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., National General Holding Corp., 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, 2012, 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, through acquisitions of companies and assets that, in each case, provide access to distribution networks and renewal rights to established books of specialty insurance business. We have operations in four business segments:  

• Small Commercial Business. We provide workers' compensation, commercial

package and other commercial insurance lines produced by wholesale

agents, retail agents and brokers in the United States.

• Specialty Risk and Extended Warranty. We provide coverage for consumer

and commercial goods and custom designed coverages, such as accidental

          damage plans and payment protection plans offered in connection with           the sale of consumer and commercial goods, in the United States and

Europe, and certain niche property, casualty and specialty liability

risks in the United States and Europe, including general liability,

          employers' liability and professional and medical liability.   •         Specialty Program. We write commercial insurance for narrowly defined

classes of insureds, requiring an in-depth knowledge of the insured's

          industry segment, through general and other wholesale agents.   •         Personal Lines Reinsurance. We reinsure 10% of the net premiums of the           GMACI personal lines business, pursuant to the Personal Lines Quota           Share with the GMACI personal lines insurance companies.                                           37

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

We transact business primarily through our eight insurance subsidiaries domiciled in the United States and four insurance subsidiaries domiciled in Europe. We are authorized to write business in all 50 states in the United States and in the European Union. Our principal operating subsidiaries are rated "A" (Excellent) by A.M. Best Company ("A.M. Best").

  For the three months ended March 31, 2013, our results of operations include activity for the following entities that were acquired subsequent to the three months ended March 31, 2012:  

• CNH Capital Insurance Agency Inc. and CNH Capital Canada Insurance

Agency, Ltd., collectively known as "CNH Capital Insurance Agencies" or

"CNH"

• First Nonprofit Companies, Inc. ("FNC")

• Car Care Plan (Holdings) Limited ("CCPH" or "Car Care")

Insurance, particularly workers' compensation, is generally affected by seasonality. The first quarter generally produces greater premiums than subsequent quarters. Nevertheless, the impact of seasonality on our Small Commercial Business and Specialty Program segments has not been significant. We believe that this is because we serve many small businesses in different geographic locations. In addition, we believe seasonality is muted by our acquisition activity.

  We evaluate our operations by monitoring key measures of growth and profitability. We measure our growth by examining our net income, return on average equity, and our loss, expense and combined ratios. The following summary provides further explanation of the key measures that we use to evaluate our results:  Gross Written Premium. Gross written premium represents estimated premiums from each insurance policy that we write, including as 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 we ceded to third party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on the 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 24 months, but range in duration from one month to 120 months.  Net Investment Income and Realized Gains and (Losses).  We invest our statutory surplus funds and the funds supporting our insurance liabilities primarily in cash and cash equivalents, fixed maturity and equity securities. Our net investment income includes interest and dividends earned on our invested assets. We report net realized gains and losses on our investments separately from our net investment income. Net realized gains occur when we sell our investment securities for more than their costs or amortized costs, as applicable. Net realized losses occur when we sell our investment securities for less than their costs or amortized costs, as applicable, or we write down the investment securities as a result of other-than-temporary impairment. We classify equity securities and our fixed maturity securities as available-for-sale. We report net unrealized gains (losses) on those securities classified as available-for-sale separately within accumulated other comprehensive income on our balance sheet.  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 the contractual formula contained therein.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.                                          38 --------------------------------------------------------------------------------

  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 nine states. In addition, we also           offer claims adjusting and loss control services for fees to           unaffiliated third parties.  

• Management services - We provide services to insurance consumers,

          traditional insurers and insurance producers by offering flexible and           cost effective alternatives to traditional insurance tools in the form

of various risk retention groups and captive management companies, as

well as management of workers' compensation and commercial property

          programs. We also offer programs and alternative funding options for           non-profit and public sector organizations for the management of their           state unemployment insurance obligations.   •         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 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, National General Holdings Corp ("NGHC"), which           changed its name from American Capital Acquisition Corp, or ACAC, in           April 2013, and ACP Re, Ltd. for which we receive a management fee.  

• Information technology services - We provide information technology and

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

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

• Policy acquisition expenses comprise commissions directly attributable

to those agents, wholesalers or brokers that produce premiums written

on our behalf. In most instances, we pay commissions based on collected

          premium, which reduces our credit risk exposure associated with           producers in case a policyholder does not pay a premium. We pay state           and local taxes, licenses and fees, assessments and contributions to           various state guaranty funds based on our premiums or losses in each           state. Surcharges that we may be required to charge and collect from

insureds in certain jurisdictions are recorded as accrued liabilities,

          rather than expense.   •         Salaries and benefits expenses are those salaries and benefits expenses           for employees that are directly involved in the origination, issuance           and maintenance of policies, claims adjustment and accounting for

insurance transactions. We classify salaries and benefits associated

          with employees that are involved in fee generating activities as other           expenses.   •         General and administrative expenses are comprised of other costs           associated with our insurance activities, such as federal excise tax,           postage, telephones and internet access charges, as well as legal and           auditing fees and board and bureau charges.                                            39

--------------------------------------------------------------------------------   Gain (loss) on Investment in Life Settlement Contracts. The gain (loss) on investment in life settlement contracts includes the gain on acquisition of life settlement contracts, the gain realized upon a mortality event, the change in fair value of the investments in life settlements as evaluated at the end of each reporting period and changes in reserves life expectancy and contestability reserves. We determine fair value based upon our estimate of 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 increased 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 (loss) realized upon a mortality event is the difference between the death benefit received and the recorded fair value of that particular policy. We allocate gain (loss) on investment in life settlement contracts to our segments based on gross 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 LAE 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 each segment's proportionate share 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 22.2% and 16.9% for the three months ended March 31, 2013 and 2012, 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 89.5% and 88.5% for the three months ended March 31, 2013 and 2012, 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, 2012.                                          40 --------------------------------------------------------------------------------

Results of Operations

  Consolidated Results of Operations for the Three Months Ended March 31, 2013 and 2012 (Unaudited)                                                                Three Months Ended March 31, (Amounts in Thousands)                                          2013                 2012 Gross written premium                                     $      943,922$      601,687  Net written premium                                       $      532,106$      359,777 Change in unearned premium                                      (124,112 )            (45,753 ) Net earned premiums                                              407,994              314,024 Ceding commission - primarily related party                       63,958               46,274 

Service and fee income (related parties - $10,507; $6,092)

                                                           60,513               40,538 Net investment income                                             18,095               14,518 Net realized gain (loss) on investments                           17,284               (1,148 ) Total revenues                                                   567,844    

414,206

 Loss and loss adjustment expense                                 272,256    

199,929

 Acquisition costs and other underwriting expenses                156,820              124,025 Other                                                             52,152               35,639 Total expenses                                                   481,228              359,593

Income before other income (expense), income taxes and equity in earnings of unconsolidated subsidiaries

                 86,616               54,613 Other income (expense): Interest expense                                                  (7,361 )             (7,091 ) Net (loss) gain on investment in life settlement contracts                                                         (1,076 )                 90 Foreign currency gain                                              1,272                  421 Total other income (expense)                                      (7,165 )             (6,580 ) 

Income before income taxes and equity in earnings (loss) of unconsolidated subsidiaries

                                    79,451               48,033 Provision for income taxes                                        17,660               11,177 

Income before equity in earnings of unconsolidated subsidiaries

                                                      61,791               36,856 Equity in earnings of unconsolidated subsidiaries - related party                                                      1,551                2,364 Net income                                                        63,342               39,220 Non-controlling interest                                             876                 (134 )

Net income attributable to AmTrust Financial Services, Inc.

$       64,218

$ 39,086

  Net realized gain (loss) on investments: Total other-than-temporary impairment loss                $            -       $            - Portion of loss recognized in other comprehensive income               -                    - Net impairment losses recognized in earnings                           -                    - Other net realized gain on investments                            17,284               (1,148 ) Net realized investment gain (loss)                       $       17,284$       (1,148 )  Key measures: Net loss ratio                                                      66.7 %               63.7 % Net expense ratio                                                   22.8 %               24.8 % Net combined ratio                                                  89.5 %               88.5 %                                            41

--------------------------------------------------------------------------------   Gross Written Premium. Gross written premium increased $342.2 million, or 56.9%, to $943.9 million from $601.7 million for the three months ended March 31, 2013 and 2012, respectively. The increase of $342.2 million was primarily attributable to growth in our three primary segments. The increase in Small Commercial Business resulted primarily from increases in the number of policies issued as well as the average policy size. The largest increases came from the states of California, Florida, New Jersey and New York. Additionally, we had an increase in our assigned risk premium. The increase in Specialty Program resulted primarily from growth in existing in workers' compensation programs and commercial package programs.  Net Written Premium. Net written premium increased $172.3 million, or 47.9%, to $532.1 million from $359.8 million for the three months ended March 31, 2013 and 2012, respectively. The increase by segment was: Small Commercial Business - $54.8 million, Specialty Risk and Extended Warranty - $43.2 million, Specialty Program - $74.2 million and Personal Lines - $0.1 million. Net written premium increased for the three months ended March 31, 2013 compared to the same period in 2012 due to the increase in gross written premium in 2013 compared to 2012 and was partially offset by lower retention of premiums written on programs in our Small Commercial Business segment and Specialty Risk and Extended Warranty segment that are not covered by the Maiden Quota Share. Our overall retention rates were 56.4% and 59.8% for the three months ended March 31, 2013 and 2012, respectively.  Net Earned Premium. Net earned premium increased $94.0 million, or 29.9%, to $408.0 million from $314.0 million for the three months ended March 31, 2013 and 2012, respectively. The increase by segment was: Small Commercial Business - $34.3 million, Specialty Risk and Extended Warranty - $5.6 million, Specialty Program - $51.8 million, and Personal Lines - $2.3 million. The increase in net earned premium corresponded to the increase in net written premium, which was partially offset by the increase in the Specialty Risk and Extended Warranty segment because premiums in that segment are earned over an average of 24 months.  Ceding Commission. Ceding commission represents commission earned primarily through the Maiden Quota Share, whereby we receive a ceding commission of 31% of premiums ceded for all business except retail commercial package business, and 34.375% for retail commercial package business. The ceding commission earned during the three months ended March 31, 2013 and 2012 was $64.0 million and $46.3 million, respectively. Ceding commission increased period over period as a result of increased premium writings and was consistent period over period as a percentage of earned premium.  Service and Fee Income. Service and fee income increased $20.0 million, or 49.3%, to $60.5 million from $40.5 million for the three months ended March 31, 2013 and 2012, respectively. The increase primarily related to additional fee income from acquisitions, as well as organic growth. We produced additional fee income of approximately $13.6 million during the three months ended March 31, 2013 related to the acquisitions of Car Care in February 2013 and FNC and CNH in the second half of 2012. Additionally, we had higher technology fee income from NGHC of approximately $2.9 million and higher reinsurance brokerage fees from Maiden of approximately $1.5 million.  Net Investment Income. Net investment income increased $3.6 million, or 24.6%, to $18.1 million from $14.5 million for the three months ended March 31, 2013 and 2012, respectively. The increase resulted primarily from having a higher average portfolio of fixed security investment securities during the three months ended March 31, 2013 compared to the three months ended March 31, 2012 partially offset by lower yields.  Net Realized Gains (Losses) on Investments. We had a net realized gain on investments of $17.3 million for the three months ended March 31, 2013, compared to a net realized loss on investments of $1.1 million for the three months ended March 31, 2012. The increase in 2013 resulted from an effort to sell securities with sizable unrealized gain positions in our investment portfolio during the three months ended March 31, 2013.   Loss and Loss Adjustment Expenses.  Loss and loss adjustment expenses increased $72.4 million, or 36.2%, to $272.3 million from $199.9 million for the three months ended March 31, 2013 and 2012, respectively. Our loss ratio for the three months ended March 31, 2013 and 2012 was 66.7% and 63.7%, respectively. The increase in the loss ratio in 2013 primarily impacted our Small Commercial Business segment and our Specialty Risk and Extended Warranty segment. The increases resulted from a higher loss ratio in our workers' compensation business in the state of California, higher ultimate loss selections in our European casualty business in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, and changes in the proportionate share of business written by segment.                                          42

--------------------------------------------------------------------------------   Acquisition Costs and Other Underwriting Expenses.  Acquisition costs and other underwriting expenses increased $32.8 million, or 26.4%, to $156.8 million from $124.0 million for the three months ended March 31, 2013 and 2012, respectively. The expense ratio for the same periods decreased to 22.8% from 24.8%, respectively, and was driven by our three primary segments. The decrease in the expense ratio resulted both from change in business mix and economies of scale. During the three months ended March 31, 2013, a higher percentage of the gross written premium increase was attributable to workers' compensation business in both the Small Commercial Business and Specialty Program segments, which has lower policy acquisition expenses. Additionally, salary expense increased at a slower rate than earned premium due to leveraging of our existing employee base.  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 $32.0 million, or 58.6%, to $86.6 million from $54.6 million for the three months ended March 31, 2013 and 2012, respectively. The change in income from 2013 to 2012 resulted primarily from increases in realized gains of $18.4 million, underwriting income of $6.5 million and investment income of $3.6 million.  Interest Expense. Interest expense for the three months ended March 31, 2013 was $7.4 million, compared to $7.1 million for the same period in 2012. The increase was primarily related to higher interest on repurchase agreements and interest on our promissory notes entered into during the third quarter of 2012.   Net Gain (Loss) on Investment in Life Settlement Contracts.  We incurred a loss on investment in life settlement contracts of $1.1 million for the three months ended March 31, 2013 compared to a gain of $0.1 million for the three months ended 2012. The decrease in income from life settlement contracts resulted from a lower net increase in fair value of the life settlement contracts, which resulted from the updating of life expectancies of the underlying insureds. This decrease was partially offset by a gain realized upon a mortality event in the three months ended March 31, 2013.  Provision for Income Tax. Income tax expense for the three months ended March 31, 2013 was $17.7 million, which resulted in an effective tax rate of 22.2%. The effective rate was consistent with the prior period as income tax expense for the three months ended March 31, 2012 was $11.2 million, which resulted in an effective tax rate of 23.3%.  Equity in Earnings of Unconsolidated Subsidiary - Related Party. Equity in earnings of unconsolidated subsidiary - related party decreased by $0.8 million for the three months ended March 31, 2013 to $1.6 million compared to $2.4 million for the three months ended March 31, 2012. The decrease in equity in earnings for the first quarter of 2013 compared to the first quarter of 2012 resulted from NGHC's proportional loss on life settlement contracts for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.                                          43

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

Small Commercial Business Segment Results of Operations for the Three Months Ended March 31, 2013 and 2012 (Unaudited)

                                                                Three Months Ended March 31, (Amounts in Thousands)                                           2013                 2012 Gross written premium                                      $      375,849$      232,351  Net written premium                                               173,740              118,890 Change in unearned premium                                        (47,140 )            (26,562 ) Net earned premiums                                               126,600               92,328 Ceding commission - primarily related party                        24,166               17,132 Loss and loss adjustment expense                                  (84,330 )            (59,224 ) Acquisition costs and other underwriting expenses                 (55,830 )            (42,930 )                                                                  (140,160 )           (102,154 ) Underwriting income                                        $       10,606$        7,306  Key measures: Net loss ratio                                                       66.6 %               64.1 % Net expense ratio                                                    25.0 %               27.9 % Net combined ratio                                                   91.6 %               92.1 %  Reconciliation of net expense ratio: Acquisition costs and other underwriting expenses          $       55,830$       42,930 Less: ceding commission revenue - primarily related party          24,166               17,132                                                                    31,664               25,798 Net earned premium                                         $      126,600$       92,328 Net expense ratio                                                    25.0 %               27.9 %    Gross Written Premium.  Gross written premium increased $143.4 million, or 61.8%, to $375.8 million from $232.4 million for the three months ended March 31, 2013 and 2012, respectively. The increase related primarily from the number of policies issued as well as the average policy size. The majority of the increase, $103 million, came from the states of California, Florida, New Jersey and New York. Additionally, we had an increase in our assigned risk premium of $17 million.  Net Written Premium.  Net written premium increased $54.8 million, or 46.1%, to $173.7 million from $118.9 million for the three months ended March 31, 2013 and 2012, respectively. The increase in net premium resulted from an increase in gross written premium for the three months ended March 31, 2013 compared to the three months ended March 31, 2012, partially offset by an increase in our assigned risk business in 2013, for which we cede 100 percent of our gross written business.  Net Earned Premium.  Net earned premium increased $34.3 million, or 37.2%, to $126.6 million from $92.3 million for the three months ended March 31, 2013 and 2012, respectively. As premiums written earn ratably over an annual period, the increase in net premium earned resulted from higher net written premium for the twelve months ended March 31, 2013 compared to the twelve months ended March 31, 2012.  Ceding Commission.  The ceding commission earned during the three months ended March 31, 2013 and 2012 was $24.2 million and $17.1 million, respectively. The ceding commission increased period over period as a result of an increase in net earned premium, as the segment received its allocation of ceding commission for their proportionate share of our overall policy acquisition expense.                                          44 --------------------------------------------------------------------------------   Loss and Loss Adjustment Expenses.  Loss and loss adjustment expenses increased $25.1 million, or 42.4%, to $84.3 million from $59.2 million for the three months ended March 31, 2013 and 2012, respectively. Our loss ratio for the segment for the three months ended March 31, 2013 increased to 66.6% from 64.1% for the three months ended March 31, 2012. The increase in the loss ratio in the three months ended March 31, 2013 resulted primarily from having a higher percentage of earned premium in 2013 from workers' compensation policies in the state of California, for which we assign a higher ultimate loss selection than for workers' compensation policies written in other states.  Acquisition Costs and Other Underwriting Expenses.  Acquisition costs and other underwriting expenses increased $12.9 million, or 30.0%, to $55.8 million from $42.9 million for the three months ended March 31, 2013 and 2012, respectively. The expense ratio decreased to 25.0% for the three months ended March 31, 2013 from 27.9% for the three months ended March 31, 2012. The decrease in the expense ratio resulted both from a change in our business mix and economies of scale. During the three months ended March 31, 2013, a higher percentage of the gross written premium increase was attributable to workers' compensation business, which has lower policy acquisition expenses. Additionally, salary expense increased at a slower rate than earned premium due to the leveraging of our existing employee base.  Net Earned Premiums less Expense Included in Combined Ratio (Underwriting Income).  Net premiums earned less expenses included in combined ratio increased $3.3 million, or 45.2%, to $10.6 million from $7.3 million for the three months ended March 31, 2013 and 2012, respectively. This increase resulted primarily from a lower expense ratio in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, partially offset by higher loss and loss adjustment expenses in the first quarter of 2013 compared to the first quarter of 2012.  

Specialty Risk and Extended Warranty Segment Results of Operations for the Three Months Ended March 31, 2013 and 2012 (Unaudited)

                                                                Three Months Ended March 31, (Amounts in Thousands)                                           2013                 2012 Gross written premium                                      $      328,329$      234,089  Net written premium                                               184,442              141,161 Change in unearned premium                                        (43,288 )             (5,588 ) Net earned premiums                                               141,154              135,573 Ceding commission - primarily related party                        18,008               17,194 Loss and loss adjustment expense                                  (92,971 )            (83,443 ) Acquisition costs and other underwriting expenses                 (41,903 )            (43,085 )                                                                  (134,874 )           (126,528 ) Underwriting income                                        $       24,288$       26,239  Key measures: Net loss ratio                                                       65.9 %               61.5 % Net expense ratio                                                    16.9 %               19.1 % Net combined ratio                                                   82.8 %               80.6 %  Reconciliation of net expense ratio: Acquisition costs and other underwriting expenses          $       41,903$       43,085 Less: ceding commission revenue - primarily related party          18,008               17,194                                                                    23,895               25,891 Net earned premium                                         $      141,154$      135,573 Net expense ratio                                                    16.9 %               19.1 %    Gross Written Premium. Gross written premium increased $94.2 million, or 40.2%, to $328.3 million from $234.1 million for the three months ended March 31, 2013 and 2012, respectively. The segment experienced growth both in Europe and the United                                         45 --------------------------------------------------------------------------------   States. The growth in Europe was driven by an increase in the underwriting of legal expense policies, while the growth in the United States resulted from the underwriting of new programs, including programs related to our acquisition of CNH in 2012.  Net Written Premium. Net written premium increased $43.2 million, or 30.6%, to $184.4 million from $141.2 million for the three months ended March 31, 2013 and 2012, respectively. The increase in net written premium resulted from an increase of gross written premium for the three months ended March 31, 2013 compared to the three months ended March 31, 2012, partially offset by a lower retention of gross written premium during 2013 compared to 2012. Our overall retention rate for the segment was 56.2% and 60.3% for the three months ended March 31, 2013 and 2012, respectively.  Net Earned Premium. Net earned premium increased $5.6 million, or 4.1%, to $141.2 million from $135.6 million for the three months ended March 31, 2013 and 2012, respectively. As net written premium is earned ratably over the term of a policy, which on average is 24 months, net earned premium did not increase proportionately to the increases in gross written premium and net written premium during the three months ended March 31, 2013.  Ceding Commission.  The ceding commission earned during the three months ended March 31, 2013 and 2012 was $18.0 million and $17.2 million, respectively. The increase related to the allocation to this segment of its proportionate share of our overall policy acquisition expense.  Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $9.6 million, or 11.5%, to $93.0 million from $83.4 million for the three months ended March 31, 2013 and 2012, respectively. Our loss ratio for the segment for the three months ended March 31, 2013 increased to 65.9% from 61.5% for the three months ended March 31, 2012. The increase in the loss ratio for the three months ended March 31, 2013 resulted primarily from our assignment of a higher ultimate loss selection for our European casualty business in the three months ended March 31, 2013 compared to the three months ended March 31, 2012.  Acquisition Costs and Other Underwriting Expenses.  Acquisition costs and other underwriting expenses decreased $1.2 million, or 2.8%, to $41.9 million from $43.1 million for the three months ended March 31, 2013 and 2012, respectively. The expense ratio decreased to 16.9% for the three months ended March 31, 2013 from 19.1% for the three months ended March 31, 2012. The decrease in the expense ratio resulted from economies of scale as salary expense increased at a slower rate than earned premium due to the leveraging of our existing employee base.  Net Earned Premiums less Expenses Included in Combined Ratio (Underwriting Income).  Net earned premiums less expenses included in combined ratio decreased $1.9 million, or 7.2%, to $24.3 million from $26.2 million for the three months ended March 31, 2013 and 2012, respectively. The decrease was attributable primarily to an increase in the segment's loss ratio during the three months ended March 31, 2013 compared to the three months ended March 31, 2012, partially offset by an decrease in the segment's expense ratio.                                         46 --------------------------------------------------------------------------------   Specialty Program Segment Results of Operations for Three Months Ended March 31, 2013 and 2012 (Unaudited)                                                                 Three Months Ended March 31, (Amounts in Thousands)                                           2013                 2012 Gross written premium                                      $      209,092$      104,638  Net written premium                                               143,272               69,117 Change in unearned premium                                        (31,794 )             (9,456 ) Net earned premium                                                111,478               59,661 Ceding commission - primarily related party                        21,784               11,948 Loss and loss adjustment expense                                  (75,554 )            (40,194 ) Acquisition costs and other underwriting expenses                 (50,327 )            (29,939 )                                                                  (125,881 )            (70,133 ) Underwriting income                                        $        7,381$        1,476  Key measures: Net loss ratio                                                       67.8 %               67.4 % Net expense ratio                                                    25.6 %               30.2 % Net combined ratio                                                   93.4 %               97.5 %  Reconciliation of net expense ratio: Acquisition costs and other underwriting expenses          $       50,327$       29,939 Less: ceding commission revenue - primarily related party          21,784               11,948                                                                    28,543               17,991 Net earned premium                                         $      111,478$       59,661 Net expense ratio                                                    25.6 %               30.2 %    Gross Written Premium. Gross premium increased $104.5 million, or 99.9%, to $209.1 million from $104.6 million for the three months ended March 31, 2013 and 2012, respectively. The segment benefited from growth in new programs and existing programs. A majority of the increase, or 55%, in gross written premium related to incremental growth of existing programs including both workers' compensation programs and commercial package policy programs. Additionally, the segment benefited from new programs, particularly in workers' compensation programs, which accounted for 32% of the total increase in gross written premium during the first quarter of 2013.  Net Written Premium. Net written premium increased $74.2 million, or 107.4%, to $143.3 million from $69.1 million for the three months ended March 31, 2013 and 2012, respectively. The increase in net written premium resulted from an increase in gross written premium for the three months ended March 31, 2013 compared to for the three months ended March 31, 2012 as well as a reduction in the percentage of gross written premium ceded to reinsurers with respect to programs that are not covered by the Maiden Quota Share.  Net Earned Premium. Net earned premium increased $51.8 million, or 86.8%, to $111.5 million from $59.7 million for the three months ended March 31, 2013 and 2012, respectively. As premiums written earn ratably over an annual period, the increase in net premium earned resulted from higher net written premium for 2013 compared to 2012.  Ceding Commission.  The ceding commission earned during the three months ended March 31, 2013 and 2012 was $21.8 million and $11.9 million, respectively. The ceding commission increased period over period as result of an increase in net earned premium, as the segment received its allocation of ceding commission for their proportionate share of our overall policy acquisition expense.                                          47 --------------------------------------------------------------------------------   Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $35.4 million, or 88.1%, to $75.6 million for the three months ended March 31, 2013, compared to $40.2 million for the three months ended March 31, 2012. Our loss ratio for the segment for the three months ended March 31, 2013 increased to 67.8% from 67.4% for the three months ended March 31, 2012. The increase in the loss ratio in the three months ended March 31, 2013 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 $20.4 million, or 68.2%, to $50.3 million from $29.9 million for the three months ended March 31, 2013 and 2012, respectively. The expense ratio decreased to 25.6% for the three months ended March 31, 2013 from 30.2% for the three months ended March 31, 2012. The decrease in the expense ratio resulted both from a change in business mix and economies of scale. During the three months ended March 31, 2013, a higher percentage of gross written premium was attributable to workers' compensation business, which has lower policy acquisition expenses than other types of business written in this segment.  Net Earned Premiums less Expense Included in Combined Ratio (Underwriting Income).   Net earned premiums less expenses included in combined ratio increased $5.9 million, or 393.3%%, to $7.4 million from $1.5 million for the three months ended March 31, 2013 and 2012, respectively. The increase of $5.9 million resulted primarily from an increase in the earned premium in 2013 compared to 2012 as well as a lower expense ratio.  

Personal Lines Reinsurance Segment Results of Operations for the Three Months Ended March 31, 2013 and 2012 (Unaudited)

                                                      Three Months Ended March 31, (Amounts in Thousands)                                  2013               2012 Gross written premium                             $      30,652$      30,609  Net written premium                                      30,652              30,609 Change in unearned premium                               (1,890 )            (4,147 ) Net earned premium                                       28,762              26,462 Loss and loss adjustment expense                        (19,401 )           (17,068 ) Acquisition costs and other underwriting expenses        (8,760 )            (8,071 )                                                         (28,161 )           (25,139 ) Underwriting income                               $         601       $       1,323  Key measures: Net loss ratio                                             67.5 %              64.5 % Net expense ratio                                          30.5 %              30.5 % Net combined ratio                                         97.9 %              95.0 %    We assumed $30.7 million and $30.6 million of premium from the insurance companies of GMAC Insurance Holdings, Inc. (the "GMACI Insurers") for the three months ended March 31, 2013 and 2012, respectively. As the GMACI premium in the three months ended March 31, 2013 compared to March 31, 2012 was essentially unchanged, the change in our assumed premium was proportionate. Net earned premium increased 8.7% in the first quarter of 2013 compared to the first quarter of 2012 due to the earning cycle of assumed written premium in 2012. Loss and loss adjustment expense increased 13.5% for the three months ended March 31, 2013 compared to the same period in 2012 and increased proportionally with net earned premium. The net expense ratio in the first quarter of 2013 was flat compared to first quarter of 2012.                                          48 --------------------------------------------------------------------------------

Liquidity and Capital Resources

  Our principal sources of operating funds are premiums, service and fee income, 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 $197.9 million and $172.7 million in the three months ended March 31, 2013 and 2012, respectively. We expect that projected cash flow from operations will provide us sufficient liquidity to fund our anticipated growth, by providing capital to increase the surplus of our insurance subsidiaries, as well as for payment of claims and operating expenses, payment of interest and principal on debt facilities and other holding company expenses for at least the next twelve months. However, if our growth attributable to potential acquisitions, internally generated growth or a combination of these, 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 operation could be adversely affected.  

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

                                                       Three Months Ended March 31, (Amounts in Thousands)                                 2013                

2012

 Cash and cash equivalents provided by (used in): Operating activities                             $      198,267$      88,434 Investing activities                                    (59,286 )          (256,372 ) Financing activities                                    (96,762 )            36,024    Net cash provided by operating activities for the three months ended March 31, 2013 increased compared to cash provided by operating activities in the three months ended March 31, 2012. The increase in cash provided from operations resulted primarily from an increase in gross written premium written in 2013 compared to 2012.  Net cash used in investing activities was approximately $59 million during the three months ended March 31, 2013. Net cash used in investing activities was $256 million for the three months ended March 31, 2012. In the three months ended March 31, 2013, net cash used in investing activities primarily included an increase of restricted cash of approximately $37 million, approximately $5 million for the net purchase of fixed maturity and equity securities, approximately $9 million for the acquisition of and premium payments for life settlement contracts, and approximately $8 million for capital expenditures. In the three months ended March 31, 2012, net cash used in investing activities primarily included approximately $8 million for life settlement contracts, approximately $205 million for the purchase of fixed maturity and equity securities and an increase in restricted cash of $36 million.  Net cash used in financing activities was approximately $97 million for the three months ended March 31, 2013 compared to net cash provided by financing activities of approximately $36 million during the three months ended March 31, 2012. During the three months ended March 31, 2013, cash used in financing activities primarily included the payment of approximately $100 million to settle repurchase agreements partially offset by the contribution of approximately $2 million from non-controlling interest to our subsidiaries. Additionally, in the three months ended March 31, 2013, no cash dividends were paid. During the three months ended March 31, 2012, cash provided by financing activities primarily included debt proceeds of approximately $25 million, minority interest capital contributions to one of our subsidiaries of approximately $5 million and borrowings from securities sold under agreements to repurchase of $9 million, partially offset by cash dividends of approximately $6 million.                                          49

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

Other Material Changes in Financial Position

  (Amounts in thousands)                              March 31, 2013         December 31, 2012 Assets: Fixed maturities, available for sale            $          2,227,384     $          2,065,226 Prepaid reinsurance premium                                  869,327                  754,844 Liabilities: Loss and loss expense reserve                   $          2,577,026     $          2,426,400 Unearned premium                                           2,147,986                1,773,593 Accrued expenses and other current liabilities               572,761        

406,447

    The increase in fixed maturities, available for sale and accrued expenses and other current liabilities from December 31, 2012 to March 31, 2013 related to certain assets and liabilities assumed from the acquisition of CCPH. The increase in prepaid reinsurance premium between periods related to higher cessions of premium during the first quarter of 2013. The increase in loss and loss expense reserve and unearned premium related to a significant increase in gross written premium during the three months ended March 31, 2013 compared to prior quarterly periods and liabilities assumed from the acquisition from the acquisition of CCPH.  

Revolving Credit Agreement

  We have a $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, which matures in 2016, is a revolving credit facility with a letter of credit sublimit of $100 million and an expansion feature not to exceed $100 million. Fees associated with the Credit Agreement were approximately $1.0 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. We are in compliance with all covenant as of March 31, 2013.  As of March 31, 2013, we had no outstanding borrowings under this Credit Agreement. We had outstanding letters of credit in place under this Credit Agreement at March 31, 2013 for $95.8 million, which reduced the availability for letters of credit to $4.2 million as of March 31, 2013, and the availability under the facility to $104.2 million as of March 31, 2013.  Borrowings under the Credit Agreement will bear interest at (x) the greatest of (a) the Administrative Agent's prime rate, (b) the federal funds effective rate plus 0.5 percent or (c) the adjusted LIBO rate for a one month interest period on such day plus 1 percent, plus (y) a margin that is adjusted on the basis of our consolidated leverage ratio. Eurodollar borrowings under the Credit Agreement will bear interest at the adjusted LIBO rate for the interest period in effect plus a margin that is adjusted on the basis of our consolidated leverage ratio. The interest rate on our credit facility as of March 31, 2013 was 2.50%. We recorded total interest expense of approximately $0.6 million and $0.5 million for the three months ended March 31, 2013 and 2012, respectively, under our current and former 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 March 31, 2013), 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 March 31, 2013).                                          50 --------------------------------------------------------------------------------

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, we issued an additional $25 million of the Notes to cover the initial purchasers' overallotment option. The Notes bear interest at a rate equal to 5.5% per year, payable semiannually in arrears on June 15 and December 15 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 March 31, 2013 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 $4.8 million will be amortized into interest expense over the term of the loan of the Notes. After considering the contractual interest payments and amortization of the original discount, the Notes effective interest rate was 8.57%. Transaction costs of $1.3 million associated with the equity component were netted in paid-in-capital. Interest expense, including amortization of deferred origination costs, recognized on the Notes was $3.6 million and $3.5 million for the three months ended March 31, 2013 and 2012, respectively.  

Secured Loan Agreement

  During 2011, we entered into a seven-year secured loan agreement with Bank of America Leasing & Capital, LLC in the aggregate amount of $10.8 million to finance the purchase of an aircraft. The loan bears interest at a fixed rate of 4.45%, requires monthly installment payments of approximately $0.1 million commencing on March 25, 2011 and ending on February 25, 2018, and a balloon payment of $3.2 million at the maturity date. We recorded interest expense of approximately $0.1 million for both the three months ended March 31, 2013 and 2012 related to this agreement. The loan is secured by an aircraft that our subsidiaries 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 March 31, 2013, there were $135.2 million principal amount outstanding at interest rates between 0.45% and 0.53%. Interest expense associated with these repurchase agreements for the three months ended March 31, 2013 was $0.3 million, of which $0.0 million was accrued as of March 31, 2013. We have approximately $144.3 million of collateral pledged in support of these agreements. Under reverse repurchase agreements, we lend cash or securities for a short term. During 2102, we entered into a collateralized lending transaction with a principal amount of $56.1 million that is included in cash and cash equivalents as of March 31, 2013. We retain collateral of $56.3 million related to this agreement.                                          51

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

Note Payable - Collateral for Proportionate Share of Reinsurance Obligation

  In conjunction with the Reinsurance Agreement between AII and Maiden Insurance (see Note 11. "Related Party Transactions"), AII entered into a loan agreement with Maiden Insurance during the fourth quarter of 2007, whereby Maiden Insurance loaned to AII the amount equal to its quota share of the obligations of the AmTrust Ceding Insurers that AII was then obligated to secure. The loan agreement provides for interest at a rate of LIBOR plus 90 basis points and is payable on a quarterly basis. Each advance under the loan is secured by a promissory note. Advances totaled $168 million as of March 31, 2013 and December 31, 2012. 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 our obligations to our U.S. subsidiaries. The amount of this collateral as of March 31, 2013 was approximately $874.7 million. Maiden retains ownership of the collateral in the trust account.   

Other Letter of Credit Facilities

  We, through one of our subsidiaries, have a secured letter of credit facility with <org value="ACORN:0318737313" idsrc="xmltag.org">Comerica Bank during the 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 $49.6 million as of March 31, 2013. We are required to pay a letter of credit participation fee for each letter of credit in the amount of 0.40%.  

We, through certain subsidiaries, have additional existing stand-by letters of credit with various lenders in the amount of $50.1 million as of March 31, 2013.

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. 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, 2012. 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, 2012.  

Investment Portfolio

  Our investment portfolio, including cash and cash equivalents but excluding life settlement contracts, other investments and equity investments, increased $256 million, or 9.9%, to $2.8 billion for the three months ended March 31, 2013 from $2.6 billion as of December 31, 2012. Our investment portfolio is classified as available-for-sale, as defined by ASC 320, Investments - Debt and Equity Securities. The increase in our investment portfolio during the three months ended March 31, 2013 related, primarily, to the acquisition of Car Care. Our fixed maturity securities, gross, had a fair value of $2.2 billion and an amortized cost of $2.1 billion as of March 31, 2013. Our equity securities are reported at fair value and totaled $21.6 million with a cost of $19.3 million as of March 31, 2013. Securities sold but not yet purchased 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. We account for sales of securities under repurchase agreements as collateralized borrowing transactions and we record these sales at their contracted amounts.                                          52 --------------------------------------------------------------------------------

Our investment portfolio exclusive of life settlement contracts and other investments is summarized in the table below by type of investment:

                                                 March 31, 2013                         December 31, 2012                                                            Percentage of                           Percentage of (Amounts in Thousands)                 Carrying Value        Portfolio         Carrying Value        Portfolio Cash, cash equivalents and restricted cash                      $        566,411            19.9 %      $        493,132            19.0 % Time and short-term deposits                   30,027             1.1                  10,282             0.4 U.S. treasury securities                       35,986             1.3                  66,192             2.6 U.S. government agencies                       13,164             0.5                  40,301             1.6 Municipals                                    337,210            11.8                 299,442            11.6 Foreign government                            197,796             7.0                       -               - Commercial mortgage back securities             9,841             0.3                  10,200             0.4 Residential mortgage backed securities: Agency backed                                 320,848            11.2                 292,614            11.3 Non-agency backed                               7,051             0.2                   7,063             0.2 Corporate bonds                             1,305,488            45.9               1,349,414            52.1 Preferred stocks                                1,543             0.1                   5,184             0.2 Common stocks                                  20,012             0.7                  15,281             0.6                                      $      2,845,377           100.0 %      $      2,589,105           100.0 %    The table below summarizes the credit quality of our fixed maturity securities as of March 31, 2013 and December 31, 2012, as rated by Standard and Poor's.                  March 31,                    2013       December 31, 2012 U.S. Treasury        1.8 %               1.9 % AAA                 14.4                13.8 AA                  32.7                31.2 A                   22.7                24.4 BBB, BBB+, BBB-     26.6                27.1 BB, BB+, BB-         1.8                 1.6 Total              100.0 %             100.0 %    The table below summarizes the average duration by type of fixed maturity as well as detailing the average yield as of March 31, 2013 and December 31, 2012:                                             March 31, 2013                December 31, 2012                                                         Average                         Average                                                        Duration                        Duration                                      Average Yield%    in Years     Average Yield%     in Years U.S. treasury securities                       2.16         2.2               2.18          2.4 U.S. government agencies                       4.88         1.2               4.14          3.1 Foreign government                             2.94         2.5               3.37          5.6 Corporate bonds                                3.69         5.2               3.95          5.1 Municipals                                     4.19         7.2               4.30          6.2 Mortgage and asset backed                      3.36         2.5               3.41          2.2   

As of March 31, 2013, the weighted average duration of our fixed income securities was 4.8 years and had a yield of 3.62%.

                                       53 --------------------------------------------------------------------------------   Quarterly, our Investment Committee ("Committee") evaluates each security that has an unrealized loss as of the end of the subject reporting period for OTTI. We generally consider an investment to be impaired when it has been in a significant unrealized loss position (in excess of 35% of cost if the issuer has a market capitalization of under $1 billion and in excess of 25% of cost if the issuer has a market capitalization of $1 billion or more) for over 24 months. In addition, the Committee uses a set of quantitative and qualitative criteria to review our investment portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of our investments. The criteria the Committee primarily considers include:  

• the current fair value compared to amortized cost;

  •         the length of time the security's fair value has been below its           amortized cost;   •         specific credit issues related to the issuer such as changes in credit           rating, reduction or elimination of dividends or non-payment of           scheduled interest payments;  

• whether management intends to sell the security and, if not, whether it

is not more than likely than not that the Company will be required to

          sell the security before recovery of its amortized cost basis;   •         the financial condition and near-term prospects of the issuer of the

security, including any specific events that may affect its operations

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

• other items, including company management, media exposure, sponsors,

marketing and advertising agreements, debt restructurings, regulatory

          changes, acquisitions and dispositions, pending litigation,           distribution agreements and general industry trends.    Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other-than-temporary. We write down investments immediately that we consider to be impaired based on the above criteria collectively.  Based on guidance in FASB ASC 320-10-65, in the event of the decline in fair value of a debt security, a holder of that security that does not intend to sell the debt security and for whom it is not more than likely than not that such holder will be required to sell the debt security before recovery of its amortized cost basis, is required to separate the decline in fair value into (a) the amount representing the credit loss and (b) the amount related to other factors. The amount of total decline in fair value related to the credit loss shall be recognized in earnings as an OTTI with the amount related to other factors recognized in accumulated other comprehensive loss net loss, net of tax. OTTI credit losses result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process, and different judgments and assumptions could affect the timing of the loss realization. During the three months ended March 31, 2013 and 2012, we had no impairment charge of our fixed and equity securities.  During the three months ended March 31, 2013, we had $9.0 million of gross unrealized losses, of which $0.5 million related to marketable equity securities and $8.5 million related to fixed maturity securities as of March 31, 2013. Corporate bonds represent 59% of the fair value of our fixed maturities and 63% of the total unrealized losses of our fixed maturities. We own 554 corporate bonds in the industrial, bank and financial and other sectors, which have a fair value of approximately 21%, 36% and 2%, respectively, and 14%, 47% and 2% 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. We believe the gross unrealized losses of $0.5 million as of March 31, 2013 is not material to our financial position.                                          54

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

Wordcount:

10788