412.0 million, or 26.3%,
to $1,975.7 million from $1,563.7 million for the nine months ended
September 30, 2012 and 2011, respectively. The increase of $412.0 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, the acquisitions of
Majestic and BTIS in 2011 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 $303.4 million, or 32.6%, to
$1,235.0 million from $931.6 million for the nine months ended September 30,
2012 and 2011, respectively. The increase by segment was: Small Commercial
Business - $86.8 million, Specialty Risk and Extended Warranty - $11.5 million,
Specialty Program - $192.7 million and Personal Lines - $12.4 million. Net
written premium increased for the nine months ended September 30, 2012 compared
to the same period in 2011 due to the increase in gross written premium in 2012
compared to 2011 and higher retention of premiums written on programs in our
Specialty Program segment that are not covered by the Maiden Quota Share.

Net Earned Premium. Net earned premium increased $298.0 million, or 40.4%, to
$1,035.5 million from $737.5 million for the nine months ended September 30,
2012 and 2011, respectively. The increase by segment was: Small Commercial
Business - $83.9 million, Specialty Risk and Extended Warranty - $71.9 million,
Specialty Program - $131.9 million, and Personal Lines - $10.3 million.

Ceding Commission. Ceding commission represents commission earned primarily
through the Maiden Quota Share, whereby AmTrust receives a ceding commission
between 30% and 31%, depending on the mix of business ceded, for all business
except retail commercial package business, and 34.375% for retail commercial
package business, for written premiums ceded to Maiden. The ceding commission
earned during the nine months ended September 30, 2012 and 2011 was $140.7
million and $111.8 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.


                                       43
--------------------------------------------------------------------------------


Service and Fee Income. Service and fee income increased $39.6 million, or
50.4%, to $118.1 million from $78.5 million for the nine months ended
September 30, 2012 and 2011, respectively. The increase related to fee income of
approximately $14.6 million produced from BTIS, which was acquired in December
2011, fee income of $4.4 million produced by CNH, which was acquired in July
2012, higher technology fee income from ACAC of approximately $9.9 million,
higher fee income of approximately $7.3 million from Warrantech from new
programs and fees generated by becoming a servicing carrier for workers'
compensation assigned risk plans in three additional states.

Net Investment Income. Net investment income increased $7.5 million, or 17.9%,
to $49.3 million from $41.8 million for the nine months ended September 30, 2012
and 2011, respectively. The increase resulted primarily from having a higher
average balance of fixed security investment securities during the nine months
ended September 30, 2012 compared to the nine months ended September 30, 2011.

Net Realized Gains (Losses) on Investments. We incurred net realized gains on
investments of $3.8 million and $1.6 million for the nine months ended
September 30, 2012 and 2011, respectively. The increase resulted from our
decision to sell certain positions that had market values that exceeded our cost
basis during the nine months ended September 30, 2012.

Loss and Loss Adjustment Expenses.  Loss and loss adjustment expenses increased
$183.3 million, or 37.9%, to $667.4 million from $484.1 million for the nine
months ended September 30, 2012 and 2011, respectively. Our loss ratio for the
nine months ended September 30, 2012 and 2011 was 64.5% and 65.6%,
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 $113.4 million, or 39.9%, to $397.5 million from
$284.1 million for the nine months ended September 30, 2012 and 2011,
respectively. The expense ratio for the same periods increased to 24.8% from
23.4%, respectively, and impacted all segments.  The increase in policy
acquisition costs was the largest contributor to the increase in the expense
ratio during the nine months ended September 30, 2012 , which was the result of
a change in business mix as well the adoption of the 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 Subsidiary. Income before other income (expense), income taxes
and equity earnings of unconsolidated subsidiary increased $31.9 million, or
22.7%, to $172.2 million from $140.3 million for the nine months ended
September 30, 2012 and 2011, respectively. The change in income from 2011 to
2012 resulted primarily from the increase in service and fee income and earned
premium coupled with a combined ratio that was flat period over period.

Interest Expense. Interest expense for the nine months ended September 30, 2012
was $21.3 million, compared to $12.0 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 $5.3 million compared to $48.3 million for the nine
months ended September 30, 2012 and 2011. The gain in the first nine months of
2011 was generated by the purchase of a large pool of distressed life settlement
contracts in 2011 and the conversion of premium finance loans acquired in 2010
into life settlement contracts in 2011. During the nine months ended
September 30, 2012, we purchased or converted fewer contracts.

Provision for Income Tax. Income tax expense for the nine months ended
September 30, 2012 was $36.1 million, which resulted in an effective tax rate of
23.6%. Income tax expense for the nine months ended September 30, 2011 was $30.6
million, which resulted in an effective tax rate of 17.0%. The increase in our
effective rate for the nine months ended September 30, 2012 resulted primarily
from earning a higher percentage of pretax income in countries with higher
effective rates.

Equity in Earnings of Unconsolidated Subsidiary - Related Party. Equity in
earnings of unconsolidated subsidiary - related party increased by $5.3 million
for the nine months ended September 30, 2012 to $8.7 million compared to $3.4
million for the nine months ended September 30, 2011. The increase period over
period resulted from ACAC's 2011 purchase price adjustment from its 2010
acquisition of GMACI's consumer property and casualty business for which our
proportionate share of the adjustment was a decline of $3.6 million.


                                       44
--------------------------------------------------------------------------------

Small Commercial Business Segment Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)


                                        Three Months Ended September 30,           Nine Months Ended September 30,
(Amounts in Thousands)                      2012                 2011                 2012                 2011
Gross written premium                $       243,603       $       145,418     $       690,081       $       460,741

Net written premium                          133,492                79,070             356,652               269,942
Change in unearned premium                    (9,686 )              10,807             (46,950 )             (44,170 )
Net earned premiums                          123,806                89,877             309,702               225,772

Ceding commission - primarily
related party                                 17,845                16,312              50,435                48,207

Loss and loss adjustment expense             (81,727 )             (55,721 )          (201,256 )            (142,411 )
Acquisition costs and other
underwriting expenses                        (48,317 )             (42,074 )          (133,412 )            (108,483 )
Total expenses                              (130,044 )             (97,795 )          (334,668 )            (250,894 )
Underwriting income                  $        11,607       $         8,394     $        25,469       $        23,085
Key measures:
Net loss ratio                                  66.0 %                62.0 %              65.0 %                63.1 %
Net expense ratio                               24.6 %                28.7 %              26.8 %                26.7 %
Net combined ratio                              90.6 %                90.7 %              91.8 %                89.8 %
Reconciliation of net expense ratio:
Acquisition costs and other
underwriting expenses                $        48,317       $        42,074     $       133,412       $       108,483
Less: ceding commission revenue -
primarily related party                       17,845                16,312              50,435                48,207
                                              30,472                25,762              82,977                60,276
Net earned premium                   $       123,806       $        89,877     $       309,702       $       225,772
Net expense ratio                               24.6 %                28.7 %              26.8 %                26.7 %


Small Commercial Business Segment Results of Operations for the Three Months Ended September 30, 2012 and 2011


Gross Written Premium.  Gross written premium increased $98.2 million, or 67.5%,
to $243.6 million from $145.4 million for the three months ended September 30,
2012 and 2011, respectively. The increase related primarily to an approximately
12 percent increase in policy issuances and rate increases in certain key
states. In addition, approximately $13 million resulted from organic growth from
Majestic, which was acquired in the third quarter of 2011. Approximately $24
million resulted from other acquisitions.

Net Written Premium.  Net written premium increased $54.4 million, or 68.8%, to
$133.5 million from $79.1 million for the three months ended September 30, 2012
and 2011, respectively. The increase in net written premium resulted from an
increase in gross written premium for the three months ended September 30, 2012
compared to for the three months ended September 30, 2011.

 Net Earned Premium.  Net earned premium increased $33.9 million, or 37.7%, to
$123.8 million from $89.9 million for the three months ended September 30, 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 September 30, 2012 compared to the twelve
months ended September 30, 2011.


                                       45
--------------------------------------------------------------------------------


Ceding Commission.  The ceding commission earned during the three months ended
September 30, 2012 and 2011 was $17.8 million and $16.3 million, respectively.
The ceding commission increased period over period as result of an increase in
net earned premium, which was partially offset by a decrease in the allocation
of ceding commission to this segment. The decrease in the allocation of ceding
commission to this segment resulted from the decrease in the segment's
proportionate share of our overall policy acquisition expense in the third
quarter of 2012 compared to the third quarter of 2011.

Loss and Loss Adjustment Expenses.  Loss and loss adjustment expenses increased
$26.0 million, or 46.7%, to $81.7 million from $55.7 million for the three
months ended September 30, 2012 and 2011, respectively. Our loss ratio for the
segment for the three months ended September 30, 2012 increased to 66.0% from
62.0% for the three months ended September 30, 2011. The increase in the loss
ratio in the three months ended September 30, 2012 resulted primarily from
higher current accident year selected ultimate losses based on business mix by
state as compared to selected ultimate losses in prior accident years.

Acquisition Costs and Other Underwriting Expenses.  Acquisition costs and other
underwriting expenses increased $6.2 million, or 14.7%, to $48.3 million from
$42.1 million for the three months ended September 30, 2012 and 2011,
respectively. The expense ratio decreased to 24.6% for the three months ended
September 30, 2012 from 28.7% for the three months ended September 30, 2011. The
decrease in expense ratio related primarily from our ability to increase earned
premium at a rate that exceeded the growth rate of salaries, benefits and
insurance general and administrative expenses during the three months ended
September 30, 2012 compared to the equivalent period in 2011. The decrease was
partially offset by the adoption of the new accounting standard for deferred
acquisition costs during the first quarter of 2012.

 Net Earned Premiums less Expenses Included in Combined Ratio (Underwriting
Income).  Net premiums earned less expenses included in combined ratio increased
$3.2 million, or 38.1%, to $11.6 million from $8.4 million for the three months
ended September 30, 2012 and 2011, respectively. This increase resulted
primarily from an overall increase in the volume of premium writings partially
offset by an increase to the segment's loss ratio in the third quarter of 2012
compared to the third quarter of 2011.

Small Commercial Business Segment Results of Operations for the Nine Months Ended September 30, 2012 and 2011


Gross Written Premium.  Gross written premium increased $229.4 million, or
49.8%, to $690.1 million from $460.7 million for the nine months ended
September 30, 2012 and 2011, respectively. The increase related primarily to an
approximately ten percent increase in policy issuances as well as rate increases
in certain key states. In addition, approximately $48 million resulted from the
Majestic acquisition in the third quarter of 2011. Approximately $52 million
resulted from the acquisition of BTIS.

Net Written Premium.  Net written premium increased $86.8 million, or 32.2%, to
$356.7 million from $269.9 million for the nine months ended September 30, 2012
and 2011, respectively. The increase in net premium resulted from an increase in
gross written premium for the nine months ended September 30, 2012 compared to
the nine months ended September 30, 2011, partially offset by both an increase
in our assigned risk business in 2012, for which we cede 100 percent of our
gross written business, as well as an unearned premium transfer in 2011 related
to Majestic acquisition.

Net Earned Premium.  Net earned premium increased $83.9 million, or 37.2%, to
$309.7 million from $225.8 million for the nine months ended September 30, 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 September 30, 2012 compared to the twelve
months ended September 30, 2011.

Ceding Commission.  The ceding commission earned during the nine months ended
September 30, 2012 and 2011 was $50.4 million and $48.2 million, respectively.
The ceding commission increased period over period as result of an increase in
net earned premium, which was offset by a decrease in the allocation of ceding
commission to this segment. The decrease in the allocation of ceding commission
to this segment resulted from the decrease in the segment's proportionate share
of our overall policy acquisition expense.

Loss and Loss Adjustment Expenses.  Loss and loss adjustment expenses increased
$58.9 million, or 41.4%, to $201.3 million from $142.4 million for the nine
months ended September 30, 2012 and 2011, respectively. Our loss ratio for the
segment for the nine months ended September 30, 2012 increased to 65.0% from
63.1% for the nine months ended September 30, 2011. The increase in the loss
ratio in the nine months ended September 30, 2012 resulted primarily from higher
current accident year selected ultimate losses based on business mix by state as
compared to selected ultimate losses in prior accident years.


                                       46
--------------------------------------------------------------------------------


Acquisition Costs and Other Underwriting Expenses.  Acquisition costs and other
underwriting expenses increased $24.9 million, or 23.0%, to $133.4 million from
$108.5 million for the nine months ended September 30, 2012 and 2011,
respectively. The expense ratio increased to 26.8% for the nine months ended
September 30, 2012 from 26.7% for the nine months ended September 30, 2011. The
increase in the expense ratio resulted primarily from the lower allocation of
ceding commission to the segment during the nine months ended September 30, 2012
compared to the same period in 2011, the recognition of higher policy
acquisition expense due to changes in business mix and the adoption of the new
accounting standard for deferred acquisition costs in 2012 on a prospective
basis.

Net Earned Premiums less Expense Included in Combined Ratio (Underwriting
Income).  Net premiums earned less expenses included in combined ratio increased
$2.4million, or 10.0%, to $25.5 million from $23.1 million for the nine months
ended September 30, 2012 and 2011, respectively. This increase resulted
primarily from an increase in the volume of premium writings partially offset by
the increase in this segment's combined ratio in the third quarter of 2012
compared to the third quarter of 2011.

Specialty Risk and Extended Warranty Segment Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)


                                        Three Months Ended September 30,           Nine Months Ended September 30,
(Amounts in Thousands)                      2012                 2011                 2012                 2011
Gross written premium                $       260,415       $       256,493     $       767,114       $       749,743

Net written premium                          137,106               149,238             450,526               438,963
Change in unearned premium                   (21,371 )             (22,454 )           (57,611 )            (117,971 )
Net earned premiums                          115,735               126,784             392,915               320,992

Ceding commission - primarily
related party                                 13,226                14,928              46,594                41,614

Loss and loss adjustment expense             (72,812 )             (83,102 )          (241,883 )            (216,579 )
Acquisition costs and other
underwriting expenses                        (36,126 )             (39,187 )          (123,249 )             (97,493 )
Total expenses                              (108,938 )            (122,289 )          (365,132 )            (314,072 )
Underwriting income                  $        20,023       $        19,423     $        74,377       $        48,534
Key measures:
Net loss ratio                                  62.9 %                65.5 %              61.6 %                67.5 %
Net expense ratio                               19.8 %                19.1 %              19.5 %                17.4 %
Net combined ratio                              82.7 %                84.7 %              81.1 %                84.9 %
Reconciliation of net expense ratio:
Acquisition costs and other
underwriting expenses                $        36,126       $        39,187     $       123,249       $        97,493
Less: ceding commission revenue -
primarily related party                       13,226                14,928              46,594                41,614
                                              22,900                24,259              76,655                55,879
Net earned premium                   $       115,735       $       126,784     $       392,915       $       320,992
Net expense ratio                               19.8 %                19.1 %              19.5 %                17.4 %


Specialty Risk and Extended Warranty Segment Results of Operations for the Three Months Ended September 30, 2012 and 2011


Gross Written Premium. Gross written premium increased $3.9 million, or 1.5%, to
$260.4 million from $256.5 million for the three months ended September 30, 2012
and 2011, respectively. The increase related primarily to growth in our European
business, although fluctuations in currency rates, particularly the Euro,
resulted in an approximately six percent decrease in our European gross written
premium.

                                       47
--------------------------------------------------------------------------------


Net Written Premium. Net written premium decreased $12.1 million, or 8.1%, to
$137.1 million from $149.2 million for the three months ended September 30, 2012
and 2011, respectively. The decrease in net written premium resulted from an
increase in the percentage of gross written premium ceded to reinsurers for the
three months ended September 30, 2012 compared to the three months ended
September 30, 2011.

Net Earned Premium. Net earned premium decreased $11.0 million, or 8.7%, to
$115.8 million from $126.8 million for the three months ended September 30, 2012
and 2011, respectively. As net premiums written are earned ratably over the term
of a policy, which on average is 23 months, the decrease resulted from growth in
net written premium between 2010 and 2012.

Ceding Commission.  The ceding commission earned during the three months ended
September 30, 2012 and 2011 was $13.2 million and $14.9 million,
respectively. The decrease was the result of a decrease in the allocation of
ceding commission to this segment, which resulted from the decrease in the
segment's proportionate share of our overall policy acquisition expense in the
third quarter of 2012 compared to the third quarter of 2011.

Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses decreased
$10.3 million, or 12.4%, to $72.8 million from $83.1 million for the three
months ended September 30, 2012 and 2011, respectively. Our loss ratio for the
segment for the three months ended September 30, 2012 decreased to 62.9% from
65.5% for the three months ended September 30, 2011. The decrease in the loss
ratio for the three months ended September 30, 2012 resulted primarily from
lower current accident year selected ultimate losses as compared to selected
ultimate losses in prior accident years and a change in business mix.

Acquisition Costs and Other Underwriting Expenses.  Acquisition costs and other
underwriting expenses decreased $3.1 million, or 7.9%, to $36.1 million from
$39.2 million for the three months ended September 30, 2012 and 2011,
respectively. Although total acquisitions costs and other underwriting expenses
declined, the expense ratio increased to 19.8% for the three months ended
September 30, 2012 from 19.1% for the three months ended September 30, 2011. The
increase in the expense ratio resulted, primarily, from higher policy
acquisition expense for the three months ended September 30, 2012 compared to
the three months ended September 30, 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
$0.6 million, or 3.1%, to $20.0 million from $19.4 million for the three months
ended September 30, 2012 and 2011, respectively. The increase was attributable
primarily to an improvement in the segment's loss ratio during the three months
ended September 30, 2012 compared to the three months ended September 30, 2011
partially offset by a decrease in ceding commission.

Specialty Risk and Extended Warranty Segment Results of Operations for the Nine Months Ended September 30, 2012 and 2011


Gross Written Premium. Gross written premium increased $17.4 million, or 2.3%,
to $767.1 million from $749.7 million for the nine months ended September 30,
2012 and 2011, respectively. The segment experienced growth in Europe, while
U.S. business was primarily flat. Additionally, fluctuations in currency rates,
particularly the Euro, resulted in an approximately five percent decrease in our
European gross written premium.

Net Written Premium. Net written premium increased $11.5 million, or 2.6%, to
$450.5 million from $439.0 million for the nine months ended September 30, 2012
and 2011, respectively. The increase in net written premium resulted from an
increase of gross written premium for the nine months ended September 30, 2012
compared to the nine months ended September 30, 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 $71.9 million, or 22.4%, to
$392.9 million from $321.0 million for the nine months ended September 30, 2012
and 2011, respectively. As net written premium is earned ratably over the term
of a policy, which on average is 23 months, the increase resulted from growth in
net written premium between 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 nine months ended
September 30, 2012 and 2011 was $46.6 million and $41.6 million,
respectively. The increase related to the allocation to this segment of its
proportionate share of our overall policy acquisition expense. Additionally,
during the nine months ended September 30, 2012, we received a five percent
ceding commission in connection with a 40% quota share arrangement with Maiden
covering our European medical liability business. During the first three months
of 2011, we ceded this business to another reinsurer and did not receive a
ceding commission.


                                       48
--------------------------------------------------------------------------------



Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased
$25.3 million, or 11.7%, to $241.9 million from $216.6 million for the nine
months ended September 30, 2012 and 2011, respectively. Our loss ratio for the
segment for the nine months ended September 30, 2012 decreased to 61.6% from
67.5% for the nine months ended September 30, 2011. The decrease in the loss
ratio for the nine months ended September 30, 2012 resulted primarily from lower
current accident year selected ultimate losses as compared to selected ultimate
losses in prior accident years and a change in business mix.

Acquisition Costs and Other Underwriting Expenses.  Acquisition costs and other
underwriting expenses increased $25.7 million, or 26.4%, to $123.2 million from
$97.5 million for the nine months ended September 30, 2012 and 2011,
respectively. The expense ratio increased to 19.5% for the nine months ended
September 30, 2012 from 17.4% for the nine months ended September 30, 2011. The
increase in the expense ratio resulted primarily from higher policy acquisition
expense for the nine months ended September 30, 2012 compared to the nine months
ended September 30, 2011 related to changes in business mix and the adoption of
the 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
$25.9 million, or 53.4%, to $74.4 million from $48.5 million for the nine months
ended September 30, 2012 and 2011, respectively. The increase was attributable
primarily to an improvement in the segment's loss ratio during the nine months
ended September 30, 2012 compared to the nine months ended September 30, 2011.










































                                       49
--------------------------------------------------------------------------------

Specialty Program Segment Results of Operations for Three and Nine Months Ended September 30, 2012 and 2011(Unaudited)


                                        Three Months Ended September 30,           Nine Months Ended September 30,
(Amounts in Thousands)                      2012                 2011                 2012                 2011
Gross written premium                $       202,280       $       132,621     $       428,796       $       275,951

Net written premium                          182,803                66,905             338,157               145,422
Change in unearned premium                   (63,560 )             (19,958 )           (88,385 )             (27,567 )
Net earned premium                           119,243                46,947             249,772               117,855

Ceding commission - primarily
related party                                 18,789                 9,492              43,655                22,009

Loss and loss adjustment expense             (82,619 )             (30,376 )          (170,639 )             (78,443 )
Acquisition costs and other
underwriting expenses                        (50,551 )             (23,806 )          (115,475 )             (54,432 )
Total expenses                              (133,170 )             (54,182 )          (286,114 )            (132,875 )
Underwriting income                  $         4,862       $         2,257     $         7,313       $         6,989
Key measures:
Net loss ratio                                  69.3 %                64.7 %              68.3 %                66.6 %
Net expense ratio                               26.6 %                30.5 %              28.8 %                27.5 %
Net combined ratio                              95.9 %                95.2 %              97.1 %                94.1 %
Reconciliation of net expense ratio:
Acquisition costs and other
underwriting expenses                $        50,551       $        23,806     $       115,475       $        54,432
Less: ceding commission revenue -
primarily related party                       18,789                 9,492              43,655                22,009
                                              31,762                14,314              71,820                32,423
Net earned premium                   $       119,243       $        46,947     $       249,772       $       117,855
Net expense ratio                               26.6 %                30.5 %              28.8 %                27.5 %


Specialty Program Segment Results of Operations for the Three Months Ended September 30, 2012 and 2011


Gross Written Premium. Gross written premium increased $69.7 million, or 52.5%,
to $202.3 million from $132.6 million for the three months ended September 30,
2012 and 2011, respectively. A majority of the increase in gross written premium
related to incremental growth from existing programs driven primarily from
programs developed from new underwriting teams we hired in 2010 and 2011.

Net Written Premium. Net written premium increased $115.9 million, or 173.2%, to
$182.8 million from $66.9 million for the three months ended September 30, 2012
and 2011, respectively. The increase in net written premium resulted from an
increase in gross written premium for the three months ended September 30, 2012
compared to for the three months ended September 30, 2011 as well as an increase
in program writings that are not covered by the Maiden Quota Share.

Net Earned Premium. Net earned premium increased $72.3 million, or 154.0%, to
$119.2 million from $46.9 million for the three months ended September 30, 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 September 30, 2012 compared to the twelve
months ended September 30, 2011 .

Ceding Commission. The ceding commission earned during the three months ended
September 30, 2012 and 2011 was $18.8 million and $9.5 million,
respectively. The increase in ceding commission related primarily to an increase
in gross written premium in this segment relative to our other segments during
the three months ended September 30, 2012 and a shift in the mix of the programs
written during the periods. For the three months ended September 30, 2012 , we
initiated certain programs that have a higher percentage of policy acquisition
costs to earned premium than in the three months ended September 30, 2011 and,
therefore, we allocated more ceding commission to the segment.


                                       50
--------------------------------------------------------------------------------


Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased
$52.2 million, or 172.0%, to $82.6 million for the three months ended
September 30, 2012 compared to $30.4 million for the three months ended
September 30, 2011. Our loss ratio for the segment for the three months ended
September 30, 2012 increased to 69.3% from 64.7% for the three months ended
September 30, 2011. The increase in the loss ratio in the three months ended
September 30, 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 $26.8 million, or 112.6%, to $50.6 million from
$23.8 million for the three months ended September 30, 2012 and 2011,
respectively. The expense ratio decreased to 26.6% for the three months ended
September 30, 2012 from 30.5% for the three months ended September 30, 2011. The
decrease in the expense ratio resulted, primarily, from a change in business mix
within the segment during the quarter to programs written that have lower direct
acquisition costs and the allocation of a higher percentage of ceding commission
for the three months ended September 30, 2012 compared to the three months ended
September 30, 2011. The decrease was partially offset by the adoption of the 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
$2.6 million, or 113.0%, to $4.9 million from $2.3 million for the three months
ended September 30, 2012 and 2011, respectively. The increase of $2.6 million
resulted from an increase of both gross written premium and retention of more
gross written premium partially offset by a higher combined ratio during the
three months ended September 30, 2012 compared to the three months ended
September 30, 2011.

Specialty Program Segment Results of Operations for the Nine Months Ended September 30, 2012 and 2011


Gross Written Premium. Gross premium increased $152.8 million, or 55.4%, to
$428.8 million from $276.0 million for the nine months ended September 30, 2012
and 2011, respectively. A majority of the increase in gross written premium
related to incremental growth of existing programs, particularly in commercial
package policy programs. Additionally, the segment benefited from new program
offerings. The overall increase was partially offset by the curtailment or
termination of certain programs as a result of our continued maintenance of our
pricing and administrative discipline.

Net Written Premium. Net written premium increased $192.7 million, or 132.5%, to
$338.1 million from $145.4 million for the nine months ended September 30, 2012
and 2011, respectively. The increase in net written premium resulted from an
increase in gross written premium for the nine months ended September 30, 2012
compared to for the nine months ended September 30, 2011 as well as a reduction
in the percentage of gross written premium ceded to reinsurers.

Net Earned Premium. Net earned premium increased $131.9 million, or 111.9%, to
$249.8 million from $117.9 million for the nine months ended September 30, 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 September 30, 2012 compared to the twelve
months ended September 30, 2011.

Ceding Commission.  The ceding commission earned during the nine months ended
September 30, 2012 and 2011 was $43.7 million and $22.0 million, respectively.
The increase in ceding commission related primarily to an increase in gross
written premium in this segment relative to our other segments during the nine
months ended September 30, 2012 and a shift in the mix of the programs written
during the periods. For the nine months ended September 30, 2012, we wrote
certain programs that have a higher percentage of policy acquisition costs to
earned premium than in the nine months ended September 30, 2011 and, therefore,
we allocated more ceding commission to the segment.

Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased
$92.2 million, or 117.6%, to $170.6 million for the nine months ended
September 30, 2012, compared to $78.4 million for the nine months ended
September 30, 2011. Our loss ratio for the segment for the nine months ended
September 30, 2012 increased to 68.3% from 66.6% for the nine months ended
September 30, 2011. The increase in the loss ratio in the nine months ended
September 30, 2012 resulted primarily from higher current accident year selected
ultimate losses as compared to selected ultimate losses from prior years.









                                       51
--------------------------------------------------------------------------------


Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other
underwriting expenses increased $61.1 million, or 112.3%, to $115.5 million from
$54.4 million for the nine months ended September 30, 2012 and 2011,
respectively. The expense ratio increased to 28.8% for the nine months ended
September 30, 2012 from 27.5% for the nine months ended September 30, 2011. The
increase in the expense ratio resulted, primarily, from higher policy
acquisition expense for the nine months ended September 30, 2012 compared to the
nine months ended September 30, 2011 as a result of changes in business mix and
the adoption of the 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 nine
months ended September 30, 2011.

Net Earned Premiums less Expense Included in Combined Ratio (Underwriting
Income).   Net earned premiums less expenses included in combined ratio
increased $0.3 million, or 4.3%, to $7.3 million from $7.0 million for the nine
months ended September 30, 2012 and 2011, respectively. The increase of $0.3
million resulted primarily from an increase in the expense ratio during the nine
months ended September 30, 2012 compared to the nine months ended September 30,
2011.

Personal Lines Reinsurance Segment Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)


                                          Three Months Ended September 30,          Nine Months Ended September 30,
(Amounts in Thousands)                        2012                 2011                2012                 2011
Gross written premium                  $        30,258       $        26,690     $       89,690       $       77,276

Net written premium                             30,258                26,690             89,690               77,276
Change in unearned premium                      (1,595 )              (1,450 )           (6,614 )             (4,427 )
Net earned premium                              28,663                25,240             83,076               72,849
Loss and loss adjustment expense               (18,488 )             (16,153 )          (53,584 )            (46,623 )
Acquisition costs and other
underwriting expenses                           (8,742 )              (8,203 )          (25,338 )            (23,676 )
Total expenses                                 (27,230 )             (24,356 )          (78,922 )            (70,299 )
Underwriting income                    $         1,433       $           884     $        4,154       $        2,550
Key measures:
Net loss ratio                                    64.5 %                64.0 %             64.5 %               64.0 %
Net expense ratio                                 30.5 %                32.5 %             30.5 %               32.5 %
Net combined ratio                                95.0 %                96.5 %             95.0 %               96.5 %



We assumed $30.3 million and $26.7 million of premium from the GMACI Insurers
for the three months ended September 30, 2012 and 2011, respectively, and $89.7
million and $77.3 million for the nine months ended September 30, 2012 and 2011,
respectively. The increase related primarily to an increase 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 14.5% and 14.9% for the three and nine months ended September 30, 2012
compared to the same period in 2011. The net loss ratio increased 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.


                                       52
--------------------------------------------------------------------------------

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 $541.1 million and $436.2 million in the
nine months ended September 30, 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:


                                                           Nine Months Ended September 30,
(Amounts in Thousands)                                            2012                 2011
Cash and cash equivalents provided by (used in):
Operating activities                                       $       399,563       $       224,217
Investing activities                                              (311,729 )            (170,807 )
Financing activities                                                61,415                37,326



Net cash provided by operating activities for the nine months ended
September 30, 2012 increased compared to cash provided by operating activities
in the nine months ended September 30, 2011. The increase in cash flow is the
result, primarily, of an overall increase in cash collections due to policy
issuances that have not been fully earned during the nine months ended September
30, 2012.

Cash used in investing activities during the nine months ended September 30,
2012 was approximately $311.7 million and consisted of approximately $218
million for the net purchase of fixed maturity and equity securities,
approximately $42 million for the acquisition of and premium payments for life
settlement contracts, an increase in restricted cash of $24 million,
approximately $20 million for acquisitions and capital expenditures of
approximately $20 million. Cash used in investing activities in the nine months
ended September 30, 2011 was approximately $171 million and primarily consisted
of approximately $108 million for the net purchase of fixed and equity
securities, approximately $12 million for the purchase of an aircraft and
approximately $44 for the acquisition of and premium payments for life
settlement contracts partially offset by the net receipt of cash in the
approximate amount of $32 million received in connection with the acquisition of
Luxembourg captive insurance companies.

Cash provided by financing activities for the nine months ended September 30,
2012 was approximately $61 million and consisted primarily of debt proceeds of
approximately $38 million, minority interest capital contributions to certain of
our subsidiaries of approximately $17 million and borrowings from securities
sold under agreements to repurchase of approximately $34 million partially
offset by dividend payments of approximately $17 million and note payments of
approximately $13 million. Cash provided by financing activities for the nine
months ended September 30, 2011 was approximately $37 million and consisted
primarily of net borrowings of approximately $33 million on revolving credit
facilities, capital contributions from non-controlling interests to subsidiaries
of approximately $24 million and borrowings on a secured loan agreement of
approximately $11 million, partially offset by dividend payments of $14 million
and repayment of certain loans of approximately $15 million.


                                       53
--------------------------------------------------------------------------------

Revolving Credit Agreement


On August 10, 2012, we entered into a four-year, $200 million credit agreement
(the "Credit Agreement"), among JPMorgan Chase Bank, N.A., as Administrative
Agent, KeyBank National Association and SunTrust Bank, as Co-Syndication Agents,
Associated Bank, National Association and Lloyds Securities Inc., as
Co-Documentation Agents and the various lending institutions party thereto. The
credit facility is a revolving credit facility with a letter of credit sublimit
of $100 million and an expansion feature not to exceed $100 million.  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 September 30, 2012, we had no outstanding borrowings under this Credit
Agreement. We had outstanding letters of credit in place under this Credit
Agreement at September 30, 2012 for $49.0 million, which reduced the
availability for letters of credit to $51.0 million as of September 30, 2012 and
the availability under the facility to $151.0 million as of September 30, 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 September 30,
2012 was 2.50%. We recorded total interest expense of approximately $1.5 million
and $2.0 million for the nine months ended September 30, 2012 and 2011,
respectively, under the Credit Agreement and the terminated 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 1.50% at September 30, 2012), a letter of credit fronting fee with respect
to each letter of credit of 0.125% and a commitment fee on the available
commitments of the lenders (a range of 0.20% to 0.30% based on our consolidated
leverage ratio and was 0.25% at September 30, 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 bear
interest at a rate equal to 5.5% per year, payable semiannually in arrears on
June 15th and December 15th of each year, beginning 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 at September 30,
2012 is equal to 34.5759 shares of Common Stock per $1,000 principal amount of
Notes, which corresponds to a conversion price of approximately $28.92 per share
of Common Stock. 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), 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
$41.7 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 $10.5 million for the
nine months ended September 30, 2012.


                                       54
--------------------------------------------------------------------------------

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 $0.3 million for both the nine
months ended September 30, 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.

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 September 30, 2012, there were $226.1 million principal amount
outstanding at interest rates between 0.40% and 0.45%. Interest expense
associated with these repurchase agreements for the nine months ended
September 30, 2012 was $0.7 million, of which $0 million was accrued as of
September 30, 2012. We have approximately $244.1 million of collateral pledged
in support of these agreements. Under reverse repurchase agreements, we lend
cash or securities for a short term. During the nine months ended September 30,
2012, we entered into a collateralized lending transaction with a principal
amount of $57 million that is included in cash and cash equivalents as of
September 30, 2012. We retain collateral of $57 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 September 30, 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 September 30, 2012 was approximately $802.4 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 September 30, 2012. We are required to pay a letter of credit
participation fee for each letter of credit in the amount of 0.40%.


                                       55
--------------------------------------------------------------------------------

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, other investments and equity investments, increased $491.0
million, or 24.8%, to $2,471.2 million for the nine months ended September 30,
2012 from $1,980.2 million as of December 31, 2011 (excluding $14.3 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
$1,847.6 million and an amortized cost of 1,749.7 million as of September 30,
2012. Our equity securities are reported at fair value and totaled $18.3 million
with a cost of $20.2 million as of September 30, 2012. Securities sold but not
yet purchased, which was $57.2 million as of September 30, 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 $226.1
million as of September 30, 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:

                                              September 30, 2012                       December 31, 2011
                                                           Percentage of                           Percentage of
(Amounts in Thousands)                 Carrying Value        Portfolio         Carrying Value        Portfolio
Cash, cash equivalents and
restricted cash                      $        604,784            24.5 %      $        421,837            21.3 %
Time and short-term deposits                      485               -                 128,565             6.5
U.S. treasury securities                       48,341             2.0                  53,274             2.7
U.S. government agencies                       46,305             1.9                   6,790             0.3
Municipals                                    265,011            10.7                 275,017            13.9
Commercial mortgage back securities            10,209             0.4                     150               -
Residential mortgage backed
securities:
Agency backed                                 332,027            13.4                 364,000            18.4
Non-agency backed                               6,759             0.3                   7,664             0.4
Corporate bonds                             1,138,971            46.1                 687,348            34.7
Preferred stocks                                4,987             0.2                   4,314             0.2
Common stocks                                  13,331             0.5                  31,286             1.6
                                     $      2,471,210           100.0 %      $      1,980,245           100.0 %




                                       56
--------------------------------------------------------------------------------


The table below summarizes the credit quality of our fixed maturity securities
as of September 30, 2012 and December 31, 2011, as rated by Standard and Poor's.

                 2012      2011
U.S. Treasury     2.2 %     3.2 %
AAA              13.3      12.5
AA               34.0      39.7
A                24.3      23.0
BBB, BBB+, BBB-  25.0      20.1
BB, BB+, BB-      1.2       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 September 30, 2012 and December 31,
2011:
                                          September 30, 2012              December 31, 2011
                                                        Average                         Average
                                                       Duration                        Duration
                                     Average Yield%    in Years     Average Yield%     in Years
U.S. treasury securities                       2.18         2.6               2.31          3.3
U.S. government agencies                       4.13         3.1               4.12          2.9
Foreign government                             3.63         5.1               3.98          5.6
Corporate bonds                                4.11         4.9               4.38          3.7
Municipals                                     4.49         5.5               4.18          5.4
Mortgage and asset backed                      3.44         2.4               3.68          2.6


As of September 30, 2012, the weighted average duration of our fixed income securities was 4.4 years and had a yield of 4.0%.


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.


                                       57
--------------------------------------------------------------------------------


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.

The impairment charges of our fixed and equity securities for the nine months ended September 30, 2012 and 2011 are presented in the table below:


(Amounts in Thousands)      2012      2011
Equity securities         $ 1,208    $ 345
Fixed maturity securities       -        -
                          $ 1,208    $ 345



In addition to the other-than-temporary impairment of $1.2 million recorded
during the nine months ended September 30, 2012, we had $13.4 million of gross
unrealized losses, of which $3.1 million related to marketable equity securities
and $10.3 million related to fixed maturity securities.

Corporate bonds represent 62% of the fair value of our fixed maturities and 84%
of the total unrealized losses of our fixed maturities. We own 355 corporate
bonds in the industrial, bank and financial and other sectors, which have a fair
value of approximately 18%, 42% and 2%, respectively, and 21%, 64% and 0% 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, three common stocks comprised approximately 87% of the unrealized
loss, while their fair market value represented approximately 19% of the
portfolio. The duration of these impairments ranged from 12 to 15 months. The
remaining securities in a loss position are not considered individually
significant and accounted for 13% of our unrealized losses. We believe these
securities will recover and that we have the ability and intent to hold them to
recovery.


                                       58

--------------------------------------------------------------------------------

Wordcount: 14207



USER COMMENTS:

comments powered by Disqus

  More Newswires

More Newswires >>
  Most Popular Newswires

More Popular Newswires >>
Hot Off the Wires  Hot off the Wires

More Hot News >>

insider icon Denotes premium content. Learn more about becoming an Insider here.
Social Security changes you need to know now.