As filed with the Securities and Exchange Commission on June 12, 2006
Registration No. 333-______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________________________________________

AMTRUST FINANCIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
55112
(Primary Standard Industrial
Classification Code Number)
04-3106389
(I.R.S. Employer
Identification Number)
_________________________________

59 Maiden Lane, 6 th Floor
New York, New York 10038
(212) 220-7120
(Address, including zip code, and telephone number,
including area code, of Registrant’s principal executive offices)
_________________________________

Barry D. Zyskind
Amtrust Financial Services, Inc.
59 Maiden Lane, 6 th Floor
New York, New York 10038
(212) 220-7120

( Name, address, including zip code, and telephone number,
including area code, of agent for service )
_________________________________

Copies to:

Henry I. Rothman, Esq.
Troutman Sanders LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
(212) 704-6000
(212) 704-6288 (fax)
_________________________________
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box. ý  
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨ ___________________
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨ ___________________
 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨ ___________________
 
CALCULATION OF REGISTRATION FEE
 
Title of each class of
securities to be registered
Amount to be registered
Proposed maximum offering price per share
Proposed maximum
aggregate offering price
Amount of
registration fee
Common stock, $0.01 par value per share
25,568,000(1)
7.50(2)
$191,760,000
$20,519

(1)
All of the shares of common stock offered hereby are for the account of selling stockholders. The selling stockholders acquired the shares of common stock offered hereby in a private placement in reliance on exemptions from registration under the Securities Act.
 
(2)
Estimated solely for the purpose of the registration fee for this offering in accordance with Rule 457(o) of the Securities Act. No exchange or over-the-counter market exits for the registrant’s common stock; however the registrant’s stockholders have privately sold shares of common stock using the Portal System. The fee is based on the price of the registrant’s common stock on June 9, 2006, which was reported on Portal at a price of $7.50 per share.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.
 

Subject to Completion
Preliminary Prospectus dated June 12, 2006

Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these Securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State
 
PROSPECTUS
 
25,568,000 Shares of Common Stock
AMTRUST FINANCIAL SERVICES, INC.
 
The persons listed in the section of this prospectus entitled "Selling Stockholders" are offering for sale 25,568,000 shares of our common stock. The selling stockholders acquired the shares of common stock offered by this prospectus in a private placement in February 2006 in reliance on exemptions from registration under the Securities Act of 1933, as amended. We are registering the offer and sale of the shares of common stock to satisfy registration rights we have granted.
 
The selling stockholders will receive all of the proceeds from the sale of the shares of our common stock offered by this prospectus, less any brokerage commissions or other expenses incurred by them. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders. The shares which may be resold by the selling stockholders constituted approximately 43% of our issued and outstanding common stock on May 31, 2006. See "Selling Stockholders" beginning on page 131 in this prospectus for a complete description of the selling stockholders.
 
Prior to this offering, there has been no public market for our common stock. We intend to apply to have our common stock approved for listing on either the New York Stock Exchange or the Nasdaq National Market under the symbol “ ”
 
The selling stockholders may sell the common stock for their own accounts in open market transactions or in private transactions, at prices related to prevailing market prices or at negotiated prices, and may engage broker-dealers to sell the shares. For additional information on the selling stockholders' possible methods of sale, see "Plan of Distribution" in this prospectus. Upon any sale of shares of common stock, the selling stockholders and participating broker-dealers or selling agents may be deemed to be "underwriters" as that term is defined in the Securities Act of 1933, as amended. We cannot determine the price to the public of the shares of common stock offered for sale by the selling stockholders. The public offering price and the amount of any underwriting discount or commissions will be determined at the time of sale.
 
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 15 to read about certain risks you should consider before investing in our common stock.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
The date of this prospectus is        , 2006
 
________________
 
 
TABLE OF CONTENTS
 
1
15
35
36
36
37
41
68
117
126
127
129
131
144
147
148
150
153
153
153
154
F-1
II-1
 
You should rely only on the information contained in or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.
 
Market and industry data and forecasts used in this prospectus have been obtained from independent industry sources and from research reports prepared for other purposes. We have not independently verified the data obtained from these sources, and we cannot assure you of the accuracy or completeness of the data. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and uncertainties as other forward-looking statements in this prospectus
 
 
SUMMARY
 
This summary highlights information contained elsewhere in this prospectus. Because it is a summary, it does not contain all of the information that you should consider before investing in us. You should read the entire prospectus carefully, including the sections entitled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” and our consolidated financial statements and the notes to those financial statements before making an investment decision. The financial information presented may not be indicative of our future operating results or financial performance. Certain insurance, reinsurance and investment terms are defined in the Glossary which appears on page 154 of this prospectus.
 
AmTrust Financial Services, Inc.

Who We Are
 
AmTrust Financial Services, Inc. (“Amtrust,” the “Company,” “we,” “our,” or “us”) is a multinational specialty property and casualty insurer focused on generating consistent underwriting profits. We provide insurance coverage for small businesses and products with high volumes of insureds and loss profiles which we believe are predictable. We target lines of insurance that we believe are generally underserved by larger insurance carriers. AmTrust has grown by hiring teams of underwriters with expertise in our specialty lines and through acquisitions of renewal rights to established books of specialty insurance business. Since our current majority stockholders acquired AmTrust in 1998, we have expanded our operations into three business segments:
 
 
·
Workers’ compensation for small businesses (average premium less than $5,000 per policy) in the United States;
 
 
·
Specialty risk and extended warranty coverage for accidental damage, mechanical breakdown and related risks primarily for selected consumer and commercial goods in the United Kingdom, certain other European Union countries and the United States; and
 
 
·
Specialty middle-market property and casualty insurance. This segment writes workers compensation, commercial automobile and general liability insurance through general and other wholesale agents.
 
Our business has grown substantially since 2002. Our annual gross premiums written increased from $27.5 million in 2002 to $286.1 million in 2005 and from $91.5 million in the three months ended March 31, 2005 to $123.3 million in the three months ended March 31, 2006. Our annual gross premiums written in our workers’ compensation segment increased from $21.1 million in 2002 to $204.6 million in 2005 and from $55.4 million in the three months ended March 31, 2005 to $69.2 million in the three months ended March 31, 2006. Our annual gross premiums written in our specialty risk and extended warranty segment increased from approximately $6.4 million in 2002 to $81.6 million in 2005 and decreased from $36.1 million in the three months ended March 31, 2005 to $20.4 million for the three months ended March 31, 2006. Our net income from continuing operations increased from $2.2 million in 2002 to $20.5 million in 2005 and from $2.0 million in the three months ended March 31, 2005 to $9.3 million in the three months ended March 31, 2006. Our gross premiums written in the specialty middle-market property and casualty insurance business segment, which we acquired in December 2005, was $33.6 million for the three months ended March 31, 2006. Given the larger scale of our current operations, our past growth rate is likely not indicative of our future growth rate.
 
AmTrust has five insurance company subsidiaries. Three are domiciled in the United States, Technology Insurance Company, Inc. (“TIC”), Rochdale Insurance Company (“RIC”) and Wesco Insurance Company (“WIC”) which we acquired on June 1, 2006. The others, AmTrust International Insurance Ltd. (“AII”) and AmTrust International Underwriters Limited (“AIU”), are domiciled in Bermuda and Ireland, respectively. AII, RIC and TIC are each rated “A-” (Excellent) by A.M. Best Company (“A.M. Best”), which rating is the fourth highest of 16 rating levels. AIU is unrated by A.M. Best. We have requested that A.M. Best assign our group rating to WIC. We reinsure our insurance risks through internal reinsurance agreements and agreements with third party reinsurers. As of March 31, 2006, we had approximately 255 employees.
 
Our Products
 
Small Business Workers’ Compensation
 
Our small business workers’ compensation insurance segment accounted for approximately 71.5% of the gross premiums written in the year ended December 31, 2005 and 56.2% of gross premiums written in the three months ended March 31, 2006. Workers’ compensation insurance provides coverage for the statutory obligations of employers to pay medical care expenses and lost wages for employees who are injured in the course of their employment. We offer workers’ compensation insurance to small businesses in low and medium hazard classes, such as restaurants, physician’s and other professional offices, through our wholly-owned subsidiaries RIC and TIC.
 
We currently distribute our small business workers’ compensation insurance in 31 states and the District of Columbia through a network of approximately 8,000 independent wholesale and retail agents. For the three months ended March 31, 2006, Florida, Georgia, New Jersey, New York and Pennsylvania accounted for approximately 73.8% of the gross premiums written in our small business workers’ compensation business, with Florida accounting for approximately 37.7%.
 
We focus on the small business employer workers’ compensation segment because we believe these policyholders may not fit the underwriting criteria of larger carriers due to the small size of the policyholders (average of less than six employees insured per policy with a maximum of 75 employees at any location) and their premiums (average annual premium of less than $5,000 per policy). We believe we can profitably underwrite these accounts because our technology enables each risk to be individually underwritten and provides effective loss control for a large number of small risks. Because of the relatively small policy size, we believe that the small business workers’ compensation market is also less competitive than the general workers’ compensation market. For these reasons, we believe that, historically, we have achieved higher retention and renewal rates than the general workers’ compensation market.
 
Specialty Risk and Extended Warranty
 
Our specialty risk and extended warranty coverage segment primarily serves manufacturers, service providers, retailers and third party warranty administrators that provide coverage for accidental damage, mechanical breakdown and related risks for consumer and commercial goods. We underwrite this coverage in Europe through AIU and in the United States through TIC and RIC and, prospectively, through WIC. The majority of our specialty risk and extended warranty business is written in Europe ($58.4 million of gross premiums written in the year ended December 31, 2005 and $15.5 million of gross premiums written in the three months ended March 31, 2006) where we underwrite approximately 60 separate coverage plans. The remaining specialty risk and extended warranty business ($4.9 million of gross premiums written in the three months ended March 31, 2006) is written in the United States and
 
 
primarily consists of insurance policies issued to manufacturers. Our specialty risk and extended warranty business primarily covers selected consumer and commercial goods and other risks, including:
 
 
·
personal computers;
 
 
·
consumer electronics, such as televisions and home theater components;
 
 
·
consumer appliances, such as refrigerators and washing machines;
 
 
·
automobiles in the United Kingdom (no liability coverage);
 
 
·
cellular telephones;
 
 
·
heavy equipment;
 
 
·
hand tools; and
 
 
·
credit payment protection in the European Union.
 
We believe we can profitably underwrite these risks by managing the frequency and severity of losses through: (i) carefully selecting suitable administrators and coverage plans to insure, (ii) drafting restrictive, risk-specific coverage terms, (iii) proactively managing claims and (iv) if necessary, adjusting our premiums.
 
We distribute our specialty risk and extended warranty coverage primarily through warranty administrators and brokers, and also directly to manufacturers, service providers and retailers. We often assist our clients in developing their specialty risk coverages by using historical product data and industry data to evaluate (or revise) pricing and contract terms. We believe that providing this expertise to our clients may give us a competitive advantage in this line of business.
 
Specialty Middle-Market Property and Casualty

The specialty middle-market property and casualty business consists of workers’ compensation, general liability, commercial auto liability and commercial property coverage for small and middle-market businesses. These lines currently are distributed through 10 general and other wholesale agents in the United States.
 
Our History
 
Our current majority stockholders acquired AmTrust and its subsidiaries, TIC and AII, from Wang Laboratories, Inc. (“Wang”) in 1998 to focus on underserved specialty property and casualty segments. Historically, TIC wrote disaster recovery insurance and accidental damage insurance covering computer hardware to support Wang’s computer clients. Since the acquisition, AmTrust has discontinued TIC’s disaster recovery line and expanded its accidental damage coverage beyond computer hardware to other specialty risk and extended warranty coverages, including consumer electronics, home and commercial appliances, construction machinery and other consumer and commercial products. In 2000, we entered the European Union specialty risk and extended warranty coverage market by acquiring AIU from Wang. We also acquired RIC, which held licenses in certain important states in which TIC was not then licensed, including New Jersey, New York and Texas.
 
 
In early 2001, AmTrust expanded into small business workers’ compensation insurance and hired an experienced workers’ compensation underwriting team. Similar to our specialty risk and extended warranty segment, our small business workers’ compensation segment is characterized by relatively small premiums per policy and a large number of insureds. We believe this segment of the market is underserved by larger insurance carriers because it is too expensive for them to process a high volume of low premium policies. We developed proprietary technology to enable us to efficiently and profitably underwrite a large number of small premium policies. On June 1, 2006, we acquired WIC, which is licensed in all 50 states and the District of Columbia.
 
Through a combination of acquisitions and organic growth, we have expanded geographically and acquired additional distribution channels, without acquiring the legacy liabilities of other insurance carriers, by primarily structuring our acquisitions as renewal rights acquisitions, including the following:
 
 
·
In December 2002, we acquired the Princeton Agency, Inc. (“Princeton”) and the renewal rights to Princeton’s book of workers’ compensation business. The acquisition increased our agent relationships in the Northeast and Midwest and enhanced our marketing efforts in these regions.
 
 
·
In December 2003, we acquired the renewal rights to the workers’ compensation business of The Covenant Group, Inc. (“Covenant”) and Covenant’s proprietary claims handling systems. We also hired several experienced claims adjusters from Covenant. This transaction increased our presence in the Southeast and enabled us to move the adjustment of claims arising from our small business workers’ compensation segment from third party administrators to an experienced internal claims staff.
 
 
·
In August 2004, we expanded our business to Florida by acquiring the renewal rights to a book of workers’ compensation business from Associated Industries Insurance Company (“Associated”).
 
 
·
On June 1, 2006, we acquired 100% of the issued and outstanding shares of WIC from Household Insurance Group Holding Company (“HIG”), an affiliate of HSBC North America Holdings, Inc. WIC has $15 million in capital and surplus and no net liabilities. WIC is licensed in all 50 states and the District of Columbia. WIC has no employees and is managed by the Company pursuant to an Intercompany Management Agreement. We will utilize WIC to expand into states in which TIC and RIC are not currently licensed, which should facilitate the growth of our specialty middle-market property and casualty and specialty risk and extended warranty segments.
 
 
·
On June 1, 2006, we acquired the renewal rights to a book of workers’ compensation business from Muirfield Underwriters, Ltd. (“Muirfield”), an affiliate of Aon Corporation, which in 2005 generated over $60 million in gross premiums written, concentrated in the Midwest. We also acquired access to Muirfield’s distribution network. We believe that this transaction will help us accelerate our growth in the Midwest. Since we acquired renewal rights, we intend to offer renewals only to policyholders for risks which meet our underwriting guidelines. Furthermore, agents and policyholders will not be obligated to renew with us.
 
In early 2003, we expanded our specialty risk and extended warranty segment in Europe by hiring a team of experienced underwriters in London, who we believe are recognized for their expertise in the European specialty risk and extended warranty business, including Max Caviet, President of AIU, who has over 30 years of experience in this business. Many of the European-based specialty risk and extended warranty coverages we currently underwrite have been underwritten by our team for a number of years.
 
 
In December 2005, we expanded into the specialty middle-market property and casualty business through our acquisition from Alea North America, Inc. (“Alea”) of the renewal rights to substantially all of its specialty middle market property and casualty business. This business was founded in 1999 by a team of experienced insurance professionals and became available to us because of capital problems associated with the reinsurance business of Alea’s parent company. Although these capital problems were unrelated to the business we purchased, they resulted in rating downgrades for Alea’s entire insurance group and, while not related, adversely affected this business. This business produced $250 million of gross premiums written for Alea in the nine months ended September 30, 2005 through a network of 25 general and other wholesale agents. We are actively integrating this business and seeking to transition selected accounts. The amount of business we will be able to successfully renew is not ascertainable at this time and will depend on our ability to successfully implement our integration strategy. Our renewal target range is 30% to 50%. Our efforts are focused on:
 
 
·
re-underwriting the book of business to determine our marketing priorities;
 
 
·
entering into agreements with key agents;
 
 
·
acquiring additional insurance licenses and making rate filings, where necessary;
 
 
·
acquiring additional reinsurance, where necessary;
 
 
·
entering into third party administration agreements; and
 
 
·
migrating portions of this business onto our existing systems.
 
In connection with the acquisition, substantially all of Alea’s former specialty middle-market property and casualty senior management, underwriting and support team, joined AmTrust. The seven-member senior management team of Alea has an average of over 20 years of experience in the specialty property and casualty business.
 
As of May 31, 2006, we have transitioned 14 coverage plans, which offer workers’ compensation, general liability or commercial automobile liability coverage through 10 wholesale agents. These agents produced approximately 32% of this business prior to the acquisition. In the three months ended March 31, 2006, the specialty middle-market property and casualty segment produced approximately $33.6 million in gross premiums written.
 
As a result of our integration efforts, each of the businesses we acquired, prior to the Alea acquisition, is processed using our proprietary systems. At present, the workers’ compensation portion of our specialty middle market property and casualty business is being processed using our proprietary systems. We expect to process all of this business using our systems over time.
 
Our Competitive Strengths and Growth Strategy
 
The net proceeds from our private placement in February 2006 provided us with the additional capital necessary to increase the amount of insurance we are able to write. We plan to continue pursuing profitable growth and favorable returns on equity. Our approach involves the following:
 
-5-
 
Generate Underwriting Profits. We intend to seek to continue to generate underwriting profits by controlling our operating expenses and focusing on underwriting specialty insurance risks in which we can use our expertise to price and structure policies to manage our claims expenses. We believe our competitive strengths include:
 
 
·
Focus on Specialty Insurance Markets. We focus on specialty markets in which we have underwriting, risk management and claims handling expertise. We believe that larger insurance carriers generally do not aggressively pursue business in these markets. We target small business workers’ compensation risks in specific industry classes, because the loss experience of these risks is historically better than the loss experience presented by larger, more competitively priced risks in the same industry classes. In our specialty risk and extended warranty segment, we believe we work with our clients more closely than most of our competitors to customize specialty risk and extended warranty coverages for their products and monitor the performance of their coverages. In addition, our specialty risk and extended warranty coverages generally have provided predictable claims development without substantial exposure to catastrophes. The specialty middle-market property and casualty segment we recently acquired focuses on niche markets which we believe are underserved by larger carriers and are also less sensitive to the pricing volatility of the general insurance market.
 
 
·
Proprietary Technology and Efficient Systems. We have developed proprietary applications and efficient systems for underwriting new business, processing claims and monitoring the performance of our coverages and agents.
 
 
—
Efficient Underwriting and Claims Processing Systems. Our proprietary internet-based applications for underwriting new business and processing claims enable us to efficiently underwrite and administer small business workers’ compensation insurance. Our paperless processing system handles most clerical duties so that our underwriters can focus on making decisions on risk submissions. Our system enables our underwriters, who review approximately 5,000 submissions per month, to provide quotes on new business generally within two business days after receiving a request. Our claims administrators have an average caseload of approximately 125 active workers’ compensation indemnity claims. We also believe that our technology is agent-friendly because it enables agents to efficiently submit workers’ compensation insurance applications online and allows us to make underwriting decisions promptly. In our specialty risk and extended warranty segment, we believe that we generally have a greater degree of control over profitability than our competitors because we access our business partners’ coverage data to monitor performance and can take corrective action in a timely fashion. We have integrated a substantial portion of the specialty middle-market property and casualty segment we recently acquired into our systems and intend to integrate the balance of this segment over time.
 
 
—
Use of Timely and Accurate Data. Our proprietary processing and data collection systems provide our management team with accurate and relevant information on what we believe is a more timely basis than many of our competitors. This data allows us to analyze trends in our business, including results by individual agent or broker, underwriter and class of business.
 
 
 
 
·
Disciplined Underwriting. We believe that earning underwriting profits is best accomplished through careful risk selection. Our senior underwriters have an average of more than 20 years of experience. In our small business workers’ compensation segment, each risk is individually underwritten, and we regularly evaluate our workers’ compensation underwriting guidelines in relation to actual results and make tailored revisions, such as the exclusion of a specific risk classification in a particular state. In our specialty risk and extended warranty segment, we thoroughly review each new opportunity that we consider—a process that generally takes three months or more, due to the data analysis required. We ultimately underwrite approximately 20% of the specialty risk and extended warranty opportunities submitted to us. In addition, we seek to customize the terms, conditions and exclusions of our spe cialty risk and extended warranty coverages to address product-specific characteristics and risks.
 
 
 
·
Actively Manage Claims. We currently administer approximately 89% of our small business workers’ compensation claims internally, and the remainder are administered by third parties on our claims systems and subject to our oversight. We believe that actively managing our workers’ compensation claims is essential to reduce losses and loss adjustment expenses and to accurately establish reserves. We promptly investigate workers’ compensation claims through direct contact with the insureds and other affected parties. As of March 31, 2006, approximately 0.8% of the 397 workers’ compensation claims reported for accident year 2001 were open, 1.3% of the 1,231 claims reported for accident year 2002 were open, 4.9% of the 2,539 claims reported for accident year 2003 were open, 7.2% of the 5,334 claims reported for accident year 2004 were open, 16.7% of the 7,357 claims reported for accident year 2005 were open, and 78.5% of the 1,442 claims reported for accident year 2006 through March 31, 2006 were open. In our specialty risk and extended warranty segment, we retain control of claims by monitoring our administrators’ performance through the analysis of timely policy and claims data and by taking appropriate remedial action, such as adjusting premium or revising coverage plan terms. Claims for the specialty middle-market property and casualty segment we recently acquired are currently administered by third parties. We intend to closely monitor the performance of third party administrators.
 
Opportunistically Grow Our Business. We plan to continue to opportunistically expand our business in markets in which we believe we can use our specialized expertise and our proprietary technology to generate consistent underwriting profits through the following strategies:
 
 
·
Expand Existing Operations. We intend to continue to increase our presence in our chosen markets. In our small business workers’ compensation segment, we encourage existing agents to submit more business to us and seek to establish relationships with new quality agents. In our specialty risk and extended warranty segment, we plan to expand our portfolio of low average premium, high volume insurance by adding new customers and offering coverage for additional products in which we can apply our actuarial and quantitative skills, such as the homeowner’s latent defects warranty coverage we recently began offering in Norway. We are continuing to seek to transition accounts in the specialty middle-market property and casualty segment. In addition, we will continue to explore new specialty insurance products we believe we can profitably write by applying our expertise and technology.
 
 
·
Expand Our Proprietary Technology and Efficient Systems. We plan to continue to develop our proprietary technology to improve our relationships with our producers and further reduce our underwriting expense ratio by increasing automation. We believe that we can apply much of the technology and systems we have developed in our small business workers’ compensation segment to improve the efficiency of our specialty risk and extended warranty business. In addition, we have integrated a substantial portion of the specialty middle-market property and casualty segment we recently acquired into our existing systems and intend to integrate the balance over time.
 
 
 
 
·
Prudent and Opportunistic Geographic Expansion. We are applying for insurance licenses in additional states and on June 1, 2006 we acquired WIC, which has approximately $15 million in capital and surplus and licenses in all 50 states and the District of Columbia. In the future, we intend to selectively expand our specialty risk and extended warranty presence to other European countries and additional foreign markets.
 
 
·
Selective Acquisitions. We intend to continue to seek to acquire renewal rights to additional books of specialty insurance business that fit our underwriting capabilities from competitors, insurance agents, warranty administrators and other producers. We also may consider whole company acquisitions and believe that we may be able to use our stock as acquisition consideration.
 
 
·
Capitalize on Our Multinational Presence. We have a presence in the United States, Ireland, the United Kingdom and Bermuda. We also have employees in Sweden. Our presence enables us to provide specialty risk and extended warranty coverage on a multinational basis and to opportunistically allocate capital and resources where we believe profitable business opportunities exist. In addition, our Bermuda-based insurance operations allow us to access Bermuda’s well developed network of insurance and reinsurance brokers and agents. Because a considerable portion of our business is written outside of the United States, our effective tax rate is lower than if we were solely a U.S. insurer.
 
 
·
Manage Capital Actively. We intend to expand our business and capital base to take advantage of profitable growth opportunities. We may raise additional funds to finance future acquisitions, but do not intend to raise or retain more capital than we believe we can profitably deploy in a reasonable time frame. Our ratings from A.M. Best are very important to us, and maintaining them will be a principal consideration in any decisions regarding capital.
 
 
·
Maintain a Strong Balance Sheet. We continue to establish reserves carefully and monitor reinsurance recoverables exposure in order to maintain a strong balance sheet. We intend to maintain underwriting profitability in various market cycles and maximize an appropriate risk adjusted return on our growing investment portfolio.
 
Our Challenges
 
We face challenges in implementing our strategies, including the following:
 
 
·
Our business is subject to extensive regulation by applicable federal, state and foreign regulators in the jurisdictions in which we operate.
 
 
·
We may not be able to successfully manage our growth.
 
 

 
·
If we fail to accurately assess the risks associated with the business we insure, we may fail to establish appropriate premium rates, and our reserves for unpaid losses and loss adjustment expenses may be inadequate to cover our actual losses.
 
 
·
If we were unable to obtain reinsurance on favorable terms, our ability to write new policies and renew existing policies could be adversely affected.
 
 
·
We believe that the A.M. Best rating of “A-” (Excellent) of certain of our insurance subsidiaries has a significant influence on our business and that many brokers, agents and customers would not place business with us if one or more of these ratings were downgraded.
 
 
·
The specialty middle-market property and casualty business we recently acquired is a new segment for us, and we may not be able to underwrite it profitably.
 
 
·
We cannot control or predict with any certainty the amount or profitability of the business we will be able to transition in the specialty middle-market property and casualty segment we recently acquired.
 
 
·
Our operating results may fluctuate significantly due to various factors generally beyond our control.
 
 
·
Because we are dependent on certain key executives and other personnel, the loss of any of these executives or our inability to retain other key personnel could adversely affect our business.
 
 
·
Competitive forces may result in the need to lower premiums thereby reducing underwriting profits.
 
 
·
A significant portion of our net income and cash flows are derived from an investment portfolio that is affected by interest rates and other market conditions.
 
How to Contact Us
 
Our principal executive offices are located at 59 Maiden Lane, 6th Floor, New York, New York 10038, and our telephone number at that location is (212) 220-7120. Our website is www.amtrustgroup.com. The information on our website is not, and should not be construed as, part of this prospectus.
 
 
The Offering

Common stock offered by the selling stockholders  
25,568,000 shares
   
Common stock outstanding
59,943,000 shares
   
Use of proceeds  
We will not receive any proceeds from the sale of the shares of common stock offered in this prospectus.
   
Dividend policy  
Historically, we have not paid dividends on our common stock. We have not made a determination as to whether we will pay dividends in the future. Any determination to pay dividends will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends and any other factors our Board deems relevant. See “Dividend Policy.”
   
Risk factors  
For a discussion of certain factors you should consider in making an investment, see “Risk Factors” on page 15 et. seq.
   
Listing
We intend to apply to list our common stock on either the New York Stock Exchange or the Nasdaq National Market under the symbol “ ”
 

 

Summary Consolidated Financial and Operating Information

The following tables set forth our selected historical consolidated financial and operating information for the periods ended and as of the dates indicated. The selected unaudited consolidated income statement data for the three months ended March 31, 2006 and 2005, and the balance sheet data as of March 31, 2006 and 2005 are each derived from our unaudited financial statements included elsewhere in this prospectus, which have been prepared in accordance with GAAP. These historical results are not necessarily indicative of results to be expected from any future period.
 
The selected consolidated income statement data for the year ended December 31, 2005 and the balance sheet data as of December 31, 2005 are derived from our audited financial statements included elsewhere in this prospectus, which have been prepared in accordance with GAAP and have been audited by BDO Seidman LLP, our independent auditors. The selected consolidated income statement data for the year ended December 31, 2004, 2003 and 2002 and the balance sheet data as of December 31, 2004, 2003 and 2002 are derived from our audited financial statements included elsewhere in this prospectus, which have been prepared in accordance with GAAP and have been audited by Berenson LLP, our former independent auditors. The selected consolidated income statement data for the year ended December 31, 2001 and the balance sheet data as of December 31, 2001 are derived from the audited financial statements of our parent, AmTrust Financial Group, Inc., which have been prepared in accordance with GAAP and have been audited by Berenson LLP, our former independent auditors. These historical results are not necessarily indicative of results to be expected from any future period. You should read the following selected consolidated financial information together with the other information contained in this prospectus, including the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.
 
   
Three Months Ended
March 31,
 
Year Ended December 31,
 
   
2006
 
2005
 
2005
 
2004
 
2003
 
2002
 
2001
 
   
(unaudited)
($ in thousands,
except percentages
and per share data)
 
($ in thousands, except percentages and per share data)
 
                             
Selected Income Statement Data(1)
                             
Gross premiums written
 
$
123,278
 
$
91,548
 
$
286,131
 
$
210,851
 
$
97,490
 
$
27,509
 
$
13,353
 
Ceded gross premiums written
   
(12,525
)
 
(9,634
)
 
(26,918
)
 
(23,353
)
 
(15,567
)
 
(4,005
)
 
(1,520
)
Net premiums written
 
$
110,753
 
$
81,914
 
$
259,213
 
$
187,498
 
$
81,923
 
$
23,504
 
$
11,833
 
Change in unearned net premiums written
   
(40,943
)
 
(34,559
)
 
(43,183
)
 
(48,684
)
 
(30,256
)
 
(6,230
)
 
(1,113
)
Net earned premiums
 
$
69,810
 
$
47,355
 
$
216,030
 
$
138,814
 
$
51,667
 
$
17,274
 
$
10,720
 
Commission and fee income
 
$
2,855
 
$
1,890
 
$
8,196
 
$
5,202
 
$
1,052
 
$
341
 
$
392
 
Net investment income(2)
   
5,335
   
1,885
   
11,534
   
4,439
   
3,072
   
2,242
   
2,035
 
Net realized gains (loss)
   
1,576
   
26
   
4,875
   
1,278
   
(1,004
)
 
(1
)
 
(16
)
Other
   
—
   
—
   
—
   
222
   
496
   
—
   
—
 
Total revenues
 
$
79,576
 
$
51,156
 
$
240,635
 
$
149,955
 
$
55,283
 
$
19,856
 
$
13,131
 
Loss and loss adjustment expense
 
$
43,774
 
$
33,997
 
$
142,006
 
$
90,178
 
$
34,884
 
$
9,139
 
$
4,459
 
Policy acquisition expenses(3)
   
8,323
   
8,671
   
30,082
   
20,082
   
8,194
   
3,848
   
—
 
Salaries and benefits(4)
   
5,119
   
3,000
   
13,903
   
10,945
   
4,063
   
3,312
   
—
 
Other insurance general and administrative expenses(5)
   
6,783
   
3,479
   
19,519
   
10,430
   
3,696
   
1,179
   
9,117
 
Other operating expenses(6)
   
1,944
   
1,125
   
5,543
   
2,167
   
1,000
   
—
   
—
 
Total expenses  
$
65,943
 
$
50,272
 
$
211,053
 
$
133,802
 
$
51,837
 
$
17,478
 
$
13,576
 
Operating income from continuing operations
 
$
13,633
 
$
884
 
$
29,582
 
$
16,153
 
$
3,446
 
$
2,378
 
$
(445
)
Other income (expense) Foreign currency gain(7)
 
$
98
   
—
 
$
388
   
—
   
—
   
—
   
—
 
Miscellaneous
   
—
   
—
   
—
   
(85
)
 
(545
)
 
(116
)
 
2,404
 
 
 
 
   
Three Months Ended
March 31,
 
Year Ended December 31,
 
   
2006
 
2005
 
2005
 
2004
 
2003
 
2002
 
2001
 
   
(unaudited)
($ in thousands,
except percentages
and per share data)
 
($ in thousands, except percentages and per share data)
 
                             
Interest expense
   
(1,213
)
 
—
   
(2,784
)
 
(264
)
 
(221
)
 
(161
)
 
(194
)
Total other income
(expenses)
 
$
(1,115
)
$
—
 
$
(2,396
)
$
(349
)
$
(766
)
$
(277
)
$
2,210
 
Income from continuing operations before provision for income taxes and change in accounting principle
 
$
12,518
 
$
884
 
$
27,186
 
$
15,804
 
$
2,680
 
$
2,101
 
$
1,765
 
Total provision for income taxes
   
3,259
   
(1,079
)
 
6,666
   
3,828
   
1,258
   
510
   
38
 
Income from continuing operations before change in accounting principle
 
$
9,259
 
$
1,963
 
$
20,520
 
$
11,976
 
$
1,422
 
$
1,591
 
$
1,727
 
Cumulative effect of change in accounting principle
   
—
   
—
   
—
   
—
   
—
   
578
   
—
 
Income from continuing operations
   
9,259
   
1,963
   
20,520
   
11,976
   
1,422
   
2,169
   
1,727
 
Foreign currency gain from discontinued operations
   
—
   
—
   
21,745
   
—
   
—
   
—
   
—
 
Other income (loss) from discontinued operations(7)
   
—
   
1,429
   
(4,706
)
 
2,134
   
(30
)
 
—
   
—
 
Net income
 
$
9,259
 
$
3,392
 
$
37,559
 
$
14,110
 
$
1,392
 
$
2,169
 
$
1,727
 
Preferred stock dividend accumulated(8)
   
—
   
1,200
   
1,200
   
4,800
   
4,800
   
—
   
—
 
Net income (loss) available to common stockholders
 
$
9,259
 
$
2,192
 
$
36,359
 
$
9,310
 
$
(3,408
)
$
2,169
 
$
1,727
 
Basic earnings (loss) per common share:
                                           
Income (loss) from continuing operations before change in accounting principle
 
$
0.21
 
$
0.03
 
$
0.80
 
$
0.30
 
$
(0.14
)
$
0.07
 
$
0.07
 
Cumulative effect of change in accounting principle
   
—
   
—
   
—
   
—
   
—
   
0.02
   
—
 
Income (loss) from discontinued operations
   
—
   
0.06
   
0.71
   
0.09
   
—
   
—
   
—
 
Net income (loss) per common share (basic)
 
$
0.21
 
$
0.09
 
$
1.51
 
$
0.39
 
$
(0.14
)
$
0.09
 
$
0.07
 
Weighted average shares outstanding
   
44,462,545
   
24,089,286
   
24,089,286
   
24,089,286
   
24,089,286
   
24,089,286
   
24,089,286
 

 
 
   
Three Months Ended
March 31,
 
Year Ended December 31,
 
   
2006
 
2005
 
2005
 
2004
 
2003
 
2002
 
2001
 
   
(unaudited)
 
($ in thousands, except percentages and per share data)
 
 
($ in thousands,
except percentages and
per share data)
   
Selected Insurance Ratios and Operating Information
                             
Net loss ratio(9)
   
62.7
%
 
71.8
%
 
65.7
%
 
65.0
%
 
67.5
%
 
52.9
%
 
41.6
%
Net expense ratio(10)
   
29.0
%
 
32.0
%
 
29.4
%
 
29.9
%
 
30.9
%
 
48.3
%
 
85.0
%
Net combined ratio(11)
   
91.7
%
 
103.8
%
 
95.1
%
 
94.8
%
 
98.4
%
 
101.2
%
 
126.6
%
                                             
Annualized return on average equity(12)
   
17.7
%
 
11.3
%
 
31.7
%
 
13.0
%
 
1.6
%
 
4.4
%
 
9.0
%
Annualized return on average equity without foreign currency gain and discontinued operations(12)
   
17.7
%
 
6.5
%
 
17.3
%
 
11.0
%
 
1.6
%
 
4.4
%
 
9.0
%

   
March 31,
 
Year Ended December 31,
 
 
 
2006
 
2005
 
2005
 
2004
 
2003
 
2002
 
2001
 
   
(unaudited)
($ in thousands,
except percentages and
per share data )
 
($ in thousands, except percentages and per share data)
 
         
Selected Balance Sheet Data
                             
Cash and cash equivalents
 
$
164,248
 
$
101,264
 
$
115,847
 
$
28,727
 
$
11,202
 
$
7,068
 
$
4,670
 
Investments
   
433,890
   
173,603
   
299,965
   
169,484
   
74,379
   
30,042
   
23,789
 
Real estate(7)
   
—
   
164,412
   
—
   
161,555
   
185,744
   
168,523
   
—
 
Amounts recoverable from reinsurers
   
19,711
   
14,682
   
17,667
   
14,445
   
4,046
   
1,533
   
1,047
 
Premiums receivable, net
   
127,545
   
76,310
   
81,070
   
56,468
   
26,143
   
11,927
   
9,947
 
Deferred income taxes
   
8,705
   
3,460
   
9,396
   
1,952
   
1,130
   
958
   
416
 
Goodwill and other intangibles
   
22,058
   
10,013
   
20,781
   
9,309
   
6,100
   
5,500
   
—
 
Total assets
   
858,159
   
604,711
   
611,342
   
497,530
   
341,394
   
306,225
   
45,165
 
Reserves for loss and loss adjustment expense
   
190,022
   
117,964
   
168,007
   
99,364
   
37,442
   
14,743
   
11,813
 
Unearned premiums
   
207,739
   
140,515
   
156,802
   
105,107
   
42,681
   
12,659
   
6,124
 
Mortgage notes(7)
   
—
   
91,873
   
—
   
92,919
   
107,960
   
93,420
   
—
 
Note payable
   
—
   
—
   
25,000
   
1,700
   
3,649
   
3,648
   
3,049
 
Junior subordinated debt
   
50,000
   
25,000
   
50,000
   
—
   
—
   
—
   
—
 
Common stock and additional paid in capital
   
239,187
   
12,647
   
12,647
   
12,647
   
12,647
   
12,647
   
19,226
 
Preferred stock(8)
   
—
   
60,000
   
60,000
   
60,000
   
60,000
   
60,000
   
—
 
Total shareholders’ equity
   
299,509
   
121,134
   
118,411
   
118,828
   
98,467
   
79,048
   
20,039
 
                                             
(1)
Results for a number of periods were affected by our acquisition of the stock and renewal rights of Princeton in December 2002, and the renewal rights and certain other assets of Covenant in December 2003 and Associated in August 2004.
 
(2)
Also included finance income of AFS Capital Corporation prior to its disposition in April 2005.
 
(3)
Policy acquisition expenses include commissions paid directly to producers as well as premium taxes and assessments.
 
(4)
For periods subsequent to 2002 salaries and benefits are for employees who are directly engaged in insurance activities. Policy acquisition expenses and salaries and benefits for 2001 and 2002 were included in other insurance general and administrative expenses.
 
(5)
Other insurance general and administrative expenses represent those costs other than policy acquisition expenses, as well as salaries and benefits, directly attributable to insurance activities. In addition, policy acquisition expenses and salaries and benefits for 2001 and 2002 were included in other insurance general and administrative expenses.
 
 
 

 
(6)
Other operating expenses are those expenses that are associated with fee and commission generating activities in which the Company engages.
 
(7)
The foreign currency gain from discontinued operations relates to our wholly-owned subsidiary, AmTrust Pacific Limited, a New Zealand real estate operating company (“APL”). Income (loss) from discontinued operations reflects the results of operations of APL and AFS Capital Corp., a premium finance company. The real estate in the balance sheet reflects the carrying value of real estate held by APL. The mortgage notes in the balance sheet reflect mortgage debt on this real estate. All of these real estate assets were liquidated by November 2005, and the net proceeds were placed in our investment portfolio. For more information about these transactions, see the consolidated financial statements and related notes included elsewhere in this prospectus.
 
(8)
In January 2006, the holder of our preferred stock agreed to a reduction of the dividend in 2005 to $1.2 million. Our preferred stock was exchanged for an aggregate of 10,285,714 shares of our common stock in February 2006.
 
(9)
Net loss ratio is calculated by dividing the loss and loss adjustment expense by net premiums earned.
 
(10)
Net expense ratio is calculated by dividing the total of the acquisition expenses, salaries and benefits as well as other insurance general and administrative expenses by net premiums earned.
 
(11)
Net combined ratio is calculated by adding net loss ratio and net expense ratio together.
 
(12)
Calculated by dividing net income or net income without currency gain and discontinued operations, as the case may be, by the average shareholders’ equity. The calculations for the three months ended March 31, 2006 and 2005 have been annualized.
 
 
 
RISK FACTORS
 
An investment in our common stock involves a number of risks. Before making a decision to purchase our common stock, you should carefully consider the following information about these risks and cautionary statements, together with the other information contained in this prospectus. Any of the risks described below could result in a significant or material adverse effect on our business, financial condition or results of operations, and a decline in the value of our common stock. You could lose all or part of your investment.
 
Risks Related to Our Business

Our loss reserves are based on estimates and may be inadequate to cover our actual losses.
 
We are liable for losses and loss adjustment expenses under the terms of the insurance polices we underwrite. Therefore, we must establish and maintain reserves for our estimated liability for loss and loss adjustment expenses with respect to our entire insurance business. If we fail to accurately assess the risks associated with the business and property that we insure, our reserves may be inadequate to cover our actual losses. We establish loss reserves that represent an estimate of amounts needed to pay and administer claims with respect to insured events that have occurred, including events that have occurred but have not yet been reported to us. Our loss reserves are based on estimates of the ultimate cost of individual claims and on actuarial estimation techniques. These estimates are based on historical information and on estimates of future trends that may affect the frequency of claims and changes in the average cost of claims that may arise in the future. They are inherently uncertain and do not represent an exact measure of actual liability. Judgment is required to determine the relevance of historical payment and claim settlement patterns under current facts and circumstances. The interpretation of this historical data can be impacted by external forces, principally legislative changes, economic fluctuations and legal trends. If there were unfavorable changes in our assumptions, our reserves may need to be increased. Any increase in reserves would result in a charge to our earnings.
 
In particular, workers’ compensation claims often are paid over a long period of time. In addition, there are no policy limits on our liability for workers’ compensation claims as there are for other forms of insurance. Therefore, estimating reserves for workers’ compensation claims may be more uncertain than estimating reserves for other types of insurance claims with shorter or more definite periods between occurrence of the claim and final determination of the loss and with policy limits on liability for claim amounts. Accordingly, our reserves may prove to be inadequate to cover our actual losses.
 
In our specialty risk and extended warranty segment, the warranties and service contracts we cover generally present high volume, low severity risks and associated losses. Accordingly, estimates of loss frequency in our specialty risk and extended warranty business are more important to accurately establish loss reserves than in other lines of business. If actual losses vary materially from our estimates, our reserves may prove inadequate or insufficiently conservative.
 
The specialty middle-market property and casualty segment we recently entered includes commercial lines we have not historically written, including general liability, auto liability and property, as well as workers’ compensation. Because certain of these commercial lines are new to us, we may be less able to accurately estimate our loss reserves for these products.
 
If we change our reserve estimates for any line of business, these changes would result in adjustments to our reserves and our loss and loss adjustment expenses incurred in the period in which the estimates are changed. If the estimate were increased, our pre-tax income for the period in which we
 
 
make the change will decrease by a corresponding amount. In addition, increasing reserves results in a reduction in our surplus and could result in a downgrade in our A.M. Best rating. Such a downgrade could, in turn, adversely affect our ability to sell insurance policies.
 
A downgrade in the A.M. Best rating of our insurance subsidiaries would likely reduce the amount of business we are able to write.
 
Rating agencies evaluate insurance companies based on their ability to pay claims. Our domestic insurance subsidiaries, TIC and RIC, and our Bermuda subsidiary, AII, each currently has a financial strength rating of “A-” (Excellent) from A.M. Best, which is the rating agency that we believe has the most influence on our business. This rating is assigned to companies that, in the opinion of A.M. Best, have demonstrated an excellent overall performance when compared to industry standards. A.M. Best considers “A-” rated companies to have an excellent ability to meet their ongoing obligations to policyholders. The ratings of A.M. Best are subject to periodic review using, among other things, proprietary capital adequacy models, and are subject to revision or withdrawal at any time. Our competitive position relative to other companies is determined in part by the A.M. Best rating of our insurance subsidiaries. A.M. Best ratings are directed toward the concerns of policyholders and insurance agencies and are not intended for the protection of investors or as a recommendation to buy, hold or sell securities.
 
There can be no assurance that TIC, RIC and AII will be able to maintain their current ratings. Any downgrade in ratings would likely adversely affect our business through the loss of certain existing and potential policyholders and the loss of relationships with independent agencies. Some of our policyholders are required to maintain workers’ compensation coverage with an insurance company with an A.M. Best rating of “A-” (Excellent) or better. We are not able to quantify the percentage of our business, in terms of premiums or otherwise, that would be affected by a downgrade in our A.M. Best rating.
 
The property and casualty insurance industry is cyclical in nature, which may affect our overall financial performance.
 
Historically, the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical periods of price competition and excess capacity (known as a soft market) followed by periods of high premium rates and shortages of underwriting capacity (known as a hard market). Although an individual insurance company’s financial performance is dependent on its own specific business characteristics, the profitability of most property and casualty insurance companies tends to follow this cyclical market pattern. Beginning in 2000 and accelerating in 2001, the property and casualty insurance industry experienced a market reflecting increasing premium rates and more conservative risk selection. We believe these trends slowed beginning in 2004 and that the current insurance market is gradually transitioning to a more competitive market environment in which underwriting capacity and price competition may increase. This additional underwriting capacity may result in increased competition from other insurance companies expanding the types or amounts of business they write, or from companies seeking to maintain or increase market share at the expense of underwriting discipline. Because this cyclicality is due in large part to the actions of our competitors and general economic factors beyond our control, we cannot predict with certainty the timing or duration of changes in the market cycle. We have experienced increased price competition in certain of our target markets during 2005 and during the first three months of 2006, and these cyclical patterns, the actions of our competitors, and general economic factors could cause our revenues and net income to fluctuate, which may cause the price of our common stock to be volatile.
 
 
If we were unable to obtain reinsurance on favorable terms, our ability to write policies could be adversely affected.
 
We purchase reinsurance from third parties to protect us from the impact of large losses. Reinsurance is an arrangement in which an insurance company, called the ceding company, transfers insurance risk to another insurance company, called the reinsurer, which accepts the risk in return for a premium payment. We currently reinsure our workers’ compensation risks with certain third party reinsurers in an excess of loss reinsurance treaty program. Effective January 1, 2006, this reinsurance covers losses on our workers’ compensation business that in any one year exceed $1 million per occurrence (in prior years our excess reinsurance incepted at lower amounts) up to an aggregate limit of $130 million, with some restrictions and exclusions for policies written after January 1, 2006. In addition, we have purchased variable quota share reinsurance covering our specialty risk and extended warranty insurance business. See “Business— Reinsurance.” Market conditions beyond our control determine the availability and cost of the reinsurance protection that we purchase. The reinsurance market has changed dramatically over the past few years as a result of inadequate pricing, poor underwriting and the significant losses incurred as a consequence of the terrorist attacks on September 11, 2001. As a result, reinsurers have exited some lines of business, reduced available capacity and implemented provisions in their contracts designed to reduce their exposure to loss. In addition, the historical results of reinsurance programs and the availability of capital also affect the availability of reinsurance. If we cannot obtain adequate reinsurance protection for the risks we underwrite, we may be exposed to greater losses from these risks or we may be forced to reduce the amount of business that we underwrite, which, in turn, would reduce our revenues. As a result, our inability to obtain adequate reinsurance protection could have a material adverse effect on our financial condition and results of operation.
 
We may not be able to recover amounts due from our third party reinsurers, which would adversely affect our financial condition.
 
Reinsurance does not discharge our obligations under the insurance policies we write; it merely provides us with a contractual right to seek reimbursement on certain claims. We remain liable to our policyholders even if we were unable to make recoveries that we are entitled to receive under our reinsurance contracts. As a result, we are subject to credit risk with respect to our reinsurers. Losses are recovered from our reinsurers after underlying policy claims are paid. The creditworthiness of our reinsurers may change before we recover amounts to which we are entitled. Therefore, if a reinsurer is unable to meet its obligations to us, we would be responsible for claims and claim settlement expenses for which we would have otherwise received payment from the reinsurer. If we were unable to collect these amounts from our reinsurers, our financial condition would be adversely affected. As of March 31, 2006, we had an aggregate amount of $19.7 million of recoverables from third party reinsurers on losses paid.
 
Catastrophic losses or the frequency of smaller insured losses may exceed our expectations as well as the limits of our reinsurance , which could adversely affect our financial condition or results of operations.
 
The incidence and severity of catastrophes, such as hurricanes, windstorms and large-scale terrorist attacks, are inherently unpredictable, and our losses from catastrophes could be substantial. In addition, it is possible that we may experience an unusual frequency of smaller losses in a particular period. In either case, the consequences could be substantial volatility in our financial condition or results of operations for any fiscal quarter or year, which could have a material adverse effect on our financial condition or results of operations and our ability to write new business. Although we attempt to manage our exposure to these types of catastrophic and cumulative losses, including through the use of reinsurance, the severity or frequency of these types of losses may exceed our expectations as well as the limits of our reinsurance coverage. We plan to write property insurance in connection with the specialty middle-market property and casualty business we recently acquired. A geographic concentration of property coverage would increase our exposure to catastrophic losses.
 
 
If we do not adequately establish our premiums, our results of operations will be adversely affected.
 
In general, the premiums for our insurance policies are established at the time a policy is issued and, therefore, before all of our underlying costs are known. Like other insurance companies, we rely on estimates and assumptions in setting our premium rates. Establishing adequate premiums is necessary, together with investment income, to generate sufficient revenue to offset losses, loss adjustment expenses and other underwriting expenses and to earn a profit. If we fail to accurately assess the risks that we assume, we may fail to charge adequate premiums to cover our losses and expenses, which could reduce our net income and cause us to become unprofitable. For example, when initiating workers’ compensation coverage on a policyholder, we estimate future claims expense based, in part, on prior claims information provided by the policyholder’s previous insurance carriers. If this prior claims information were incomplete or inaccurate, we may under-price premiums by using claims estimates that are too low. As a result, our actual costs for providing insurance coverage to our policyholders may be significantly higher than our premiums. In order to set premiums accurately, we must:
 
 
·
collect and properly analyze a substantial volume of data from our insureds;
 
 
·
develop, test and apply appropriate rating formulae;
 
 
·
closely monitor and timely recognize changes in trends; and
 
 
·
project both frequency and severity of our insureds’ losses with reasonable accuracy.
 
We also must implement our pricing accurately in accordance with our assumptions. Our ability to undertake these efforts successfully and, as a result set premiums accurately, is subject to a number of risks and uncertainties, principally:
 
 
·
insufficient reliable data;
 
 
·
incorrect or incomplete analysis of available data;
 
 
·
uncertainties generally inherent in estimates and assumptions;
 
 
·
our inability to implement appropriate rating formulae or other pricing methodologies;
 
 
·
regulatory constraints on rate increases;
 
 
·
unexpected escalation in the costs of ongoing medical treatment;
 
 
·
our inability to accurately estimate investment yields and the duration of our liability for loss and loss adjustment expenses; and
 
 
·
unanticipated court decisions, legislation or regulatory action.
 
Our workers’ compensation insurance premium rates are generally established for a term of no less than twelve months. Consequently, we could set our premiums too low, which would negatively affect our results of operations and our profitability, or we could set our premiums too high, which could reduce our competitiveness and lead to lower revenues.
 
 
We may not be able to successfully transition or integrate the specialty middle-market property and casualty business we recently acquired.
 
The specialty middle-market property and casualty business is a new business segment for us, and certain insurance lines that comprise this segment, including general liability and auto liability, are new lines to us. In addition, we have had limited experience with the distribution system for this business, which involves wholesale agents. In connection with our acquisition of this segment, we hired approximately 40 former employees of Alea, who comprised substantially all of Alea’s former specialty middle-market property and casualty senior management, underwriting and support team. These hirings represented an increase in our total employee headcount of approximately 20% and resulted in a substantial increase in our payroll. Alea’s capital problems and related ratings downgrades adversely affected this business. Our success in this segment will depend in large part on how much business we are able to successfully transition from Alea, which is not yet ascertainable. Lines distributed through two wholesale agents have historically accounted for approximately one-third of this business, and if we were not to establish and maintain good relations with these agents, the amount of business we are able to successfully transition may be substantially reduced. There is no assurance, however, that these agents will be able to produce any level of premiums in the future or that the retail agents through whom they distribute will agree to write policies with us. In addition, there is no assurance as to how successful general or other wholesale agents will be in transitioning business to us. Furthermore, our ability to write business will depend on a number of additional factors such as our ability to obtain adequate reinsurance on satisfactory terms, obtain additional insurance licenses and timely submit rate and form filings in various jurisdictions. We also plan to integrate the general liability, commercial automobile and property portions of this segment into our existing technology and systems over time to increase efficiency, but there is no assurance our efforts will be successful. Accordingly, we may not be able to successfully or profitably integrate this new segment.
 
Regulators may challenge our use of fronting arrangements in states in which we are not licensed.
 
In states in which we are not licensed at all or are not authorized to write particular lines of insurance, we conduct the business for which we are not authorized through “fronting arrangements” with State National Insurance Company (“State National”). Pursuant to these arrangements, State National insures risks we underwrite on policy forms that we supply. We administer the business, settle all claims and reinsure 100% of the risks. We pay State National a fee for its services, but it does not share in the profits or losses of the business it writes for us. Some state insurance regulators object to fronting arrangements on the grounds that the reinsurer controlling the fronted business is in effect transacting insurance in the state without the proper license. If regulators in any of the states where we use this fronting arrangement were to prohibit the arrangement, we would be prevented from conducting the business for which we are not authorized in those states, unless and until we are able to obtain the necessary licenses. This could have an adverse effect on our business and, in particular, on our ability to write certain portions of the business. With the acquisition of WIC, which is licensed in all 50 states and the District of Columbia, our future reliance on fronting arrangements should be reduced.
 
We may not be able to successfully acquire or integrate additional business.
 
We have expanded our business historically through internally generated growth and acquisitions of renewal rights to existing business. We plan to continue to seek to make opportunistic acquisitions of renewal rights to existing business and, possibly, whole companies. We believe that certain of our competitors also may plan to make similar acquisitions. The costs and benefits of future acquisitions are uncertain. There is no assurance that we will be able to successfully identify and acquire additional existing business on acceptable terms. In addition, if we acquire whole companies, as opposed to renewal rights, we may acquire unanticipated liabilities.
 
 
Negative developments in the workers’ compensation insurance industry would adversely affect our financial condition and results of operations.
 
Although we engage in other businesses, the majority of our premium currently is attributable to workers’ compensation insurance. As a result, negative developments in the economic, competitive or regulatory conditions affecting the workers’ compensation insurance industry could have an adverse effect on our financial condition and results of operations. For example, if legislators in one of our larger markets were to enact legislation to increase the scope or amount of benefits for employees under workers’ compensation insurance policies without related premium increases or loss control measures, this could negatively affect the workers’ compensation insurance industry. Negative developments in the workers’ compensation insurance industry could have a greater effect on us than on more diversified insurance companies that also sell many other types of insurance.
 
A decline in the level of business activity of our policyholders could negatively affect our earnings and profitability.
 
In 2005, nearly all of our workers’ compensation gross premiums written were derived from small businesses. Because workers’ compensation premium rates are calculated, in general, as a percentage of a policyholder’s payroll expense, premiums fluctuate depending upon the level of business activity and number of employees of our policyholders. Because of their size, small businesses may be more vulnerable to changes in economic conditions. We believe that the most common reason for policyholder non-renewals is business failure. As a result, our workers’ compensation gross premiums written are primarily dependent upon economic conditions where our policyholders operate.
 
Our inability to register the “AMTRUST” service mark with the United States Patent and Trademark Office in connection with operation of our business could expose us to trademark infringement by others.
 
Some other companies currently use the “AMTRUST” service mark in connection with their businesses in the United States, including Ohio Savings Bank, which registered the mark “AMTRUST” with the United States Patent and Trademark Office (“PTO”) in 1985. Because a third party has previously registered the “AMTRUST” service mark for financial services, we may not be able to register the “AMTRUST” service mark with the PTO. Our inability to register the “AMTRUST” service mark may hinder our ability to protect “AMTRUST” against infringement in the United States, which could adversely affect the effectiveness of our marketing efforts in the United States markets in which we operate. If we discontinue using the “AMTRUST” service mark in connection with our United States business, we would have to adopt a new service mark, which would require us to change our United States marketing materials to reflect the new mark, promote the new mark and build name recognition of the new mark in the United States markets in which we operate. See “Business — Legal Proceedings.”
 
Adverse developments affecting the internet may impede our ability to generate new business, service existing business and administer claims.
 
We rely heavily on our internet-based computer systems to generate new business and administer claims in our small business workers’ compensation segment. Our independent agents use our software to enter risk-assessment and underwriting information for all new business, which is required for our underwriters to evaluate risks. In addition, we utilize a proprietary claims handling system, which uses our internal network to handle the claims administration function that was previously outsourced. Any adverse developments that may affect the internet could potentially reduce our ability to generate new business and administer claims. Adverse developments could include:
 
 
 
·
system disruptions;
 
 
·
inaccessibility of our network;
 
 
·
long response times;
 
 
·
loss of important data;
 
 
·
viruses;
 
 
·
power outages; and
 
 
·
terrorism.
 
We maintain our servers at our facilities in Cleveland and Atlanta. A failure to protect our systems against damage from fire, hurricanes, power loss, telecommunications failure, break-ins or other events, could have a material adverse effect on our business, financial condition and results of operations.
 
Unfavorable changes in economic conditions affecting the states and European countries in which we operate could adversely affect our financial condition or results of operations.
 
As of March 31, 2006, we provided small business workers’ compensation insurance in 31 states and the District of Columbia and specialty risk and extended warranty coverage insurance in all 50 states and the District of Columbia. Although we have expanded our operations into new geographic areas and expect to continue to do so in the future, in the three months ended March 31, 2006, Florida, Georgia, New Jersey, New York and Pennsylvania accounted for approximately 73.8% of the gross premiums written in our small business workers’ compensation business, with Florida accounting for approximately 37.7%. In Europe, approximately 58.3% of our gross premiums written for the year ended December 31, 2005 were derived from policyholders in the United Kingdom. In the future, we may be exposed to economic and regulatory risks or risks from natural perils that are greater than the risks faced by insurance companies that have a larger percentage of their gross premiums written diversified over a broader geographic area. Unfavorable changes in economic conditions affecting the states or countries in which we write business could adversely affect our financial condition or results of operations. See “Business—Policyholders.”
 
Our specialty risk and extended warranty business is dependent upon the sale of products covered by warranties and service contracts which we cannot control.
 
Our specialty risk and extended warranty segment primarily covers manufacturers, service providers and retailers for the cost of performing their obligations under extended warranties and service contracts provided in connection with the sale or lease of various types of consumer electronics, automobiles, light and heavy construction equipment and other consumer and commercial products. Thus, any decrease in the sale or leasing of these products, whether due to economic factors or otherwise, is likely to have an adverse impact upon our specialty risk and extended warranty business. We cannot influence materially the success of our specialty risk clients’ primary product sales and leasing efforts.
 
 
State insurance regulators may require the restructuring of the warranty or service contract business of certain policyholders that purchase our specialty risk products and this may adversely affect our specialty risk business.
 
Some of the largest purchasers of our specialty risk insurance products in the United States are manufacturers, service providers and retailers that issue extended warranties or service contracts for consumer and commercial-grade goods, including coverage against accidental damage to the goods covered by the warranty or service contract. We insure these policyholders against the cost of repairing or replacing such goods in the event of such accidental damage. State insurance regulators may take the position that certain of the extended warranties or service contracts issued by our policyholders constitute insurance contracts that may only be issued by licensed insurance companies. In that event, the extended warranty or service contract business of our policyholders may have to be restructured which could adversely affect our specialty risk and extended warranty business.
 
Our revenues and results of operations may fluctuate as a result of factors beyond our control, which may cause the price of our common stock to be volatile.
 
The revenues and results of operations of insurance companies historically have been subject to significant fluctuations and uncertainties. Our profitability can be affected significantly by:
 
 
·
rising levels of claims costs, including medical and prescription drug costs, that we cannot anticipate at the time we establish our premium rates;
 
 
·
fluctuations in interest rates, inflationary pressures and other changes in the investment environment that affect returns on invested assets;
 
 
·
changes in the frequency or severity of claims;
 
 
·
the financial stability of our third party reinsurers, changes in the level of reinsurance capacity, termination of reinsurance agreements and changes in our capital capacity;
 
 
·
new types of claims and new or changing judicial interpretations relating to the scope of liabilities of insurance companies;
 
 
·
volatile and unpredictable developments, including man-made, weather-related and other natural catastrophes or terrorist attacks;
 
 
·
price competition;
 
 
·
inadequate reserves;
 
 
·
downgrades in the A.M. Best rating of one or more of our insurance subsidiaries;
 
 
·
cyclical nature of the property and casualty insurance market;
 
 
·
negative developments in the specialty property and casualty insurance sectors in which we operate; and
 
 
·
reduction in the business activities of our policyholders.
 
 

If our revenues and results of operations fluctuate as a result of one or more of these factors, the price of our common stock may be volatile.
 
We operate in a highly competitive industry and may lack the financial resources to compete effectively.
 
Although we believe that large insurance carriers generally do not aggressively pursue business in our chosen specialty market there still is significant competition. We compete with other insurance companies, and many of our existing and potential competitors are significantly larger and possess greater financial, marketing and management resources than we do. In our small business workers’ compensation segment, we also compete with individual self-insured companies, state insurance pools and self-insurance funds. We compete on the basis of many factors, including coverage availability, responsiveness to the needs of our independent producers, claims management, payment/settlement terms, premium rates, policy terms, types of insurance offered, overall financial strength, financial ratings and reputation. If any of our competitors offer premium rates, policy terms or types of insurance which were more competitive than ours, we could lose market share. There is no assurance that we will maintain our current competitive position in the markets in which we currently operate or that we will establish a competitive position in new markets into which we may expand.
 
If we cannot sustain our business relationships, including our relationships with independent agencies and third party warranty administrators, we may be unable to operate profitably.
 
Our business relationships are generally governed by agreements with agents and warranty administrators that may be terminated on short notice. We market our workers’ compensation insurance primarily through independent wholesale and retail agencies. As of March 31, 2006, independent agencies produced all of our workers’ compensation insurance premiums and one of our wholesale agents accounted for approximately 31.6% of those premiums. Except in connection with certain renewal rights acquisitions, independent agencies generally are not obligated to promote our workers’ compensation insurance and may sell workers’ compensation insurance offered by our competitors. As a result, our continued profitability depends, in part, on the marketing efforts of our independent agencies and on our ability to offer workers’ compensation insurance and maintain financial strength ratings that meet the requirements and preferences of our independent agencies and their policyholders.
 
Ten independent producers and policyholders account for the vast majority of our specialty risk and extended warranty business. As a result, the profitability of this segment of our business depends, in part, on our ability to retain these accounts, which cannot be assured.
 
In the specialty middle-market property and casualty segment, independent wholesale agents produce and largely control the renewal of all the business. Our ability to successfully and profitably transition this business depends on, among other things, our ability to establish and maintain good relationships with these producers.
 
An inability to effectively manage the growth of our operations could make it difficult for us to compete and affect our ability to operate profitably.
 
Our continuing growth strategy includes expanding in our existing markets, opportunistically acquiring books of business, other insurance companies or producers, entering new geographic markets and further developing our relationships with independent agencies and extended warranty/service contract administrators. Our growth strategy is subject to various risks, including risks associated with our ability to:
 
·
identify profitable new geographic markets for entry;
 
 
·
attract and retain qualified personnel for expanded operations;
 
 
·
identify, recruit and integrate new independent agencies and extended warranty/service contract administrators;
 
 
·
identify potential acquisition targets and successfully acquire them;
 
 
·
expand existing agency relationships; and
 
 
·
augment our internal monitoring and control systems as we expand our business.
 
Because we are subject to extensive state, federal, Irish and Bermudan regulation, legislative or other regulatory changes may negatively impact our business.
 
General. Our insurance and reinsurance subsidiaries may not be able to obtain or maintain necessary licenses, permits, authorizations or accreditations in jurisdictions where we currently engage in business or in new jurisdictions, or may be able to do so only at significant cost. In addition, we may not be able to comply fully with, or obtain appropriate exemptions from, the wide variety of laws and regulations applicable to insurance or reinsurance companies or holding companies. Also, we follow practices based on interpretations of laws and regulations that we believe are generally followed by our industry. These practices may be different from the interpretation of insurance regulatory agencies. Failure to comply with or to obtain appropriate authorizations or exemptions under any applicable laws could result in restrictions on our ability to do business or conduct certain activities that are regulated in one or more of the jurisdictions in which we operate and could subject us to fines and other sanctions, or otherwise have a material adverse effect on our business. In addition, changes in the laws or regulations to which our insurance and reinsurance subsidiaries are subject could have a material adverse effect on our business.
 
U.S. Regulation. Our current U.S.-domiciled insurance company subsidiaries are subject to extensive regulation by the insurance regulators of the states in which we are licensed and, to a lesser extent, federal regulation. Such state departments and agencies have broad regulatory powers designed primarily to protect policyholders and injured workers covered by workers’ compensation policies, and not our stockholders. Laws and regulations applicable to insurance companies vary from state to state, but typically address:
 
 
·
standards of solvency, including risk-based capital measurements;
 
 
·
restrictions on the nature, quality and concentration of investments;
 
 
·
restrictions on the terms of the insurance policies they offer;
 
 
·
restrictions on the way premium rates are established and the premium rates they may charge;
 
 
·
required reserves for unearned premiums and loss and loss adjustment expenses;
 
 
·
standards for appointing general agencies;
 
 
·
limitations on transactions with affiliates;
 
 

 
·
restrictions on mergers and acquisitions;
 
 
·
restrictions on the ability to pay dividends to AmTrust;
 
 
·
certain required methods of accounting; and
 
 
·
potential assessments for state guaranty funds, second injury funds and other mandatory pooling arrangements.
 
In addition to such laws and regulations, TIC, RIC and WIC are subject to state insurance laws and regulations that regulate the specific lines of insurance written by them. State insurance laws and regulations applicable to workers’ compensation insurance regulate the form and content of workers’ compensation policies and the rights and benefits that are available to injured workers, their representatives and medical providers. In some states, such as Florida, state insurance regulators determine the premium rates which insurers may charge insureds for workers’ compensation insurance coverage. State insurance laws and regulations also impact our ability to investigate fraud and other abuses of the workers’ compensation system in the states in which we write workers’ compensation insurance. Our relationships with medical providers also are impacted by legislation and regulation, including penalties for failure to make timely payments. Commercial liability and property insurance is also subject to extensive regulation.
 
Irish Regulation. AIU is a non-life insurance company incorporated under the laws of Ireland and as such is subject to the regulation and supervision of the Irish Financial Services Regulatory Authority (the “Irish Financial Regulator”) pursuant to the Irish Insurance Acts 1908 to 2000 and the European Communities (Non Life Insurance Framework) Regulations 1994 (as amended). The Irish Financial Regulator has responsibility for the regulation and supervision of the insurance and reinsurance industries in Ireland. Without the consent of the Irish Financial Regulator, AIU may not make any dividend payments or intercompany loans. In addition, AIU must maintain a minimum solvency margin and minimum guarantee fund. These rules and regulations may have the effect of restricting the ability of AIU to write new business or distribute assets to AmTrust.
 
Bermuda Regulation. AII is a registered Class 3 Bermuda reinsurance company. Among other matters, Bermuda statutes and regulations and policies of the Bermuda Monetary Authority (“BMA”) require AII to maintain minimum levels of statutory capital, surplus and liquidity, meet solvency standards, submit to periodic examinations of its financial condition and restrict payments of dividends and reductions of capital. These statutes, regulations and policies may, in effect, restrict AII’s ability to write reinsurance, to make certain investments and to distribute funds.
 
The offshore insurance and reinsurance regulatory environment has become subject to increased scrutiny in many jurisdictions, including the United States and various states within the United States. Compliance with any new laws or regulations regulating offshore reinsurers could have a material adverse effect on our business.
 
Our inability to obtain the necessary reinsurance collateral could limit our ability to take credit for AII’s reinsurance.
 
AII is not licensed or admitted as a reinsurer in any jurisdiction other than Bermuda. Because many jurisdictions do not permit insurance companies to take credit for reinsurance obtained from unlicensed or non-admitted reinsurers on their statutory financial statements unless appropriate security mechanisms are in place, AII is typically required to post letters of credit or other collateral. If we were unable to arrange for adequate collateral on commercially reasonable terms to secure the reinsurance obligations of AII, AII could be limited in its ability to reinsure the business of TIC, RIC, and WIC and any unrelated insurance companies.
 
 
The effects of emerging claim and coverage issues on our business are uncertain.
 
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until after we have issued insurance policies that are affected by the changes. As a result, the full extent of our liability under an insurance policy may not be known until many years after the policy is issued. For example, medical costs associated with permanent and partial disabilities may increase more rapidly or be higher than we currently expect. Changes of this nature may expose us to higher workers’ compensation claims than we anticipated when we wrote the underlying policy. Unexpected increases in our claim costs many years after workers’ compensation policies are issued may also result in our inability to recover from certain of our reinsurers the full amount that they would otherwise owe us for such claims costs because certain of the reinsurance agreements covering our workers’ compensation business include commutation clauses which permit the reinsurers to terminate their obligations by making a final payment to us based on an estimate of their remaining liabilities.
 
Additional capital that we may require in the future may not be available to us or may be available to us only on unfavorable terms.
 
Our future capital requirements will depend on many factors, including regulatory requirements, the financial stability of our reinsurers, future acquisitions and our ability to write new business and establish premium rates sufficient to cover our estimated claims. We may need to raise additional capital or curtail our growth to support future operating requirements or cover claims. If we have to raise additional capital, equity or debt financing may not be available to us or may be available only on terms that are not favorable. In the case of equity financings, dilution to our stockholders could result and the securities sold may have rights, preferences and privileges senior to the common stock sold pursuant to this prospectus. In addition, under certain circumstances, we may sell our common stock, or securities convertible or exchangeable into shares of our common stock, at a price per share less than the market value of our common stock. 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 or results of operations could be adversely affected.
 
If we were unable to realize our investment objectives, our financial condition and results of operations may be adversely affected.
 
Investment income is an important component of our net income. We primarily manage our investment portfolio internally under investment guidelines approved by our Board of Directors and the Boards of Directors of our subsidiaries. Although these guidelines stress diversification and capital preservation, our investments are subject to a variety of risks, including risks related to general economic conditions, interest rate fluctuations and market volatility. General economic conditions may be adversely affected by U.S. involvement in hostilities with other countries and large-scale acts of terrorism, or the threat of hostilities or terrorist acts.
 
Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Changes in interest rates could have an adverse effect on the value of our investment portfolio and future investment income. For example, changes in interest rates can expose us to prepayment risks on mortgage-backed securities included in our investment portfolio. When interest rates fall, mortgage-backed securities typically are prepaid more quickly than expected and the holder must reinvest the proceeds at lower interest rates. In periods of increasing interest rates, mortgage-backed securities are prepaid more slowly, which may require us to receive interest payments that are below the interest rates then prevailing for longer than expected.
 
We invest a portion of our portfolio in below investment-grade securities. The risk of default by borrowers that issue below investment-grade securities is significantly greater than that of other borrowers because these borrowers are often highly leveraged and more sensitive to adverse economic conditions, including a recession. In addition, these securities are generally unsecured and often subordinated to other debt. The risk that we may not be able to recover our investment in below investment-grade securities is higher than with investment-grade securities.
 
We also invest a portion of our portfolio in equity securities, which are more speculative than debt securities.
 
These and other factors affect the capital markets and, consequently, the value of our investment portfolio and our investment income. Any significant decline in our investment income would adversely affect our revenues and net income and, as a result, decrease our surplus and s tockholders’ equity.
 
Our operating results may be adversely affected by currency fluctuations.
 
Our functional currency is the U.S. dollar. For the year ended December 31, 2005, 19.2% of our net premiums written were written in currencies other than the U.S. dollar, and for the three months ended March 31, 2006, 12.9% of our net premiums written were written in currencies other than the U.S. dollar. As of March 31, 2006, 7.5% of our cash and investments were denominated in non-U.S. currencies. Because we write business in the European Union and United Kingdom, we hold investments denominated in British Pounds and Euros and may, from time to time, experience losses resulting from fluctuations in the values of these non-U.S. currencies, which could adversely affect our operating results.
 
Our business is dependent on the efforts of our executive officers, underwriters and other personnel.
 
Our success is dependent on the efforts of our executive officers because of their industry expertise, knowledge of our markets and relationships with our independent agencies and warranty administrators. Our principal executive officers are Barry Zyskind, Ronald Pipoly, Michael Saxon, Stephen Ungar, Christopher Longo and Max Caviet. Should any of our executive officers cease working for us, we may be unable to find acceptable replacements with comparable skills and experience in the workers’ compensation insurance industry and/or the specialty risk sectors that we target. In addition, our business is also dependent on skilled underwriters, and other skilled employees and adequate replacements for our experienced and specialized underwriters and other skilled employees may be difficult to locate and recruit. As a result, our operations and marketing relationships may be disrupted and our business may be adversely affected. We do not currently maintain life insurance policies with respect to our executive officers or other employees.
 
AmTrust is an insurance holding company and does not have any direct operations.
 
AmTrust is a holding company that transacts business through its operating subsidiaries. AmTrust’s primary assets are the capital stock of these operating subsidiaries. Payments from our insurance company subsidiaries pursuant to management agreements and tax sharing agreements are our primary source of funds to pay AmTrust’s direct expenses. We anticipate that such payments, together with dividends paid to us by our subsidiaries, will continue to be the primary source of funds for AmTrust. The ability of AmTrust to pay dividends to our stockholders largely depends upon the surplus and earnings of our subsidiaries and their ability to pay dividends to AmTrust. Payment of dividends by our insurance subsidiaries is restricted by insurance laws of various states, Ireland and Bermuda, and the laws of certain foreign countries in which we do business, including laws establishing minimum solvency and liquidity thresholds, and could be subject to contractual restrictions in the future, including those imposed by indebtedness we may incur in the future. See “Regulation.” As a result, at times, AmTrust may not be able to receive dividends from its insurance subsidiaries and may not receive dividends in amounts necessary to pay dividends on our capital stock.
 
 
Assessments and premium surcharges for state guaranty funds, second injury funds and other mandatory pooling arrangements may reduce our profitability.
 
Most states require insurance companies licensed to do business in their state to participate in guaranty funds, which require the insurance companies to bear a portion of the unfunded obligations of impaired, insolvent or failed insurance companies. These obligations are funded by assessments, which are expected to continue in the future. State guaranty associations levy assessments, up to prescribed limits, on all member insurance companies in the state based on their proportionate share of premiums written in the lines of business in which the impaired, insolvent or failed insurance companies are engaged. See “Regulation.” Accordingly, the assessments levied on us may increase as we increase our premiums written. Some states also have laws that establish second injury funds to reimburse insurers and employers for claims paid to injured employees for aggravation of prior conditions or injuries. These funds are supported by either assessments or premium surcharges based on paid losses. The effect of assessments and premium surcharges or changes in them could reduce our profitability in any given period or limit our ability to grow our business.
 
In addition, as a condition to conducting workers’ compensation business in most states, insurance companies are required to participate in residual market programs to provide insurance to those employers who cannot procure coverage from an insurance carrier willing to provide coverage on a voluntary basis. Insurance companies generally can fulfill their residual market obligations by, among other things, participating in a reinsurance pool where the results of all policies provided through the pool are shared by the participating insurance companies. Although we are compensated for our participation in these pools by receiving a share of the premium paid to the pools, this compensation is often inadequate to cover the cost of our losses arising from our participation in these pools. Accordingly, mandatory pooling arrangements may cause a decrease in our profits. We currently participate in mandatory pooling arrangements in 13 states. Our premiums from mandatory pooling arrangements were $3.7 million for the three months ended March 31, 2006 and $17.7 million for the year ended December 31, 2005. These mandatory pooling arrangements caused our net combined ratio to increase by 2.6% for the twelve months ended December 31, 2005 and 2.4% for the three months ended March 31, 2006. As we write policies in new states that have mandatory pooling arrangements, we will be required to participate in additional pooling arrangements. Further, the impairment, insolvency or failure of other insurance companies in these pooling arrangements would likely increase the liability of other members in the pool.
 
The outcome of recent insurance industry investigations and regulatory proposals in the United States could adversely affect our financial condition and results of operations.
 
The United States insurance industry has recently become the focus of increased scrutiny by regulatory and law enforcement authorities, as well as class action attorneys and the general public, relating to allegations of improper special payments, price-fixing, bid-rigging, improper accounting practices and other alleged misconduct, including payments made by insurers to brokers and the practices surrounding the placement of insurance business. Formal and informal inquiries have been made of a large segment of the industry, and a number of companies in the insurance industry have received or may receive subpoenas, requests for information from regulatory agencies or other inquiries relating to these and similar matters. These efforts have resulted and are expected to result in both enforcement actions and proposals for new state and federal regulation. Some states have adopted new disclosure requirements in connection with the placement of insurance business. It is difficult to predict the outcome of these investigations, whether they will expand into other areas not yet contemplated, whether activities and practices currently thought to be lawful will be characterized as unlawful, what form any additional laws or regulations will have when finally adopted and the impact, if any, of increased regulatory and law enforcement action and litigation on our business and financial condition. TIC received and responded to a general, industry-wide request for information from the New Hampshire Insurance Department regarding compensation arrangements with insurance agents and brokers. Subsequent to TIC’s response to such request, TIC did not receive further inquiries or comments from the New Hampshire Insurance Department.
 
 
We may have exposure to losses from terrorism for which we are required by law to provide coverage.
 
When writing workers’ compensation insurance policies, we are required by law to provide workers’ compensation benefits for losses arising from acts of terrorism. We also are required by law to offer to provide terrorism coverage in other commercial property and casualty insurance policies (except commercial auto policies) that we market. The impact of any terrorist act is unpredictable, and the ultimate impact on us would depend upon the nature, extent, location and timing of such an act. Because there are substantial limitations and restrictions on the protection against terrorism losses provided to us by our reinsurance and the Terrorism Risk Insurance Act of 2002, as modified by the Terrorism Risk Extension Act of 2005 (“TRIA”), the risk of severe losses to us from acts of terrorism remains. Accordingly, events constituting acts of terrorism may not be covered by, or may exceed the capacity of, our reinsurance and TRIA protections and could adversely affect our business and financial condition.
 
Our policies providing specialty risk and extended warranty coverage are not intended to provide coverage for losses arising from acts of terrorism. Accordingly, we have not obtained reinsurance for terrorism losses nor taken any steps to preserve our rights to the benefits of the TRIA program for this line of business and would not be entitled to recover from our reinsurers or the TRIA program if we were required to pay any terrorism losses under our specialty risk and extended warranty segment. Because there have been no claims filed under the TRIA program as yet, there is still a great deal of uncertainty over the way in which the federal government will implement the rules governing such claims. However, it is possible that the fact that we have not taken steps to preserve our right to the benefits of the TRIA program for the U.S. portion of our specialty risk and extended warranty segment may adversely affect our ability to collect under the program generally.
 
AII may become subject to taxes in Bermuda after March 28, 2016.
 
The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966, as amended, of Bermuda, has given AII an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to AII or any of its operations, shares, debentures or other obligations until March 28, 2016. See “Business—Certain International Tax Considerations.” Given the limited duration of the Minister of Finance’s assurance, we cannot be certain that AII will not be subject to any Bermuda tax after March 28, 2016. In the event that AII becomes subject to any Bermuda tax after such date, it may have a material adverse effect on our financial condition and results of operations.
 
 

The effects of the increasing amount of litigation against insurers on our business are uncertain.
 
Although we are not currently involved in any material litigation with our customers, other members of the insurance industry are the target of an increasing number of class action lawsuits and other types of litigation, some of which involve claims for substantial or indeterminate amounts, and the outcomes of which are unpredictable. This litigation is based on a variety of issues including insurance and claim settlement practices. We cannot predict with any certainty whether we will be involved in such litigation in the future.
 
Risks Related to Our Common Stock

There is currently no public trading market for our common stock, a public trading market for our common stock may never develop, and our common stock price may be volatile and could decline substantially.
 
There is currently no public market for our common stock. Accordingly, no assurances can be given as to the following:
 
 
·
the likelihood that a public trading market for our shares of common stock will develop or be sustained;
 
 
·
the liquidity of any such market;
 
 
·
the ability of our stockholders to sell their common stock; or
 
 
·
the price that our stockholders may obtain for their common stock.
 
Upon the effective date of this registration statement, we expect our common stock to be listed on either the New York Stock Exchange or the Nasdaq National Market. However, the market price for shares of our common stock may be highly volatile. Our performance, as well as government regulatory action, tax laws, interest rates and general market conditions, could have a significant impact on the future market price of our common stock. Some of the factors that could negatively affect our share price or result in fluctuations in the price of our common stock include:
 
 
·
actual or anticipated variations in our quarterly results of operations;
 
 
·
changes on our earnings estimates or publications of research reports about us or the industry;
 
 
·
increase in market interest rates that may lead purchasers of common stock to demand a higher yield;
 
 
·
changes in market valuations of other insurance companies;
 
 
·
adverse market reaction to any increased indebtedness we incur in the future;
 
 
·
additions or departures of key personnel;
 
 
·
actions by institutional stockholders;
 
 
 
 
·
reaction to the sale or purchase of company stock by our principal stockholders or our executive officers;
 
 
·
changes in the economic environment in the markets in which we operate;
 
 
·
changes in tax law;
 
 
·
speculation in the press or investment community; and
 
 
·
general market, economic and political conditions.
 
Our principal stockholders will still have the ability to control our business, which may be disadvantageous to other stockholders.
 
Based on the number of shares outstanding as of March 31, 2006, George Karfunkel, Michael Karfunkel and Barry Zyskind, directly or indirectly, collectively beneficially own or control approximately 59% of our outstanding common stock. As a result, these stockholders, acting together, have the ability to control all matters requiring approval by our stockholders, including the election and removal of directors, amendments to our certificate of incorporation and bylaws, any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions (including related party transactions). These stockholders may have interests that are different from other stockholders. In addition, we are a “controlled company” as defined in NASD Rule 4350(c)(5). We plan to apply to have our common stock approved for listing on either the New York Stock Exchange or the Nasdaq National Market. We intend to rely on the exemption from the New York Stock Exchange or the Nasdaq National Market, as applicable, Board of Directors independence requirements available to a controlled company. Also, each of our board committees, except our audit committee, may include non-independent directors. The audit committee independence requirements imposed by the Sarbanes-Oxley Act of 2002 would apply to us, and we have organized our audit committee to meet these requirements.
 
In addition, certain of these individuals or their affiliates have entered into transactions with us and may from time to time in the future enter into other transactions with us. As a result, these individuals may have interests that are different from, or in addition to, their interest as stockholders in our Company. Such transactions may adversely affect our results or operations or financial condition. See “Certain Relationships and Related Transactions.”
 
Our officers, directors and principal stockholders could delay or prevent an acquisition or merger of our company even if the transaction would benefit other stockholders. Moreover, this concentration of share ownership makes it impossible for other stockholders to replace directors and management without the consent of the controlling stockholders. In addition, this significant concentration of share ownership may adversely affect the price prospective buyers are willing to pay for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. See “Principal Shareholders” for a more detailed description of our share ownership.
 
Future sales of our common stock may affect the value of our common stock.
 
We cannot predict what effect, if any, future sales of our common stock, or the availability of shares for future sale, will have on the price prospective buyers are willing to pay for our common stock. Sales of a substantial number of shares of our common stock by us, or the perception that such sales could occur, may adversely affect the price prospective buyers are willing to pay for our common stock and may make it more difficult to sell shares at a time and price determined appropriate. See “Shares Eligible
 
 
for Future Sale” for further information regarding circumstances under which additional shares of our common stock may be sold.
 
Applicable insurance laws may make it difficult to effect a change of control of our company.
 
We are subject to state statutes governing insurance holding companies, which generally require that any person or entity desiring to acquire direct or indirect control of any of our insurance company subsidiaries obtain prior regulatory approval.
 
RIC is domiciled in New York State. Before a person may acquire control of a New York insurance company, prior written approval must be obtained from the Superintendent of Insurance of the State of New York. Prior to granting approval of an application to acquire control of a New York insurer, the Superintendent of Insurance of the State of New York will consider such factors as the financial strength of the applicant, the integrity of the applicant’s board of directors and executive officers, the acquirer’s plans for the future operations of the domestic insurer and any anti-competitive results or hazards to policyholders that may arise from the consummation of the acquisition of control. Pursuant to the New York insurance holding company statute, “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and polices of the company, whether through the ownership of voting securities, by contract (except a commercial contract for goods or non-management services) or otherwise. Control is presumed to exist if any person directly or indirectly owns, controls or holds with the power to vote 10% or more of the voting securities of the company; however, the New York State Insurance Department, after notice and a hearing, may determine that a person or entity which directly or indirectly owns, controls or holds with the power to vote less than 10% of the voting securities of the company, “controls” the company. Because a person acquiring 10% or more of our common stock would indirectly control the same percentage of the stock of RIC, the insurance change of control laws of New York would apply to such a transaction.
 
TIC is domiciled in New Hampshire. Before a person may acquire control of a New Hampshire insurance company, prior written approval must be obtained from the New Hampshire Insurance Commissioner. Prior to granting approval of an application to acquire control of a New Hampshire insurer, the New Hampshire Insurance Commissioner will hold a public hearing on the acquisition and will consider such factors as the financial strength of the applicant, the competence, experience and integrity of the persons who would control the operations of the domestic insurer, applicant’s board of directors and executive officers, the acquirer’s plans for the future operations of the domestic insurer and any anti-competitive results or hazards to the insurance-buying public that may arise from the consummation of the acquisition of control. Pursuant to the New Hampshire insurance holding company statute, “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and polices of the company, whether through the ownership of voting securities, by contract (except a commercial contract for goods or non-management services) or otherwise. Control is presumed to exist if any person directly or indirectly owns, controls or holds with the power to vote 10% or more of the voting securities of the company; however, the New Hampshire Insurance Department, after notice and a hearing, may determine that “control” exists in fact, notwithstanding the absence of a presumption to that effect. Because a person acquiring 10% or more of our common stock would indirectly control the same percentage of the stock of TIC, the insurance change of control laws of New Hampshire would apply to such a transaction.
 
WIC is domiciled in Delaware. Before a person may acquire control of a Delaware insurance company, prior written approval must be obtained from the Delaware Insurance Commissioner. Prior to granting approval of an application to acquire control of a Delaware insurer, the Delaware Insurance Commissioner will hold a public hearing on the acquisition and consider such factors as the financial strength of the applicant, the competence, experience and integrity of the persons who would control the operations of the domestic insurer, applicant’s board of directors and executive officers, the acquirer’s plans for the future operations of the domestic insurer and any anti-competitive results or hazards to the insurance-buying public that may arise from the consummation of the acquisition of control. Pursuant to the Delaware insurance holding company statute, “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and polices of a company, whether through the ownership of voting securities, by contract (except a commercial contract for goods or non-management services) or otherwise. Control is presumed to exist if any person directly or indirectly owns, controls or holds with the power to vote 10% or more of the voting securities of company; however, the Delaware Insurance Department, after notice and a hearing, may determine that “control” exists in fact, notwithstanding the absence of a presumption to that effect. Because a person acquiring 10% or more of our common stock would indirectly control the same percentage of the stock of WIC, the insurance change of control laws of Delaware would apply to such a transaction.
 
 
AIU is domiciled in the Republic of Ireland. Irish law requires that anyone acquiring or disposing of a “qualifying holding” in AIU, or anyone who proposes to decrease or increase that holding to specified levels, must first notify the Irish Financial Regulator of their intention to do so. It also requires any insurance company that becomes aware of any acquisitions or disposals of its capital involving the “specified levels” to notify the Irish Financial Regulator. The Irish Financial Regulator has three months from the date of submission of a notification within which to oppose the proposed transaction, if the Irish Financial Regulator is not satisfied as to the suitability of the acquirer “in view of the necessity to ensure sound and prudent management of the insurance undertaking.” A “qualifying holding” means a direct or indirect holding in an insurance company that represents 10% or more of the capital or of the voting rights of such company or that makes it possible to exercise a significant influence over the management of such company. The specified levels are 20%, 33% and 50%, or such other level of ownership that results in the company becoming the acquirer’s subsidiary.
 
Any person having a shareholding of 10% or more of the issued share capital in AmTrust would be considered to have an indirect holding in AIU at or over the 10% limit. Any change that resulted in the indirect acquisition or disposal of a shareholding of greater than or equal to 10% in the share capital of AIU, or a change that resulted in an increase to or decrease below one of the specified levels, would need to be cleared with the Irish Financial Regulator prior to the transaction.
 
These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of our company, including through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be desirable.
 
We may be unable to pay dividends on our common stock.
 
AmTrust’s income is generated primarily from our insurance subsidiaries. The laws of New York, New Hampshire, Delaware, Ireland and Bermuda regulate and restrict, under certain circumstances, the ability of our insurance subsidiaries to pay dividends to AmTrust. If AmTrust’s insurance subsidiaries could not pay dividends to AmTrust, AmTrust could not, in turn, pay dividends to shareholders. In addition, the terms of AmTrust’s junior subordinated debentures limit, in some circumstances, AmTrust’s ability to pay dividends on its common stock, and future borrowings may include prohibitions on dividends or other restrictions. For these reasons, AmTrust may be unable to pay dividends on its common stock. See “Regulation.”
 
Being a public company will increase our expenses and administrative burden.
 
We will be required to comply with additional laws and regulations, including the Sarbanes-Oxley Act of 2002 and related rules of the SEC, and likely the regulations of either the New York Stock Exchange or the Nasdaq National Market. Complying with these laws and regulations will require the time and attention of our board of directors and management and will increase our expenses. Among other things, we will need to:
 
 
 
·
design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;
 
 
·
prepare and distribute periodic reports in compliance with our obligations under the federal securities laws;
 
 
·
establish new internal policies, principally those relating to disclosure controls and procedures and corporate governance;
 
 
·
institute a more comprehensive compliance function; and
 
 
·
involve to a greater degree our outside legal counsel and accountants in the above activities.
 
In addition, it may be expensive for us to obtain directors’ and officers’ liability insurance. We may be required to accept reduced coverage or incur substantially higher costs to obtain this coverage. These factors could also make it more difficult for us to attract and retain qualified executives and members of our board of directors, particularly directors willing to serve on our audit committee.
 
We will be exposed to risks relating to evaluations of our internal controls over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002.
 
We expect that we will be required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act in connection with our 2007 financial statements. We are in the process of evaluating our internal control systems to allow management to report on, and our independent auditors to assess, our internal controls over financial reporting. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with Section 404. However, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board rules and regulations that remain unremediated. We will be required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that materially affect, or are reasonably likely to materially affect, internal controls over financial reporting. A “material weakness” is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. If we fail to implement the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory agencies such as the SEC. In addition, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our financial statements and the trading price of our common stock may decline. If we fail to remedy any material weakness, our financial statements may be inaccurate, our access to the capital markets may be restricted and the trading price of our common stock may decline.
 
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains various “forward-looking statements.” Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “targets,” “may,” “will,” “would,” “could,” “should,” “seeks,” “approximately,” “intends,” “plans,” “projects,” “estimates” or “anticipates” or the negative of these words or phrases or similar words or phrases.
 
All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include but are not limited to those described under “Risk Factors” and the following:
 
 
·
Our business is subject to extensive regulation by applicable federal, state and foreign regulators in the jurisdictions in which we operate.
 
 
·
We may not be able to successfully manage our growth.
 
 
·
If we fail to accurately assess the risks associated with the business we insure, we may fail to establish appropriate premium rates, and our reserves for unpaid losses and loss adjustment expenses may be inadequate to cover our actual losses.
 
 
·
If we are unable to obtain reinsurance on favorable terms, our ability to write new policies and renew existing policies could be adversely affected.
 
 
·
We believe that the A.M. Best rating of “A-” (Excellent) of certain of our insurance subsidiaries has a significant influence on our business and that many brokers, agents and customers would not place business with us if one or more of these ratings were downgraded.
 
 
·
The specialty middle-market property and casualty business we recently acquired is a new segment for us, and we may not be able to underwrite it profitably.
 
 
·
We cannot control or predict with any certainty the amount or profitability of the business we will be able to transition in the specialty middle-market property and casualty segment we recently acquired.
 
 
·
Our operating results may fluctuate significantly due to various factors generally beyond our control.
 
 
·
Because we are dependent on certain key executives and other personnel, the loss of any of these executives or our inability to retain other key personnel could adversely affect our business.
 
 
·
Changes in rating agency policies or practices.
 
 
·
Changes in legal theories of liability under our insurance policies.
 
 
·
Changes in accounting policies or practices.
 
 

 
·
Changes in general economic conditions, including inflation and other factors.
 
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
 
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we project. Any forward-looking statements you read in this prospectus reflect our views as of the date of this prospectus with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. Before making an investment decision, you should specifically consider all of the factors identified in this prospectus that could cause actual results to differ.
 
We cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. We do not intend, and disclaim any duty or obligation, to update or revise any industry information or forward-looking statements set forth in this prospectus to reflect new information, future events or otherwise.
 
USE OF PROCEEDS
 
We will not receive any of the proceeds from the sale of the shares of our common stock by the selling stockholders
 
DIVIDEND POLICY
 
Historically, we have not paid dividends on our common stock. We have not made a determination as to whether we will pay dividends in the future. Any future determination to pay cash dividends on our common stock will be at the discretion of our board of directors and will be dependent on our earnings, financial condition, operating results, capital requirements, any contractual, regulatory or other restrictions on the payment of dividends by our subsidiaries to AmTrust, and other factors that our board of directors deems relevant.
 
AmTrust is a holding company and has no direct operations. Our ability to pay dividends in the future primarily depends on the ability of our operating subsidiaries to pay dividends to us. Our insurance company subsidiaries are regulated insurance companies and therefore are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. In addition, the terms of our junior subordinated debt require that we make scheduled interest payments on the debt before we pay any dividends to our stockholders. Agreements or indentures governing future debt financings may contain prohibitions or other restrictions on the payment of dividends. We paid a dividend of $9.6 million to the holder of our preferred stock in July 2005 and an additional dividend of $1.2 million to this holder in December 2005. In February 2006 we exchanged all of the outstanding shares of preferred stock for an aggregate of 10,285,714 shares of common stock. For additional information regarding restrictions on the payment of dividends by us and our insurance company subsidiaries, see “Regulation.”
 
 
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
 
The following tables set forth our selected historical consolidated financial and operating information for the periods ended and as of the dates indicated. The selected unaudited consolidated income statement data for the three months ended March 31, 2006 and 2005 and the balance sheet data as of March 31, 2006 and 2005 are each derived from our unaudited financial statements included elsewhere in this prospectus, which have been prepared in accordance with GAAP. These historical results are not necessarily indicative of results to be expected from any future period.
 
The selected consolidated income statement data for the year ended December 31, 2005 and the balance sheet data as of December 31, 2005, are derived from our audited financial statements included elsewhere in this prospectus, which have been audited by BDO Seidman LLP, our independent auditors. The selected consolidated income statement data for the year ended December 31, 2004, 2003 and 2002 and the balance sheet data as of December 31, 2004, 2003 and 2002 are derived from our audited financial statements included elsewhere in this prospectus, which have been prepared in accordance with GAAP and have been audited by Berenson LLP, our former independent auditors. The selected consolidated income statement data for the year ended December 31, 2001 and the balance sheet data as of December 31, 2001 are derived from the audited financial statements of our parent, AmTrust Financial Group, Inc., which have been prepared in accordance with GAAP and have been audited by Berenson LLP, our former independent auditors. These historical results are not necessarily indicative of results to be expected from any future period. You should read the following selected consolidated financial information together with the other information contained in this prospectus, including the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.
 
     
Three Months
Ended March 31,
   
Year Ended December 31,
 
     
2006
   
2005
   
2005
   
2004
   
2003
   
2002
   
2001
 
     
(unaudited)
($ in thousands,
except percentages and
per share data)
   
($ in thousands, except percentages and per share data)
  		 
Selected Income Statement Data(1)                                            
Gross premiums written
 
$
123,278
 
$
91,548
 
$
286,131
 
$
210,851
 
$
97,490
 
$
27,509
 
$
13,353
 
Ceded gross premiums written
   
(12,525
)
 
(9,634
)
 
(26,918
)
 
(23,353
)
 
(15,567
)
 
(4,005
)
 
(1,520
)
Net premiums written
 
$
110,753
 
$
81,914
 
$
259,213
 
$
187,498
 
$
81,923
 
$
23,504
 
$
11,833
 
Change in unearned net premiums written
   
(40,943
)
 
(34,559
)
 
(43,183
)
 
(48,684
)
 
(30,256
)
 
(6,230
)
 
(1,113
)
Net earned premiums
 
$
69,810
 
$
47,355
 
$
216,030
 
$
138,814
 
$
51,667
 
$
17,274
 
$
10,720
 
Commission and fee income
 
$
2,855
 
$
1,890
 
$
8,196
 
$
5,202
 
$
1,052
 
$
341
 
$
392
 
Net investment income(2)
   
5,335
   
1,885
   
11,534
   
4,439
   
3,072
   
2,242
   
2,035
 
Net realized gains (loss)
   
1,576
   
26
   
4,875
   
1,278
   
(1,004
)
 
(1
)
 
(16
)
Other
   
—
   
—
   
—
   
222
   
496
   
—
   
—
 
Total revenues
 
$
79,576
 
$
51,156
 
$
240,635
 
$
149,955
 
$
55,283
 
$
19,856
 
$
13,131
 
Loss and loss adjustment expense
 
$
43,774
 
$
33,997
 
$
142,006
 
$
90,178
 
$
34,884
 
$
9,139
 
$
4,459
 
Policy acquisition expenses(3)
   
8,323
   
8,671
   
30,082
   
20,082
   
8,194
   
3,848
   
—
 
Salaries and benefits(4)
   
5,119
   
3,000
   
13,903
   
10,945
   
4,063
   
3,312
   
—
 
Other insurance general and administrative expenses(5)
   
6,783
   
3,479
   
19,519
   
10,430
   
3,696
   
1,179
   
9,117
 
Other operating expenses(6)
   
1,944
   
1,125
   
5,543
   
2,167
   
1,000
   
—
   
—
 
Total expenses  
$
65,943
 
$
50,272
 
$
211,053
 
$
133,802
 
$
51,837
 
$
17,478
 
$
13,576
 
Operating income from continuing operations
 
$
13,633
 
$
884
 
$
29,582
 
$
16,153
 
$
3,446
 
$
2,378
 
$
(445
)
Other income (expense) Foreign currency gain(7)
 
$
98
   
—
 
$
388
   
—
   
—
   
—
   
—
 
Miscellaneous
   
—
   
—
   
—
   
(85
)
 
(545
)
 
(116
)
 
2,404
 
Interest expense
   
(1,213
)
 
—
   
(2,784
)
 
(264
   
(221
)
 
(161
)
 
(194
)
Total other income (expenses)  
$
(1,115
)
$
—
 
$
(2,396
)
$
(349
)
$
(766
)
$
(277
)
$
2,210
 
 
 
 
     
Three Months
Ended March 31,
   
Year Ended December 31,
 
     
2006
   
2005
   
2005
   
2004
   
2003
   
2002
   
2001
 
     
(unaudited)
($ in thousands,
except percentages and
per share data)
   
($ in thousands, except percentages and per share data)
  		 
Income from continuing operations before provision for income taxes and change in accounting principle
 
$
12,518
 
$
884
 
$
27,186
 
$
15,804
 
$
2,680
 
$
2,101
 
$
1,765
 
Total provision for income taxes
   
3,259
   
(1,079
)
 
6,666
   
3,828
   
1,258
   
510
   
38
 
Income from continuing operations before change in accounting principle
 
$
9,259
 
$
1,963
 
$
20,520
 
$
11,976
 
$
1,422
 
$
1,591
 
$
1,727
 
Cumulative effect of change in accounting principle
   
—
   
—
   
—
   
—
   
—
   
578
   
—
 
Income from continuing operations
   
9,259
   
1,963
   
20,520
   
11,976
   
1,422
   
2,169
   
1,727
 
Foreign currency gain from discontinued operations
   
—
   
—
   
21,745
   
—
   
—
   
—
   
—
 
Other income (loss) from discontinued operations(7)
   
—
   
1,429
   
(4,706
)
 
2,134
   
(30
)
 
—
   
—
 
Net income
 
$
9,259
 
$
3,392
 
$
37,559
 
$
14,110
 
$
1,392
 
$
2,169
 
$
1,727
 
Preferred stock dividend accumulated(8)
   
—
   
1,200
   
1,200
   
4,800
   
4,800
   
—
   
—
 
Net income (loss) available to common stockholders
 
$
9,259
 
$
2,192
 
$
36,359
 
$
9,310
 
$
(3,408
)
$
2,169
 
$
1,727
 
Basic earnings (loss) per common share:
                                           
Income (loss) from continuing operations before change in accounting principle
 
$
0.21
 
$
0.03
 
$
0.80
 
$
0.30
 
$
(0.14
)
$
0.07
 
$
0.07
 
Cumulative effect of change in accounting principle
   
—
   
—
   
—
   
—
   
—
   
0.02
   
—
 
Income (loss) from discontinued operations
   
—
   
0.06
   
0.71
   
0.09
   
—
   
—
   
—
 
Net income (loss) per common share (basic)
 
$
0.21
 
$
0.09
 
$
1.51
 
$
0.39
 
$
(0.14
)
$
0.09
 
$
0.07
 
Weighted average shares outstanding
   
44,462,545
   
24,089,286
   
24,089,286
   
24,089,286
   
24,089,286
   
24,089,286
   
24,089,286
 

 
 
 
 
Three Months
Ended March 31,
 
Year Ended December 31,
 
 
 
2006
 
2005
 
2005
 
2004
 
2003
 
2002
 
2001
 
 
(unaudited)
($ in thousands,
except percentages and
per share data)
 
($ in thousands, except percentages and per share data)
 
Selected Insurance Ratios and Operating Information
                             
Net loss ratio(9)
   
62.7
%
 
71.8
%
 
65.7
%
 
65.0
%
 
67.5
%
 
52.9
%
 
41.6
%
Net expense ratio(10)
   
29.0
%
 
32.0
%
 
29.4
%
 
29.9
%
 
30.9
%
 
48.3
%
 
85.0
%
Net combined ratio(11)
   
91.7
%
 
103.8
%
 
95.1
%
 
94.8
%
 
98.4
%
 
101.2
%
 
126.6
%
                                             
Annualized return on average equity(12)
   
17.7
%
 
11.3
%
 
31.7
%
 
13.0
%
 
1.6
%
 
4.4
%
 
9.0
%
Annualized return on average equity without foreign currency gain and discontinued operations(12)
   
17.7
%
 
6.5
%
 
17.3
%
 
11.0
%
 
1.6
%
 
4.4
%
 
9.0
%


   
March 31,
 
Year Ended December 31,
 
   
2006
 
2005
 
2005
 
2004
 
2003
 
2002
 
2001
 
   
(unaudited)
($ in thousands, except percentages and per share data)
 
($ in thousands, except percentages and per share data)
 
         
Selected Balance Sheet Data
                             
Cash and cash equivalents
 
$
164,248
 
$
101,264
 
$
115,847
 
$
28,727
 
$
11,202
 
$
7,068
 
$
4,670
 
Investments
   
433,890
   
173,603
   
299,965
   
169,484
   
74,379
   
30,042
   
23,789
 
Real estate(7)
   
—
   
164,412
   
—
   
161,555
   
185,744
   
168,523
   
—
 
Amounts recoverable from reinsurers
   
19,711
   
14,682
   
17,667
   
14,445
   
4,046
   
1,533
   
1,047
 
Premiums receivable, net
   
127,545
   
76,310
   
81,070
   
56,468
   
26,143
   
11,927
   
9,947
 
Deferred income taxes
   
8,705
   
3,460
   
9,396
   
1,952
   
1,130
   
958
   
416
 
Goodwill and other intangibles
   
22,058
   
10,013
   
20,781
   
9,309
   
6,100
   
5,500
   
—
 
Total assets
   
858,159
   
604,711
   
611,342
   
497,530
   
341,394
   
306,225
   
45,165
 
Reserves for loss and loss adjustment expense
   
190,022
   
117,964
   
168,007
   
99,364
   
37,442
   
14,743
   
11,813
 
Unearned premiums
   
207,739
   
140,515
   
156,802
   
105,107
   
42,681
   
12,659
   
6,124
 
Mortgage notes(7)
   
—
   
91,873
   
—
   
92,919
   
107,960
   
93,420
   
—
 
Note payable
   
—
   
—
   
25,000
   
1,700
   
3,649
   
3,648
   
3,049
 
Junior subordinated debt
   
50,000
   
25,000
   
50,000
   
—
   
—
   
—
   
—
 
Common stock and additional paid in capital
   
239,187
   
12,647
   
12,647
   
12,647
   
12,647
   
12,647
   
19,226
 
Preferred stock(8)
   
—
   
60,000
   
60,000
   
60,000
   
60,000
   
60,000
   
—
 
Total shareholders’ equity
   
299,509
   
121,134
   
118,411
   
118,828
   
98,467
   
79,048
   
20,039
 
                                             
(1)
Results for a number of periods were affected by our acquisition of the stock and renewal rights of Princeton in December 2002, and the renewal rights and certain other assets of Covenant in December 2003 and Associated in August 2004.
 
(2)
Also included finance income of AFS Capital Corporation prior to its disposition in April 2005.
 
(3)
Policy acquisition expenses include commissions paid directly to producers as well as premium taxes and assessments.
 
(4)
For periods subsequent to 2002 salaries and benefits are for employees who are directly engaged in insurance activities. Policy acquisition expenses and salaries and benefits for 2001 and 2002 were included in other insurance general and administrative expenses.
 
(5)
Other insurance general and administrative expenses represent those costs other than policy acquisition expenses, as well as salaries and benefits, that are directly attributable to insurance activities. Policy acquisition expenses and salaries and benefits for 2001 and 2002 were included in other insurance general and administrative expenses.
 
 

(6)
Other operating expenses are those expenses that are associated with fee and commission generating activities in which the Company engages.
 
(7)
The foreign currency gain from discontinued operations relates to our wholly-owned subsidiary, AmTrust Pacific Limited, a New Zealand real estate operating company (“APL”). Income (loss) from discontinued operations reflects the results of operations of APL and AFS Capital Corp., a premium finance company. The real estate in the balance sheet reflects the carrying value of real estate held by APL. The mortgage notes in the balance sheet reflect mortgage debt on this real estate. All of these real estate assets were liquidated as of November 2005. For more information about these transactions, see the consolidated financial statements and related notes included elsewhere in this prospectus.
 
(8)
In January 2006, the holder of our preferred stock agreed to a reduction of the dividend in 2005 to $1.2 million. Our preferred stock was exchanged for an aggregate of 10,285,714 shares of our common stock in February 2006.
 
(9)
Net loss ratio is calculated by dividing the loss and loss adjustment expense by net premiums earned.
 
(10)
Net expense ratio is calculated by dividing the total of the acquisition expenses, salaries and benefits as well as other insurance general and administrative expenses by net premiums earned.
 
(11)
Net combined ratio is calculated by adding net loss ratio and net expense ratio together.
 
(12)
Calculated by dividing net income or net income without currency gain and discontinued operations, as the case may be, by the average shareholders’ equity. The calculations for the three months ended March 31, 2005 and March 31, 2006 have been annualized.
 
 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this prospectus. This discussion and analysis includes forward-looking statements that are subject to risks, uncertainties and other factors described under the caption “Risk Factors” beginning on page 15. These factors could cause our actual results in current and future periods to differ materially from those expressed in, or implied by, those forward-looking statements. See “Special Note Regarding Forward-Looking Statements.”
 
Overview
 
AmTrust is a multinational specialty property and casualty insurer focused on generating consistent underwriting profits. We provide insurance coverage for small businesses and products with high volumes of insureds and loss profiles which we believe are predictable. We target lines of insurance that we believe are generally underserved by larger insurance carriers. AmTrust has grown by hiring teams of underwriters with expertise in our specialty lines and through acquisitions of renewal rights to established books of specialty insurance business. Since our current majority stockholders acquired AmTrust in 1998, we have expanded our operations into three business segments:
 
 
·
Workers’ compensation for small businesses (average premium less than $5,000 per policy) in the United States;
 
 
·
Specialty risk and extended warranty coverage for accidental damage, mechanical breakdown and related risks primarily for selected consumer and commercial goods in the United Kingdom, certain other European Union countries and the United States; and
 
 
·
Specialty middle-market property and casualty insurance. This segment writes workers’ compensation, commercial automobile and general liability insurance through general and other wholesale agents.
 
Our business has grown substantially since 2002. Our annual gross premiums written increased from $27.5 million in 2002 to $286.1 million in 2005 and from $91.5 million in the three months ended March 31, 2005 to $123.3 million in the three months ended March 31, 2006. Our annual premiums written in our workers’ compensation segment increased from $21.1 million in 2002 to $204.6 million in 2005 and from $55.4 million in the three months ended March 31, 2005 to $69.2 million in the three months ended March 31, 2006. Our annual gross premiums written in our specialty risk and extended warranty segment increased from approximately $6.4 million in 2002 to $81.6 million in 2005 and decreased from $36.1 million in the three months ended March 31, 2005 to $20.4 million for the three months ended March 31, 2006. Our net income from continuing operations increased from $2.2 million in 2002 to $20.5 million in 2005 and from $2.0 million in the three months ended March 31, 2005 to $9.3 million in the three months ended March 31, 2006. Our gross premiums written in the specialty middle-market property and casualty insurance business segment, which we acquired in December 2005, was $33.6 million for the three months ended March 31, 2006. Given the larger scale of our current operations, our past growth rate is likely not indicative of our future growth rate.
 
One of the key financial measures that we use to evaluate our operating performance is return on average equity. We calculate return on average equity by dividing net income by the average of shareholders’ equity. Our return on average equity was 4.4% in 2002, 1.6% in 2003, 13.0% in 2004 and 31.7% in 2005. Our annualized return on average equity, excluding foreign currency gains and income from discontinued operations, for the three months ended March 31, 2005 was 6.5% and for the three months ended March 31, 2006 was 17.7%. Our overall financial objective is to produce a return on average equity of 15.0% or more over the long term. In addition, we target a net combined ratio of 95.0% or lower over the long term, while maintaining optimal operating leverage in our insurance subsidiaries commensurate with our A.M. Best rating objectives. Our net combined ratio was 101.2% in 2002, 98.4% in 2003, 94.8% in 2004, 95.1% in 2005 and 91.7% for the three months ended March 31, 2006. A key factor in achieving our targeted net combined ratio is improvement of our net expense ratio. We plan to write additional premiums without a proportional increase in expenses and further reduce the expense component of our net combined ratio over time.
 
 
Our strategy across our segments is to maintain premium rates, deploy capital judiciously, manage our expenses and focus on the sectors in which we have expertise, which we believe will provide opportunities for greater returns.
 
Our consolidated results include the results for our holding company and our wholly-owned subsidiaries which principally include:
 
 
·
Technology Insurance Company, Inc. (“TIC”) which underwrites workers’ compensation insurance, specialty risk insurance and extended warranty coverage, and specialty middle-market property and casualty coverages in the United States;
 
 
·
Rochdale Insurance Company (“RIC”), which underwrites workers’ compensation insurance, specialty risk and extended warranty coverage, and specialty middle-market property and casualty coverages in the United States;
 
 
·
AmTrust International Underwriters Limited (“AIU”), which underwrites specialty risk and extended warranty coverage plans in the European Union;
 
 
·
AmTrust International Insurance, Ltd. (“AII”), which reinsures the underwriting activities of TIC, RIC and AIU; and
 
 
·
AmTrust Pacific Limited, a New Zealand real estate operating company, which discontinued operations in 2004.
 
AII, RIC and TIC are each rated “A-” (Excellent) by A.M. Best Company (“A.M. Best”), which rating is the fourth highest of 16 rating levels. AIU is unrated by A.M. Best. We have requested that A.M. Best assign our group rating to WIC. We reinsure our insurance risks through internal reinsurance agreements and agreements with third party reinsurers. As of March 31, 2006, we had approximately 255 employees.
 
Through a combination of acquisitions and organic growth, we have expanded geographically and acquired additional distribution channels, without acquiring the legacy liabilities of other insurance carriers, by primarily structuring our acquisitions as renewal rights acquisitions, including the following:
 
 
·
In December 2002, we acquired the Princeton Agency, Inc. (“Princeton”) and the renewal rights to Princeton’s book of workers’ compensation business. The acquisition increased our agent relationships in the Northeast and Midwest and enhanced our marketing efforts in these regions.
 
 

 
·
In December 2003, we acquired the renewal rights to the workers’ compensation business of The Covenant Group, Inc. (“Covenant”) and Covenant’s proprietary claims handling systems. We also hired several experienced claims adjusters from Covenant. This transaction increased our presence in the Southeast and enabled us to move the adjustment of claims arising from our small business workers’ compensation segment from third party administrators to an experienced internal claims staff.
 
 
·
In August 2004, we expanded our business to Florida by acquiring the renewal rights to a book of workers’ compensation business from Associated Industries Insurance Company (“Associated”).
 
 
·
In December 2005, we expanded into the specialty middle-market property and casualty business through our acquisition of Alea North America Inc.’s (“Alea”) renewal rights to substantially all of its specialty middle market property and casualty business. The business in this segment produced approximately $33.6 million of gross premiums written in the first three months of 2006. See “—Business Segments—Specialty Middle-Market Property and Casualty.”
 
 
·
On June 1, 2006, we acquired 100% of the issued and outstanding shares of WIC. WIC has approximately $15 million in capital and surplus and no net liabilities. WIC is licensed in all 50 states and the District of Columbia. WIC has no employees and will be managed by the Company pursuant to an Intercompany Management Agreement.
 
 
·
On June 1, 2006, we acquired the renewal rights to Muirfield’s book of workers’ compensation business, which generated over $60 million in gross premiums written in 2005, concentrated in the Midwest. We also acquired access to Muirfield’s distribution network. We believe that this transaction will help us accelerate our growth in the Midwest. Since we acquired renewal rights, we intend to offer renewals only to policyholders for risks which meet our underwriting guidelines. Furthermore, agents and policyholders will not be obligated to renew with us. We anticipate that we should renew approximately 50% of Muirfield’s existing book of workers’ compensation business.
 
As a result of our integration efforts, each of the businesses we acquired, prior to the Alea acquisition, is processed using our proprietary systems. At present, the workers’ compensation portion of our specialty middle market property and casualty business is being processed using our propriety systems. We expect to process all of this business using our systems over time.
 
In early 2003, we expanded our specialty risk and extended warranty segment in Europe by hiring a team of experienced underwriters in London, who we believe are recognized for their expertise in the European specialty risk and extended warranty coverage market, including Max Caviet, President of AIU, who has over 30 years of experience in this business. Many of the European-based specialty risk and extended warranty coverages we currently underwrite have been underwritten by our team for a number of years.
 
Investment income is an important part of our business. Because the period of time between our receipt of premiums and the ultimate settlement of claims is often several years or longer, we are able to invest cash from premiums for significant periods of time. As a result, we are able to generate more investment income from our premiums as compared to insurance companies that operate in many other lines of business. Our net investment income (including finance income of AFS Capital Corporation prior to its disposition in April 2005) was $2.2 million in 2002, $3.1 million in 2003, $4.4 million in 2004, $11.5 million for 2005 and $5.3 million for the three months ended March 31, 2006. As of March 31, 2006, the Company held 27.6% of total invested assets in cash and cash equivalents. This relatively high concentration of cash and cash equivalents represents our reaction to the relatively flat debt yield curve and enables the Company to quickly redeploy assets should the interest rate environment change.
 
 
Our most significant balance sheet liability is our reserves for loss and loss adjustment expense. We record reserves for estimated losses under insurance policies that we write and for loss adjustment expenses related to the investigation and settlement of policy claims. Our reserves for loss and loss adjustment expenses represent the estimated cost of all reported and unreported loss and loss adjustment expenses incurred and unpaid at any given point in time based on known facts and circumstances. Our reserves for loss and loss adjustment expenses incurred and unpaid are not discounted using present value factors. Our loss reserves are reviewed at least annually by external actuaries. Reserves are based on estimates of the most likely ultimate cost of individual claims. These estimates are inherently uncertain. Judgment is required to determine the relevance of our historical experience and industry information under current facts and circumstances. The interpretation of this historical and industry data can be impacted by external forces, principally frequency and severity of future claims, length of time to achieve ultimate settlement of claims, inflation of medical costs and wages, insurance policy coverage interpretations, jury determinations and legislative changes. Accordingly, our reserves may prove to be inadequate to cover our actual losses. If we change our estimates, these changes would be reflected in our results of operations during the period in which they are made, with increases in our reserves resulting in decreases in our earnings.
 
The use of reinsurance is an important component of our business strategy. See “Business— Reinsurance.” As losses are incurred and recorded, we record amounts recoverable from third party reinsurers for the portion of the paid and unpaid losses ceded to the reinsurers. We have purchased reinsurance for our small business workers’ compensation segment and our specialty risk and extended warranty segment, which also reinsures the workers’ compensation portion of the specialty middle-market property and casualty business we recently acquired. We plan to seek additional reinsurance to cover the property portion of this business, although we currently have not written any property coverage. We do not plan to reinsure the general liability and auto liability portions of this business.
 
Principal Revenue and Expense Items
 
Our revenues consist primarily of the following:
 
Gross Premiums Written. Gross premiums written represent estimated premiums from each insurance policy that we write, including as part of an assigned risk pool, during a reporting period based on the effective date of the individual policy. Certain polices that are underwritten by the Company are subject to premium audit at that policy’s cancellation or expiration. The final actual gross premiums written may vary from the original estimate based on changes to the final rating parameters or classifications of the policy.
 
Net Premiums Written. Net premiums written are gross premiums written less that portion of premium that is ceded to third party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on a contractual formula contained in the individual reinsurance agreement.
 
Net Premiums Earned. Net premiums earned is the earned portion of our net premiums written. Workers’ compensation premiums are earned on a pro rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums and are earned in subsequent periods over the remaining term of the policy. Our workers’ compensation insurance policies typically have a term of one year. Thus, for a one-year policy written on July 1, 2005 for an employer with constant payroll during the term of the policy, we would earn half of the premiums in 2005 and the other half in 2006. Our specialty risk and extended warranty coverages are earned over the estimated exposure time period. The terms vary depending on the risk and have an average duration of approximately 19 months, but range in duration from one month to 60 months.
 
 
Net Investment Income. We invest our statutory surplus funds and the funds supporting our insurance liabilities in fixed maturity and equity securities. A portion of these funds are held in cash and cash equivalents. Our net investment income includes interest and dividends earned on our invested assets. Net realized gains and losses on our investments are reported separately from our net investment income. Net realized gains occur when our investment securities are sold for more than their costs or amortized costs, as applicable. Net realized losses occur when our investment securities are sold for less than their costs or amortized costs, as applicable, or are written down as a result of an other-than-temporary impairment. We classify most of our fixed maturity securities as held-to-maturity, and the remainder of our fixed maturity securities and all of our equity securities as available-for-sale. Net unrealized gains (losses) on those securities classified as available-for-sale are reported separately within accumulated other comprehensive income on our balance sheet.
 
Fee Income. We recognize fee revenue as a servicing carrier for the State of Georgia’s workers’ compensation insurance plan. In addition, we also offer claims adjusting and loss control services for fees to unaffiliated third parties. We also 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, fees charged to reinstate a policy after it has been cancelled for non-payment, in jurisdictions where it is permitted and approved. Our specialty risk and extended warranty business generates fee revenue for product warranty registration and claims handling services provided to unaffiliated third parties.
 
Our expenses consist primarily of the following:
 
Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses 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 claims to take several years to settle and we revise our estimates as we receive additional information about the condition of injured employees 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.
 
Policy Acquisition Expenses. Policy acquisition expenses comprise commissions directly attributable to those agents, wholesalers or brokers that produce premiums written on our behalf. In most instances, commissions are paid 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 workers’ compensation guaranty funds based on our premiums or losses in each state. Surcharges that the Company may be required to charge insureds in certain jurisdictions are considered accrued liabilities, rather than expense.
 
Salaries and Benefits. Salaries and benefits expenses are those salaries and benefits expenses for employees that are directly involved in the origination, issuance, maintenance of policies, claims adjusting and accounting for insurance transactions. Salaries and benefits associated with employees that are involved in fee generating activities are classified as other expenses.
 
 
Other Insurance General and Administrative Expenses. Other insurance general and administrative expenses are comprised of other costs associated with the Company’s 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.
 
Other Operating Expenses. Other operating expenses include those charges that are related to the non-insurance fee generating activities in which the Company engages, including salaries and benefits expenses and other charges directly attributable to non-insurance fee generating activities.
 
Policyholder Dividends. In limited circumstances, we may pay dividends to policyholders in particular states as an underwriting incentive.
 
Interest Expense. Interest expense represents amounts we incur on our outstanding indebtedness at the then-applicable interest rates.
 
Income Tax Expense. We incur federal, state and local income tax expense as well as income tax expense in certain foreign jurisdictions in which we operate.
 
Critical Accounting Policies
 
It is important to understand our accounting policies in order to understand our financial statements. We consider some of these policies to be very important to the presentation of our financial results because they require us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of our assets, liabilities, revenues and expenses and the related disclosures. Some of the estimates result from judgments that can be subjective and complex, and, consequently, actual results in future periods might differ from these estimates.
 
We believe that the most critical accounting policies relate to the reporting of reserves for loss and loss adjustment expenses, including losses that have occurred but have not been reported prior to the reporting date, amounts recoverable from third party reinsurers, assessments, deferred policy acquisition costs, deferred income taxes, the impairment of investment securities, goodwill and other intangible assets and the valuation of stock based compensation.
 
The following is a description of our critical accounting policies.
 
Reserves for Loss and Loss Adjustment Expenses. We record reserves for estimated losses under insurance policies that we write and for loss adjustment expenses related to the investigation and settlement of policy claims. Our reserves for loss and loss adjustment expenses represent the estimated cost of all reported and unreported loss and loss adjustment expenses incurred and unpaid at any given point in time based on known facts and circumstances. Our reserves for loss and loss adjustment expenses are estimated using case-by-case valuations and statistical analyses.
 
In establishing these estimates, we make various assumptions regarding a number of factors, including frequency and severity of claims, length of time to achieve ultimate settlement of claims, projected inflation of medical costs and wages (for workers’ compensation), insurance policy coverage interpretations and judicial determinations. Due to the inherent uncertainty associated with these estimates, our actual liabilities may be different from our original estimates. On a quarterly basis, and in some cases more frequently, we review our reserves for loss and loss adjustment expenses to determine whether further adjustments are required. Any resulting adjustments are included in the current period’s results. In establishing our reserves, we do not use loss discounting, which would involve recognizing the time value of money and offsetting estimates of future payments by future expected investment income. Additional information regarding our reserves for loss and loss adjustment expenses can be found in “Risk Factors” and “Business—Loss Reserves.”
 
 
Amounts Recoverable from Reinsurers. Amounts recoverable from third party reinsurers represent the portion of our paid and unpaid loss and loss adjustment expenses that is assumed by such reinsurers. We are required to pay claims even if a reinsurer fails to pay us under the terms of a reinsurance contract. We calculate amounts recoverable from reinsurers based on our estimates of the underlying loss and loss adjustment expenses, as well as the terms and conditions of our reinsurance contracts, which could be subject to interpretation. In addition, we bear credit risk with respect to our reinsurers, which can be significant because some of the unpaid loss and loss adjustment expenses for which we have reinsurance coverage remain outstanding for extended periods of time.
 
Assessments Related to Insurance Premiums. We are subject to various assessments and premium surcharges related to our insurance activities, including assessments and premium surcharges for state guaranty funds and second injury funds. Assessments based on premiums are generally paid within one year after the calendar year in which the policies are written. Assessments based on losses are generally paid within one year of when claims are paid by us. State guaranty fund assessments are used by state insurance oversight agencies to pay claims of policyholders of impaired, insolvent or failed insurance companies and the operating expenses of those agencies. Second injury funds are used by states to reimburse insurers and employers for claims paid to injured employees for aggravation of prior conditions or injuries. In some states, these assessments and premium surcharges may be partially recovered through a reduction in future premium taxes.
 
Premiums. Insurance premiums are recognized as earned primarily on the straight-line basis over the contract period. Unearned premiums represent the portion of premiums written which is applicable to the unexpired term of policies in force. Premium adjustments on contracts and audit premiums are based on estimates made over the contract period. Premiums earned but not yet billed to insureds are estimated and accrued, net of related costs. These estimates are subject to the effects of trends in payroll audit adjustments. Although considerable variability is inherent in such estimates, management believes that the accrual for earned but unbilled premiums is reasonable. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations. The Company also estimates an allowance for doubtful accounts.
 
Earned But Unbilled Premium. Earned but unbilled premium (“EBUB”) estimates the amount of audit premium for those policies that have yet to be audited as of the date of the quarter or year end. Workers’ compensation policies are subject to audit and the final premium may increase or decrease materially from the original premium estimate due to revisions to actual payroll and/or employee classification. EBUB is calculated using the Company’s best estimate based on trends in the average audit adjustment from original policy premium. In calculating EBUB, the Company considers its ability to collect the projected increased premium as well as those expenses associated with both the additional premium and return premium.
 
Goodwill and Other Intangible Assets. Goodwill and other intangible assets represent the consideration we pay for the acquisition of renewal rights from certain third parties. In a renewal rights transaction, we purchase the right, but not the obligation, to offer insurance coverage to a defined group of the seller’s current policyholders when the current in-force policies expire (we do not acquire any in-force policies) as well as existing agency lists and certain operating platforms. We record intangible assets based on minimum future consideration that is paid or to be paid to the seller as provided in the acquisition agreement with the seller. Intangible assets may be increased in future periods if minimum consideration is exceeded due to production incentive payments to the seller. Intangible assets are currently being amortized over a 40 year period. Intangible assets are evaluated periodically to ensure that there is no change required in the amortization period based on required accounting standards. Goodwill is not amortized. The carrying amount is evaluated annually for impairment. If there is an impairment to goodwill, we will recognize a reduction in intangible assets with a corresponding charge to expense in the period in which the impairment occurs.
 
 
Deferred Policy Acquisition Costs. We defer commission expenses, premium taxes and assessments as well as certain marketing, sales, underwriting and safety costs that vary with and are primarily related to the acquisition of insurance policies. These acquisition costs are capitalized and charged to expense ratably as premiums are earned. In calculating deferred policy acquisition costs, these costs are limited to their estimated realizable value, which gives effect to the premiums to be earned, anticipated losses and settlement expenses and certain other costs we expect to incur as the premiums are earned, less related net investment income. Judgments as to the ultimate recoverability of these deferred policy acquisition costs are highly dependent upon estimated future profitability of unearned premiums. If the unearned premiums were less than our expected claims and expenses after considering investment income, we would reduce the deferred costs and, if necessary, recognize a premium deficiency reserve.
 
Deferred Income Taxes. We use the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities resulting from a tax rate change impacts our net income or loss in the reporting period that includes the enactment date of the tax rate change.
 
In assessing whether our deferred tax assets will be realized, management considers whether it is more likely than not that we will generate future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. If necessary, we establish a valuation allowance to reduce the deferred tax assets to the amounts that are more likely than not to be realized.
 
Stock Compensation Expense. We historically have not issued stock options or had other stock-based compensation programs. We adopted an equity incentive plan comprising 5,994,300 shares of common stock and issued options for 1,175,000 shares to certain of our officers and directors in February 2006. We plan to account for stock compensation expense under Statement of Financial Accounting Standard No. 123R, “Accounting for Stock Based Compensation” commencing in 2006 and, therefore, will be recognizing stock compensation expense in 2006 and succeeding years.
 
Impairment of Investment Securities. Impairment of an investment security results in a reduction of the carrying value of the security and the realization of a loss when the fair value of the security declines below our cost or amortized cost, as applicable, for the security and the impairment is deemed to be other-than-temporary. We regularly review our investment portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of our investments. We consider various factors in determining if a decline in the fair value of an individual security is other-than-temporary. Some of the factors we consider include:
 
 
·
how long and by how much the fair value of the security has been below its cost;
 
 

 
·
the financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations or earnings;
 
 
·
our intent and ability to keep the security for a sufficient time period for it to recover its value;
 
 
·
any downgrades of the security by a rating agency; and
 
 
·
any reduction or elimination of dividends, or nonpayment of scheduled interest payments.
 
Outlook
 
Based on our business model and anticipated capital, we currently have the following expectations for our business:
 
 
·
Reinsurance. We intend to cede between 5% and 15% of our gross premiums written to third party reinsurers under reinsurance treaties.
 
 
·
Leverage. We plan to target a net leverage ratio, as measured by net premiums written to statutory capital and surplus, of approximately 1.2 to 1 to 1.7 to 1 and of debt to total equity under GAAP of less than 30%. The actual leverage ratios may vary from the target ratios depending upon many factors that affect our ratings with various organizations and capital adequacy requirements imposed by insurance regulatory authorities. These factors include but are not limited to the amount of our statutory surplus and GAAP equity, premium growth, quality and terms of reinsurance and line of business mix.
 
 
·
Underwriting. Our primary underwriting goal will be to achieve profitable results through targeted net loss ratios complemented by management of net expense ratio. We intend to target the pricing of our products to achieve a ratio of loss and loss adjustment expenses to net premiums earned of approximately 62.0% to 66.0% over time. In addition, we are targeting a ratio of underwriting expenses to net premiums earned of approximately 26.0% to 31.0%, over time.
 
 
·
Investments.
 
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Investment Grade. We expect the majority of our portfolio will consist of high quality fixed income securities and short-term investments. We plan to earn competitive relative returns while investing in a diversified portfolio of securities of high credit quality issuers and to limit the amount of credit exposure to any one issuer.
 
—
High Yield and Equity. In addition, we plan to invest up to 25% of our investment portfolio in below investment grade securities as well as equity securities in order to enhance our overall return on invested assets. The equity security portfolio is managed internally, and the below investment grade fixed income security portfolio is managed by one or more external managers.
 
—
Yield. Based on current market conditions, we expect our yield on investments to be approximately 5.5% to 6.5% in the near term.
 
 

—
Investment Portfolio Leverage. We plan to target an invested assets to equity ratio of approximately 2.0 to 1 to 3.0 to 1.
 
Results of Operations  
 
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005

Gross Premiums Written . Gross premiums written increased from $91.5 million for the three months ended March 31, 2005 to $123.3 million for the three months ended March 31, 2006. The 34.7% increase was attributable to our commencement in January 2006 of business in the specialty middle-market property and casualty segment, which generated gross premiums written of $33.6 million and increases in our small business workers’ compensation gross premiums written of $13.8 million, which were offset by a $15.7 million reduction in gross premiums written in our specialty risk and extended warranty business.

Gross Premiums Written - Small Business Workers’ Compensation. Gross premiums written for the three months ended March 31, 2006 were $69.2 million compared to $55.4 million for the same period in 2005, an increase of 24.9%, or $13.8 million. The increase was primarily attributable to internal growth.

Gross Premiums Written - Specialty Risk and Extended Warranty. Gross premiums written for the three months ended March 31, 2006 were $20.4 million compared to $36.1 million for the same period in 2005, a decrease of 43.4%, or $15.7 million. The decrease is attributable to (i) the effect of our assumption in the first quarter of 2005 of gross premiums written in the amount of $13.6 million in connection with our acceptance of a loss portfolio transfer of an in-force extended warranty coverage plan and (ii) the decrease in the value of the Euro against the U.S. dollar. AIU, the Company’s Irish insurance company subsidiary, which underwrites the majority of the business written in the specialty risk and extended warranty segment, reports gross premiums written in Euros.

Gross Premiums Written - Specialty Middle Market Property and Casualty. Gross premiums written for the three months ended March 31, 2006, which was the period in which the Company commenced writing business in this segment, were $33.6 million, compared to $0 million for the same period in 2005.

Net Premiums Written . Net premiums written increased from $81.9 million to $110.8 million for the three months ended March 31, 2005 and 2006, respectively. This 35.2% increase was the result of an increase in gross premiums written in 2005.

Net Premiums Written - Small Business Workers’ Compensation. Net premiums written for the three months ended March 31, 2006, were $63.6 million, compared to $51.2 million for the same period in 2005, an increase of 24.2%. The increase is attributable to growth in gross premiums written.

Net Premiums Written - Specialty Risk and Extended Warranty. Net premiums written for the three months ended March 31, 2006, were $16.2 million, compared to $30.7 million for the same period in 2005, a decrease of 47.0%. The decrease is attributable to (i) the effect of our assumption in the first quarter of 2005 of gross premiums written in the amount of $13.6 million in connection with our acceptance of a loss portfolio transfer of in-force extended warranty coverage plan, and (ii) the decrease in the value of the Euro against the U.S. dollar. AIU, the Company’s Irish insurance company subsidiary, which underwrites the majority of the business written in the specialty risk and extended warranty segment, reports gross premiums written in Euros.
 

Net Premiums Written - Specialty Middle Market Property and Casualty. Net premiums written for the three months ended March 31, 2006, which was the period in which the Company commenced writing business in this segment, were $31.0 million, compared to $0 million for the same period in 2005.

Net Premiums Earned . Net premiums earned increased from $47.4 million for the three months ended March 31, 2005 to $69.8 million for the three months ended March 31, 2006. This 47.4% increase is the result of the increase in net premiums written over the twelve preceding months of March 31, 2006, relative to the increase in net premiums written over the twelve months preceding March 31, 2005.

Net Premiums Earned - Small Business Workers’ Compensation. Net premiums earned for the three months ended March 31, 2006 were $49.5 million, compared to $32.2 million for the same period in 2005, an increase of 53.8%. This increase was primarily the result of an increase in premiums written during the twelve months ended March 31, 2006, compared to the twelve months ended March 31, 2005, which resulted in higher premiums earned in the three months ended March 31, 2006, compared to the same period in 2005.

Net Premiums Earned - Specialty Risk and Extended Warranty. Net premiums earned for the three months ended March 31, 2006 were $15.3 million, compared to $15.1 million for the same period in 2005, an increase of 1.0%. This increase is attributable, primarily, to the maturation of business written in prior years, including premiums assumed in connection with the loss portfolio transfer accepted by the Company in the first quarter 2005. Specialty risk and extended warranty coverage plans provide coverage for periods of up to 60 months. Premiums are earned ratably over the coverage period. Thus, a portion of the net premiums earned in the period relates to gross premiums written or assumed in 2005 or earlier.

Net Premiums Earned - Specialty Middle Market Property and Casualty. Net premiums earned for the three months ended March 31, 2006, which was the period in which the Company commenced writing business in this segment, were $5.0 million, compared to $0 million for the same period in 2005.

Net Investment Income. Net investment income for the three months ended March 31, 2006, was $5.3 million, compared to $1.9 million for the same period in 2005, an increase of 183.0%. The increase in net investment income was the result of increased invested assets. The increase in invested assets was the result of the $166.5 million of net proceeds from the Company’s private placement in February of 2006 as well as $118.0 million of positive cash flow from operations in 2005.

Net Realized Gains on Investments. Net realized gains on investments for the three months ended March 31, 2006 were $1.6 million, compared to $0.03 million for the same period in 2005. The increase was the result of hiring a team to actively manage our new equity portfolio which resulted in increase realized activity.

Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased 28.8% from $34.0 million for the three months ended March 31, 2005 to $43.8 million for the three months ended March 31, 2006. Nevertheless, the Company’s loss ratio for the three months ended March 31, 2006 decreased to 62.7% from 71.8% for the three months ended March 31, 2005. The decrease in the loss ratio resulted from revised actuarially projected ultimate losses based on the Company’s experience.
 
 
Loss and Loss Adjustment Expenses - Small Business Workers’ Compensation. Loss and loss adjustment expenses incurred were $30.0 million for the three months ended March 31, 2006, as compared to $22.3 million for the three months ended March 31, 2005, an increase of $7.7 million, or 34.6%. The net loss ratio decreased from 69.3% to 60.6%. The decrease in the loss ratio is attributable to revised actuarially projected ultimate losses, based on the actual loss experience of the Company’s small business workers compensation segment.

Loss and Loss Adjustment Expenses - Specialty Risk and Extended Warranty. Loss and loss adjustment expenses incurred were $10.6 million for the three months ended March 31, 2006, as compared to $11.7 million for the three months ended March 31, 2005, a decrease of $1.1 million, or 9.3%. The net loss ratio decreased from 77.1% to 69.2%. The decrease in the loss ratio is attributable to revised actuarially projected ultimate losses of the Company’s specialty risk and extended warranty business.

Loss and Loss Adjustment Expenses - Specialty Middle Market Property and Casualty. Loss and loss adjustment expenses incurred were $3.2 million for the three months ended March 31, 2006, which is the period in which the Company commenced writing business in this segment, as compared to $0 million for the three months ended March 31, 2005.

Policy Acquisition Expense, Salaries and Benefits Expense and Other Insurance General and Administrative Expense. Policy acquisition expense, salaries and benefits expense and other insurance general and administrative expense increased from $15.1 million for the three months ended March 31, 2005 to $20.2 million for the three months ended March 31, 2006, an increase of 33.5%. Despite this increase, the expense ratio (the sum of (i) policy acquisition expense, (ii) salaries and benefits expense and other insurance general and (iii) administrative expense divided by net premium earned) for the same periods decreased from 32.0% to 29.0%, respectively.

Policy Acquisition Expense, Salaries and Benefits Expense and Other Insurance General and Administrative Expense - Small Business Workers’ Compensation. Policy acquisition expense, salaries and benefits expense and other insurance general and administrative expense increased by $3.4 million from $11.9 million for the three months ended March 31, 2005 to $15.3 million for the three months ended March 31, 2006. The expense ratio decreased from 37.3% for the three months ended March 31, 2005 to 31.0% for the three months ended March 31, 2006. The decrease is attributable to the increase in net premiums earned and the Company’s ability to leverage its current infrastructure.

Policy Acquisition Expense, Salaries and Benefits Expense and Other Insurance General and Administrative Expense - Specialty Risk and Extended Warranty. Policy acquisition expense, salaries and benefits expense and other insurance general and administrative expense decreased by $0.1 million from $3.2 million for the three months ended March 31, 2005 to $3.1 million for the three months ended March 31, 2006. The expense ratio decreased from 20.7% for the three months ended March 31, 2005 to 20.3% for the three months ended March 31, 2006.
 

Policy Acquisition Expense, Salaries and Benefits Expense and Other Insurance General and Administrative Expense - Specialty Middle Market Property and Casualty. Policy acquisition expense, salaries and benefits expense and other insurance general and administrative expense was $1.8 million for the three months ended March 31, 2006. The Company began writing this business in the first quarter of 2006.

Operating Income From Continuing Operations. Operating income from continuing operations increased to $13.6 million for the three months ended March 31, 2006, from $0.9 million for the three months ended March 31, 2005, an increase of $12.7 million or 1,411.1%. This increase is attributable to strong growth in revenue combined with an improvement in the both the loss ratio and net expense ratio.

Interest Expense. Interest expense for the three months ended March 31, 2006 was $1.2 million, compared to $0.1 million for the same period in 2005. The increase was attributable to interest payable on junior subordinated debentures in the amount of $50.0 million issued by the Company in 2005 and a short term $25 million credit facility, which the Company paid in full from the proceeds of the private placement.

Income Tax Expense (Benefit). Our income tax expense for the three months ended March 31, 2006 was $3.3 million for an effective tax rate of 26.0% compared to income tax benefit of $1.1 million for the same period in 2005.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Gross Premiums Written . Gross premiums written increased from $210.9 million for the year ended December 31, 2004 to $286.1 million for the year ended December 31, 2005. The 35.7% increase was attributable to increases in our workers’ compensation of $66.7 million as well as a $8.7 million increase in writings in our specialty risk and extended warranty business
 
Gross Premiums Written - Small Business Workers’ Compensation. Gross premiums written for the year ended December 31, 2005 were $204.6 million, compared to $137.9 million for the same period in 2004, an increase of 48.4%, or $66.7 million. $46.2 million or 69.3% of the increase is attributable to business generated by the Company’s renewal rights acquisitions and $20.5 million or 30.7% is attributable to internal growth.

Gross Premiums Written - Specialty Risk and Extended Warranty. Gross premiums written for the year ended December 31, 2005 were $81.6 million, compared to $72.9 million for the same period in 2004, an increase of 11.9% or $8.7 million, the increase was due to new accounts being added in 2005 through increased market distribution.

Net Premiums Written . Net premiums written increased from $187.5 million to $259.2 million for the years ended December 31, 2004 and 2005, respectively. This 38.2% increase was the result of the increased gross premiums written over the same period of time.

Net Premiums Written - Small Business Workers’ Compensation. Net premiums written for the year ended December 31, 2005 was $188.3 million, compared to $128.8 million for the same period in 2004, an increase of 46.2%. The increase is attributable to growth in gross premiums written.
 

Net Premiums Written - Specialty Risk and Extended Warranty. Net premiums written for the year ended December 31, 2005 were $70.9 million, compared to $58.7 million for the same period in 2004, an increase of 20.8%. The increase is attributable to growth in gross premiums written.

Net Premiums Earned . Net premiums earned increased from $138.8 million for the year ended December 31, 2004 to $216.0 million for the year ended December 31, 2005. This 55.6% increase was the result of the increase in net premiums written over the twelve months preceding December 31, 2005 relative to the increase in net premiums written over the twelve months preceding December 31, 2004.

Net Premiums Earned - Small Business Workers’ Compensation. Net premiums earned for the year ended December 31, 2005 were $166.0 million, compared to $114.0 million for the same period in 2004, an increase of 45.6%. This increase was primarily the result of an increase in premiums written during the twelve months ended December 31, 2005 compared to the twelve months ended December 31, 2004, which resulted in higher premiums earned in the year ended December 31, 2005 compared to the same period in 2004.

Net Premiums Earned - Specialty Risk and Extended Warranty. Net premiums earned for the year ended December 31, 2005 were $50.0 million, compared to $24.8 million for the same period in 2004, an increase of 101.6%. This increase was primarily the result of an increase in premiums written during the twelve months ended December 31, 2005 compared to the twelve months ended December 31, 2004, which resulted in higher premiums earned in the year ended December 31, 2005 compared to the same period in 2004.

Net Investment Income. Net investment income for the year ended December 31, 2005 was $11.5 million, compared to $4.4 million for the same period in 2004, an increase of 159.8%. Investment income was increased by the sale of approximately $80.0 million in net assets previously held in real estate (which did not produce regular fixed income) the proceeds of which were placed in our investment portfolio as well as the issuance of $50.0 million of junior subordinated debentures in two trust preferred securities transactions during the year. Also the Company generated positive cash flows from operations of $109.8 million for the year ended December 31, 2005.

Net Realized Gains on Investments. Net realized gains on investments for the year ended December 31, 2005 were $4.9 million, compared to $1.3 million for the same period in 2004. The increase is the result of hiring a team to actively manage our new equity portfolio which resulted in increase realized activity.

Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased 57.5% from $90.2 million for the year ended December 31, 2004 to $142.0 million for the year ended December 31, 2005. The loss ratio remained comparable for the periods with a loss ratio of 65.0% for the year ended December 31, 2004 and 65.7% for the year ended December 31, 2005.

Loss and Loss Adjustment Expenses - Small Business Workers’ Compensation. Loss and loss adjustment expenses incurred were $107.9 million for the year ended December 31, 2005, compared to $72.2 million for the year ended December 31, 2004, an increase of $35.7 million, or 49.4%. The net loss ratio increased from 63.4% to 65.0%.
 

Loss and Loss Adjustment Expenses - Specialty Risk and Extended Warranty. Loss and loss adjustment expenses incurred totaled $34.1 million for the year ended December 31, 2005, compared to $18.0 million for the year ended December 31, 2004, an increase of $16.1 million, or 89.8%. The net loss ratio decreased from 72.3% to 68.1%.

Policy Acquisition Expense, Salaries and Benefits Expense and Other Insurance General and Administrative Expense. Policy acquisition expense, salaries and benefits expense and other insurance general and administrative expense increased from $41.5 million for the year ended December 31, 2004 to $63.5 million for the year ended December 31, 2005, an increase of 53.2%. Despite this increase, the expense ratio (the sum of (i) policy acquisition expense, (ii) salaries and benefits expense and other insurance general and (iii) administrative expense divided by net premium earned) decreased from 29.9% to 29.4% for the same period.

Policy Acquisition Expense, Salaries and Benefits Expense and Other Insurance General and Administrative Expense - Small Business Workers’ Compensation. Policy acquisition expense, salaries and benefits expense and other insurance general and administrative expense increased by $17.4 million from $34.2 million for the year ended December 31, 2004 to $51.6 million for the year ended December 31, 2005. The expense ratio increased from 29.9% for the year ended December 31, 2004 to 31.1% for the year ended December 31, 2005.

Policy Acquisition Expense, Salaries and Benefits Expense and Other Insurance General and Administrative Expense - Specialty Risk and Extended Warranty. Policy acquisition expense, salaries and benefits expense and other insurance general and administrative expense increased by $4.6 million from $7.3 million for the year ended December 31, 2004 to $11.9 million for the year ended December 31, 2005. The expense ratio decreased from 29.5% for the year ended December 31, 2004 to 23.8% for the year ended December 31, 2005. This decrease was primarily attributable to an increase in Net Premium Earned as well as a reduction in allocated overhead which is based on written premium by segment.

Operating Income From Continuing Operations. Income from continuing operations increased to $29.6 million for the year ended December 31, 2005 from $16.2 million for the year ended December 31, 2004, an increase of 83.1%. This increase is attributable to strong growth in revenue combined with an improvement in the net expense ratio.

Interest Expense. Interest expense for the year ended December 31, 2005 was $2.8 million, compared to $0.3 million for the same period in 2004. The increase was attributable to interest payable on $50.0 million of junior subordinated debentures that the Company issued in 2005.

Income Tax Expense (Benefit). Company income tax expense for the year ended December 31, 2005 was $6.7 million for an effective tax rate of 24.5% compared to income tax expense of $3.8 million for an effective tax rate of 24.2% for the same period in 2004. The decrease in the effective tax rate is the function of certain activities in our foreign operations that are not subject to United States Federal Taxation.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Gross Premiums Written. Gross premiums written increased from $97.5 million for the year ended December 31, 2003 to $210.9 million for the year ended December 31, 2004. The 116.3% increase was attributable to increases in our workers’ compensation and specialty risk and extended warranty business of $61.6 million and $51.8 million, respectively.
 
 
Gross Premiums Written—Small Business Workers’ Compensation. Gross premiums written for the year ended December 31, 2004 were $137.9 million, compared to $76.4 million for the same period in 2003, an increase of 80.6% or $61.6 million. $30.7 million or 49.8% of the increase was attributable to new business written in connection with the acquisition of renewal rights to certain workers’ compensation business from Covenant, which occurred in December 2003. $17.1 million or 27.8% was attributable to new business written in connection with the acquisition of renewal rights to certain workers’ compensation business from Princeton, which occurred in 2002. The remaining increase of $13.8 million or 22.2% was attributable to internally generated growth in the remainder of our workers’ compensation business.
 
Gross Premiums Written—Specialty Risk and Extended Warranty. Gross premiums written for the twelve months ended December 31, 2004 were $72.9 million, compared to $21.1 million for the same period in 2003, an increase of 245.1% or $51.8 million. This increase is attributable to new business written in 2004, which was the first full year of our European Union specialty risk and extended warranty operations.
 
Net Premiums Written. Net premiums written increased from $81.9 million for the year ended December 31, 2003 to $187.5 million for the year ended December 31, 2004, an increase of 128.9%. This increase was attributable to an increase in gross premiums written during 2004.
 
Net Premiums Written—Small Business Workers’ Compensation. Net premiums written for the twelve months ended December 31, 2004 were $128.8 million, compared to $66.7 million for the same period in 2003, an increase of 93.0%. The increase was attributable to growth in gross premiums written and also reflects a reduction in the rates the Company paid on its excess of loss reinsurance program.
 
Net Premiums Written—Specialty Risk and Extended Warranty. Net premiums written for the twelve months ended December 31, 2004 were $58.7 million, compared to $15.2 million for the same period in 2003, an increase of 286.2%. The increase was attributable to growth in gross premiums written and, to a lesser extent, a reduced percentage of gross premiums written ceded to third party reinsurers.
 
Net Premiums Earned. Net premiums earned increased from $51.7 million for the year ended December 31, 2003 to $138.8 million for the year ended December 31, 2004, an increase of 168.7%. This increase was attributable to an increase in net premiums written during 2004.
 
Net Premiums Earned—Small Business Workers’ Compensation. Net premiums earned for the twelve months ended December 31, 2004 were $114.0 million, compared to $42.8 million for the same period in 2003, an increase of 166.5%. This increase was primarily the result of an increase in premiums written during the twelve months ended December 31, 2004 compared to the twelve months ended December 31, 2003 which resulted in higher premiums earned in the twelve months ended December 31, 2004 compared to the same period in 2003.
 
Net Premiums Earned—Specialty Risk and Extended Warranty. Net premiums earned for the twelve months ended December 31, 2004 were $24.8 million, compared to $8.9 million for the same period in 2003, an increase of 179.2%. This increase was primarily the result of an increase in premiums written during the twelve months ended December 31, 2004 compared to the twelve months ended December 31, 2003 which resulted in higher premiums earned in the twelve months ended December 31, 2004 compared to the same period in 2003.
 
 
Net Investment Income. Net investment income for the year ended December 31, 2004 was $4.4 million, compared to $3.1 million for the same period in 2003, an increase of 44.5%. The increase was attributable to the growth in our investment portfolio from an average of $61.3 million in 2003 to an average of $141.9 million in 2004, an increase of 131.3%. The growth in our investment portfolio resulted primarily from our cash flow from operations.
 
Net Realized Gains on Investments. Net realized gains on investments for the year ended December 31, 2004 totaled $1.3 million, compared to a loss of $1.0 million for the same period in 2003.
 
Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased 158.5% from $34.9 million for the year ended December 31, 2003 to $90.2 million for the year ended December 31, 2004. The net loss ratio decreased from 67.5% for the year ended December 31, 2003 to 65.0% for the year ended December 31, 2004. The decrease in the net loss ratio is attributable to revised actuarially projected ultimate losses, based on the actual experience of the Company’s small business workers’ compensation segment.
 
Loss and Loss Adjustment Expenses—Small Business Workers’ Compensation. Loss and loss adjustment expenses increased to $72.2 million for the year ended December 31, 2004 from $29.8 million for the year ended December 31, 2003, an increase of 142.1%. The net loss ratio was 63.4% in 2004 compared to 69.7% in 2003. The decrease in the net loss ratio is attributable to revised actuarially projected ultimate losses, based on the actual experience of the Company’s small business workers’ compensation segment.
 
Loss and Loss Adjustment Expenses—Specialty Risk and Extended Warranty. Loss and loss adjustment expenses increased to $18.0 million for the year ended December 31, 2004 from $5.1 million for the year ended December 31, 2003, an increase of 255.1%. The net loss ratio was 72.3% in 2004 compared to 56.9% in 2003. The increase is attributable to the expansion of our European operations which generally target high growth extended warranty and accidental damage coverages that tend to have higher ultimate net loss ratios, but have lower expenses, than certain specialty risk and extended warranty coverages historically written in the United States.
 
Policy Acquisition Expense, Salaries and Benefits Expense and Other Insurance General and Administrative Expense. Policy acquisition expense, salaries and benefits expense and other insurance general and administrative expense increased from $16.0 million for the year ended December 31, 2003 to $41.5 million for the year ended December 31, 2004, an increase of 159.9%. Despite this increase, the net expense ratio decreased from 30.9% to 29.9% for the same periods.
 
Policy Acquisition Expense, Salaries and Benefits Expense and Other Insurance General and Administrative Expense—Small Business Workers’ Compensation. Policy acquisition expense, salaries and benefits expense and other insurance general and administrative expense increased by $20.0 million from $14.2 million for the year ended December 31, 2003 to $34.1 million for the year ended December 31, 2004. The net expense ratio decreased from 33.1% for the year ended December 31, 2003 to 29.9% for the year ended December 31, 2004. This decrease was primarily attributable to an increase in net premium earned without a corresponding increase in employee headcount.
 
 
Policy Acquisition Expense, Salaries and Benefits Expense and Other Insurance General and Administrative Expense—Specialty Risk and Extended Warranty. Policy acquisition expense, salaries and benefits expense and other insurance general and administrative expense increased by $5.5 million from $1.8 million for the year ended December 31, 2003 to $7.3 million for the year ended December 31, 2004. The net expense ratio increased from 20.1% for the year ended December 31, 2003 to 29.5% for the year ended December 31, 2004. This increase was primarily attributable to the expansion of our underwriting and marketing capabilities in the United States and Europe.
 
Operating Income From Continuing Operations. Operating income from continuing operations increased to $16.2 million for the year ended December 31, 2004 compared to $3.4 million for the year ended December 31, 2003.
 
Interest Expense. Interest expense for the year ended December 31, 2004 was $0.3 million, compared to $0.2 million for the same period in 2003. Interest on mortgage debt associated with AmTrust Pacific Limited is not included in interest expense, but instead is a component of income from discontinued operations.
 
Income Tax Expense. Income tax expense for the year ended December 31, 2004 was $3.8 million, compared to $1.3 million for the same period in 2003, an increase of 204.3%. As a percentage of pre-tax income, our effective income tax rate decreased from 46.9% in 2003 to 24.2% in 2004. The decrease in the effective rate resulted from a larger portion of profits being realized from certain foreign operations.
 
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 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 company subsidiaries as well as for payment of claims and operating expenses, payment of interest on our junior subordinated debentures and other holding company expenses until at least 2007. However, if our growth attributable to the Alea acquisition, other acquisitions, internally generated growth or a combination of these, exceeds our projections, we may have to raise additional capital sooner to support our growth.
 
Pursuant to an Intercompany Management Agreement, AmTrust performs certain management functions for RIC, TIC and WIC including:
 
•
financial and accounting services, including, but not limited to, tax compliance, investment management, statutory and GAAP accounting, loss reserving, regulatory compliance, development of premium and commission rates, and premium collection and refunds;

•
maintenance of fiduciary accounts;
 
 
 
•
retention and maintenance of all files, books, records and accounts;

•
submission of form and rate filings, preparation and submission of applications for certificates of authority; and

•
maintenance of agency relationships and corresponding with policyholders.

RIC, TIC and WIC reimburse AmTrust for all direct expenses incurred in performing these services, and pay an annual management fee equal to the lesser of 2% of the total annual gross premiums written or $0.75 million.
 
Pursuant to a General Agency Agreement, RIC and TIC have appointed our wholly-owned subsidiary, AmTrust North America, Inc. (“ANA”), as agent to solicit and accept applications for policies and to perform compliance, marketing, underwriting, administrative, billing and reporting duties. ANA also handles for RIC and TIC all reinsurance-related services and reporting. RIC and TIC pay ANA a commission for its services equal to 20% of gross premiums written.
 
AmTrust’s income is generated primarily from our insurance subsidiaries. The laws of New York, New Hampshire, Delaware, Ireland and Bermuda regulate and restrict, under certain circumstances, the ability of our insurance subsidiaries to pay dividends to AmTrust. In addition, the terms of AmTrust’s junior subordinated debentures limit AmTrust’s ability to pay dividends on its common stock, and future borrowings may include prohibitions and restrictions on dividends. See “Dividend Policy,” “Regulation” and “Risk Factors.” We paid a dividend of $9.6 million to the holders of our preferred stock in July 2005 and an additional dividend of $1.2 million in December 2005.
 
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 a short- and long-term basis. Cash payments for claims were $6.6 million in 2002, $14.3 million in 2003, $38.6 million in 2004, $76.6 million in 2005 and $23.8 million in the three months ended March 31, 2006. Since December 31, 2001, we have funded claim payments from cash flow from operations (principally premiums) net of amounts ceded to our third party reinsurers. We presently expect to maintain sufficient cash flow from operations to meet our anticipated claim obligations and operating and capital expenditure needs. Our cash and investment portfolio has increased from $28.5 million at December 31, 2001 to $595.9 million (excluding $2.2 million of other investments) at March 31, 2006. We do not anticipate selling securities in our investment portfolio to pay claims or to fund operating expenses. Accordingly, we currently classify most of our fixed maturity securities in the held-to-maturity category. Should circumstances arise that would require us to do so, we may incur losses on such sales, which would adversely affect our results of operations and could reduce investment income in future periods.
 
The use of reinsurance is an important component of our business strategy. See “Business— Reinsurance.” As losses are incurred and recorded, we record amounts recoverable from third party reinsurers for the portion of the paid losses ceded to third party reinsurers and reduce our loss and allocated loss adjustment expense reserves by the amount of unpaid losses allocated to third party reinsurers. In addition to the reinsurance currently in force, we intend to purchase reinsurance for the property portion of the specialty middle-market property and casualty business that we plan to write in connection with our acquisition of renewal rights from Alea. We do not plan to reinsure the general liability and auto liability portions of this business.
 
We purchase excess of loss workers’ compensation reinsurance to protect us from the impact of large losses. Under this reinsurance program, we pay our reinsurers a percentage of our net or gross earned insurance premiums, subject to certain minimum reinsurance premium requirements. Our reinsurance program for 2006 includes multiple reinsurers in five layers of reinsurance that provide us with coverage in excess of a certain specified amount per loss occurrence, or retention level. Our reinsurance program for 2006 provides coverage for claims in excess of $1.0 million per occurrence with coverage up to $130.0 million per occurrence, subject to certain exclusions and restrictions, including a $1.25 million aggregate deductible applicable to the first layer of this reinsurance coverage. Our reinsurance for workers’ compensation losses caused by acts of terrorism is more limited than our reinsurance for other types of workers’ compensation losses. We have obtained reinsurance for this line of business with higher limits as our exposures have increased. As the scale of our workers’ compensation business has increased, we have also increased the amount of risk we retain.
 
 
Since January, 2003, we have maintained quota share reinsurance for our extended warranty and accidental damage insurance underwritten in the European Union and certain coverage plans underwritten in the United States. This reinsurance also covers certain other risks we underwrite in the European Union. Under these quota share reinsurance arrangements, we cede a portion (35% for the majority of the risks) of each reinsured risk to our reinsurers and recover the same percentage of ceded loss and loss adjustment expenses, subject to certain exclusions and restrictions. In return for this reinsurance protection, we pay the reinsurers their pro rata shares of the insurance premiums on the ceded business, less a ceding or overriding commission. For the most part, coverage for losses arising out of acts of terrorism is excluded from this reinsurance. The majority of our extended warranty and accidental damage insurance underwritten in the United States is not reinsured with third party reinsurers. However, a portion of these risks as well as much of the risk that we retain under our various third party reinsurance arrangements are ceded under reinsurance arrangements with AII.
 
The following table summarizes the four reinsurers that account for approximately 95% of our reinsurance recoverables.
 
Reinsurer
 
A.M. Best
Rating
 
Amount
Recoverable as of
March 31, 2006
 
     
($ in thousands)
 
Midwest Employers Casualty Company
   
A
 
$
8,379
 
Converium Limited(1)
   
B++
   
4,600
 
Munich Reinsurance Company
   
A+
   
3,001
 
General Reinsurance Corporation
   
A++
   
2,751
 
               
(1)
As of March 31, 2006, amounts recoverable from Converium Limited were fully collateralized by a combination of a letter of credit and cash withheld under our reinsurance contracts with Converium Limited.

We reevaluate our reinsurance program annually or more frequently and consider a number of factors, including cost of reinsurance, our liquidity requirements, operating leverage and coverage terms. Even if we maintain our existing retention levels, if the cost of reinsurance increases, our cash flow from operations would decrease as we would cede a greater portion of our premiums written to our reinsurers. Conversely, our cash flow from operations would increase if the cost of reinsurance declined relative to our retention.
 
Net cash provided by operating activities was $35.8 million for the three months ended March 31, 2006, compared to $55.1 million for the same period in 2005. For the first three months of 2006, major components of cash provided by operating activities were premiums collected of $64.3 million, partially offset by claim payments of $23.8 million. Major components of cash provided by operating activities for the three months ended March 31, 2005 were premiums collected of $62.1 million, partially offset by claim payments of $15.4 million.
 
Net cash provided by operating activities was $118.0 million for the year ended December 31, 2005, $98.6 million for the year ended December 31, 2004 and $53.2 million for the year ended December 31, 2003. Major components of cash provided by operating activities in 2005 were net premiums collected of $234.6 million, partially offset by claim payments of $76.6 million. Major components of cash provided by operating activities in 2004 were net premiums collected of $157.2 million, partially offset by claim payments of $38.6 million. Major components of cash provided by operating activities in 2003 were net premiums collected of $67.5 million, partially offset by claim payments of $14.3 million.
 
Net cash used in investing activities was $128.9 million for the three months ended March 31, 2006, compared to $5.9 million for the same period in 2005. Net cash provided by investing activities was $12.5 million for the year ended December 31, 2005. Net cash used by investing activities was $92.0 million for the year ended December 31, 2004 and $51.5 million for the year ended December 31, 2003. In 2005, major components of net cash provided by investing activities included proceeds of $115.0 million from sales and maturities of investments and $161.6 million from the sale of all of the real estate assets which comprised the discontinued operations of APL, partially offset by net cash used in investing activities in the amount of $244.2 million for investment purchases. In 2004, major components of net cash used in investing activities included investment purchases of $138.2 million, partially offset by proceeds from sales and maturities of investments of $42.5 million. In 2003, major components of net cash used in investing activities included investment purchases of $73.6 million, partially offset by proceeds from sales and maturities of investments of $25.8 million.
 
Net cash provided by financing activities was $141.5 million for the three months ended March 31, 2006 and $23.3 million for the three months ended March 31, 2005. The major component of cash provided by financing activities was $166.5 million of net proceeds from the Company’s private offering. This was partially off-set by the repayment in February 2006 of the Company’s $25.0 million short term borrowing facility.
 
Net cash used in financing activities was $43.4 million for the year ended December 31, 2005, which represents the issuance of an aggregate of $50.0 million in principal amount of junior subordinated debentures (the “Debentures”). The Debentures were issued in two $25.0 million tranches in March and June of 2005 in connection with the issuance of trust preferred securities (“Trust Preferred Securities”) by subsidiary trusts. The Debentures mature in 2035 and bear interest as follows: (i) the Debentures issued in March bear interest at a rate per annum of 8.275% until March 2015 and thereafter bear interest at a floating rate per annum equal the sum of the 3-month London Interbank Offered Rate for U.S. dollars (LIBOR) determined each quarter and 3.40% and (ii) the Debentures issued in June bear interest at a rate per annum of 7.710% until June 2015 and thereafter bear interest at a floating rate per annum equal the sum of the 3-month LIBOR determined each quarter and 3.40%. The Debentures are redeemable at par at the Company’s election after five years from the date of issue. Partially offsetting this was a $10.8 million payment of preferred dividends as well as the repayment of a $13.0 million advance from certain indirect shareholders. Other cash provided by financing activities include proceeds of $23.3 million from borrowings under the $25.0 million short term borrowing facility. We repaid this indebtedness in full on February 13, 2006. In addition, $92.9 million of mortgage notes were paid in full from the proceeds of the sale of real estate which comprised the majority of APL’s discontinued operations.
 
Net cash provided by financing activities was $11.0 million for the year ended December 31, 2004. The major component of cash provided by operating activities was $13.0 million advance from the ultimate shareholders, partially offset by repayment of $2.0 million on a credit facility.
 
 
Inflation

Property and casualty insurance premiums are established before we know the amount of losses and loss adjustment expenses or the extent to which inflation may affect such amounts. We attempt to anticipate the potential impact of inflation in establishing our reserves, especially as it relates to medical and hospital rates where historical inflation rates have exceeded the general level of inflation. Inflation in excess of the levels we have assumed could cause loss and loss adjustment expenses to be higher than we anticipated, which would require us to increase reserves and reduce earnings.
 
Fluctuations in rates of inflation also influence interest rates, which in turn impact the market value of our investment portfolio and yields on new investments. Operating expenses, including salaries and benefits, generally are impacted by inflation.
 
Investment Portfolio

The first priority of our investment strategy is preservation of capital, with a secondary focus on maximizing an appropriate risk adjusted return. We expect to maintain sufficient liquidity from funds generated from operations to meet our anticipated insurance obligations and operating and capital expenditure needs, including debt service and additional payments in connection with our past renewal rights acquisitions. The excess funds will be invested in accordance with both the overall corporate investment guidelines as well as an individual subsidiary’s investments guidelines. Our investment guidelines are designed to maximize investment returns through a prudent distribution of cash and cash equivalents, fixed maturities and equity positions. Cash and cash equivalents include cash on deposit, commercial paper, pooled short-term money market funds and certificates of deposit with an original maturity of 90 days or less. Our fixed maturity securities include obligations of the U.S. Treasury or U.S. agencies, obligations of both U.S. and Canadian corporations, mortgage-backed securities, and mortgages guaranteed by the Federal National Mortgage Association and the Federal Home Loan and Federal Farm Credit entities. Our equity securities include common stocks of both U.S. and Canadian corporations. As of March 31, 2006, the Company held 27.5% of total invested assets in cash and cash equivalents. This relatively high concentration of cash and cash equivalents represents our reaction to the relatively flat debt yield curve and enables the Company to quickly redeploy assets should the interest rate environment change.
 
In December 2002, the Company acquired 100% of the common stock of AmTrust Pacific Limited, a New Zealand real estate operating company, from New Gulf Holdings, Inc, a Delaware corporation, in exchange for 1,000 shares of preferred stock of the Company. The purpose of this transaction was to increase the surplus of the Company. In 2005, all the real estate holdings for AmTrust Pacific Limited were sold and the net proceeds (consideration received less repayment of the outstanding mortgage notes and transaction costs) were placed in our investment portfolio. The Company recognized approximately a $18.0 million net gain from these transactions. Of the $18.0 million net gain, $21.7 million was a gain from foreign currency which was offset by a $3.7 million loss on discontinued operations.
 
Our investment portfolio, including cash and cash equivalents, had a carrying value of $596.0 million (excludes $2.2 million of other investments) as of March 31, 2006, and is summarized in the table below by type of investment.
 
 
 
Carrying
Value
 
Percentage of
Portfolio
 
   
($ in thousands)
     
Fixed income securities:
         
Mortgage backed securities
 
$
10,134
   
1.7
%
U.S. Treasury securities
   
19,606
   
3.3
 
Obligations of U.S. government agencies
   
205,130
   
34.4
 
Corporate bonds
   
51,229
   
8.6
 
Time and short-term deposits
   
107,984
   
18.1
 
     
394,083
   
66.1
 
Equity securities:
             
Common stock
   
37,556
   
6.3
 
Nonredeemable preferred stock
   
62
   
—
 
Total equity securities
   
37,618
   
6.3
 
Total investments, excluding cash and cash equivalents
   
431,701
   
72.4
 
Cash and cash equivalents
   
164,248
   
27.6
 
   
$
595,949
   
100
%
               
 
 
 
As of March 31, 2006, our fixed maturity portfolio (excluding time and short-term deposits) had a carrying value of $286.0 million, which represented 48.0% of the carrying value of our investments, including cash and cash equivalents. The table below summarizes the credit quality of our fixed maturity securities as of March 31, 2006 as rated by Standard and Poor’s.
 
S & P Rating
 
Percentage of Fixed
Maturity Portfolio
 
U.S. Treasury
   
6.8
%
AAA
   
77.2
 
AA
   
1.0
 
A
   
2.5
 
BBB
   
0.3
 
B
   
1.6
 
B-
   
1.7
 
CCC+
   
2.9
 
Other(1)
   
6.0
 
Total
   
100.0
 
         
(1)
Includes securities rated B+, BB, BB+, BBB-, CC, CCC, CCC-.
 
The table below shows the composition of our fixed maturity securities by remaining time to maturity as of March 31, 2006. As of March 31, 2006, the weighted average duration of our fixed income securities was 2.4 years.
 
Remaining Time to Maturity
 
Amount
(in thousands)
 
Percentage of Fixed
Maturity Portfolio
 
Less than one year
 
$
47,867
   
16.7
%
One to five years
   
210,814
   
73.7
 
Five to ten years
   
17,284
   
6.1
 
Mortgage backed securities
   
10,134
   
3.5
 
Total
 
$
286,099
 
$
100
%

The table below summarizes the average duration by type of fixed maturity as well as detailing the average yield.

Fixed Income Investment Type
 
Average Yield
 
Average Duration
in Years
 
U.S. Treasury securities
   
3.3
%
 
0.1
 
U.S. government agencies
   
4.7
   
2.3
 
Corporate bonds
   
4.0
   
4.0
 
Mortgage backed
   
5.4
   
5.1
 
Time and short term deposits
   
4.6
   
1.0
 
 
 
 
We regularly evaluate our investment portfolio to identify other-than-temporary impairments in the fair values of the securities held in our investment portfolio. We consider various factors in determining whether a decline in the fair value of a security is other-than-temporary, including:
 
·
how long and by how much the fair value of the security has been below its cost;
 
 
·
the financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations or earnings;
 
 
·
our intent and ability to keep the security for a sufficient time period for it to recover its value;
 
 
·
any downgrades of the security by a rating agency; and
 
 
·
any reduction or elimination of dividends, or nonpayment of scheduled interest payments.
 
During the three months ended March 31, 2006, there were no other-than-temporary declines in the fair values of the securities held in our investment portfolio.
 


The table below summarizes the gross unrealized losses of our fixed maturity and equity securities as of March 31, 2006
 
       
Remaining Time to Maturity
     
   
Less than 12 Months
 
12 Months or Longer
 
Total
 
Type of Fixed Maturity Investment
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
   
($ in thousands)
 
U.S. Treasury securities
 
$
3,406
 
$
12
 
$
13,575
 
$
139
 
$
16,981
 
$
151
 
U.S. government agencies
   
60,869
   
251
   
76,984
   
1,791
   
137,853
   
2,042
 
Corporates
   
84,735
   
1,984
   
5,947
   
148
   
90,682
   
2,132
 
Mortgage backed
   
3,513
   
80
   
5,391
   
367
   
8,904
   
447
 
Common Stock
   
33,187
   
6,739
   
4,369
   
660
   
37,556
      7,399  
Total
 
$
185,710
 
$
9,066
 
$
106,266
 
$
3,105
 
$
291,976
 
$
12,171
 

As of March 31, 2006, we did not hold any fixed maturity securities with unrealized losses in excess of 20% of the security’s carrying value as of that date.
 
Contractual Obligations and Commitments

The following table sets forth certain of our contractual obligations as of March 31, 2006

 
 
Payment Due By Period
 
Contractual Obligations
 
Total
 
Less
Than
1 Year
 
1-3 Years
 
4-5 Years
 
More
Than
5 Years
 
 
($ in thousands)
 
Loss and loss adjustment expenses(1)
 
$
190,022
 
$
75,860
 
$
76,639
 
$
13,871
 
$
23,652
 
Loss-based insurance assessments(2)
   
8,184
   
3,268
   
3,301
   
597
   
1,018
 
Capital lease obligations
   
0
   
0
   
0
   
0
   
0
 
Operating lease obligations
   
5,341
   
1,723
   
2,916
   
702
   
0
 
Purchase obligations(3)
   
6,027
   
2,250
   
3,763
   
14
   
0
 
Employment agreement obligations
   
6,663
   
2,559
   
3,654
   
450
   
0
 
Subordinated debt and interest
   
87,577
   
4,120
   
8,240
   
8,240
   
66,977
 
Total
 
$
303,814
 
$
89,780
 
$
98,513
 
$
23,874
 
$
91,647
 
                                 
(1)
The loss and loss adjustment expense payments due by period in the table above are based upon the loss and loss adjustment expense estimates as of March 31, 2006 and actuarial estimates of expected payout patterns and are not contractual liabilities as to a time certain. Our contractual liability is to provide benefits under the policy. As a result, our calculation of loss and loss adjustment expense payments due by period is subject to the same uncertainties associated with determining the level of loss and loss adjustment expenses generally and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our loss and loss adjustment expense estimate process, see “Business—Loss Reserves.” Actual payments of loss and loss adjustment expenses by period will vary, perhaps materially, from the table above to the extent that current estimates of loss and loss adjustment expenses vary from actual ultimate claims amounts and as a result of variations between expected and actual payout patterns. See “Risk Factors—Risks Related to Our Business—Our loss reserves are based on estimates and may be inadequate to cover our actual losses” for a discussion of the uncertainties associated with estimating loss and loss adjustment expenses.

(2)
We are subject to various annual assessments imposed by certain of the states in which we write insurance policies. These assessments are generally based upon the amount of premiums written or losses paid during the applicable year. Assessments based on premiums are generally paid within one year after the calendar year in which the policies are written, while assessments based on losses are generally paid within one year after the loss is paid. When we establish a reserve for loss and loss adjustment expenses for a reported claim, we accrue our obligation to pay any applicable assessments. If settlement of the claim is to be paid out over more than one year, our obligation to pay any related loss-based assessments extends for the same period of time. Because our reserves for loss and loss adjustment expenses are based on estimates, our accruals for loss-based insurance assessments are also based on estimates. Actual payments of loss and loss adjustment expenses may differ, perhaps materially, from our reserves. Accordingly, our actual loss-based insurance assessments may vary, perhaps materially, from our accruals.
 
 
 

(3)
We are required by the terms of certain renewal right purchase agreements to pay the seller an annual minimum override payment based on a contractually defined formula. The amount payable to the seller under these renewal rights acquisitions could be materially higher if the premiums produced generate a higher payment than the calculated minimum payment.
 
Quantitative and Qualitative Disclosures About Market Risk

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

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

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

Interest Rate Risk. We had fixed maturity securities (excluding $108.0 million of time and short-term deposits) with a fair value of $283.0 million and a carrying value of $286.1 million as of March 31, 2006 that are subject to interest rate risk. Interest rate risk is the risk that we may incur losses due to adverse changes in interest rates. Fluctuations in interest rates have a direct impact on the market valuation of our fixed maturity securities. We manage our exposure to interest rate risk through a disciplined asset and liability matching and capital management process. In the management of this risk, the characteristics of duration, credit and variability of cash flows are critical elements. These risks are assessed regularly and balanced within the context of our liability and capital position.
 
The table below summarizes the interest rate risk associated with our fixed maturity securities by illustrating the sensitivity of the fair value and carrying value of our fixed maturity securities as of March 31, 2006 to selected hypothetical changes in interest rates, and the associated impact on our shareholders’ equity. We classify our fixed maturity securities, other than redeemable preferred stock, mortgage backed and corporate obligations as held-to-maturity and carry them on our balance sheet at cost or amortized cost, as applicable. Any redeemable preferred stock we hold from time to time, is classified as available-for-sale and carried on our balance sheet at fair value. Temporary changes in the fair value of our fixed maturity securities that are held-to-maturity, such as those resulting from interest rate fluctuations, do not impact the carrying value of these securities and, therefore, do not affect our shareholders’ equity. However, temporary changes in the fair value of our fixed maturity securities that are held as available-for-sale do impact the carrying value of these securities and are reported in our shareholders’ equity as a component of other comprehensive income, net of deferred taxes. The selected scenarios in the table below are not predictions of future events, but rather are intended to illustrate the effect such events may have on the fair value and carrying value of our fixed maturity securities and on our shareholders’ equity, each as of March 31, 2006.

Hypothetical Change in Interest Rates
 
Fair Value
 
Estimated
Change in
Fair Value
 
Carrying
Value
 
Estimated
Change in
Carrying
Value
 
Hypothetical
Percentage
(Increase)
Decrease in
Shareholders’
Deficit
 
 
($ in thousands)
 
200 basis point increase
 
$
273,449
 
$
(9,501
)
$
—
 
$
(2,954
)
 
-0.6
%
100 basis point increase
   
278,220
   
(4,730
)
 
—
   
(1,493
)
 
-0.3
 
No change
   
282,950
   
—
   
286,099
   
—
   
—
 
100 basis point decrease
   
287,133
   
4,183
   
—
   
1,465
   
0.3
 
200 basis point decrease
   
290,022
   
7,072
   
—
   
2,941
   
0.6
 

Foreign Currency Risk. We write insurance in the United Kingdom and certain other European Union member countries through AIU. While the functional currency of AIU is the Euro, we write coverages that are settled in local currencies, including the British Pound. We attempt to maintain sufficient local currency assets on deposit to minimize our exposure to realized currency losses; however, we may be exposed to future losses based on fluctuations in currency valuations.

Equity Price Risk. Equity price risk is the risk that we may incur losses due to adverse changes in the market prices of the equity securities we hold in our investment portfolio, which include common stocks, nonredeemable preferred stocks and master limited partnerships. We classify our portfolio of equity securities as available-for-sale and carry these securities on our balance sheet at fair value. Accordingly, adverse changes in the market prices of our equity securities result in a decrease in the value of our total assets and a decrease in our shareholders’ equity. As of March 31, 2006, the equity securities in our investment portfolio had a fair value of $37.6 million, representing 6.3% of our total assets on that date. We are fundamental long buyers and short sellers, with a focus on value oriented stocks.
 
 
BUSINESS
 
Overview
 
AmTrust is a multinational specialty property and casualty insurer focused on generating consistent underwriting profits. We provide insurance coverage for small businesses and products with high volumes of insureds and loss profiles which we believe are predictable. We target lines of insurance that we believe are generally underserved by larger insurance carriers. Amtrust has grown by hiring teams of underwriters with expertise in our specialty lines and through acquisitions of renewal rights to established books of specialty insurance business. Since our current majority stockholders acquired AmTrust in 1998, we have expanded our operations into three business segments:
 
 
·
Workers’ compensation for small businesses (average premium less than $5,000 per policy) in the United States;
 
 
·
Specialty risk and extended warranty coverage for accidental damage, mechanical breakdown and related risks primarily for selected consumer and commercial goods in the United Kingdom, certain other European Union countries and the United States; and
 
 
·
Specialty middle-market property and casualty insurance. This segment writes workers’ compensation, commercial automobile and general liability insurance through general and other wholesale agents.
 
Our business has grown substantially since 2002. Our annual gross premiums written increased from $27.5 million in 2002 to $286.1 million in 2005 and from $91.5 million in the three months ended March 31, 2005 to $123.3 million in the three months ended March 31, 2006. Our annual gross premiums written in our workers’ compensation segment increased from $21.1 million in 2002 to $204.6 million in 2005 and from $55.4 million in the three months ended March 31, 2005 to $69.2 million in the three months ended March 31, 2006. Our annual gross premiums written in our specialty risk and extended warranty segment increased from approximately $6.4 million in 2002 to $81.6 million in 2005 and decreased from $36.1 million in the three months ended March 31, 2005 to $20.4 million for the three months ended March 31, 2006. Our net income from continuing operations increased from $2.2 million in 2002 to $20.5 million in 2005 and from $2.0 million in the three months ended March 31, 2005 to $9.3 million in the three months ended March 31, 2006. Our gross premiums written in the specialty middle-market property and casualty insurance business segment, which we acquired in December 2005, was $33.6 million for the three months ended March 31, 2006. Given the larger scale of our current operations, our past growth rate is likely not indicative of our future growth rate.
 
AII, RIC and TIC are each rated “A-” (Excellent) by A.M. Best, which rating is the fourth highest of 16 rating levels. AIU is unrated by A.M. Best. We have requested that A.M. Best assign our group rating to WIC. We reinsure our insurance risks through internal reinsurance agreements and agreements with third party reinsurers. As of March 31, 2006, we had approximately 255 employees.
 
Our History
 
The current majority stockholders acquired AmTrust and its subsidiaries, TIC and AII, from Wang Laboratories, Inc. (“Wang”) in 1998 to focus on underserved specialty property and casualty segments. Historically, TIC wrote disaster recovery insurance and accidental damage insurance covering computer hardware to support Wang’s computer clients. Since the acquisition, AmTrust has discontinued TIC’s disaster recovery line and expanded its accidental damage coverage beyond computer hardware to other specialty risk and extended warranty coverages, including consumer electronics, home and commercial appliances, construction machinery and other consumer and commercial products. In 2000, we entered the European Union specialty risk and extended warranty coverage market by acquiring AIU from Wang. We also acquired RIC, which held licenses in certain important states in which TIC was not then licensed, including New Jersey, New York and Texas. On June 1, 2006, we acquired WIC, which is licensed in all 50 states and the District of Columbia.
 
 
In early 2001, AmTrust expanded into small business workers’ compensation insurance and hired an experienced workers’ compensation underwriting team. Similar to our specialty risk and extended warranty segment, our small business workers’ compensation segment is characterized by relatively small premiums per policy and a large number of insureds. We believe this segment of the market is underserved by larger insurance carriers because it is too expensive for them to process a high volume of low premium policies. We developed proprietary technology to enable us to efficiently and profitably underwrite a large number of small premium policies.
 
Through a combination of acquisitions and organic growth, we have expanded geographically and acquired additional distribution channels, without acquiring the legacy liabilities of other insurance carriers, by primarily structuring our acquisitions as renewal rights acquisitions, including the following:
 
 
·
In December 2002, we acquired Princeton and the renewal rights to Princeton’s book of workers’ compensation business. The acquisition increased our agent relationships in the Northeast and Midwest and enhanced our marketing efforts in these regions.
 
 
·
In December 2003, we acquired the renewal rights to the workers’ compensation business of Covenant and Covenant’s proprietary claims handling systems. We also hired several experienced claims adjusters from Covenant. This transaction increased our presence in the Southeast and enabled us to move the adjustment of claims arising from our small business workers’ compensation segment from third party administrators to an experienced internal claims staff.
 
 
·
In August 2004, we expanded our business to Florida by acquiring the renewal rights to a book of workers’ compensation business from Associated.
 
 
·
In December 2005, we expanded into the specialty middle-market property and casualty business through our acquisition of the renewal rights from Alea North America, Inc. (“Alea”) to substantially all of its specialty middle market property and casualty business. The business in this segment produced approximately $33.6 million of gross premiums written in the first three months of 2006.
 
 
·
On June 1, 2006, we acquired 100% of the issued and outstanding shares of WIC from HIG. WIC has approximately $15 million in capital and surplus and no net liabilities. WIC is licensed in all 50 states and the District of Columbia. WIC has no employees and will be managed by the Company pursuant to an Intercompany Management Agreement.
 
 
·
On June 1, 2006 we acquired the renewal rights to Muirfield’s book of workers compensation business, which generated over $60 million in gross premiums written in 2005, concentrated in the Midwest. We also acquired access to Muirfield’s distribution network. We believe that this transaction will help us accelerate our growth in the Midwest. Because we acquired renewal rights, we intend to offer renewals only to policyholders for risks which meet our underwriting guidelines. Furthermore, agents and policyholders will not be obligated to renew with us. We anticipate that we will renew approximately 50% of Muirfield’s existing book of worker’s compensation business.
 
 
 
As a result of our integration efforts, each of the businesses we acquired, prior to the Alea acquisition, is processed using our proprietary systems. At present, the workers’ compensation portion of our specialty middle market property and casualty business is being processed using our propriety systems. We expect to integrate all of this business in our systems over time.
 
In early 2003, we expanded our specialty risk and extended warranty segment in Europe by hiring a team of experienced underwriters in London, who we believe are recognized for their expertise as market leaders in the European specialty risk and extended warranty business, including Max Caviet, President of AIU, who has over 30 years of experience in this business. Many of the European-based specialty risk and extended warranty coverages we currently underwrite have been underwritten by our team for several years.
 
Business Segments
 
Small Business Workers’ Compensation Insurance
 
Our small business worker’s compensation segments accounted for approximately 71.5% of gross premiums written in the year ended December 31, 2005 and 56.2% of gross premiums written in the three months ended March 31, 2006. Workers’ compensation insurance provides coverage for the statutory obligations of employers to pay medical care expenses and lost wages for employees who are injured in the course of their employment. We primarily offer workers’ compensation insurance to small businesses. We believe that, historically, the loss experience of the risks inherent in small business workers’ compensation insurance is better than the loss experience presented by larger, more competitively priced risks because small-business operators are generally more familiar with the details of their businesses and provide to underwriters more accurate and complete information about their risks. Many insurance companies are unwilling to underwrite small risks because they are unable to cost-effectively write small business workers’ compensation policies, and, we believe that as a result, there is less competition in the small business workers’ compensation insurance market. We believe our focus on small employers has enabled us to consistently generate loss ratios in our workers’ compensation segment below those of our peers.
 
We exclusively offer and provide guaranteed cost insurance contracts. Under guaranteed cost contracts, policyholders pay premiums based on a percentage of their payroll determined by job classification. Our premium rates for these policies vary depending upon certain factors, including the type of work to be performed by employees and the general business of the policyholder. Excluding the compulsory pools in which we participate, our policyholders paid an average of $2.13 per $100 of payroll for policies issued in the three months ended March 31, 2006. In return for premium payments, we assume the statutorily imposed obligations of the policyholder to provide workers’ compensation benefits to its employees. There are no policy limits on our liability for workers’ compensation claims as there are for other forms of insurance.
 
Our policy renewal rate on voluntary business (excluding assigned risk pools) that we elected to quote for renewal was 82% in 2003, 85% in 2004, 82% in 2005 and 84% for the three months ended March 31, 2006.
 
Some of our commonly written small business risks include:
 
 
·
restaurants;
 
 
·
retail stores;
 
 

 
·
physician and other professional offices;
 
 
·
building management-operations by owner or contractor;
 
 
·
private schools;
 
 
·
hotels;
 
 
·
machine shops-light metalworking;
 
 
·
small grocery and specialty food stores;
 
 
·
wholesale shops; and
 
 
·
beauty shops.
 
Specialty Risk and Extended Warranty
 
Our specialty risk and extended warranty coverage segment primarily serves manufacturers, service providers, retailers and third party warranty administrators that provide coverage for accidental damage, mechanical breakdown and related risks for consumer and commercial goods. We underwrite this coverage in Europe through AIU and in the United States through TIC, RIC and, prospectively, WIC. The majority of our specialty risk and extended warranty business is written in Europe ($58.4 million of gross premiums written for the year ended December 31, 2005 and $15.5 million of gross premiums written for the three months ended March 31, 2006) where we underwrite approximately 60 separate coverage plans. The remaining specialty risk and extended warranty business ($4.9 million of gross premiums written for the three months ended March 31, 2006) is written in the United States and primarily consists of insurance policies issued to manufacturers. Our specialty risk and extended warranty business primarily covers selected consumer and commercial goods and other risks, including:
 
 
·
personal computers;
 
 
·
consumer electronics, such as televisions and home theater components;
 
 
·
consumer appliances, such as refrigerators and washing machines;
 
 
·
automobiles in the United Kingdom (no liability coverage);
 
 
·
cellular telephones;
 
 
·
heavy equipment;
 
 
·
homeowner’s latent defects warranty in Norway;
 
 
·
hand tools; and
 
 
·
credit payment protection in the European Union.
 
We believe we can profitably underwrite these risks by managing the frequency and severity of losses through: (i) carefully selecting suitable administrators and coverage plans to insure, (ii) drafting restrictive, risk-specific coverage terms, (iii) proactively managing claims and (iv) if necessary, adjusting our premiums.
 
 
Our specialty risk and extended warranty coverages typically have a term of twelve months, but typically are subject to rate adjustment (and earlier cancellation in our European Business). Terms, however, range from one month to 60 months, and the weighted average term of our specialty risk and extended warranty coverages is approximately 25 months. We believe that the profitability of each coverage we underwrite is primarily dependent upon our management and review. We collect and analyze claims data to forecast future claims trends on a continuing basis. We also provide warranty administration services for a limited number of coverage plans in the United States.
 
Our specialty risk and extended warranty policyholders primarily include warranty and service contract providers and consumers. As of March 31, 2006, we provided specialty risk coverage for approximately 72 extended warranty and accidental damage coverage plans in the European Union and the United States. As of March 31, 2006, our five largest specialty risk and extended warranty coverage plans accounted for approximately 55% of our in-force premiums. Our renewal rate on specialty risk and extended warranty coverage plans that we elected to quote for renewal was over 90% in both 2004 and in 2005.
 
Specialty Middle-Market Property and Casualty
 
The specialty middle-market property and casualty business consists of workers’ compensation, general liability, commercial auto liability and commercial property coverage for small and middle-market businesses. In December, 2005, we expanded into this business segment through our acquisition of the renewal rights to substantially all of Alea’s specialty middle-market property and casualty business. This business was founded in 1999 by a team of experienced insurance professionals and became available to us because of capital problems associated with the reinsurance business of Alea’s parent company. Although these capital problems were unrelated to the business we purchased, they resulted in ratings downgrades for Alea’s entire insurance group which adversely affected this business.
 
The coverage is offered through accounts with these agents to multiple insureds, and the placing agents generally share a portion of the risk. Policyholders in this segment primarily include the following types of industries:
 
 
·
retail;
 
 
·
wholesale;
 
 
·
service operations;
 
 
·
artisan contracting; and
 
 
·
light and medium manufacturing.
 
This business produced for Alea $250 million of gross premiums written in the nine months ended September 30, 2005 through a network of 25 general and other wholesale agents. Workers’ compensation insurance historically comprised approximately 50% of this business and primarily covers risks similar to the risks we cover in our small business workers’ compensation segment, but also covers, to a small extent, higher risk businesses. The general liability and auto liability lines historically comprised approximately 25% and 20% of this business, respectively, and generally limit exposure through coverage limits of $1.0 million per occurrence. The property line, which comprised approximately 5% of this business, generally covers relatively low value real property and improvements. We are actively integrating this business and transitioning selected accounts. Our renewal target range is 30% to 50%.
 
 
In connection with the acquisition, substantially all of Alea’s former specialty middle-market property and casualty senior management, underwriting and support team, joined AmTrust. The seven-member senior management team of Alea averages of over 20 years of experience in the specialty property and casualty business.
 
As of May 31, 2006, we have transitioned 14 coverage plans which offer workers’ compensation, general liability, or commercial automobile liability coverage through 10 wholesale agents. These agents historically accounted for approximately 32% of this business prior to the acquisition. In the three months ended March 31, 2006, the specialty middle-market property and casualty segment produced approximately $33.6 million in gross premiums written.
 
We currently are using our existing licenses to write most of the workers’ compensation portion of this business. In addition, we have pending insurance license applications in Connecticut, Colorado, Hawaii and North Carolina. We have applied to amend our existing licenses in thirteen states to cover additional specialty middle-market property and casualty lines including general liability, property and auto liability. We plan to utilize WIC, which is licensed in all 50 states and the District of Columbia, to write most of the business in this segment. The acquisition of WIC should permit us to utilize dual workers compensation rates in states in which we write business in both our small business workers’ compensation insurance and specialty middle-market property and casualty business segments and to more expeditiously commence writing business in states in which we are not licensed currently. However, WIC currently is not authorized to write all lines in all states. To the extent we have not obtained the requisite licenses, we have fronting arrangements with State National to write this business.
 
We will use our existing workers’ compensation reinsurance treaties to reinsure the workers’ compensation portion of this business. We do not to reinsure the general liability and auto liability portions of this business. We plan to seek additional reinsurance to cover the property portion of this business, but have not yet written any property coverages.
 
Currently, claims for this segment are administered by third parties. We intend to closely monitor the performance of third party administrators.
 
Our Competitive Strengths
 
We believe the proceeds we received from the private placement completed in February 2006 has provided us with the additional capital necessary to increase the amount of insurance we are able to write. We plan to continue pursuing profitable growth and favorable returns on equity. Our approach involves the following:
 
Generate Underwriting Profits. We intend to continue generating underwriting profits by controlling our operating expenses and focusing on underwriting specialty insurance risks in which we can use our expertise to price and structure policies to manage our claims expenses. We believe our competitive strengths include:
 
 
·
Focus on Specialty Insurance Markets. We focus on specialty markets in which we have underwriting, risk management and claims handling expertise. We believe that larger insurance carriers generally do not aggressively pursue business in these markets. We target small business workers’ compensation risks in specific industry classes,
 
 
 
because the loss experience of these risks is historically better than the loss experience presented by larger, more competitively priced risks in the same industry classes. In our specialty risk and extended warranty segment, we believe we work with our clients more closely than most of our competitors to customize specialty risk and extended warranty coverages for their products and monitor the performance of their coverages. In addition, our specialty risk and extended warranty coverages generally have provided predictable claims development without substantial exposure to catastrophes. The specialty middle-market property and casualty segment we recently acquired focuses on niche markets which we believe are underserved by larger carriers and are also less sensitive to the pricing volatility of the general insurance market.
 
 
·
Proprietary Technology and Efficient Systems. We have developed proprietary applications and efficient systems for underwriting new business, processing claims and monitoring the performance of our coverages and agents.
 
 
—
Efficient Underwriting and Claims Processing Systems. Our proprietary internet-based applications for underwriting new business and processing claims enable us to efficiently underwrite and administer small business workers’ compensation insurance. Our paperless processing system handles most clerical duties so that our underwriters can focus on making decisions on risk submissions. Our system enables our underwriters, who review approximately 4,000 submissions per month, to provide quotes on new business generally within two business days after receiving a request. Our claims administrators have an average caseload of approximately 125 active workers’ compensation indemnity claims. We also believe that our technology is agent-friendly because it enables agents to efficiently submit workers’ compensation insurance applications online and allows us to make underwriting decisions promptly. In our specialty risk and extended warranty segment, we believe that we generally have a greater degree of control over profitability than our competitors because we access our business partners’ coverage data to monitor performance and can take corrective action in a timely fashion. We have integrated a substantial portion of the specialty middle-market property and casualty segment we recently acquired into our systems and intend to integrate the balance of this segment over time.

 
—
Use of Timely and Accurate Data. Our proprietary processing and data collection systems provide our management team with accurate and relevant information on what we believe is a more timely basis than many of our competitors. This data allows us to analyze trends in our business, including results by individual agent or broker, underwriter and class of business.

 
·
Disciplined Underwriting. We believe that earning underwriting profits is best accomplished through careful risk selection. Our senior underwriters have an average of more than 20 years of experience. In our small business workers’ compensation segment, each risk is individually underwritten, and we regularly evaluate our workers’ compensation underwriting guidelines in relation to actual results and make tailored revisions, such as the exclusion of a specific risk classification in a particular state. In our specialty risk and extended warranty segment, we thoroughly review each new opportunity that we consider—a process that generally takes three months or more, due to the data analysis required. We ultimately underwrite approximately 20% of the specialty risk and extended warranty opportunities submitted to us. In addition, we seek to
 
 
 
customize the terms, conditions and exclusions of our specialty risk and extended warranty coverages to address product-specific characteristics and risks.
 
 
·
Actively Manage Claims. We currently administer approximately 80% of our small business workers’ compensation claims internally, and the remainder are administered by third parties on our claims systems and subject to our oversight. We believe that actively managing our workers’ compensation claims is essential to reduce losses and loss adjustment expenses and to accurately establish reserves. We promptly investigate workers’ compensation claims through direct contact with the insureds and other affected parties. As of March 31, 2006, approximately 0.8% of the 397 workers’ compensation claims reported for accident year 2001 were open, 1.3% of the 1,231 claims reported for accident year 2002 were open, 4.9% of the 2,539 claims reported for accident year 2003 were open, 7.2% of the 5,334 claims reported for accident year 2004 were open, 16.7% of the 7,357 claims for accident year 2005 were open and 78.5% of the 1,442 claims reported for accident year 2006 through March 31, 2006 were open. In our specialty risk and extended warranty segment, we retain control of claims by monitoring our administrators’ performance through the analysis of timely policy and claims data and by taking appropriate remedial action, such as adjusting premium or revising coverage plan terms. Claims for the specialty middle-market property and casualty segment are currently administered by third parties. We intend to closely monitor the performance of third party administrators.
 
Growth Strategy
 
Opportunistically Grow Our Business. We plan to continue to opportunistically expand our business in markets in which we believe we can use our specialized expertise and our proprietary technology to generate consistent underwriting profits through the following strategies:
 
 
·
Expand Existing Operations. We intend to continue to increase our presence in our chosen markets. In our small business workers’ compensation segment, we encourage existing agents to submit more business to us and seek to establish relationships with new quality agents. In our specialty risk and extended warranty segment, we plan to expand our portfolio of low average premium, high volume insurance by adding new customers and offering coverage for additional products in which we can apply our actuarial and quantitative skills, such as the homeowner’s latent defects warranty coverage we recently began offering in Norway. We are continuing to seek to transition accounts in the specialty middle-market property and casualty segment. In addition, we will continue to explore new specialty insurance products we believe we can profitably write by applying our expertise and technology.
 
 
·
Expand Our Proprietary Technology and Efficient Systems. We plan to continue to develop our proprietary technology to improve our relationships with our producers and further reduce our underwriting expense ratio by increasing automation. We believe that we can apply much of the technology and systems we have developed in our small business workers’ compensation segment to improve the efficiency of our specialty risk and extended warranty business. In addition, we have integrated a substantial portion of the specialty middle-market property and casualty segment we recently acquired into our existing systems and intend to integrate the balance over time.
 
 
·
Prudent and Opportunistic Geographic Expansion. We are applying for insurance licenses in additional states and on June 1, 2006, we acquired WIC, which has approximately $15 million in capital and surplus and licenses in all 50 states and the District of Columbia. In the future we intend to selectively expand our specialty risk and extended warranty presence to other European countries and additional foreign markets.
 
 
 
 
·
Selective Acquisitions. We intend to continue to seek to acquire renewal rights to additional books of specialty insurance business that fit our underwriting capabilities from competitors, insurance agents, warranty administrators and other producers. We also may consider whole company acquisitions and believe that we may be able to use our stock as acquisition consideration.
 
 
·
Capitalize on Our Multinational Presence. We have a presence in the United States, Ireland, the United Kingdom and Bermuda. We also have employees in Sweden. Our multinational presence enables us to provide specialty risk and extended warranty coverage on a multinational basis and to opportunistically allocate capital and resources where we believe profitable business opportunities exist. In addition, our Bermuda-based insurance operations allow us to access Bermuda’s well developed network of insurance and reinsurance brokers and agents. Because a considerable portion of our business is written outside of the United States, our effective tax rate is lower than if we were solely a U.S. insurer.
 
 
·
Manage Capital Actively. We intend to expand our business and capital base to take advantage of profitable growth opportunities. We may raise additional funds to finance future acquisitions, but do not intend to raise or retain more capital than we believe we can profitably deploy in a reasonable time frame. Our ratings from A.M. Best are very important to us, and maintaining them will be a principal consideration in any decisions regarding capital.
 
 
·
Maintain a Strong Balance Sheet. We continue to establish reserves carefully and monitor reinsurance recoverables exposure in order to maintain a strong balance sheet. We intend to maintain underwriting profitability in various market cycles and maximize an appropriate risk adjusted return on our growing investment portfolio.
 
Certain Acquisitions
 
Our acquisitions have principally been “renewal rights” purchases from other insurance companies. In a renewal rights transaction, we purchase the right, but not the obligation, to offer insurance coverage to a defined group of the seller’s current policyholders when the current in-force policies expire (we do not acquire any in-force policies). Our ability to renew policies is subject to our ability to negotiate mutually acceptable price and coverage terms with each insured. We typically pay the renewal rights seller a combination of an initial purchase price and a percentage of the premiums we receive on business that we successfully renew. Because the cost of each renewal rights transaction is ultimately based on the amount of renewal business we successfully renew, we believe that renewal rights transactions are generally more cost effective than traditional types of acquisitions.
 
WIC Acquisition
 
On June 1, 2006, we acquired 100% of the issued and outstanding shares of WIC from HIG. WIC had offered credit insurance products for HIG’s affiliated banks and finance companies. WIC is licensed in 50 states and the District of Columbia. HSBC Insurance Company of Delaware (“HSBC”), an affiliate of HIG, and WIC entered into a reinsurance agreement pursuant to which HSBC reinsures all of WIC’s existing liabilities. In addition, HIG provided WIC a guaranty, by which HIG guaranteed all of HSBC’s obligations to WIC. In connection with the acquisition, the Company paid HIG the sum of $7.5 million and WIC’s capital and statutory surplus as of the closing date, which was $15 million.
 
 
Muirfield Renewal Rights Acquisition
 
On June 1, 2006, we acquired the renewal rights to certain workers’ compensation business from Muirfield. The business generated approximately $64 million in gross premiums written for Muirfield in 2005. Pursuant to the Agreement, we will not acquire any in-force business or historical liabilities associated with the acquired policies.
 
We paid Muirfield $2.0 million at closing and have agreed to pay a specified percentage of direct premiums written on new policies and renewal policies, quarterly, through the three year period ending May 31, 2009. Of the $2.0 million payment made at closing, $500,000 was an advance against the quarterly payments. The minimum aggregate amount payable by us under the Agreement is $2.0 million. Muirfield and its affiliates have agreed not to solicit workers’ compensation business prior to June 1, 2012.
 
Alea Renewal Rights Acquisition
 
On December 13, 2005, we acquired the renewal rights for certain specialty middle-market property and casualty business from the alternative risk group of Alea together with certain assets for payments equal to a percentage of premiums written on business we renew or otherwise generate for the next five years through the agent relationships we acquired from Alea. We paid to Alea a $12.0 million nonrefundable advance against these payments at the closing of this transaction. In connection with the acquisition, we hired approximately 40 former Alea employees, including substantially all of Alea’s former specialty middle-market property and casualty segment senior management and underwriting team. See “—Business Segments—Specialty Middle-Market Property and Casualty.”
 
Associated Renewal Rights Acquisition
 
In August 2004, we acquired the renewal rights for certain Florida workers’ compensation business from Associated. We did not acquire any in-force business or historical liabilities associated with the policies. In addition, we are not obligated to renew any particular policies, but are free to seek to renew those policies that meet our underwriting guidelines and on which we can charge a satisfactory premium. The agents that produced the subject policies for Associated are not obligated to produce the renewals for Associated and can direct the renewals to other wholesale agents or carriers if they choose.
 
We paid Associated $250,000 at closing and have agreed to pay Associated a specified percentage of direct premiums written on new or renewal policies each quarter through December 31, 2007. The minimum aggregate amount payable by us to Associated is $2.3 million. Associated and its principals have agreed not to solicit the policyholders subject to the acquisition prior to December 31, 2010.
 
Covenant Renewal Rights Acquisition
 
In December 2003, we acquired the renewal rights for certain workers’ compensation business from Covenant. We also acquired Covenant’s proprietary claims handling system and shortly after the acquisition began to use this system to internally administer our claims, which had previously been outsourced. We did not acquire any in-force business or historical liabilities associated with the policies.
 
 
We paid Covenant $100,000 at closing and have agreed to pay Covenant (i) an additional $500,000 over time until December 2008, and (ii) a specified percentage of direct premiums written on new or renewal policies each quarter for the three-year period ending December 1, 2006. The rate of commission payable will increase if our A.M. Best Rating falls below “A-”. We also agreed to pay a specified percentage of our annual profits on the purchased business for a three-year period ending December 1, 2006. As of March 31, 2006, an additional $2.5 million of purchase price had been incurred. Covenant and its principals have agreed not to solicit the policyholders included in the acquisition prior to December 2009.
 
Princeton   Acquisition
 
In December 2002, we acquired from Princeton Insurance Company (“PIC”) all the outstanding stock of Princeton, the assets of which included the right to seek to renew a block of workers’ compensation insurance policies that had been underwritten by PIC. Under the terms of the agreement, we did not acquire any in-force business or historical liabilities of any insurance carrier in connection with the policies. In addition, the acquisition also provided us access to Princeton’s agent relationships in the Northeast, which has enhanced our workers’ compensation marketing in that region.
 
In connection with the acquisition, we paid PIC $500,000 and agreed to pay an additional percentage of premium on new and renewal business written through Princeton until March 31, 2008. The minimum aggregate amount payable by us is $5.5 million. PIC has agreed not to solicit the policyholders included in the acquisition prior to December 2007.
 
Industry Overview
 
Workers’   Compensation   Insurance
 
Workers’ compensation is a statutory system under which an employer is required to pay for its employees’ medical, disability, vocational rehabilitation and death benefit costs for work-related injuries or illnesses. While some employers elect to self-insure workers’ compensation risks, most employers purchase workers’ compensation insurance. The principal concept underlying workers’ compensation laws is that employees injured in the course and scope of their employment have only the legal remedies available under workers’ compensation laws and do not have any other recourse against their employer. An employer’s obligation to pay workers’ compensation does not depend on any negligence or wrongdoing on the part of the employer and exists even for injuries that result from the negligence or fault of another person, a co-employee or, in most instances, the injured employee. Workers’ compensation laws vary by state.
 
Workers’ compensation insurance policies generally provide that the insurance carrier will pay all benefits that the insured employer may become obligated to pay under applicable workers’ compensation laws. Each state has a regulatory and adjudicatory system that quantifies the level of wage replacement to be paid, determines the level of medical care required to be provided and the cost of permanent impairment and specifies the options in selecting medical providers available to the injured employee or the employer. These state laws generally require two types of benefits for injured employees: (i) medical benefits, which include expenses related to diagnosis and treatment of the injury, as well as any required rehabilitation, and (ii) indemnity payments, which consist of temporary wage replacement, permanent disability payments and death benefits to surviving family members. To fulfill these mandated financial obligations, virtually all employers purchase workers’ compensation insurance or, if permitted by state law, self-insure. Employers may purchase workers’ compensation insurance from a private insurance carrier, a state-sanctioned assigned risk pool or a self-insurance fund, which is an entity that allows employers to obtain workers’ compensation coverage on a pooled basis, typically subjecting each employer to joint and several liability for the entire fund.
 
 
We believe the challenges faced by the workers’ compensation insurance industry over the past decade have created significant opportunity for workers’ compensation insurers to increase the amount of business that they write. The year 2002 marked the first year in five years that private carriers in the property and casualty insurance industry experienced an increase in annual after-tax returns on surplus, including realized capital gains, according to the National Council on Compensation Insurance, Inc. (“NCCI”). Workers’ compensation insurance industry calendar year combined ratios declined for the first time in seven years, falling from 122% in 2001 (with 1.9% attributable to the September 11, 2001 terrorist attacks) to 102% in 2005 as premium rates have increased and claims severity has declined. In addition, claims frequency has declined. From 1990 through 2005, the cumulative decline in lost-time claims frequency was approximately 50%.
 
Specialty Risk and Extended Warranty
 
Extended warranty and accidental damage plans offered by manufacturers, service providers, retailers and third party administrators provide coverage to purchasers of the subject consumer or commercial goods or other property against mechanical failure, accidental damage and other specified risks. These plans supplement basic manufacturer’s warranties by providing coverage for a defined time period after the expiration of the basic warranty, additional types of losses, or both. In some instances, the manufacturer, service provider or retailer offers its extended warranty or accidental damage plans directly to its customers. In others, the manufacturer, service provider or retailer partners with a third party administrator which offers the plans to users of the covered goods.
 
A plan may consist of a service contract setting forth the terms of the extended warranty, accidental damage or other coverage, issued by the plan provider (the manufacturer, service provider, retailer or third party administrator) or an insurance policy or insurance certificate issued by the plan provider on behalf of an insurer (often at the point of sale of the covered product). In the former case, the plan provider often seeks to mitigate its risk of loss through the purchase of contractual liability insurance. In a typical plan, the plan provider or insurer assumes the risk of mechanical failure, accidental damage or other covered losses in exchange for the payment of a fee or premium. If the plan provider is not an insurer, the plan provider typically remits part of the service contract fee to the contractual liability insurer as premium.
 
We believe that extended warranty and accidental damage coverage represents a growing sector of consumer services, including in the European Union and other foreign markets.
 
Specialty Middle-Market Property and Casualty
 
The specialty middle-market property and casualty market generally covers narrowly defined, homogeneous segments of primary commercial property and casualty insurance, which requires in-depth knowledge of the industry segment and underwriting expertise. Underwriting often entails customized coverage, loss control and claims services as well as risk sharing mechanisms. Competition in this segment is based primarily on client service, availability of insurance capacity, specialized policy forms, efficient claims handling and other value-based considerations, rather than price. In some instances, initial underwriting and claims functions are outsourced to specialized general agents and third party administrators.
 
Agents or insureds typically participate in underwriting results, through a variety of structures, such as captive insurance, risk retention groups and profit-based commissions, which are designed to provide greater stability in premium costs and control over insurance expenses for the insurance companies writing this risk.
 
 
Competition
 
The insurance industry, in general, is highly competitive and there is significant competition in the workers’ compensation insurance sector. Competition in the insurance business is based on many factors, including coverage availability, claims management, safety services, payment terms, premium rates, policy terms, types of insurance offered, overall financial strength, financial ratings assigned by independent rating organizations, such as A.M. Best, and reputation. Some of the insurers with which we compete have significantly greater financial, marketing and management resources and experience than we do. We may also compete with new market entrants in the future. Our competitors include other insurance companies, state insurance pools and self-insurance funds. More than 350 insurance companies participate in the workers’ compensation market. The insurance companies with which we compete vary by state and by the industries we target. We believe our competitive advantages include our underwriting and claims management practices and systems and our A.M. Best rating of “A-” (Excellent). In addition, we believe that our insurance is competitively priced and that our premium rates are typically lower than those for policyholders assigned to the state insurance pools, allowing us to provide a viable alternative for policyholders in those pools.
 
We believe that the specialty risk and extended warranty sector in which we do business is not as developed as most other insurance sectors (including workers’ compensation insurance). We believe that our European specialty risk and extended warranty team is recognized for its expertise in this market. Nonetheless, we face significant competition, including several internationally well-known insurers that have significantly greater financial, marketing and management resources and experience than we. We believe that our competitive advantages include the ability to provide technical assistance to warranty providers, experienced underwriting, resourceful claims management practices and good relations with the leading warranty administrators in the European Union.
 
Geographic Distribution
 
TIC and RIC, collectively, are licensed to provide workers’ compensation insurance in 35 states and the District of Columbia, and in the three months ended March 31, 2006, we wrote workers’ compensation business in 31 states and the District of Columbia. We have workers’ compensation license applications pending in four states and intend to apply for licenses in additional states in the future. In addition, WIC is licensed to provide small business worker’s compensation insurance in 24 states and the District of Columbia, including 5 states in which RIC and TIC are not currently licensed. For the three months ended March 31, 2006, Florida, Georgia, New Jersey, New York and Pennsylvania accounted for approximately 73.8% of the gross premiums written in our workers’ compensation business, with Florida accounting for approximately 37.7%. The table below identifies, for the years ended December 31, 2005, 2004, 2003 and the three months ended March 31, 2006, the states in which the percentage of our direct premiums written in our small business workers’ compensation insurance segment exceeded 3.0% for any of the periods presented.
 
Percentage of Aggregate Workers’ Compensation Direct Premiums Written By State(1)
 
   
Three Months
     
   
Ended
 
Year Ended
 
   
March 31,
 
December 31,
 
State
 
2006
 
2005
 
2004
 
2003
 
Florida
   
37.7
   
29.1
%
 
6.1
%
 
0.0
%
New Jersey
   
10.9
   
12.1
   
15.6
   
18.3
 
New York
   
10.5
   
12.0
   
13.9
   
16.7
 
Georgia
   
7.5
   
9.7
   
16.0
   
11.5
 
Pennsylvania
   
7.3
   
10.5
   
12.9
   
14.7
 
Illinois
   
6.0
   
6.5
   
9.7
   
12.8
 
Texas
   
2.9
   
5.6
   
5.4
   
0.7
 
Tennessee
   
2.9
   
1.6
   
2.6
   
2.1
 
South Carolina
   
2.1
   
2.2
   
3.2
   
3.6
 
Virginia
   
1.7
   
2.0
   
3.1
   
4.5
 
All Other States and the District of Columbia
   
10.5
   
8.7
   
11.5
   
15.1
 
                         
(1)
Direct premiums consist of gross premiums written other than those premiums assumed or written that are attributable to assigned risk pools.
 
We are licensed to provide specialty risk and extended warranty coverage in 41 states and the District of Columbia, and in Ireland, and pursuant to European Union law, certain other European Union member states. Through fronting arrangements with State National, we are able to underwrite specialty risk insurance and extended warranty coverage in all 50 states. Pursuant to these arrangements, State National insures risks we underwrite on policy forms that we supply. We administer the business, settle all claims and reinsure 100% of the risks. We pay State National a fee for its services, but it does not share in the profits or losses of the business it writes for us.
 
Based on coverage plans written or renewed in 2005, the European Union accounts for approximately 72% of our specialty risk and extended warranty business, and the United Kingdom accounts for approximately 58.3% of our European specialty risk and extended warranty business. Sweden makes up approximately 15% of our European specialty risk and extended warranty business. The table below shows the geographic distribution of our annualized gross premiums written in our specialty risk and extended warranty segment with respect to coverage plans in effect at December 31, 2005.
 
Percentage of Specialty Risk and Extended Warranty Gross Premiums Written by Country  
 
Country
 
Percentage of
Annualized
Gross Premiums
Written
 
United Kingdom
   
42.0
%
Sweden
   
15.0
 
United States
   
21.0
 
Czech Republic
   
6.0
 
Norway
   
7.0
 
Slovakia
   
2.0
 
Other Countries(1)
   
7.0
 
         
(1)
Primarily attributable to coverage plans outside the United States and European Union.
 
 
Percentage of Special Middle-Market Property and Casualty Direct Premiums Written By State .
 
State
 
Three Months Ended
March 31, 2006
 
New York
   
50.7
%
Pennsylvania
   
14.7
%
New Jersey
   
12.3
%
Missouri
   
9.2
%
Illinois
   
3.8
%
Kansas
   
3.2
%
All other States and the District of Columbia
   
6.1
%

Distribution
 
We market our small business workers’ compensation insurance products and specialty risk and extended warranty products through unaffiliated third parties that charge us a commission or, as is often the case in our specialty risk and extended warranty segment, charge an administrative fee to the manufacturer or retailer providing the extended warranty or accidental damage coverage plan. Accordingly, the success of our business is dependent upon our ability to motivate these third parties to sell our products and support them in their sales efforts.
 
Small Business Workers’ Compensation
 
Currently, we have a network of approximately 8,000 active independent wholesale and retail agents, located in 31 states and the District of Columbia. In the three months ended March 31, 2006, we sold 15,671 workers’ compensation insurance policies to small businesses. We plan to maintain our specialized small business workers’ compensation market focus and grow our policyholder base through development of additional agent relationships and expansion of current agent relationships. Our efforts to maintain and broaden our market include the continued development and enhancement of software that enables and promotes responsive interaction with our agents, including our proprietary web-based indicative rate quotation system. Our current system permits agents and brokers to determine whether a risk is within our eligible classes in real-time and enables the underwriters, in most cases, to make an underwriting determination within two business days of receiving a request.
 
We also enhanced our marketing and customer liaison capabilities for small-business workers’ compensation insurance by acquiring renewal rights and agency relationships from Princeton in 2002, Covenant in 2003 and Associated in 2004. These entities had long-standing relationships with agents and the expertise and infrastructure to support placing and servicing the smaller workers’ compensation insurance accounts that make up the core of our workers’ compensation business. These acquisitions have expanded our geographic reach. We anticipate that the recent acquisition of renewal rights and agency relationships from Muirfield will similarly enhance our capabilities and expand our reach.
 
Specialty Risk and Extended Warranty
 
We market our specialty risk insurance and extended warranty coverage primarily through brokers and third party warranty administrators. Approximately 91% of our specialty risk and extended warranty business has been placed through or issued to approximately ten independent administrators and policyholders, and we plan to maintain and expand these relationships.
 
 
Specialty Middle-Market Property and Casualty
 
The specialty middle-market property and casualty segment we recently acquired currently is distributed through a network of 10 general and other wholesale agents in the United States. This coverage is offered through these wholesale agents to multiple retail agents and insureds. These wholesale agents typically have a substantial role in underwriting and claims administration as well. These agents or the ultimate insureds generally share a portion of the risk. We pay these agents commission based on the services they provide. In addition, generally, a substantial portion of the commission is based on the profitability over time of business written in a given year.
 
We continue to seek to transition additional selected agents and accounts, but there is no assurance that we will be successful due to competition and other factors. We believe that A.M. Best ratings are particularly important in placing and retaining business in this segment. These agents are generally not required to place this business with us exclusively.
 
The specialty middle-market property and casualty segment primarily comprises workers’ compensation, general liability, commercial auto liability and commercial property coverage to small and middle-market businesses. We are not currently licensed to offer certain lines in certain states. With our acquisition of WIC, we have licenses in all 50 states and the District of Columbia, but we are not licensed for every line of business which we write in each state and the District of Columbia. We plan to continue to apply for licenses for these lines of business. In the event that we have opportunities in states in which we are not yet licensed, we have fronting arrangements with State National to write a portion of this business.
 
Underwriting and Pricing
 
Small Business Workers’ Compensation
 
We use proprietary web-based tools and computer applications to assist in the underwriting process for our small business workers’ compensation insurance. To begin the underwriting process, an agent logs on to our web-page and enters general information about the risk and automatically receives an indicative price quotation. If the prospective policyholder and agent elect to continue, the agent enters detailed information and submits an underwriting request. The underwriting request is electronically delivered to one of our underwriters who reviews the submission. If the underwriter approves the submission, the underwriter provides a quote to the agent. The complete submission record is indexed to the quote, and the policy is bound as soon as the customer pays the requisite down-payment. We issue our policies via the internet to agents who are responsible to deliver them to the insureds. Our system will not allow business to be placed if it does not fit within our guidelines. Due to our adherence to our underwriting guidelines and filed rates, we offer quotes on only about 40% of the coverage requests we receive and issue policies on approximately half of the quotes we provide. Our system handles most clerical duties, so that our underwriters can focus on making decisions on risk submissions. Through May 31, 2006, we employed 12 underwriters who collectively reviewed an average of approximately 4,000 risk submissions per month. Effective June 5, 2006, we added 13 underwriters in connection with the Muirfield acquisition.
 
Specialty Risk and Extended Warranty
 
We underwrite our specialty risk coverage on a coverage plan-level basis, which involves substantial data collection and actuarial analysis as well as analysis of applicable laws governing policy coverage language and exclusions. We prefer to apply a historical rating approach in which we analyze historical loss experience of the covered product or similar products rather than an approach that attempts to estimate our total exposure without such historical data. In addition, we believe that the warranty administrator is very important to the profitability of each coverage we underwrite because the warranty administrator typically handles marketing and claims administration. Accordingly, each underwriting includes a critical evaluation of the prospective warranty administrator. The results of our underwriting analysis are used to determine the premium we charge and to draft the coverage language and exclusions. The underwriting process in our specialty risk and extended warranty segment generally takes three months or more to complete. We ultimately underwrite approximately 20% of the specialty risk and extended warranty business we are offered. Our specialty risk and extended warranty business is underwritten primarily in London, where we employ three underwriters. We also employ one underwriter in the United States and two in Sweden.
 
 
 
 
Specialty Middle-Market Property and Casualty
 
In the specialty middle-market property and casualty segment we recently acquired, independent wholesale agents handle underwriting, subject to underwriting standards we provide, and the agents or the ultimate insureds generally bear a portion of the risk. Our specialty middle-market property and casualty underwriting team establishes these standards through actuarial analysis using industry data. Our team carefully monitors the loss experience of business written through our wholesale agents. We are currently re-underwriting the business for which we acquired renewal rights to prioritize our marketing efforts.
 
Claims Administration
 
Small Business Workers’ Compensation
 
We have internally administered the majority of our workers’ compensation claims since April, 2004. Previously, we had utilized national third party administrators to handle claims. We have structured our claims operation to provide immediate and personal management of claims to guide injured employees through medical treatment, rehabilitation and recovery with the primary goal of returning the injured employee to work as promptly as practicable. We seek to limit the number of claim disputes with injured employees through early intervention in the claims process. We use a proprietary system of internet-based tools and applications that enable our claims staff to concentrate on investigating submitted claims, to seek subrogation opportunities and to determine the compensability of each claim. This system allows the claims process to begin as soon as a claim is submitted. Our adjusters handle an average workers’ compensation indemnity caseload of approximately 125 claims.
 
Approximately 77% of our small business workers’ compensation claims seek only medical expenses as opposed to an additional claim for lost wages. Based on industry data, we believe this rate exceeds the workers’ compensation industry average. We believe that we have such a high percentage of medical-only claims because of the nature of small businesses. We have entered into a consulting agreement with two consulting physicians pursuant to which they review certain serious claims. As of March 31, 2006 with respect to our small business workers’ compensation segment, approximately 0.8% of the 397 claims reported for accident year 2001 were open, 1.3% of the 1,231 claims reported for accident year 2002 were open, 4.9% of the 2,539 claims reported for accident year 2003 were open, 7.2% of the 5,334 claims reported for accident year 2004 were open, 16.7% of the 7,357 claims reported for accident year 2005 were open and 78.5% of the 1,442 claims reported for accident year 2006 through March 31, 2006 were open.
 
Our small business workers’ compensation adjusters have an average of 15 years of experience. Supervision of the adjusters is performed by our internal claims manager in each region. Increases in reserves over the authority of the claims adjuster must be approved by supervisors. Senior claims managers provide direct oversight on all claims with an incurred value of $50,000 or more.
 
 
We have small business workers’ compensation claims offices in Atlanta, Georgia, Princeton, New Jersey, Lexington, Kentucky, Dallas, Texas, Missoula, Montana and Chicago, Illinois.
 
Specialty Risk and Extended Warranty
 
In our specialty risk and extended warranty segment, third party administrators generally handle claims on our policies and provide monthly loss reports. We review the monthly reports and if the losses are unexpectedly high, we generally have the right under our policies to adjust our pricing or cease underwriting new business under the coverage plan. We routinely audit the claims paid by the administrators. We generally settle our specialty risk claims in-kind — by repair or replacement — rather than in cash. When possible, we negotiate volume fixed-fee repair or replacement agreements with third parties to reduce our loss exposure. We hire third party experts to validate certain types of claims. For example, we engage engineering consultants to validate claims made on coverage we provide on heavy machinery.
 
Specialty Middle-Market Property and Casualty
 
In the specialty middle-market property and casualty segment third party administrators generally handle claims and provide periodic loss reports. Approximately six such providers administered this business as of March 31, 2006. We plan to closely monitor the loss experience of each coverage we provide and audit claims paid by the administrators on a regular basis. We intend to integrate a substantial portion of this business into our systems over time.
 
Reinsurance
 
Our insurance subsidiaries cede portions of their insurance risk to reinsurance companies through reinsurance agreements. Such agreements serve to limit our maximum loss as a result of a single occurrence. The cost and limits of the reinsurance coverage we purchase vary from year to year based upon the availability of quality reinsurance at an acceptable price and our desired level of retention. Retention refers to the amount of risk that we retain for our own account. We have obtained excess of loss reinsurance for our small business workers’ compensation coverage and the workers’ compensation portion of our specialty middle-market property and casualty business segment. We have obtained variable quota share reinsurance for our European Union specialty risk and extended warranty insurance exposures. We plan to seek additional reinsurance to cover the property portion of this business, which we have not commenced. We do not plan to reinsure the general liability and auto liability portions of this business. We do not purchase finite reinsurance.
 
We believe reinsurance is critical to our business. Our reinsurance strategy is to protect against unforeseen or catastrophic loss activity that would adversely impact our income and capital base. We periodically evaluate the financial condition of our third party reinsurers in order to minimize our exposure to significant losses from reinsurer insolvencies. Reinsurance does not discharge or diminish our obligation to pay claims covered under insurance policies we issue; however, it does permit us to recover losses on such risks from our reinsurers. We would be obligated to pay claims in the event these reinsurers were unable to meet their obligations. We have only selected financially strong reinsurers with an A.M. Best rating of “A-” (Excellent) or better at the time we entered into our reinsurance agreements. As of the date of prospectus 95% of our reinsurers as measured by gross reinsurance recoverables are rated “A-” or higher by A.M. Best or have provided us with collateral for the full amount of their recoverables. Many of our reinsurance agreements permit the reinsurers to terminate their reinsurance coverage on relatively short notice.
 
 
The following table summarizes the four reinsurers that account for approximately 95% of our reinsurance recoverables on paid and unpaid losses and loss adjustment expenses.
 
Reinsurer
 
A.M. Best
Rating
 
Amount
Recoverable as of
March 31, 2006
 
     
($ in thousands)
 
Midwest Employers Casualty Company
   
A
 
$
8,379
 
Converium Limited(1)
   
B++
   
4,600
 
Munich Reinsurance Company
   
A+
   
3,001
 
General Reinsurance Corporation
   
A++
   
2,751
 
               
(1)
As of March 31, 2006, amounts recoverable from Converium Limited were fully collateralized by a combination of a letter of credit and cash withheld under our reinsurance contracts with Converium Limited.
 
Intercompany Reinsurance
 
TIC/RIC/WIC/AII Intercompany Reinsurance. Our subsidiaries, AII, TIC, RIC and WIC are parties to an Intercompany Reinsurance Agreement, effective June 1, 2006, which provides reinsurance for insurance risks of TIC, RIC and WIC net of any applicable third party reinsurance. Although this reinsurance agreement is worded broadly enough to cover all insurance written by TIC, RIC and WIC in any line of business, not all specialty risk and extended warranty business is ceded under the agreement. Pursuant to the Intercompany Reinsurance Agreement, TIC and RIC act as both ceding companies and reinsurers, WIC acts only as a ceding company and AII acts only as a reinsurer. Under the original terms of the agreement, which apply to policies with effective dates prior to January 1, 2003, TIC ceded 57.5% of its risks covered by the agreement to RIC and AII (15% to RIC, 42.5% to AII) and reinsured 42.5% of the risks ceded by RIC. RIC ceded 85% of its risks covered by the agreement to TIC and AII (42.5% to TIC, 42.5% to AII) and reinsured 15% of the risks ceded by TIC. AII reinsured 42.5% of the risks ceded by both TIC and RIC. WIC was not a party to the agreement until June 1, 2006.
 
Pursuant to an endorsement to the Intercompany Reinsurance Agreement, which applied to policies with an effective date of January 1, 2003, TIC ceded 80% of its risks covered by this agreement to RIC and AII (10% to RIC, 70% to AII) and reinsured 20% of the risks ceded by RIC. RIC ceded 90% of its risks covered by the agreement to TIC and AII (20% to TIC, 70% to AII) and reinsured 10% of the risks ceded by TIC. AII reinsured 70% of the risks ceded by both TIC and RIC. Pursuant to a second endorsement to the agreement, effective January 1, 2003, TIC and RIC ceded and AII reinsured 100% of TIC’s and RIC’s risks from any assigned risk or similar plans. An assigned risk is one underwritten by special insurance facilities established under state laws to provide certain types of coverage for those who cannot purchase it in the open market.
 
 
The table below outlines the risks ceded and assumed net of third party reinsurance under the current terms of the Intercompany Reinsurance Agreement:
 
Subsidiary Company
 
Retains
 
Cedes
 
Assumes
 
TIC*
   
20% of own risk
   
10% risk to RIC
   
20% of RIC risk and
 
 
   
0% of assigned risk
   
70% risk to AII*
   
WIC risk
 
RIC*
   
10% of own risk
   
20% risk to TIC
   
10% of TIC risk
 
 
   
0% of assigned risk
   
70% risk to AII*
   
N/A
 
WIC*
   
10% of own risk
   
20% to TIC
   
N/A
 
 
   
0% of assigned risk
   
70% to AII
   
N/A
 
AII*
   
N/A
   
N/A
   
70% of RIC risk*
 
               
70% of TIC risk*
 
               
70% of WIC risk*
 
                   
*
TIC, RIC and WIC cede 100% of all assigned risks to AII.
 
In connection with our acquisition of WIC, the Intercompany Reinsurance Agreement was amended to include WIC effective June 1, 2006. Pursuant to the current Intercompany Reinsurance Agreement by which WIC cedes 70% of its risks covered by the agreement to AII and 20% to TIC and AII would reinsure 70% of the risks ceded by WIC and TIC would reinsure 20% of such risks. WIC did not cede any part of its business to RIC and would not reinsure any business written by the other companies. The cession and reinsurance of risks among TIC, RIC and AII will otherwise remain the same.
 
AIU/AII Intercompany Reinsurance . AIU has entered into a 60% quota share reinsurance arrangement with AII for the portion of AIU’s risks under its specialty risk and extended warranty business that is not ceded to third party reinsurers. Although this intercompany reinsurance arrangement is broad enough to cover all of AIU’s specialty risk and extended warranty risks to the extent that they are not reinsured with third party reinsurers, AIU has elected not to cede certain of these risks to AII.
 
Third Party Workers’ Compensation Reinsurance
 
We purchase excess of loss reinsurance for our workers’ compensation coverage from third party reinsurers. Under excess of loss reinsurance, covered losses in excess of the retention level up to the limit of the reinsurance coverage are paid by the reinsurer. Our excess of loss reinsurance is written in layers, in which our reinsurers accept a band of coverage up to a specified amount. In return for this coverage, we pay our reinsurers a percentage of our net or gross earned insurance premiums subject to certain minimum reinsurance premium requirements. Different layers in our excess of loss reinsurance program are scheduled to renew at different times during the year. Effective January 1, 2006, our retention for workers’ compensation claims other than those arising out of acts of terrorism is $1.0 million per occurrence.
 
The following description of our third party reinsurance protection covers the period from January 1, 2006 through December 31, 2007 and certain periods prior to January 1, 2006. Some layers of this reinsurance include so-called “sunset clauses” which limit reinsurance coverage to claims reported within eight years of the inception of a 12-month contract period and may also include commutation clauses which permit reinsurers to terminate their obligations by making a final payment to us based on an estimate of their remaining liabilities, which may ultimately prove to be inadequate. In addition to insuring employers for their statutory workers’ compensation liabilities, our workers’ compensation policies provide insurance for the employers’ tort liability (if any) for bodily injury or disease sustained by employees in the course of their employment. Certain layers of our workers’ compensation reinsurance exclude coverage for such employers’ liability insurance or provide coverage for such insurance at lower limits than the applicable limits for workers’ compensation insurance.
 
 
January 1, 2006 to January 1, 2007. From January 1, 2006 to January 1, 2007, we retain the first $1 million per occurrence on workers’ compensation claims other than those arising out of acts of terrorism. We cede losses greater than $1.0 million for such claims. Our reinsurance for such claims totals $129.0 million, structured as a five layer tower. The first three layers of this reinsurance exclude coverage for our participation in assigned risk pools.
 
 
·
The first layer of this reinsurance, which will remain in effect until January 1, 2008, provides $9.0 million of coverage per occurrence in excess of our $1.0 million retention. It has an annual aggregate deductible of $1.25 million and reinsures losses in excess of $1.0 million up to $10.0 million. Pursuant to these deductible provisions, we must pay a total amount of $1.25 million in workers’ compensation losses incurred in 2006 in excess of our $1.0 million retention before we are entitled to any reinsurance recovery.
 
 
·
The second layer provides $10.0 million of coverage per occurrence in excess of $10.0 million. This layer reinsures losses in excess of $10.0 million up to $20.0 million.
 
 
·
The third layer provides $30.0 million of coverage per occurrence for claims in excess of $20.0 million. This layer provides coverage for losses in excess of $20.0 million up to $50.0 million. It has limits of $10.0 million per individual. This means that if an individual is involved in a compensable claim, the maximum coverage provided under this layer would not exceed $10.0 million for that individual. It has an aggregate limit of $60.0 million for the entire 12-month contract period.
 
 
·
The fourth layer provides $30.0 million of coverage per occurrence for claims in excess of $50.0 million. It reinsures losses in excess of $50.0 million up to $80.0 million. It has limits of $10.0 million per individual and an aggregate limit of $60.0 million for the entire 12-month contract period.
 
 
·
The fifth layer provides $50.0 million of coverage per occurrence for claims in excess of $80.0 million. It reinsures losses greater than $80.0 million up to $130.0 million. It has limits of $10.0 million ($5.0 million for losses occurring before May 1, 2005) per individual and an aggregate limit of $100.0 million for the entire 12-month contract period.
 
January 1, 2005 to January 1, 2006. From January 1, 2005 to January 1, 2006, we retain the first $0.6 million per occurrence on workers’ compensation claims other than those arising out of acts of terrorism. We cede losses greater than $0.6 million for such claims. Our reinsurance for such claims totals $129.4 million, structured as a six layer tower. The first three layers of this reinsurance exclude coverage for our participation in assigned risk pools.
 
 
·
The first layer of this reinsurance provides $4.4 million of coverage per occurrence excess of our $0.6 million retention. It has an annual aggregate deductible of $1.25 million and reinsures losses in excess of $0.6 million up to $5.0 million. Pursuant to these deductible provisions, we must pay a total amount of $1.25 million in workers’ compensation losses incurred in 2005 in excess of our $0.6 million retention before we are entitled to any reinsurance recovery.
 
 

 
·
The second layer provides $5.0 million of coverage per occurrence excess of $5.0 million. This layer reinsures losses in excess of $5.0 million up to $10.0 million.
 
 
·
The third layer provides $10.0 million of coverage per occurrence excess of $10.0 million. It reinsures losses in excess of $10.0 million up to $20.0 million. It has an aggregate limit of $20.0 million per 12-month contract period. This means that regardless of the number of occurrences in any 12-month contract period with insured losses in excess of $10.0 million, the aggregate amount paid under this layer would not exceed $20.0 million.
 
 
·
The fourth layer provides $30.0 million of coverage per occurrence for claims excess of $20.0 million. This layer provides coverage for losses in excess of $20.0 million up to $50.0 million. It has limits of $10.0 million per individual. This means that if an individual is involved in a compensable claim, the maximum coverage provided under this layer would not exceed $10.0 million for that individual. It has an aggregate limit of $60.0 million for the entire 12-month contract period.
 
 
·
The fifth layer provides $30.0 million of coverage per occurrence for claims excess of $50.0 million. It reinsures losses in excess of $50.0 million up to $80.0 million. It has limits of $10.0 million per individual and an aggregate limit of $60.0 million for the entire 12-month contract period.
 
 
·
The sixth layer provides $50.0 million of coverage per occurrence for claims excess of $80.0 million. It reinsures losses greater than $80.0 million up to $130.0 million. It has limits of $10.0 million ($5.0 million for losses occurring before May 1, 2005) per individual and an aggregate limit of $100.0 million for the entire 12-month contract period.
 
All told, for calendar year 2005, we have $129.4 million per occurrence of reinsurance for workers’ compensation claims.
 
January 1, 2004 to January 1, 2005. From January 1, 2004 to January 1, 2005, we retain the first $0.5 million per occurrence on workers’ compensation claims other than those arising out of acts of terrorism. We cede losses greater than $0.5 million for such claims. From January 1, 2004 to May 1, 2004, our reinsurance for such claims totals $79.5 million, structured as a five layer tower. From May 1, 2004 to January 1, 2005, our reinsurance for such claims totals $129.5 million, structured as a six layer tower. The first four layers of this reinsurance exclude coverage for our participation in assigned risk pools.
 
 
·
The first layer of this reinsurance provides $4.5 million of coverage per occurrence excess of our $0.5 million retention. It has an annual aggregate deductible of $1.0 million and reinsures losses in excess of $0.5 million up to $5.0 million.
 
 
·
The second layer provides $5.0 million of coverage per occurrence excess of $5.0 million. This layer reinsures losses in excess of $5.0 million up to $10.0 million.
 
 
·
The third layer provides $10.0 million of coverage per occurrence excess of $10.0 million. It reinsures losses in excess of $10.0 million up to $20.0 million. It has an aggregate limit of $20.0 million per 12-month contract period.
 
 

 
·
The fourth layer provides $30.0 million of coverage per occurrence for claims excess of $20.0 million. This layer provides coverage for losses in excess of $20.0 million up to $50.0 million. It has limits of $10.0 million ($5.0 million for losses occurring prior to April 1, 2004) per individual and an aggregate limit of $60.0 million for the entire 12-month contract period.
 
 
·
The fifth layer provides $30.0 million of coverage per occurrence for claims excess of $50.0 million. It reinsures losses in excess of $50.0 million up to $80.0 million. It has limits of $10.0 million ($5.0 million for losses occurring before May 1, 2004) per individual and an aggregate limit of $60.0 million per 12-month contract period.
 
 
·
The sixth layer only applies to losses occurring on or after May 1, 2004. It provides $50.0 million of coverage per occurrence for claims excess of $80.0 million. It reinsures losses greater than $80.0 million up to $130.0 million. It has limits of $10.0 million per one individual and an aggregate limit of $100.0 million for the entire 12-month contract period.
 
All told, for the period January 1, 2004 to May 1, 2004, we have $79.5 million per occurrence of reinsurance for workers’ compensation claims. For the period May 1, 2004 to January 1, 2005, we have $129.5 million per occurrence of reinsurance for such claims.
 
March 1, 2003 to January 1, 2004. From March 1, 2003 to January 1, 2004, we retain the first $0.5 million per occurrence on workers’ compensation claims. We cede losses greater than $0.5 million for such claims. Our reinsurance for such claims totals $49.5 million, structured as a five layer tower, except that for losses occurring from December 1, 2003 to January 1, 2004, we have an additional $30 million layer of protection, bringing total reinsurance coverage during that month to $79.5 million. Other than the additional $30 million layer, all layers of this reinsurance exclude coverage for our participation in assigned risk pools.
 
 
·
The first layer of this reinsurance provides $0.5 million coverage per occurrence excess of our $0.5 million retention. It reinsures losses in excess of $0.5 million up to $1.0 million. It has an aggregate limit of $4.0 million per 12-month contract period.
 
 
·
The second layer provides $4.0 million of coverage per occurrence excess of $1.0 million. This layer reinsures losses in excess of $1.0 million up to $5.0 million. It has an aggregate limit of $12.0 million per 12-month contract period.
 
 
·
The third layer provides $5.0 million of coverage per occurrence excess of $5.0 million. It reinsures losses in excess of $5.0 million up to $10.0 million. It has an aggregate limit of $10.0 million per 12-month contract period.
 
 
·
The fourth layer provides $10.0 million of coverage per occurrence for claims excess of $10.0 million. This layer provides coverage for losses in excess of $10.0 million up to $20.0 million. It has an aggregate limit of $10.0 million per 12-month contract period.
 
 
·
The fifth layer provides $30.0 million of coverage per occurrence for claims excess of $20.0 million. This layer provides coverage for losses in excess of $20.0 million up to $50.0 million. This layer has limits of $5.0 million per individual and an aggregate limit of $60 million per 12-month contract period.
 
 

 
·
The sixth layer only applies to losses occurring on or after December 1, 2003. It provides $30.0 million of coverage per occurrence for claims excess of $50.0 million. It reinsures losses greater than $50.0 million up to $80.0 million. It has limits of $5.0 million per individual and an aggregate limit of $60.0 million per 12-month contract period.
 
All told, for the period March 1, 2003 to December 1, 2003, we had $49.5 million per occurrence of reinsurance for workers’ compensation claims. For the one-month period beginning December 1, 2003, we had $79.5 million per occurrence of reinsurance for such claims.
 
Certain layers of our reinsurance provide coverage for losses caused by terrorism. As of January 1, 2006, for terrorism losses in excess of $20.0 million per occurrence, we have three layers of reinsurance, none of which provides coverage for nuclear, biological or chemical terrorism. This additional reinsurance is provided net of any recovery that we receive from the federal government pursuant to TRIA.
 
 
·
The first layer of this additional reinsurance provides $30.0 million of coverage per occurrence for claims in excess of $20.0 million. It reinsures terrorism losses in excess of $20.0 million up to $50.0 million and has an aggregate limit of $30.0 million for the entire 12-month contract period.
 
 
·
The second layer of this additional reinsurance provides $30.0 million of coverage per occurrence for claims in excess of $50.0 million. This layer provides coverage for losses in excess of $50.0 million up to $80.0 million and has an aggregate limit of $30.0 million for the entire 12-month contract period.
 
 
·
The third layer of this additional reinsurance provides $50.0 million of coverage per occurrence for claims in excess of $80.0 million. It reinsures losses in excess of $80.0 million up to $130.0 million and has an aggregate limit of $50.0 million for the entire 12-month contract period.
 
TRIA, as recently extended and amended, requires that commercial property and casualty insurance companies offer coverage (with certain exceptions, such as with respect to commercial auto insurance) for certain acts of terrorism and has established a federal assistance program through the end of 2007 to help such insurers cover claims for terrorism-related losses. TRIA covers certified acts of terrorism, and the U.S. Secretary of the Treasury must declare the act to be a “certified act of terrorism” for it to be covered under this federal program. In addition, no certified act of terrorism will be covered by the TRIA program unless the aggregate insurance industry losses from the act exceed certain substantial threshold amounts ($50 million for acts of terrorism occurring from April 1, 2006 to December 31, 2006 and $100 million for acts of terrorism occurring in 2007). Under the TRIA program, the federal government covers 90% (85% for acts of terrorism occurring in 2007) of the losses from covered certified acts of terrorism on commercial risks in the United States only, in excess of a deductible amount. This deductible is calculated as a percentage of an affiliated insurance group’s prior year premiums on commercial lines policies (with certain exceptions, such as commercial auto insurance policies) covering risks in the United States. This deductible amount is 17.5% of such premiums for losses occurring in 2006 and 20% of such premiums for losses occurring in 2007.
 
Third Party Specialty Risk and Extended Warranty Reinsurance
 
Variable Quota Share Reinsurance. Since January 1, 2003, we have had variable quota share reinsurance with Munich Reinsurance Company (“Munich Re”) for our specialty risk and extended warranty insurance. The scope of this reinsurance arrangement is broad enough to cover all of our specialty risk and extended warranty insurance worldwide. However, we do not cede to Munich Re the majority of our U.S. specialty risks and extended warranty business, although we may cede more of this U.S. business to Munich Re in the future.
 
 
Under quota share reinsurance arrangements, the ceding company cedes a percentage of each risk within the covered class or classes of business to the reinsurer and recovers the same percentage of the ceded loss and loss adjustment expenses. The ceding company pays the reinsurer the same percentage of the insurance premium on the ceded business, less a ceding commission. The ceding commission rate for our reinsurance with Munich Re is based upon a certain net loss ratio for the ceded business.
 
Under the variable quota share reinsurance arrangements with Munich Re, we may elect to cede from 35% to 85% of each covered risk, but Munich Re shall not reinsure more than £850,000 for each  ceded risk which we at acceptance regard as one individual risk. This means that regardless of the amount of insured losses generated by any ceded risk, the maximum coverage for that ceded risk under this reinsurance arrangement is £850,000. For the majority of the business ceded under this reinsurance arrangement, we cede 35% of the risk to Munich Re, but for some newer or larger risks, we cede a larger share to Munich Re. This reinsurance is subject to a limit of £2.5 million per occurrence of certain natural perils such as windstorms, earthquakes, floods and storm surge. Coverage for losses arising out of acts of terrorism is excluded from the scope of this reinsurance.
 
Reinsurance for the Mayflower Facility. Beginning December 30, 2003, AIU entered into an arrangement with Mayflower Underwriting Ltd. (“Mayflower”) pursuant to which AIU issues extended warranty and accidental damage coverage for risks bound and administered by Mayflower. For the period December 30, 2003 to May 31, 2005, AIU ceded 100% of these risks to Converium, Limited. Beginning June 1, 2005, AIU has retained a 5% share of these risks and ceded 95% of the risks to Converium, Limited (50% share of the ceded risks) and a certain syndicate at Lloyd’s (50% share of the ceded risks). Because its A.M. Best rating is less that “A-”, Converium, Limited. has provided AIU with collateral for the full amount of its reinsurance recoverables as of March 31, 2006 in the form of a combination of a letter of credit issued by a group of banks led by ABN Amro Bank N.V. and withheld funds.
 
Loss Reserves
 
Workers’ Compensation Segment
 
We record reserves for estimated losses under insurance policies that we write and for loss adjustment expenses related to the investigation and settlement of policy claims. Our reserves for loss and loss adjustment expenses represent the estimated cost of all reported and unreported loss and loss adjustment expenses incurred and unpaid at a given point in time. In establishing our reserves, we do not use loss discounting, which involves recognizing the time value of money and offsetting estimates of future payments by future expected investment income. Our process and methodology for estimating reserves applies to both our voluntary and assigned risk business and does not include our reserves for mandatory pooling arrangements. We record reserves for mandatory pooling arrangements as those reserves are reported to us by the pool administrators. We use a consulting actuary to assist in the evaluation of the adequacy of our reserves for loss and loss adjustment expenses.
 
When a claim is reported, we establish an initial case reserve for the estimated amount of our loss based on our estimate of the most likely outcome of the claim at that time. Generally, a case reserve is established within 30 days after the claim is reported and consists of anticipated medical costs, indemnity costs and specific adjustment expenses, which we refer to as defense and cost containment expenses, or DCC expenses. At any point in time, the amount paid on a claim, plus the reserve for future amounts to be paid, represents the estimated total cost of the claim, or the case incurred amount. The estimated amount of loss for a reported claim is based upon various factors, including:
 
 
·
type of loss;
 
 
·
severity of the injury or damage;
 
 
·
age and occupation of the injured employee;
 
 
·
estimated length of temporary disability;
 
 
·
anticipated permanent disability;
 
 
·
expected medical procedures, costs and duration;
 
 
·
our knowledge of the circumstances surrounding the claim;
 
 
·
insurance policy provisions, including coverage, related to the claim;
 
 
·
jurisdiction of the occurrence; and
 
 
·
other benefits defined by applicable statute.
 
The case incurred amount can vary due to uncertainties with respect to medical treatment and outcome, length and degree of disability, employment availability and wage levels and judicial determinations. As changes occur, the case incurred amount is adjusted. The initial estimate of the case incurred amount can vary significantly from the amount ultimately paid, especially in circumstances involving severe injuries with comprehensive medical treatment. Changes in case incurred amounts, or case development, is an important component of our historical claim data.
 
In addition to case reserves, we establish reserves on an aggregate basis for loss and DCC expenses that have been incurred but not reported, or IBNR. Our IBNR reserves are also intended to provide for aggregate changes in case incurred amounts as well as the unpaid cost of recently reported claims for which an initial case reserve has not yet been established.
 
The third component of our reserves for loss and loss adjustment expenses is our adjusting and other reserve, or AO reserve. Our AO reserve is established for the costs of future unallocated loss adjustment expenses for all known and unknown claims. Our AO reserve covers primarily the estimated cost of administering claims. The final component of our reserves for loss and loss adjustment expenses is the reserve for mandatory pooling arrangements.
 
We have written workers’ compensation only since 2001. In 2001 and 2002, there was limited premium volume, with premiums beginning to increase substantially in 2003. In order to establish IBNR reserves, we project ultimate losses by accident year both through use of our historical experience, though limited, and the use of industry experience by state. Our consulting actuary projects ultimate losses in two different ways:
 
 
·
Monthly Incurred Development Method (Use of AmTrust factors). Monthly incurred loss development factors are derived from AmTrust’s historical, cumulative incurred losses by accident month. These factors are then applied to the latest actual incurred losses and DCC by month to estimate ultimate losses and DCC, based on the assumption that each accident month will develop to estimated ultimate cost in a similar manner to prior years. Given the limited historical experience, there is a substantial amount of judgment involved in this method.
 
 

 
·
Yearly Incurred Development (Use of NCCI Industry Factors By State). Yearly incurred loss development factors are derived from either NCCI’s annual statistical bulletin or state bureaus. These factors are then applied to the latest actual incurred losses and DCC by year by state to estimate ultimate losses and DCC, based on the assumption that each year will develop to an estimated ultimate cost similar to the industry development by year by state.
 
Each method produces estimated ultimate loss and DCC expenses net of amounts that will be ultimately paid by our reinsurers. Our consulting actuary estimates a range of ultimate losses, along with a selection which gives more weight to the results from AmTrust’s monthly development factors and less weight to the results from industry development factors.
 
Management makes its final selection of loss and DCC reserves after reviewing the actuary’s results; consideration of other underwriting, claim handling and operational factors; and the use of judgment.
 
To establish our AO reserves, we review our past adjustment expenses in relation to past claims and estimate our future costs based on expected claims activity and duration.
 
As of March 31, 2006, our best estimate of our ultimate liability for workers’ compensation loss and loss adjustment expenses, net of amounts recoverable from reinsurers, was $153.1 million, of which $19.3 million was reserves from mandatory pooling arrangements as reported by the pool administrators. This estimate was derived from the procedures and methods described above, which rely on substantial judgment. Estimating ultimate losses and loss adjustment expenses is an inexact process—a broad range exists around any estimate. Variability may be inherently greater given that AmTrust has been writing substantial premiums for only a few years. While management believes its estimates are reasonable, it is possible that our actual loss and loss adjustment expenses incurred may vary significantly from our estimates.
 
The two methods described above are “incurred” development methods. These methods rely on historical development factors derived from changes in our incurred losses, which are estimates of paid claims and case reserves over time. As a result, if case reserving practices change over time, the two incurred methods may produce substantial variation in the estimate of ultimate losses. Because of our limited historical experience, we have not used any “paid” development methods, which rely on actual claims payment patterns and therefore are not sensitive to changes in case reserving procedures. As our paid historical experience grows in the future, we will consider using “paid” loss development methods.
 
Of the two methods above, the use of industry loss development factors has consistently produced higher estimates of workers’ compensation losses and DCC expenses. The table below shows this higher estimate, along with the lower estimate produced by AmTrust’s monthly factors.
 
 
As of March 31, 2006
(in millions)

 
Loss & DCC
Expense Reserves
 
Mandatory Pooling
Arrangements
 
 
Total
 
Lower estimate
 
$
113.8
 
$
19.3
 
$
133.1
 
Net reserve
   
126.5
   
19.3
   
145.8
 
Higher estimate
   
139.1
   
19.3
   
158.4
 

The higher estimate would increase reserves by $5.3 million and reduce net income and stockholders’ equity by $3.5 million. The lower estimate would decrease reserves by $20.0 million and increase net income and stockholders equity by $13.0 million. A change in our net loss and DCC expense reserve would not have an immediate impact on our liquidity but would affect future cash flow as losses are paid.
 
Given the numerous factors and assumptions used in our estimate of reserves, we do not believe that it would be meaningful to provide more detailed disclosure regarding specific factors and assumptions and the individual effects of these factors and assumptions on our net reserves. Furthermore, there is no precise method for subsequently evaluating the impact of any specific factor or assumption on the adequacy of reserves, because the eventual deficiency or redundancy is affected by multiple interdependent factors.
 
Specialty Risk and Extended Warranty
 
Specialty risk and extended warranty claims are usually paid quickly, development on a known claim is negligible, and generally, case reserves are not established. IBNR reserves for warranty claims are generally “pure” IBNR, i.e. amounts for claims that occurred prior to an accounting date but are reported after that date. The reporting lag for warranty IBNR claims is generally small, usually in the range of one to three months. Management determines warranty IBNR by examining the experience of individual coverage plans. Our consulting actuary, at the end of each calendar year, reviews our IBNR by looking at our overall coverage plan experience, with assumptions of claim reporting lag and average monthly claim payouts. Our net IBNR as of March 31, 2006 for our specialty risk and extended warranty segment was $11.7 million. Though we believe this is a reasonable best estimate of future claims development, this amount is subject to a substantial degree of uncertainty.
 
There is generally more uncertainty in the unearned premium reserve than in the IBNR reserve with respect to our specialty risk and extended warranty business. Earnings profiles for different types of specialty risk and extended warranty products have different patterns of incidence during the period of risk. Some products tend to show increasing incidence of claims during the risk period; others may show a relatively uniform incidence of claims, while still others tend to show decreasing claim incidence. We have assumed, on average, a uniform incidence of claims for all contracts combined, based on our review of contract provisions and claim history. Incorrect earnings of warranty policy premiums or inadequate pricing of warranty products may produce insufficiencies in the unearned premium reserve. Our unearned premium reserve as of March 31, 2006 for our specialty risk and extended warranty segment was $55.7 million. Though we believe this is a reasonable best estimate of our unearned premium reserve, this amount is subject to a substantial degree of uncertainty.
 
 
Reconciliation of Loss and Loss Adjustment Expense Reserves
 
The table below shows the reconciliation of loss reserves on a gross and net basis for the years ended December 31, 2004 and 2005 and the three months ended March 31, 2006, reflecting changes in losses incurred and paid losses.
 
 
 
Three Months Ended
March 31,
 
Year Ended
December 31,
 
 
 
2006
 
2005
 
2004  
 
 
($ in thousands)
 
($ in thousands)
 
Balance at January 1
 
$
168,007
 
$
99,364
 
$
37,442
 
Less: reinsurance recoverable
   
17,667
   
14,445
   
4,046
 
Net balance at January 1
   
150,340
   
84,919
   
33,396
 
Incurred related to:
                   
current year
   
44,842
   
142,968
   
86,762
 
prior year
   
(1,068
)
 
(962
)
 
3,416
 
Total incurred
   
43,774
   
142,006
   
90,178
 
Paid related to:
                   
current year
   
(14,184
)
 
(53,988
)
 
(34,724
)
prior year
   
(9,619
)
 
(22,597
)
 
(3,836
)
Total paid
   
(23,803
)
 
(76,585
)
 
(38,560
)
Commuted loss reserves
   
—
   
—
   
(95
)
Net balance
   
170,311
   
150,340
   
84,919
 
Plus reinsurance recoverable
   
19,711
   
17,667
   
14,445
 
Balance
 
$
190,022
 
$
168,007
 
$
99,364
 

Our gross reserves for loss and loss adjustment expenses of $190.0 million as of March 31, 2006 are expected to cover all unpaid loss and loss adjustment expenses related to open claims as of that date, as well as IBNR reserves, which represented 61.4% of our gross reserves on that date.
 
As of December 31, 2005, our gross reserves for loss and loss adjusted expenses were $168.0 million, of which our IBNR reserves represented 61.8% of our gross reserves on that date.
 
As of December 31, 2004, our gross reserves for loss and loss adjustment expenses were $99.4 million, of which our IBNR reserves represented 59.6% of our gross reserves on that date.
 
Loss Development
 
The table below shows the net loss development for business written each year from 1995 through 2005. The table reflects the changes in our loss and loss adjustment expense reserves in subsequent years from the prior loss estimates based on experience as of the end of each succeeding year on a GAAP basis.
 
The first line of the table shows, for the years indicated, our liability including the incurred but not reported loss and loss adjustment expenses as originally estimated, net of amounts recoverable from reinsurers. For example, as of December 31, 2002 it was estimated that $13.4 million would be sufficient to settle all claims not already settled that had occurred on or prior to December 31, 2002, whether reported or unreported. The next section of the table sets forth the re-estimates in later years of incurred losses, including payments, for the years indicated. The next section of the table shows, by year, the cumulative amounts of loss and loss adjustment expense payments, net of amounts recoverable from reinsurers, as of the end of each succeeding year. For example, with respect to the net loss reserves of $13.4 million as of December 31, 2002, by December 31, 2004 (two years later), $2.3 million had actually been paid in settlement of the claims that relate to liabilities as of December 31, 2002.
 
 
The “cumulative redundancy (deficiency)” represents, as of December 31, 2005, the difference between the latest re-estimated liability and the amounts as originally estimated. A redundancy means that the original estimate was higher than the current estimate. A deficiency means that the current estimate is higher than the original estimate.
 
The period from 1995 to 2000 relates primarily to business written prior to the acquisition of TIC and RIC by our current stockholders. Therefore, the high redundancies in these periods were attributable primarily to the runoff of these closed books of business.
 
Analysis of Loss and Loss Adjustment Expense Reserve Development
 
     
As of December 31,
 
     
1995
   
1996
   
1997
   
1998
   
1999
   
2000
   
2001
   
2002
   
2003
   
2004
   
2005
 
   
($ in thousands)
 
Reserve for loss and loss adjustment expenses, net of reinsurance recoverables
 
$
10,309
 
$
10,573
 
$
10,679
 
$
8,972
 
$
10,611
 
$
10,396
 
$
10,906
 
$
13,402
 
$
33,396
 
$
84,919
 
$
150,340
 
Net reserve estimated as of:
                                                                   
One year later
   
9,734
   
9,488
   
4,819
   
6,999
   
5,991
   
7,485
   
9,815
   
13,536
   
34,591
   
83,869
       
Two years later
   
8,667
   
10,626
   
4,197
   
5,855
   
5,466
   
6,653
   
10,034
   
13,804
   
37,954
             
Three years later
   
9,669
   
8,217
   
5,479
   
4,353
   
4,870
   
5,510
   
10,797
   
10,175
                   
Four years later
   
7,262
   
7,179
   
6,129
   
4,609
   
4,245
   
5,510
   
10,797
                         
Five years later
   
6,004
   
6,515
   
6,458
   
3,931
   
4,245
   
5,510
                               
Six years later
   
5,589
   
5,904
   
6,758
   
3,931
   
4,245
                                     
Seven years later
   
4,875
   
5,391
   
6,523
   
3,931
                                           
Eight years later
   
4,459
   
5,391
   
6,523
                                                 
Nine years later
   
4,459
   
5,391
                                                       
Ten years later
   
4,459
                                                             
Net cumulative redundancy (deficiency)
 
$
5,850
 
$
5,182
 
$
4,156
 
$
5,041
 
$
6,366
 
$
4,886
 
$
109
 
$
3,227
 
$
(4,558
)
 
1,050
       

   
Year Ended December 31,
 
   
1995
 
1996
 
1997
 
1998
 
1999
 
2000
 
2001
 
2002
 
2003
 
2004
 
2005
 
   
($ in thousands)
 
Cumulative amount of reserve paid, net of reinsurance recoverables through
                                             
One year later
 
$
53
 
$
51
 
$
44
 
$
203
 
$
222
 
$
542
 
$
971
 
$
1,904
 
$
5,079
 
$
51,738
       
Two years later
   
63
   
59
   
57
   
76
   
106
   
1,050
   
1,187
   
2,328
   
10,198
             
Three years later
   
74
   
76
   
38
   
127
   
212
   
1,117
   
1,439
   
2,877
                   
Four years later
   
95
   
51
   
76
   
254
   
349
   
677
   
1,439
                         
Five years later
   
63
   
76
   
127
   
419
   
169
   
677
                               
Six years later
   
159
   
169
   
209
   
190
   
169
                                     
Seven years later
   
212
   
220
   
83
   
190
                                           
Eight years later
   
159
   
144
   
83
                                                 
Nine years later
   
180
   
144
                                                       
Ten years later
   
180
                                                             
Net reserve—December 31,
 
$
10,309
 
$
10,573
 
$
10,679
 
$
8,972
 
$
10,611
 
$
10,396
 
$
10,906
 
$
13,402
 
$
33,396
 
$
84,919
 
$
150,340
 
Reinsurance recoverables
   
2,851
   
2,474
   
2,174
   
391
   
531
   
821
   
1,742
   
4,078
   
3,529
   
13,527
   
17,667
 
Gross reserves—December 31,
 
$
13,160
 
$
13,047
 
$
12,853
 
$
9,363
 
$
11,142
 
$
11,217
 
$
12,648
 
$
17,480
 
$
36,925
 
$
98,446
 
$
168,007
 
Net re-estimated reserve
   
4,459
   
5,391
   
6,523
   
3,931
   
4,245
   
5,510
   
10,797
   
10,175
   
37,954
   
83,869
       
Re-estimated reinsurance recoverable
   
47
   
—
   
—
   
—
   
—
   
—
   
—
   
2,473
   
3,592
   
14,445
       
Gross re-estimated reserve
 
$
4,506
 
$
5,391
 
$
6,523
 
$
3,931
 
$
4,245
 
$
5,510
 
$
10,797
 
$
12,648
 
$
41,546
 
$
98,314
       
Gross cumulative redundancy (deficiency)
 
$
8,654
 
$
7,656
 
$
6,330
 
$
5,432
 
$
6,897
 
$
5,707
 
$
1,851
 
$
4,832
 
$
(4,621
)
$
132
       

 
 
Investments
 
The first priority of our investment strategy is preservation of capital, with a secondary focus on maximizing an appropriate risk adjusted return. We expect to maintain sufficient liquidity from funds generated from operations to meet our anticipated insurance obligations and operating and capital expenditure needs, including debt service and additional payments in connection with our past renewal rights acquisitions. The excess funds will be invested in accordance with both the overall corporate investment guidelines as well as an individual subsidiary’s investments guidelines. Our investment guidelines are designed to maximize investment returns through a prudent distribution of cash and cash equivalents, fixed maturities and equity positions. Cash and cash equivalents include cash on deposit, commercial paper, pooled short-term money market funds and certificates of deposit with an original maturity of 90 days or less. Our fixed maturity securities include obligations of the U.S. Treasury or U.S. agencies, obligations of both U.S. and Canadian corporations, mortgage-backed securities, and mortgages guaranteed by the Federal National Mortgage Association and the Federal Home Loan and Federal Farm Credit entities. Our equity securities include common stocks of both U.S. and Canadian corporations. As of March 31, 2006, the Company held 27.5% of total invested assets in cash and cash equivalents. This relatively high concentration of cash and cash equivalents represents our reaction to the relatively flat debt yield curve and enables the Company to quickly redeploy assets should the interest rate environment change.
 
A portion of our high quality fixed income portfolio (U.S. government obligations, U.S. government agencies as well as investment grade corporate securities) is managed by Alliance Capital Management LP. The remaining portion of the Company’s high quality fixed income portfolio is managed internally. In addition, we invest a portion of our assets in equity securities and below investment grade fixed income securities in an effort to enhance our overall yield. Our equity portfolio is managed internally. The Company’s below investment grade fixed income securities portfolio is managed by Cedarview Capital Management, LP in a separate account.
 
In December 2002, the Company acquired 100% of the common stock of AmTrust Pacific Limited, a New Zealand real estate operating company, from New Gulf Holdings, Inc, a Delaware corporation, in exchange for one thousand shares of preferred stock of the Company. The purpose of this contribution was to increase the surplus of the Company. In 2005, all the real estate holdings for AmTrust Pacific Limited were sold and the net proceeds (consideration received less repayment of the outstanding mortgage notes and transaction costs) were placed in our investment portfolio. The Company recognized approximately a $18.0 million net gain from these transactions. Of the $18.0 million net gain, $21.7 million was gain from foreign currency which was offset by a $3.7 million loss on discontinued operations.
 
Our investment portfolio, including cash and cash equivalents, had a carrying value of $596.0 million (excludes $2.2 million of other investments) as of March 31, 2006, and is summarized in the table below by type of investment.
 
 
 
Carrying
Value
 
Percentage
of Portfolio
 
   
($ in thousands)
     
Fixed income securities:
         
Mortgage backed securities
 
$
10,134
   
1.7
%
U.S. Treasury securities
   
19,606
   
3.3
 
Obligations of U.S. government agencies
   
205,130
   
34.4
 
Corporate bonds
   
51,229
   
8.6
 
Time and short-term deposits
   
107,984
   
18.1
 
     
394,083
   
66.1
 
Equity securities:
             
Common stock
   
37,556
   
6.3
 
Nonredeemable preferred stock
   
62
   
—
 
Total equity securities
   
37,618
   
6.3
 
Total investments, excluding cash and cash equivalents
   
431,701
   
72.4
 
Cash and cash equivalents
   
164,248
   
27.6
 
   
$
595,949
   
100
%
               
 
 

As of March 31, 2006, our fixed maturity portfolio (excluding time and short-term deposits) had a carrying value of $286.0 million, which represented 48.0% of the carrying value of our investments, including cash and cash equivalents. The table below summarizes the credit quality of our fixed maturity securities as of March 31, 2006 as rated by Standard and Poor’s.
  S & P Rating
 
Percentage of Fixed
Maturity Portfolio
 
U.S. Treasury
   
6.8
%
AAA
   
77.2
 
AA
   
1.0
 
A
   
2.5
 
BBB
   
0.3
 
B
   
1.6
 
B-
   
1.7
 
CCC+
   
2.9
 
Other(1)
   
6.0
 
Total
   
100
%
         
(1)
Includes securities rated B+, BB, BB+, BBB-, CC, CCC, CCC-.
 
The table below shows the composition of our fixed maturity securities by remaining time to maturity as of March 31, 2006. As of March 31, 2006, the weighted average duration of our fixed income securities was 2.4 years.
 
  Remaining Time to Maturity
 
Amount
 
Percentage of Fixed
Maturity Portfolio
 
 
(in thousands)
     
Less than one year
 
$
47,867
   
16.7
%
One to five years
   
210,814
   
73.7
 
Five to ten years
   
17,284
   
6.1
 
Mortgage backed securities
   
10,134
   
3.5
 
Total
 
$
286,099
   
100
%

The table below summarizes the average duration by type of fixed maturity as well as detailing the average yield.

Fixed Income Investment Type
 
Average Yield
 
Average
Durational Years
 
U.S. Treasury securities
   
3.3
%
 
0.1
 
U.S. government agencies
   
4.7
   
2.3
 
Corporate bonds
   
4.0
   
4.0
 
Mortgage backed
   
5.4
   
5.1
 
Time and short term deposits
   
4.6
   
1.0
 

We regularly evaluate our investment portfolio to identify other-than-temporary impairments in the fair values of the securities held in our investment portfolio. We consider various factors in determining whether a decline in the fair value of a security is other-than-temporary, including:
 
 
·
how long and by how much the fair value of the security has been below its cost;
 
 
·
the financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations or earnings;
 
 
·
our intent and ability to keep the security for a sufficient time period for it to recover its value;
 
 

 
·
any downgrades of the security by a rating agency; and
 
 
·
any reduction or elimination of dividends, or nonpayment of scheduled interest payments.
 
During the three months ended March 31, 2006, there were no other-than-temporary declines in the fair values of the securities held in our investment portfolio.
 
The table below summarizes the gross unrealized losses of our fixed maturity and equity securities as of March 31, 2006.
 
       
Remaining Time to Maturity
     
   
Less than 12 Months
 
12 Months or Longer
 
Total
 
Type of Fixed Maturity Investment
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
   
($ in thousands)
 
U.S. Treasury securities
 
$
3,406
 
$
12
 
$
13,575
 
$
139
 
$
16,981
 
$
151
 
U.S. government agencies
   
60,869
   
251
   
76,984
   
1,791
   
137,853
   
2,042
 
Corporates
   
84,735
   
1,984
   
5,947
   
148
   
90,682
   
2,132
 
Mortgage backed
   
3,513
   
80
   
5,391
   
367
   
8,904
   
447
 
Common Stock
   
33,187
   
6,739
   
4,369
   
660
   
37,556
      7,399  
Total
 
$
185,710
 
$
9,066
 
$
106,266
 
$
3,105
 
$
291,976
 
$
12,171
 

As of March 31, 2006, we did not hold any fixed maturity securities with unrealized losses in excess of 20% of the security’s carrying value as of that date.
 
Certain International Tax Considerations
 
We operate our business in several foreign countries and are subject to taxation in several foreign jurisdictions. A brief description of certain international tax considerations affecting us appears below. We will be subject to U.S. income taxation on any income of our foreign subsidiaries which is Subpart F income.
 
Bermuda
 
Bermuda currently does not impose any income, corporation or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax on AII. We cannot assure you that AII will not be subject to any such tax in the future.
 
AII has received a written assurance from the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended, that, if any legislation is enacted in Bermuda imposing tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of that tax would not be applicable to AII or to any of its operations, shares, debentures or obligations until March 28, 2016; provided, that the assurance is subject to the condition that it will not be construed to prevent the application of such tax to people ordinarily resident in Bermuda, or to prevent the application of any taxes payable by AII in respect of real property or leasehold interests in Bermuda held by it. We cannot assure you that AII will not be subject to any such tax after March 28, 2016.
 
For U.S. federal income tax purposes, our Bermuda subsidiaries are controlled foreign corporations. A majority of the income of these subsidiaries, which consists primarily of foreign personal holding company income (such as investment income) and income from reinsuring risks, is categorized as Subpart F income. We must include in our taxable income for U.S. federal income tax purposes this Subpart F income.
 
 
Ireland
 
AIU, a company incorporated in Ireland, will be managed and controlled in Ireland and, therefore, will be resident in Ireland for Irish tax purposes and subject to Irish corporation tax on its worldwide profits (including revenue profits and capital gains). Income derived by AIU from an Irish trade (that is, a trade that is not carried on wholly outside of Ireland) will be subject to Irish corporation tax at the current rate of 12.5%. Other income (that is, income from passive investments, income from non-Irish trades and income from certain dealings in land) will generally be subject to Irish corporation tax at the current rate of 25%.
 
The Irish Revenue Commissioners have published a statement indicating that deposit interest earned by an insurance company on funds held for regulatory purposes will be regarded as part of its trading income, and accordingly will be part of the profits taxed at 12.5%. This statement also indicates acceptance of case law which states that investment income of an insurance company will likewise be considered as trading income where it is derived from assets required to be held for regulatory capital purposes. Other investment income earned by AIU will generally be taxed in Ireland at a rate of 25%. Capital gains realized by AIU will generally be subject to Irish corporation tax at an effective rate of 20%.
 
For U.S. federal income tax purposes, AIU is a controlled foreign corporation and its income generally will be included in our U.S. federal taxable income. A credit against U.S. federal income tax liability is available for any Irish tax paid on such income.
 
If AIU carries on a trade in the United Kingdom through a permanent establishment in the U.K., profits realized from such a trade in the U.K. will be subject to Irish corporation tax notwithstanding that such profits may also be subject to taxation in the U.K. A credit against the Irish corporation tax liability is available for any U.K. tax paid on such profits, subject to the maximum credit being equal to the Irish corporation tax payable on such profits.
 
If we list our shares on a stock exchange in an EU member state or country with which Ireland has a tax treaty, and provided that such shares are substantially and regularly traded on that exchange, Irish dividend withholding tax will not apply to dividends and other distributions paid by AIU to AII, provided we have made an appropriate declaration, in prescribed form, to AIU.
 
We expect that neither AmTrust or any of its subsidiaries, other than AIU, will be resident in Ireland for Irish tax purposes unless the central management and control of such companies is, as a matter of fact, located in Ireland. A company not resident in Ireland for Irish tax purposes can be subject to Irish corporation tax if it carries on a trade through a branch or agency in Ireland or disposes of certain specified assets (e.g., Irish land, minerals, or mineral rights, or unquoted shares deriving the greater part of their value from such assets). In such cases, the charge to Irish corporation tax is limited to trading income connected with the branch or agency, and capital gains on the disposal of assets used in the branch or agency which are situated in Ireland at or before the time of disposal, and capital gains arising on the disposal of specified assets, with tax imposed at the rates discussed above. A company not resident in Ireland is otherwise subject to Irish income tax at the standard rate, currently 20%, on other taxable income arising from sources within Ireland, and to capital gains tax at the current rate of 20% of the taxable gain, on disposals of “specified assets.”
 
Insurance companies are subject to an insurance premium tax in the form of a stamp duty charged at 2% of premium income. It applies to general insurance business, mainly business other than:
 
 
·
Reinsurance;
 
 

 
·
Life insurance;
 
 
·
Certain, maritime, aviation and transit insurance; and
 
 
·
Health insurance.
 
It applies to a premium in respect of a policy where the risk is located in Ireland. Legislation provides that risk is located in Ireland:
 
 
·
In the case of insurance of buildings together with their contents, where the building is in Ireland;
 
 
·
In the case of insurance of vehicles, where the vehicle is registered in Ireland; and
 
 
·
In the case of insurance of four months or less duration of travel or holiday if the policyholder took out the policy in Ireland.
 
Otherwise where the policyholder is resident in Ireland, or if not an individual, if its head office is in Ireland or its branch to which the insurance relates is in Ireland.
 
Intercompany Management
 
Pursuant to an Intercompany Management Agreement, AmTrust performs certain management functions for RIC, TIC and WIC (as of June 1, 2006) including:
 
 
·
financial and accounting services, including, but not limited to, tax compliance, investment management, statutory and GAAP accounting, loss reserving, regulatory compliance, development of premium and commission rates, and premium collection and refunds;
 
 
·
maintenance of fiduciary accounts;
 
 
·
retention and maintenance of all files, books, records and accounts;
 
 
·
submission of form and rate filings, preparation and submission of applications for certificates of authority; and
 
 
·
maintenance of agency relationships and corresponding with policyholders.
 
RIC, TIC, currently and WIC will reimburse AmTrust for all direct expenses incurred in performing these services, and pay an annual management fee equal to the lesser of 2% of the total annual premiums written or $0.75 million.
 
Pursuant to a General Agency Agreement, RIC and TIC have appointed our wholly-owned subsidiary, ANA as agent to solicit and accept applications for policies and to perform compliance, marketing, underwriting, administrative, billing and reporting duties. ANA also handles for RIC and TIC all reinsurance-related services and reporting. RIC and TIC pay ANA a commission for its services equal to 20% of gross premiums written.
 
 
Ratings
 
Many insurance buyers, agents and brokers use the ratings assigned by A.M. Best and other agencies to assist them in assessing the financial strength and overall quality of the companies from which they are considering purchasing insurance. AII, TIC and RIC were each assigned a letter rating of “A-” (Excellent) by A.M. Best in 2003 and we have requested that A.M. Best assign WIC our group rating. These ratings have since remained unchanged. An “A-” rating is the 4th highest of the 16 categories used by A.M. Best, and is assigned to companies that have, in A.M. Best’s opinion, an excellent ability to meet their ongoing obligations to policyholders. AIU is not rated by A.M. Best.
 
These ratings were derived from an in-depth evaluation of our subsidiaries’ balance sheet strengths, operating performances and business profiles. A.M. Best evaluates, among other factors, the company’s capitalization, underwriting leverage, financial leverage, asset leverage, capital structure, quality and appropriateness of reinsurance, adequacy of reserves, quality and diversification of assets, liquidity, profitability, spread of risk, revenue composition, market position, management, market risk and event risk. A.M. Best ratings are intended to provide an independent opinion of an insurer’s ability to meet its obligations to policyholders and are not an evaluation directed at investors.
 
AIU is not currently rated by A.M. Best, which may limit our efforts to expand our European specialty risk and extended warranty business.
 
Employees
 
As of March 31, 2006, we employed approximately 255 employees at locations in the United States, Ireland, the United Kingdom and Sweden. In connection with Muirfield transaction, we added 21 employees in the United States. We have employment agreements with certain members of senior management. See “Management.” None of our employees is subject to collective bargaining agreements. We believe that our employee relations are good.
 
Properties
 
We recently purchased a 63,000 square foot building in Seven Hills, Ohio, which is a suburb of Cleveland. In addition, we lease an aggregate of approximately 50,000 square feet of office space in over ten cities. In connection with the Muirfield transaction, we leased additional office space in the aggregate amount of approximately 5,000 square feet. See “Certain Relationships and Related Transactions.”
 
Legal Proceedings
 
On October 24, 2005, we received a letter from counsel for Ohio Savings Bank (the “Bank”), the owner of a federal trademark registration for the “AMTRUST” service mark, filed in November 1985, for use in connection with retail banking and mortgage services. The Bank alleged that our use of the “AMTRUST” service mark in an identical business would likely result in confusion, deception or mistake among consumers and therefore violated the bank’s trademark rights. The Bank requested confirmation that we would cease using the “AMTRUST” service mark in literature, advertisements, business cards, and the like, as a mark for mortgage services. In October 2005, we responded in writing, stating that we are in the insurance business rather than the banking or mortgage business, sell insurance exclusively through agents to sophisticated business customers and, therefore, there is neither a likelihood of confusion nor any trademark infringement. We also confirmed that we are not using the “AMTRUST” service mark in connection with mortgage services. We received no further communication from the Bank.
 
 
Notwithstanding our response to the Bank, we note that the Bank has registered the “AMTRUST” service mark with the United States Patent and Trademark Office in Class 36 which covers insurance, financial affairs, monetary affairs, real estate affairs, and services dealing with insurance such as services rendered by agents or brokers engaged in insurance, services rendered to insureds, and insurance underwriting services. There is a strong likelihood that if we were to attempt to register the “AMTRUST” service mark in connection with our business with the Patent and Trademark Office, we would receive strong opposition to our registration efforts from the Bank. There is also the possibility of the Bank bringing an infringement action, which if successful could prevent us from using the “AMTRUST” service mark. See “Risk Factors.”
 
From time to time, we are involved in various legal proceedings in the ordinary course of business. For example, to the extent a claim is asserted by an employee against their employer who is one of our insureds under a workers’ compensation policy, we are involved in the adjudication of claim resulting from the workplace injuries. These claims primarily relate to lost wages and medical expenses. Thus, when such a claim is submitted to us, in accordance with our contractual duty we adjudicate the claim in accordance with the policy and the laws of the state where the claim is brought.
 
In addition to the claims arising from the policies we issue, as with any company actively engaged in business, from time to time, we may be involved in litigation involving non-policyholders such as vendors or other third parties with whom we have entered into contracts and out of which disputes have arisen, or litigation arising from employment related matters, such as actions by employees claiming unlawful treatment or improper termination. We are not currently involved in any such suits or other legal or administrative claims of this nature that we believe are likely to have a materially adverse effect on our business, financial condition or results of operations.
 
REGULATION
 
General
 
The business of insurance and reinsurance is regulated in most countries, although the degree and type of regulation vary significantly from one jurisdiction to another. We are subject to extensive regulation in the United States and the European Union (especially, Ireland) and are subject to relatively less regulation in Bermuda.
 
United States
 
We have three operating insurance subsidiaries domiciled in the United States, RIC, TIC and WIC.
 
Holding Company Regulation
 
All or nearly all states have enacted legislation that regulates insurance holding company systems. Each insurance company in a holding company system is required to register with the insurance supervisory agency of its state of domicile and furnish information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. These laws require disclosure of material transactions within the holding company system as well as prior notice of or approval for certain transactions. All transactions within a holding company system affecting an insurer must have fair and reasonable terms and are subject to other standards and requirements established by law and regulation.
 
 
Change of Control
 
The insurance holding company laws of all or nearly all states require advance approval by the respective state insurance departments of any change of control of an insurer. “Control” is generally defined as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the company, whether through the ownership of voting securities, by contract (except a commercial contract for goods or non-management services) or otherwise. Control is generally presumed to exist through the direct or indirect ownership of 10% or more of the voting securities of a domestic insurance company or any entity that controls a domestic insurance company. In addition, insurance laws in many states contain provisions that require pre-notification to the insurance commissioners of a change of control of certain non-domestic insurance companies licensed in those states. Any future transactions that would constitute a change of control of RIC, TIC or WIC, including a change of control of AmTrust, would generally require the party acquiring control to obtain the prior approval of the department of insurance in the state in which the insurance company being acquired is domiciled (and in any other state in which the company may be deemed to be commercially domiciled by reason of concentration of our insurance business within such state) and may also require pre-notification in the states where pre-notification provisions have been adopted. Obtaining these approvals may result in the material delay of, or deter, any such transaction.
 
These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of AmTrust, including through transactions, and in particular unsolicited transactions, that some or all of the stockholders of AmTrust might consider to be desirable.
 
State Insurance Regulation
 
Insurance companies are subject to regulation and supervision by the department of insurance in the state in which they are domiciled (New York in the case of RIC, New Hampshire in the case of TIC and Delaware in the case of WIC) and, to a lesser extent, other states in which they conduct business. The primary purpose of such regulatory powers is to protect individual policyholders. State insurance authorities have broad regulatory, supervisory and administrative powers, including among other things, the power to grant and revoke licenses to transact business, set the standards of solvency to be met and maintained, determine the nature of, and limitations on, investments and dividends, approve policy forms and rates in some instances and regulate unfair trade and claims practices. In particular, workers’ compensation policy forms and rates are closely regulated in all or nearly all states. As workers’ compensation insurers, RIC, TIC and WIC are also subject, to some degree, to regulation by the workers’ compensation regulators in the states in which they provide such insurance.
 
RIC, TIC and WIC are required to file detailed financial statements and other reports with the departments of insurance in all states in which they are licensed to transact business. These financial statements are subject to periodic examination by the department of insurance in each state in which they are filed.
 
In addition, many states have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For example, states may limit an insurer’s ability to cancel or not renew policies. Furthermore, certain states prohibit an insurer from withdrawing from one or more lines of business written in the state, except pursuant to a plan that is approved by the state insurance department. The state insurance department may disapprove a plan that may lead to market disruption. Laws and regulations that limit cancellation and non-renewal and that subject program withdrawals to prior approval requirements may restrict the ability of RIC, TIC and WIC to exit unprofitable markets.
 
Insurance producers, third party administrators, claims adjustors and service contract providers and administrators are subject to licensing requirements and regulation by insurance regulators in various states in which they conduct business. Our subsidiaries, ANA, Amtrust South, Inc., Princeton, United Underwriting Agency, Inc. and AMT Service Corp. are subject to licensing requirements and regulation by insurance regulators in various states.
 
 
Federal and State Legislative and Regulatory Changes
 
From time to time, various regulatory and legislative changes have been proposed in the insurance industry. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the National Association of Insurance Commissioners (“NAIC”). We are unable to predict whether any of these laws and regulations will be adopted, the form in which any such laws and regulations would be adopted or the effect, if any, these developments would have on our operations and financial condition.
 
TRIA requires that commercial property and casualty insurance companies offer coverage (with certain exceptions, such as with respect to commercial auto liability) for certain acts of terrorism and has established a federal assistance program through the end of 2007 to help such insurers cover claims for terrorism-related losses. TRIA covers certified acts of terrorism, and the U.S. Secretary of the Treasury must declare the act to be a “certified act of terrorism” for it to be covered under this federal program. In addition, no certified act of terrorism will be covered by the TRIA program unless the aggregate insurance industry losses from the act exceed certain substantial threshold amounts ($50 million for acts of terrorism occurring from April 1, 2006 to December 31, 2006 and $100 million for acts of terrorism occurring in 2007). Under the TRIA program, the federal government covers 90% (85% for acts of terrorism occurring in 2007) of the losses from covered certified acts of terrorism on commercial risks in the United States only, in excess of a deductible amount. This deductible is calculated as a percentage of an affiliated insurance group’s prior year premiums on commercial lines policies (with certain exceptions, such as commercial auto policies) covering risks in the United States. This deductible amount is 17.5% of such premiums for losses occurring in 2006 and 20% of such premiums for losses occurring in 2007.
 
Producer Disclosures
 
The NAIC has proposed for adoption by the various states model legislation that would require insurance producers who either receive compensation from their customers in connection with the placement of insurance or represent their customers in connection with the placement of insurance to make certain disclosures to their customers regarding the compensation they receive from insurers and, in some cases, to obtain their customers’ documented acknowledgment of such compensation. A few states have already adopted some form of this compensation disclosure legislation, and more states may do so in the future. However, we do not believe that the enactment of this sort of legislation will have any significant effect on the business of RIC, TIC and WIC.
 
State Insurance Department Examinations
 
As part of their regulatory oversight process, state insurance departments conduct periodic detailed examinations of the financial reporting of insurance companies domiciled in their states, generally once every three to five years. Examinations are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the NAIC. An examination of the financial condition of RIC was made as of December 31, 2003 by the New York Insurance Department. An examination of the financial condition of TIC was made as of the same date by the New Hampshire Insurance Department. Neither RIC nor TIC has been the subject of an examination of its market conduct, which would involve review by an insurance department of its compliance with laws governing marketing, underwriting, claims-handling and other aspects of its insurance business.
 
 
Guaranty Fund Assessments
 
In most, if not all, of the states where we are licensed to transact business, there is a requirement that property and casualty insurers doing business within each such state participate in a guaranty association, which is organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by the member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets.
 
Property and casualty insurance company insolvencies or failures may result in additional guaranty association assessments to RIC, TIC and WIC at some future date. At this time, we are unable to determine the impact, if any, such assessments may have on the financial position of RIC, TIC and WIC or results of their operations. RIC, TIC and WIC, as of June 30, 2006, have established or will establish for guaranty fund assessments with respect to insurers that are currently subject to insolvency proceedings.
 
Residual Market Programs
 
Many of the states in which RIC, TIC and WIC conduct business or intend to conduct business, require that all licensed insurers participate in a program to provide workers’ compensation insurance to those employers that have not or cannot procure coverage from an insurer on a voluntary basis. The level of required participation in such residual market programs of insurers, such as RIC, TIC and WIC, is generally determined by calculating the volume of the voluntarily issued business in that state of the particular insurer as a percentage of all voluntarily issued business in that state by all insurers. The resulting factor is the proportion of the premiums the insurer must accept as a percentage of all premiums for policies issued in that state’s residual market program.
 
Insurance companies generally can fulfill their residual market obligations by either issuing insurance policies to employers assigned to them, or participating in a reinsurance pool where the results of all policies provided through the pool are shared by the participating companies. Currently, RIC, TIC and WIC satisfy their residual market obligations by participating in various reinsurance pools. Neither company issues policies to employers assigned to them except to the extent that we act as a servicing carrier for the Georgia Workers’ Compensation Insurance Plan (the “Georgia Plan”).
 
Coverage provided by the Georgia Plan is offered through servicing carriers, which issue policies to employers assigned to them by the Georgia Plan’s administrator. Polices issued pursuant to the Georgia Plan are 100% reinsured by the National Workers’ Compensation Reinsurance Pool (the “Pool”). which is funded by assessments on insurers which write workers’ compensation insurance in the states which participate in the Pool. As of January 1, 2006, TIC is one of four servicing carriers for the Georgia Plan. Servicing carrier contracts in Georgia and other states which participate in the Pool are awarded based on a competitive bidding process. As a servicing carrier, we receive fee income for our services but do not retain any underwriting risk, which is fully reinsured by the Pool. We plan to pursue other servicing carrier contracts in other states which participate in the Pool.
 
 
Second Injury Funds
 
A number of states operate trust funds that reimburse insurers and employers for claims paid to injured employees for aggravation of prior conditions or injuries. These state-managed trust funds are funded through assessments against insurers and self-insurers providing workers’ compensation coverage in a particular state. Neither RIC nor TIC have received any recoveries from such state-managed trust funds. The aggregate amount of cash paid by RIC and TIC for assessments to state-managed trust funds for the years ended December 31, 2005, 2004 and 2003 was approximately $633,000, $200,000 and $141,000, respectively.
 
Dividend Limitations
 
RIC’s ability to pay dividends is subject to restrictions contained in the insurance laws and related regulations of New York. Under New York law, RIC may only pay dividends out of statutory earned surplus. In addition, the New York Insurance Department must approve any dividend declared or paid by RIC that, together with all dividends declared or distributed by RIC during the preceding 12 months, exceeds the lesser of (1) 10% of RIC’s policyholders’ surplus as shown on its latest statutory financial statement filed with the New York Insurance Department or (2) its adjusted net investment income during this period. At March 31, 2006, RIC could not pay a dividend without prior approval of the New York Insurance Department.
 
TIC’s ability to pay dividends is subject to restrictions contained in the insurance laws and related regulations of New Hampshire. Under New Hampshire law, TIC may not pay a dividend unless (1) it provides the New Hampshire Insurance Department with 30 days’ prior notice of the payment in the case of any extraordinary dividend and 15 days’ prior notice of the payment of any other dividend, and (2) within the prescribed notice period, the Department has either approved the payment or has not disapproved it or ordered it not to be paid. An extraordinary dividend is a dividend that, together with all dividends or distributions made within the preceding 12 months, exceeds 10% of an insurer’s policyholders’ surplus as of the preceding December 31. At March 31, 2006, a dividend of approximately $5.0 million or more by TIC would constitute an extraordinary dividend.
 
WIC’s ability to pay dividends is subject to restrictions contained in the insurance laws and related regulations of Delaware. Under Delaware law, WIC may not, without the approval of the Delaware Insurance Department, pay a dividend from any source other than WIC’s earned surplus. In addition, the Delaware Insurance Department must approve any dividend declared or paid by WIC that, together with all dividends declared or distributed by WIC in the preceding 12 months, exceeds the greater of (1) 10% of the WIC’s surplus as regards policyholders as of the 31 st day of December next preceding; or (2) WIC’s net income, not including realized capital gains or pro rata distributions of any class of WIC’s own securities, for the 12 month period ending the 31 st day of December next preceding.
 
Risk-Based Capital Regulations
 
The New York, New Hampshire and Delaware Insurance Departments require domestic property and casualty insurers, such as RIC, TIC and WIC, to report their risk-based capital based on a formula developed and adopted by the NAIC that attempts to measure statutory capital and surplus needs based on the risks in the insurer’s mix of products and investment portfolio. The formula is designed to allow insurance regulators to identify weakly-capitalized companies. Under the formula, a company determines its “risk-based capital” by taking into account certain risks related to the insurer’s assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer’s liabilities (including underwriting risks related to the nature and experience of its insurance business). At December 31, 2005, RIC’s, TIC’s and WIC’s risk-based capital level exceeded the minimum level that would trigger regulatory attention .
 
 
Insurance Regulatory Information System Ratios
 
The Insurance Regulatory Information System, or IRIS, was developed by the NAIC and is intended primarily to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies twelve industry ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer’s business.
 
As of December 31, 2005, RIC had two IRIS ratios outside the usual range, as set forth in the following table:
 
Ratio
 
Usual Range
 
Actual Results
 
Reason for Unusual Results
Change in net writings
 
33-33
 
48
 
Successful integration of renewal rights acquisitions
Gross agents balances to policyholders surplus
 
40
 
42
 
Participation in Intercompany Reinsurance Agreement

As of December 31, 2005, TIC had four IRIS ratios outside the usual range as set forth in the following table:

Ratio
 
Usual Range
 
Actual Results
 
Reason for Unusual Results
Change in net writings
 
33-33
 
53
 
Successful integration of renewal rights acquisition
Investment yield
 
6.5 - 3
 
2.8
 
Investment in RIC constitutes 16% of cash and invested assets
Gross change in policyholders’ surplus
 
50-10
 
60
 
Receipt of capital contribution of $9.2 million, net income of $6.5 million and increases in unrealized gains of $2.1 million and deferred tax amount of $1.5 million
Net change in policyholder’s surplus
 
25-10
 
31
 
Receipt of capital contribution of $9.2 million, net income of $6.5 million and increases in unrealized gains of $2.1 million and deferred tax amount of $1.5 million

Statutory Accounting Principles
 
Statutory accounting principles, or SAP, are a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s surplus to policyholders. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.
 
GAAP is concerned with a company’s solvency, but is also concerned with other financial measurements, principally income and cash flows. Accordingly, GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP as compared to SAP.
 
Statutory accounting practices established by the NAIC and adopted in part by the New York, New Hampshire and Delaware insurance regulators, determine, among other things, the amount of statutory surplus and statutory net income of RIC, TIC and WIC and thus determine, in part, the amount of funds that are available to pay dividends to AmTrust.
 
Privacy Regulations
 
In 1999, Congress enacted the Gramm-Leach-Bliley Act, which, among other things, protects consumers from the unauthorized dissemination of certain personal information. Subsequently, a majority of states have implemented additional regulations to address privacy issues. These laws and regulations apply to all financial institutions, including insurance and finance companies, and require us to maintain appropriate policies and procedures for managing and protecting certain personal information of our policyholders and to fully disclose our privacy practices to our policyholders. We may also be exposed to future privacy laws and regulations, which could impose additional costs and impact our results of operations or financial condition. In 2000, the NAIC adopted the Privacy of Consumer Financial and Health Information Model Regulation, which assisted states in promulgating regulations to comply with the Gramm-Leach-Bliley Act. In 2002, to further facilitate the implementation of the Gramm-Leach-Bliley Act, the NAIC adopted the Standards for Safeguarding Customer Information Model Regulation. Several states have now adopted similar provisions regarding the safeguarding of policyholder information. We have established policies and procedures to comply with the Gramm-Leach-Bliley related privacy requirements.
 
 
Credit for Reinsurance
 
In addition to regulatory requirements imposed by the jurisdictions in which they are licensed, reinsurers’ business operations are affected by regulatory requirements in various states of the United States governing “credit for reinsurance” that are imposed on their ceding companies. In general, a ceding company obtaining reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction or state in which the ceding company files statutory financial statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company’s liability for unearned premiums (which are that portion of premiums written which applies to the unexpired portion of the policy period), loss reserves and loss expense reserves ceded to the reinsurer. AII, which reinsures risks of RIC, TIC and WIC, is not licensed, accredited or approved in any state in the United States. The great majority of states, however, permit a credit to statutory surplus resulting from reinsurance obtained from a non-licensed or non-accredited reinsurer to be recognized to the extent that the reinsurer provides a letter of credit, trust fund or other acceptable security arrangement.
 
Ireland
 
AIU is a non-life insurance company organized under the laws of Ireland. AIU is subject to the regulation and supervision of the Irish Financial Services Regulatory Authority (the “Irish Financial Regulator”) pursuant to the Insurance Acts 1908 to 2000 (the “Insurance Acts”) and the European Communities (Non Life Framework) Regulations 1994 (as amended) (the “Regulations”). AIU has been authorized to undertake various classes of non-life insurance business.
 
Conditions of Insurance Authorization
 
As is customary, when AIU was authorized to write various classes of non-life insurance business, in addition to the obligations imposed on AIU by the Insurance Acts and Regulations, the authorization was granted subject to certain conditions. Those conditions include:
 
 
·
AIU’s adherence to its revised business plan submitted to the Irish Financial Regulator;
 
 
·
AIU may not make any dividend payments or intercompany loans without the Irish Financial Regulator’s prior approval;
 
 
·
AIU must adhere to the regulatory policy regarding inward reinsurance;
 
 
·
AIU must maintain a minimum solvency margin equal to 150% of the solvency margin laid down by the Insurance Acts and Regulations (and a solvency ratio of 40%); and
 
 
·
AIU must file quarterly management accounts with the Irish Financial Regulator.
 
 
 
In July 2005, the Irish Financial Regulator indicated that certain business written by AIU falls within Classes 1 and 2, Accident and Health, and Class 18, Assistance, for which AIU did not have authorization. The Irish Financial Regulator also inquired as to AIU’s internal control processes, compliance procedures, risk management and corporate governance. The Irish Financial Regulator further required that AIU appoint Irish resident General, Underwriting and Claims Managers, and complete certain internal and third-party operational risk audits. In response to these regulatory inquiries and requirements, AIU provided the Irish Financial Regulator with extensive information regarding its control processes, compliance procedures, risk management and corporate governance. In addition, AIU appointed an Irish resident general manager and acting claims manager, as well as an Irish resident compliance officer, completed and filed with the Irish Financial Regulator the required internal audit of its Dublin operations, and received the financial regulator’s approval for the auditors selected to conduct the required operational audit, which should be completed by the end of the second quarter of 2006. In December 2005, the Irish Financial Regulator granted AIU authorization to write insurance falling within Classes 1, 2 and 18, which classes include AIU’s payment protection and auto roadside assistance coverage plans.
 
European Passport
 
Ireland is a member state of the European Union (the “EU”), which is comprised of each of Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and the United Kingdom. Ireland has adopted the EU’s Third Non-Life Insurance Directive (92/49/EEC) into Irish law. This directive introduced a single system for the authorization and financial supervision of non-life insurance companies by their home member states Under this system, AIU (as an Irish authorized insurance company) is permitted to carry on insurance business in any other member state of the European Economic Area (“EEA”) by way of freedom to provide services, on the basis that it has notified the Irish Financial Regulator of its intention to do so and subject to complying with such conditions as may be laid down by the regulator of the jurisdiction in which the insurance activities are carried out for reasons of the “general good.” The EEA was established by a 1992 agreement between the EU, Iceland, Liechtenstein and Norway, the effect of which is to create an area of free movement of goods and services (including insurance services) within the EU and these countries. A consequential effect of the EEA agreement is that the rules on passporting of insurance services that apply between EU member states are extended to Iceland, Liechtenstein and Norway.
 
The Third Non-Life Insurance Directive also permits AIU to carry on insurance business in any other EEA member state under the freedom of establishment clause. Utilizing this freedom, AIU intends to establish a London branch in 2006. The Irish Financial Regulator will remain responsible for the authorization and financial supervision of any London branch. In addition, any London branch must comply with the “general good” requirements of the Financial Services Authority of the United Kingdom.
 
On the basis of the foregoing, in addition to being authorized to carry on non-life insurance business in Ireland, AIU is also authorized to carry on non-life insurance business in specific classes in all other EEA member states under freedom to provide services. However, AIU is not licensed or admitted as an insurance company in any jurisdiction other than Ireland and the other EEA member states.
 
Qualifying Shareholders
 
The Insurance Acts and Regulations require that anyone acquiring or disposing of a “qualifying holding” in an insurance company (such as AIU), or anyone who proposes to decrease or increase that holding to specified levels, must first notify the Irish Financial Regulator of their intention to do so. It also requires any insurance company that becomes aware of any acquisitions or disposals of its capital involving the “specified levels” to notify the Irish Financial Regulator. The Irish Financial Regulator has three months from the date of submission of a notification within which to oppose the proposed transaction, if the Irish Financial Regulator is not satisfied as to the suitability of the acquirer “in view of the necessity to ensure sound and prudent management of the insurance undertaking.” A “qualifying holding” means a direct or indirect holding in an insurance company that represents 10% or more of the capital or of the voting rights of such company or that makes it possible to exercise a significant influence over the management of such company. The specified levels are 20%, 33% and 50%, or such other level of ownership that results in the company becoming the acquirer’s subsidiary.
 
 
Any person having a shareholding of 10% or more of the issued share capital in AmTrust would be considered to have an indirect holding in AIU at or over the 10% limit. Any change that resulted in the indirect acquisition or disposal of a shareholding of greater than or equal to 10% in the share capital of AIU, or a change that resulted in an increase to or decrease below one of the specified levels, would need to be cleared with the Irish Financial Regulator prior to the transaction. The Irish Financial Regulator’s approval would be required if any person were to acquire a shareholding equal to or in excess of 10% of our outstanding common stock or in excess of one of the specified levels.
 
AIU is required, at such times as may be specified by the Irish Financial Regulator, and at least once a year, to notify the Irish Financial Regulator of the names of stockholders possessing qualifying holdings and the size of such holdings.
 
Transactions with Related Companies
 
The Insurance Acts and Regulations provide that prior to entering into any transaction of a material nature with a related company or companies (including, in particular, the provision of loans to and acceptance of loans from a related company or companies), AIU must submit to the Irish Financial Regulator a draft of any contract or agreement that is to be entered into by AIU in relation to the transaction. In addition, AIU must notify the Irish Financial Regulator on an annual basis with respect to transactions with related companies in excess of €10,000.
 
Financial Requirements
 
AIU is required to maintain technical reserves calculated in accordance with the Insurance Acts and Regulations. Assets representing its technical reserves are required to cover AIU’s calculated underwriting liabilities.
 
AIU is obligated to prepare annual accounts (comprising balance sheet, profit and loss account and notes) in accordance with the provisions of the European Communities (Insurance Undertakings: Accounts) Regulations, 1996 (the “Insurance Accounts Regulations”). The accounts must be filed with the Irish Financial Regulator and with the Registrar of Companies in Ireland. Accounts in the same format must also be filed on a quarterly basis.
 
Additionally, AIU is required to establish and maintain an adequate solvency margin and a minimum guarantee fund, both of which must be free from all foreseeable liabilities. Currently, the solvency margin is calculated as the higher amount of a percentage of the annual amount of premiums (premiums basis) or the average burden of claims for the last three years (claims basis). As noted above with respect to the conditions attaching to AIU’s authorization, AIU is required to have a solvency margin significantly in excess of the prescribed minimum.
 
 
The amount of the minimum guarantee fund which AIU is required to maintain is equal to the minimum solvency margin, which at March 31, 2006 was approximately €6.8 million. The amount of the minimum guarantee fund may never be less than €2.0 million.
 
Regulatory Guidelines
 
In addition to the Insurance Acts and Regulations, AIU is expected to comply with guidelines issued by the Irish Financial Regulator in July, 2001. The following are the most relevant guidelines:
 
 
·
All insurance companies supervised by the Irish Financial Regulator are obliged to appoint a compliance officer, who must carry out the duties and functions set forth in the guidelines;
 
 
·
All directors of insurance companies supervised by the Irish Financial Regulator are required to certify to the Irish Financial Regulator on an annual basis that the company has complied with all relevant legal and regulatory requirements throughout the year;
 
 
·
All insurance companies must adopt an appropriate asset management policy having regard to its liabilities profile;
 
 
·
All companies supervised by the Irish Financial Regulator must formulate a clear and prudent policy on the use of derivatives for all purposes and, furthermore, have controls in place to ensure that the policy is implemented;
 
 
·
Non-life companies supervised by the Irish Financial Regulator, such as AIU, are required to provide an annual actuarial opinion to the adequacy of their reserves; and
 
 
·
All insurance companies must have a reinsurance strategy approved by its board of directors that is appropriate to their risk profile and disclosed to the Irish Financial Regulator.
 
Supervision, Investigation and Intervention
 
The Insurance Acts and Regulations confer on the Irish Financial Regulator wide-ranging powers in relation to the supervision and investigation of insurers, including the following:
 
 
·
The Irish Financial Regulator has power to require an insurer to submit returns and documents to him in such form as may be prescribed by regulation and to require that they be attested by directors and officers of the insurer. The Irish Financial Regulator may also require that they be attested by independent professionals and that they be published. Additionally, the Irish Financial Regulator has a right to disclose any such returns or documents to the supervisory authorities of other EU member states;
 
 
·
The Irish Financial Regulator has power to direct that an investigation of an insurer’s affairs be carried out in order to be satisfied that the insurer is complying or has the ability to continue to comply with its obligations under the Insurance Acts and Regulations. If necessary, the Irish Financial Regulator may seek a High Court order prohibiting the free disposal of an insurer’s assets; and
 
 
·
The Irish Financial Regulator may confer certain powers on an “authorized officer” for the purpose of the Insurance Acts and Regulations. Such powers relate to, among others, insurers and other prescribed persons and may permit an authorized officer to search a premises and remove documents. An authorized officer may also be empowered to compel persons to provide information and to prepare a report on specified aspects of the business or activities of the insurer and other prescribed persons.
 
 
 
Some breaches of the Insurance Acts and Regulations may constitute criminal offences and render the persons found guilty of such offences liable to fines and/or imprisonment.
 
Certain Other Irish Law Considerations
 
As AIU is a company which is incorporated in Ireland and which carries on business in Ireland, it is subject to the laws and regulations of Ireland. Some of the applicable restrictions contained in the Irish Companies Acts, 1963 to 2005 (the “Companies Acts”) are as follows:
 
 
·
Irish company law applies capital maintenance rules. In particular, AIU is restricted to declaring dividends only out of “profits available for distribution.” Profits available for distribution are a company’s accumulated realized profits less its accumulated realized losses. Such profits may not include profits utilized either by distribution or capitalization and such losses do not include amounts previously written off in a reduction or reorganization of capital;
 
 
·
Irish law restricts a company from entering into certain types of transactions with its directors and officers by either completely prohibiting such transactions or permitting them only subject to conditions;
 
 
·
All Irish companies are obliged to file prescribed returns in the Companies Registration Office annually and on the happening of certain events such as the creation of new shares, a change in directors or the passing of certain stockholder resolutions;
 
 
·
A statutory body (known as the Office of the Director of Corporate Enforcement) has power to carry out investigations into the affairs of Irish companies in circumstances prescribed in the Companies Acts; and
 
 
·
Civil and criminal sanctions exist for breaches of the Companies Act.
 
Bermuda
 
The Insurance Act 1978 of Bermuda (the “Insurance Act”), which regulates the insurance business of AII, provides that no person shall carry on any insurance business in or from within Bermuda unless registered as an insurer under the Insurance Act by the Bermuda Monetary Authority (“BMA”), which is responsible for the day-to-day supervision of insurers. Under the Insurance Act, insurance business includes reinsurance business. The BMA, in deciding whether to grant registration, has broad discretion to act as the BMA thinks fit in the public interest. The BMA is required by the Insurance Act to determine whether the applicant is a fit and proper body to be engaged in the insurance business and, in particular, whether it has, or has available to it, adequate knowledge and expertise. The registration of an applicant as an insurer is subject to its complying with the terms of its registration and such other conditions as the BMA may impose from time to time.
 
An Insurance Advisory Committee appointed by the Bermuda Minister of Finance advises the BMA on matters connected with the discharge of the BMA’s functions and sub-committees thereof supervise and review the law and practice of insurance in Bermuda, including reviews of accounting and administrative procedures.
 
 
The Insurance Act imposes on Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements and grants to the BMA powers to supervise, investigate and intervene in the affairs of insurance companies. Certain significant aspects of the Bermuda insurance regulatory framework are set forth below.
 
Classification of Insurers
 
The Insurance Act distinguishes between insurers carrying on long-term business and insurers carrying on general business. There are four classifications of insurers carrying on general business with Class 4 insurers subject to the strictest regulation. AII is registered as a Class 3 insurer under the Insurance Act. AII is licensed to carry on long-term business. Long-term business broadly includes life insurance and disability insurance with terms in excess of five years. General business broadly includes all types of insurance that is not long-term business.
 
Cancellation of Insurer’s Registration
 
An insurer’s registration may be canceled by the BMA on certain grounds specified in the Insurance Act, including failure of the insurer to comply with its obligations under the Insurance Act or if, in the opinion of the BMA, the insurer has not been carrying on business in accordance with sound insurance principles.
 
Principal Representative
 
An insurer is required to maintain a principal office in Bermuda and to appoint and maintain a principal representative in Bermuda. For the purposes of the Insurance Act, the principal representative of AII is Michael Bott, and AII’s principal office is at the offices of the principal representative. Without a reason acceptable to the BMA, an insurer may not terminate the appointment of its principal representative, and the principal representative may not cease to act as such, unless 30 days’ notice in writing to the BMA is given of the intention to do so. It is the duty of the principal representative upon reaching the view that there is a likelihood of the insurer (for which the principal representative acts) becoming insolvent or that a reportable “event” has, to the principal representative’s knowledge, occurred or is believed to have occurred, to immediately notify the BMA and to make a report in writing to the BMA within 14 days, setting out all the particulars of the case that are available to the principal representative. Examples of such a reportable “event” include failure by the insurer to comply substantially with a condition imposed upon the insurer by the BMA relating to a solvency margin or a liquidity or other ratio. The written report must set out all the particulars of the case that are available to the principal representative.
 
Independent Approved Auditor
 
Every registered insurer must appoint an independent auditor (the “approved auditor”) who will annually audit and report on the statutory financial statements and the statutory financial return of the insurer, both of which, in the case of AII, are required to be filed annually with the BMA. The approved auditor of AII must be approved by the BMA. AII’s approved auditor is Arthur Morris & Company.
 
 
Loss Reserve Specialist
 
As a registered Class 3 insurer, AII is required to submit an opinion of an approved loss reserve specialist with its statutory financial return in respect of its loss and loss adjustment expense provisions. The loss reserve specialist, who will normally be a qualified casualty actuary, must be approved by the BMA.
 
Statutory Financial Statements
 
An insurer must prepare annual statutory financial statements. The Insurance Act prescribes rules for the preparation and substance of such statutory financial statements (which include, in statutory form, a balance sheet, an income statement, a statement of capital and surplus and notes thereto). The insurer is required to give detailed information and analyses regarding premiums, claims, reinsurance and investments. The statutory financial statements are not prepared in accordance with GAAP and are distinct from the financial statements prepared for presentation to the insurer’s stockholders under the Companies Act, which financial statements will be prepared in accordance with GAAP. AII, as a general business insurer, is required to submit the annual statutory financial statements as part of the annual statutory financial return. The statutory financial statements and the statutory financial return do not form part of the public records maintained by the BMA.
 
Annual Statutory Financial Return
 
AII is required to file with the BMA statutory financial returns no later than four months after its financial year end (unless specifically extended). The statutory financial return for an insurer includes, among other matters, a report of the approved auditor on the statutory financial statements of such insurer, the solvency certificates, the declaration of statutory ratios, the statutory financial statements themselves, and the opinion of the loss reserve specialist. The solvency certificates must be signed by the principal representative and at least two directors of the insurer who are required to certify, among other matters, whether the minimum solvency margin has been met and whether the insurer complied with the conditions attached to its certificate of registration. The approved auditor is required to state whether in his opinion it was reasonable for the directors to so certify. Where an insurer’s accounts have been audited for any purpose other than compliance with the Insurance Act, a statement to that effect must be filed with the statutory financial return.
 
Minimum Solvency Margin and Restrictions on Dividends and Distributions
 
Under the Insurance Act, the value of the general business assets of a Class 3 insurer, such as AII, must exceed the amount of its general business liabilities by an amount greater than the prescribed minimum solvency margin. AII is required, with respect to its general business, to maintain a minimum solvency margin equal to the greatest of:
 
(A)   $1.0 million;
 
(B)   20% of net premiums written up to $6.0 million plus 15% of net premiums written over $6.0 million; and
 
(C)   15% of loss and other insurance reserves.
 
AII is prohibited from declaring or paying any dividends during any financial year if it is in breach of its minimum solvency margin or minimum liquidity ratio or if the declaration or payment of such dividends would cause it to fail to meet such margin or ratio. In addition, if it has failed to meet its minimum solvency margin or minimum liquidity ratio on the last day of any financial year, AII is
 
 
prohibited, without the approval of the BMA, from declaring or paying any dividends during the next financial year.
 
AII is prohibited, without the approval of the BMA, from reducing by 15% or more its total statutory capital as set out in its previous year’s financial statements, and any application for such approval must include an affidavit stating that it will continue to meet the required margins.
 
Minimum Liquidity Ratio
 
The Insurance Act provides a minimum liquidity ratio for general business insurers. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable and reinsurance balances receivable. There are certain categories of assets which, unless specifically permitted by the BMA, do not automatically qualify as relevant assets, such as unquoted equity securities, investments in and advances to affiliates and real estate and collateral loans. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities (by interpretation, those not specifically defined).
 
Supervision, Investigation and Intervention
 
The BMA may appoint an inspector with extensive powers to investigate the affairs of an insurer if the BMA believes that an investigation is required in the interest of the insurer’s policyholders or persons who may become policyholders. In order to verify or supplement information otherwise provided to the BMA, the BMA may direct an insurer to produce documents or information relating to matters connected with the insurer’s business.
 
If it appears to the BMA that there is a risk of the insurer becoming insolvent, or that it is in breach of the Insurance Act or any conditions imposed upon its registration, the BMA may, among other things, direct the insurer (1) not to take on any new insurance business, (2) not to vary any insurance contract if the effect would be to increase the insurer’s liabilities, (3) not to make certain investments, (4) to realize certain investments, (5) to maintain in, or transfer to the custody of, a specified bank, certain assets, (6) not to declare or pay any dividends or other distributions or to restrict the making of such payments or (7) to limit its premium income.
 
Disclosure of Information
 
In addition to powers under the Insurance Act to investigate the affairs of an insurer, the BMA may require certain information from an insurer (or certain other persons) to be produced to it. Further, the BMA has been given powers to assist other regulatory authorities, including foreign insurance regulatory authorities, with their investigations involving insurance and reinsurance companies in Bermuda but subject to restrictions. For example, the BMA must be satisfied that the assistance being requested is in connection with the discharge of regulatory responsibilities of the foreign regulatory authority. Further, the BMA must consider whether to cooperate is in the public interest. The grounds for disclosure are limited and the Insurance Act provides sanctions for breach of the statutory duty of confidentiality.
 
Certain other Considerations
 
Although AII is incorporated in Bermuda, it is classified as a non-resident of Bermuda for exchange control purposes by the BMA. Pursuant to its non-resident status, AII may engage in transactions in currencies other than Bermuda dollars. Other than the restrictions outlined above in “Minimum Solvency Margin and Restrictions on Dividends and Distributions,” there are no restrictions on its ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to U.S. residents who are holders of its common stock.
 
 
Under Bermuda law, exempted companies are companies formed for the purpose of conducting business outside Bermuda from a principal place of business in Bermuda. As an “exempted” company, AII may not, without the express authorization of the Bermuda legislature or under a license or consent granted by the Minister of Finance, participate in certain business transactions, including: (i) the acquisition or holding of land in Bermuda (except that held by way of lease or tenancy agreement which is required for its business and held for a term not exceeding 50 years, or which is used to provide accommodation or recreational facilities for its officers and employees and held with the consent of the Bermuda Minister of Finance, for a term not exceeding 21 years); (ii) the taking of mortgages on land in Bermuda to secure an amount in excess of $50,000; or (iii) the carrying on of business of any kind for which it is not licensed in Bermuda, except in certain limited circumstances such as doing business with another exempted undertaking in furtherance of AII’s business carried on outside Bermuda. AII is a licensed insurer in Bermuda, and so may carry on activities from Bermuda that are related to and in support of its insurance and reinsurance business.
 
Common stock may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act 2003 of Bermuda which regulates the sale of securities in Bermuda. In addition, the BMA must approve all issuances and transfers of shares of a Bermuda exempted company.
 
MANAGEMENT
 
Directors and Executive Officers
 
The table below sets forth the names, ages and positions of our directors and executive officers:
 
Name
 
Age
 
Position(s)
Barry D. Zyskind
 
34
 
Chief Executive Officer, President and Director
Michael Karfunkel
 
63
 
Chairman of the Board of Directors
George Karfunkel
 
58
 
Director
Donald T. DeCarlo
 
67
 
Director
Abraham Gulkowitz
 
57
 
Director
Isaac M. Neuberger
 
58
 
Director
Jay J. Miller
 
73
 
Director
Max G. Caviet
 
52
 
President of AII and AIU
Michael J. Saxon
 
48
 
Chief Operating Officer
Ronald E. Pipoly, Jr.
 
39
 
Chief Financial Officer
Christopher M. Longo
 
33
 
Chief Information Officer
Eli Tisser
 
54
 
Treasurer
Stephen B. Ungar
 
43
 
General Counsel and Secretary

Barry D. Zyskind, Chief Executive Officer, President and Director of the Company. He has held senior management positions since 1998. Mr. Zyskind serves as president and a director of AmTrust Financial Group, Inc. (“AFG”), the ultimate parent company of AmTrust, TIC, RIC and WIC. Mr. Zyskind is vice president and a director at G/MK Acquisition Corp. (“G/MK”), the direct parent company of AmTrust, and currently serves as a director of American Stock Transfer & Trust Co. Prior to joining AmTrust, Mr. Zyskind was an investment banker at Janney Montgomery Scott LLC in New York. Mr. Zyskind received an M.B.A. from New York University’s Stern School of Business in 1997. Mr. Zyskind is the son-in-law of Michael Karfunkel.
 
 
Michael Karfunkel, Chairman of the Board of Directors since 1998, has been associated with American Stock Transfer & Trust Company since 1971, where he is Chairman of the Board and President. Mr. Karfunkel serves as co-chairman of the board of AFG. He also serves on the boards of directors of G/MK, TIC, RIC and WIC. Mr. Karfunkel is the brother of George Karfunkel and father-in-law of Mr. Zyskind.
 
George Karfunkel, Director since 1998, has been associated with American Stock Transfer & Trust Company since 1971, where he is Senior Vice President and a Director. Mr. Karfunkel serves as co-chairman of the board of AFG and as vice chairman of The Upstate Bank. He is president and a director of G/MK, and serves on the boards of directors of TIC, RIC and WIC. Mr. Karfunkel is the brother of Michael Karfunkel.
 
Donald T. DeCarlo, Director since 2005, is a sole practitioner attorney. From 1996 to 2004, Mr. DeCarlo practiced in the New York offices of Lord, Bissell & Brook, LLP, where he was managing partner prior to his departure. Mr. DeCarlo has been a commissioner of the New York State Insurance Fund since 1997. He is also a director of Atrium Insurance Corporation (an insurer that primarily underwrites financial guaranty insurance), Jackson National Life Insurance Co. of New York, TIC, RIC, WIC and Greater New York Mutual Insurance Company (an insurer that primarily underwrites large property coverages). From 1994 to 1996, Mr. DeCarlo was senior vice president and general counsel of all of the Travelers Group’s insurance companies. From 1973 to 1986, Mr. DeCarlo was vice president and general counsel of NCCI. Mr. DeCarlo received a B.A. from Iona College in 1960 and a J.D. from St. John’s University School of Law in 1969.
 
Abraham Gulkowitz, Director since 2005, is the senior managing principal of Brookville Capital, a hedge fund specializing in credit analysis. Mr. Gulkowitz was previously a Senior Managing Director and a member of the partners management group at Bankers Trust, before its acquisition by Deutsche Bank. His responsibilities included the analysis of economic and business issues related to leveraged financing transactions as well as mergers and acquisitions, private equity and real estate investments. Mr. Gulkowitz joined Bankers Trust in 1978 from Chase Manhattan Bank where he was responsible for financial market analysis. Previously, he was an economics research assistant to Alan Greenspan. Mr. Gulkowitz received his M.B.A. from New York University, where he also did post-graduate work in economics.
 
Isaac M. Neuberger, Director since 2005, is the senior principal of the law firm of Neuberger, Quinn, Gielen, Rubin & Gibber P.A., where he specializes in complex corporate and commercial matters, with emphasis in mergers and acquisitions and finance. Prior to starting the firm in 1989, Mr. Neuberger practiced in the firm of Melnicove, Kaufman, Weiner, Smouse & Garbis P.A. As an undergraduate, Mr. Neuberger studied at Johns Hopkins University, Loyola College and Ner Israel Rabbinical College, and he received his J.D. from the University of Maryland School of Law in 1969.
 
Jay J. Miller, Director, joined the Company in 1998 and served as its secretary (without compensation) from 1998 to 2005. Mr. Miller serves as a director of AFG and several of the Company’s subsidiaries, including TIC, RIC, WIC, AII and AIU, and is chairman of the board of Gulf USA Corporation and AmTrust Pacific Limited. He is also a director of Colvista Communications Inc., American Stock Transfer & Trust Company and Integrated Business Systems, Inc. Mr. Miller received an A.B. from Syracuse University in 1952 and a J.D. from Columbia University School of Law in 1955.
 
Max G. Caviet, President of AII and AIU, joined the Company in January 2003. Mr. Caviet serves on the boards of directors of both companies. Between 1972 and 1982, Mr. Caviet was an underwriter and team leader, specializing in engineering risks, at British Engine Insurance Company. In 1982, Mr. Caviet joined CIGNA Insurance Company of North America (UK) Ltd. as a Senior
 
 
Underwriter for Special Risks and was promoted to Engineering and Underwriting Manager. In 1990, Mr. Caviet joined Crowe Underwriting Agency Ltd. as its Engineering and Extended Warranty Underwriter. From 1994 to 2003, Mr. Caviet was Engineering and Underwriting Manager with Trenwick International Limited.
 
Michael J. Saxon, Chief Operating Officer, joined the Company in 2001. Prior to coming to AmTrust, he was chief claims officer for Credit General Insurance Company (a property and casualty insurer). In 1984, Mr. Saxon began his career at Liberty Mutual. Thereafter, Mr. Saxon joined Progressive Insurance Company, where he held successively more responsible management positions in the Claims Department over an eight-year period. Mr. Saxon received a B.S. in Finance from the University of Akron in 1983.
 
Ronald E. Pipoly, Jr., Chief Financial Officer, joined the Company in 2001. From 1993 to 2001, Mr. Pipoly served as Financial Analyst, Assistant Controller, and finally Controller at PRS Group, Inc. (a property and casualty insurance holding company) in Beachwood, Ohio. Mr. Pipoly began his career at Coopers and Lybrand, where he worked from 1988 through 1993. He received a B.S. in Accounting from the University of Akron in 1988.
 
Eli Tisser, Treasurer, joined the Company in 2000. Prior to that, Mr. Tisser was a consultant with E.T. Consulting. He also serves as treasurer of TIC, RIC, and WIC and as a director of RIC. From 1980 to 1987, Mr. Tisser served in various positions at AIG, including Comptroller. In 1987, Mr. Tisser became Chief Financial Officer of Galaxy Insurance Company (a property and casualty insurer), where he also served on the board of directors. From 1989 through 1997, Mr. Tisser was Financial Vice President and a director at Interboro Mutual Insurance Company. Between 1987 and 1992, Mr. Tisser was a lecturer of statutory accounting at the College of Insurance. Mr. Tisser received a B.S. in Accounting from Brooklyn College in 1973.
 
Christopher M. Longo, Chief Information Officer, joined the Company in 2001. Previous to his employment with the Company, Mr. Longo was a commercial lines underwriter and actuarial analyst with Credit General Insurance Company.
 
Stephen B. Ungar, General Counsel and Secretary, joined the Company in 2001. Mr. Ungar also serves a General Counsel and Secretary of TIC, RIC and WIC and as a director of RIC. Mr. Ungar left the company to engage in the private practice of law from 2002 to 2003, after which he rejoined the Company. From 1990 to 2001, Mr. Ungar served as Special Counsel and Managing Attorney with the State of New York Insurance Department. Between 1987 and 1990, Mr. Ungar was an associate at Hendler and Murray and Kroll and Tract in New York. Mr. Ungar received a B.A. from New York University in 1984 and a J.D., with honors, from George Washington University School of Law in 1987.
 
From 1993 to 2000, Mr. Pipoly was Controller of PRS Insurance Group, Inc. (“PRS”), as well as a director of Credit General Insurance Company (“CGIC”) and Credit General Indemnity Company (“CGIND”). From 1997 to 2000, Mr. Saxon was Chief Claims Officer of CGIC, as well as a director of PRS, CGIC and CGIND. In January 2001, PRS entered Chapter 11 proceedings in U.S. Bankruptcy Court for the District of Delaware. Also at that time, CGIC and CGIND were placed in liquidation proceedings before the Court of Common Pleas for Franklin County, Ohio. In connection with their positions as officers and directors of PRS, CGIC and CGIND, Messrs. Pipoly and Saxon were named as defendants in four lawsuits against all the directors and certain officers of these entities, each alleging breaches of fiduciary duty. Three of these cases were settled out of court in February 2004, April 2005 and September 2005, and the other was dismissed in April 2004.
 
 
Board of Directors
 
We have seven directors presently serving on our board, at least three of whom are independent as that term is defined by the National Association of Securities Dealers Inc. All directors hold office until the next annual meeting of stockholders or until their successors have been duly elected and qualified.
 
Board Committees
 
Our board of directors has established an executive committee, a compensation committee and a nominating and corporate governance committee. Our board of directors has also established an audit committee, which is comprised entirely of independent directors.
 
Audit Committee
 
The audit committee assists our board of directors in its oversight of:
 
 
·
the integrity of our financial statements;
 
 
·
the independent auditor’s qualifications and independence; and
 
 
·
the performance of our independent auditors.
 
The audit committee also has direct responsibility for the appointment, compensation, retention and oversight of the work of our independent auditors, BDO Seidman, LLP. In addition, approval of the audit committee is required prior to our entering into any related-party transaction.
 
The members of our audit committee are Mr. Gulkowitz, who is also the chairman of the committee, Mr. DeCarlo and Mr. Neuberger. Mr. Gulkowitz is our audit committee financial expert.
 
Compensation Committee
 
The compensation committee reviews and determines, together with the other directors if directed by the board of directors, the compensation of our executive officers and reviews and approves employment and severance agreements with our executive officers. The compensation committee also administers the issuance of stock options and other awards under our 2005 Equity Incentive Plan and establishes and reviews policies relating to the compensation and benefits of our employees and consultants.
 
The members of the compensation committee are Mr. DeCarlo, who is also the chairman of the committee, Mr. Miller and Michael Karfunkel. Michael Karfunkel will not participate in any matters relating to Mr. Zyskind’s compensation.
 
Executive Committee
 
The executive committee’s responsibilities include:
 
 
·
exercising the authority of the board of directors with respect to matters requiring action between meetings of the board of directors; and
 
 
·
deciding issues from time to time delegated by the board of directors.
 
 

The members of our executive committee are Mr. Zyskind, who is also the chairman of the committee, George Karfunkel and Michael Karfunkel.
 
Nominating and Corporate Governance Committee
 
The nominating and corporate governance committee:
 
 
·
identifies and nominates members of the board of directors;
 
 
·
develops and recommends to the board of directors a set of corporate governance principles applicable to us; and
 
 
·
oversees the evaluation of the board of directors and management.
 
Procedures for the consideration of director nominees recommended by stockholders have been set forth in our amended and restated bylaws.
 
The members of our nominating and corporate governance committee are Mr. Neuberger, who is also the chairman of the committee, and Mr. Miller and Michael Karfunkel.
 
Director Compensation
 
We have agreed to pay an annual retainer of $55,000 to each non-employee director other than George Karfunkel and Michael Karfunkel. In addition, each such director will receive a fee of $2,000 for each meeting of the board of directors attended in person and $1,000 for each meeting of the board of directors attended via teleconference. Each such non-employee director who chairs a committee also will receive an annual retainer of $5,000, as well as $1,000 for each meeting of such committee of the board chaired. Each such non-employee director will receive a fee of $1,000 for each meeting of a committee of the board of directors attended. We also will reimburse our directors for reasonable expenses they incur in attending board of directors or committee meetings. Pursuant to our 2005 Equity Incentive Plan, we have made an initial grant of options to purchase 12,500 shares of our common stock to each of our non-employee directors, other than George Karfunkel and Michael Karfunkel, in 2006 and an automatic annual grant 6,250 shares during each successive year. Such options will have an exercise price equal to the fair market value as of the date of the grant, will expire ten years from the date of the grant and vest over four years, commencing one year after the date of grant. George Karfunkel and Michael Karfunkel will not receive any compensation for serving on the board of directors.
 
Compensation Committee Interlocks and Insider Participation
 
The members of our compensation committee have no interlocking relationships as defined under the regulations of SEC.
 
Employment and Noncompetition Agreements
 
The following information summarizes the employment agreements for our chief executive officer and our other named executive officers who were the most highly compensated for the year ended December 31, 2005.
 
Barry D. Zyskind. Under Mr. Zyskind’s employment agreement, dated as of January 1, 2005, Mr. Zyskind has agreed to serve as our President and Chief Executive Officer. Mr. Zyskind’s term of employment under this agreement continues until December 31, 2009, at which time the employment
 
 
agreement will automatically renew for successive three year terms, unless Mr. Zyskind or the Company provides 180 days’ written notice of an intention not to renew. Mr. Zyskind receives an annual base salary in the minimum amount of $600,000, and is entitled to an annual profit bonus based on the achievement of certain financial targets, which are tied to the Company’s overall profitability, subject to a cap equal to two and one-half times his salary. We paid Mr. Zyskind a bonus of $550,000 for the year 2005. Mr. Zyskind is eligible to receive special bonuses at the discretion of the board of directors or the compensation committee. Mr. Zyskind’s salary is subject to review by the board of directors or the compensation committee annually. Mr. Zyskind is eligible to participate in any long-term incentive compensation plan established for his benefit or in any such plan established for the benefit of the senior management of the Company.
 
If Mr. Zyskind’s employment terminates due to death, his beneficiary is entitled to his salary payable for the remainder of his term of employment or one year, whichever is greater, at the rate in effect immediately before such termination, any annual or special bonus earned or awarded through the date of termination, any deferred compensation under any incentive or other deferred compensation plan, any other compensation or benefits that have vested through the date of termination or to which he may then be entitled according to the terms and conditions of each grant, plan or award and any reimbursements of expenses due him through the date of termination. If Mr. Zyskind’s employment terminates due to disability, he will be entitled to the compensation and benefits enumerated above, except that his salary shall be offset by the amount of any long-term disability insurance benefit the Company may have elected to provide for him.
 
We may terminate Mr. Zyskind’s employment for cause upon written notice to Mr. Zyskind at least 30 days prior to the intended termination, which must specify the grounds for termination. If Mr. Zyskind’s employment were terminated for cause, he would be entitled to his salary through the date of termination, any annual or special bonus earned or awarded through the date of termination, any deferred compensation under any incentive or other deferred compensation plan, any other compensation or benefits which may have vested through the date of termination or to which he then may be entitled according to the terms and conditions of each grant, plan or award and any reimbursements of expenses due him through the date of termination.
 
If we terminate Mr. Zyskind’s employment without cause or if Mr. Zyskind terminates his employment with good reason, as defined in the employment agreement, then Mr. Zyskind is entitled, in addition to the compensation and benefits specified in the paragraph above, to (i) a lump-sum payment equal to the salary payable to him for the remainder of his employment term at the rate in effect immediately before the termination, (ii) a lump-sum payment equal to the annual profit bonuses for the remainder of his term of employment (to be prorated for any partial fiscal year) equal to the greater of the average of the bonuses awarded to him during the three fiscal years preceding the fiscal year of termination or the bonus awarded to him for the fiscal year immediately preceding termination, (iii) continued participation, for the remainder of his term of employment, in all employee benefit plans or programs in which he was participating on the date of his termination; or, if such participation is prohibited, he shall be entitled to the economic equivalent of any such benefit and (iv) continued payment of 100% of the cost of health insurance through the Company’s group health plan for himself, spouse and dependent children.
 
Max G. Caviet. Under Mr. Caviet’s employment agreement, dated as of January 1, 2005, Mr. Caviet has agreed to serve as a senior executive of the Company and as President of AmTrust International Insurance, Ltd. Mr. Caviet’s term of employment under this agreement continues until December 31, 2008, at which time the employment agreement will automatically renew for successive three year terms, unless Mr. Caviet or the Company provides 180 days’ written notice of an intention not to renew. Effective January 1, 2006, Mr. Caviet will receive an annual base salary of £250,000 (approximately $433,000 at March 31, 2006). Mr. Caviet is entitled to an annual profit bonus based on the profitability of the special risk and extended warranty business written by the Company and its affiliates under the direct or indirect supervision of Mr. Caviet, which is subject to a cap equal to one and one-half times his salary. Mr. Caviet has been granted an option to purchase under the plan 62,500 shares of the Company’s common stock, subject to the terms and conditions of the 2005 Equity Incentive Plan. Mr. Caviet’s salary is subject to review by the board of directors or the compensation committee annually.
 
 
In the event of disability, the Company may terminate Mr. Caviet’s employment agreement upon five days’ written notice; however, the Company must provide Mr. Caviet permanent health insurance, which is intended to provide benefits to him in the event of termination for disability. In the event Mr. Caviet dies during his term of employment, his employment agreement will terminate on the date of death and his heirs will be entitled to receive his salary and profit bonus earned through his date of death as well as any unreimbursed expenses.
 
If we terminate Mr. Caviet’s employment agreement for gross misconduct, as defined in his employment agreement, we will not be obligated to pay any other compensation to Mr. Caviet after the date of termination.
 
If we terminate or non-renew Mr. Caviet’s employment for any reason other than gross misconduct, he will be entitled to receive (i) his salary for a period of one year from the original expiration date of the term of employment, or one year from the effective date of termination or non-renewal, whichever is greater and (ii) his profit bonus on all special risk and extended warranty business written by the Company and its affiliates under the direct or indirect supervision of Mr. Caviet written through the date of termination, through the expiration of such business, for a maximum period of five years from the date of termination.
 
If Mr. Caviet does not renew his employment agreement for the purpose of retirement, he will be entitled to his profit bonus on all special risk and extended warranty business written by the Company and its affiliates under the direct or indirect supervision of Mr. Caviet written through the date of retirement, through the expiration of such business, for a maximum period of five years from the date of retirement.
 
Michael J. Saxon. Under Mr. Saxon’s employment agreement, dated as of June 1, 2005, Mr. Saxon has agreed to serve as President of AmTrust North America, Inc (“ANA”). Mr. Saxon’s term of employment under this agreement continues until May 31, 2008, at which time the employment agreement will automatically renew for successive one year terms, unless Mr. Saxon or ANA provides 90 days’ written notice of an intention not to renew. Effective January 1, 2006, Mr. Saxon will receive an annual base salary in the amount of $325,000. Mr. Saxon is entitled to an annual profit bonus, based on the profitability of the Company, subject to a cap in the amount of his then current salary. Mr. Saxon has been granted an option to purchase under the plan 343,750 shares of the Company’s common stock, subject to the terms and conditions of the 2005 Equity Incentive Plan. Mr. Saxon’s salary is subject to review by the board of directors or the compensation committee annually, commencing on June 1, 2007.
 
In the event of disability, ANA may terminate his employment agreement upon five days’ written notice; however, Mr. Saxon will be entitled to receive his salary and any unreimbursed expenses through the disability termination date and for three months thereafter. In the event Mr. Saxon dies during his term of employment, his employment agreement shall terminate on the date of death and his heirs shall be entitled to receive his salary and any unreimbursed expenses through the disability termination date and for three months thereafter.
 
 
We may terminate Mr. Saxon’s employment agreement at any time for cause as defined in the Employment Agreement.
 
Ronald E. Pipoly, Jr. Under Mr. Pipoly’s employment agreement, dated as of December 1, 2005, Mr. Pipoly has agreed to serve as an officer of ANA. Mr. Pipoly’s term of employment under this agreement continues until May 31, 2008, at which time the employment agreement will automatically renew for successive one year terms, unless Mr. Pipoly or ANA provides 90 days’ written notice of an intention not to renew.   Effective January 1, 2006, Mr. Pipoly will receive an annual base salary in the amount of $225,000. Provided that the Company meets certain targets set forth in its business plan for the given time period, Mr. Pipoly is entitled to an annual bonus, which shall be no less than 30% of his then current salary. Mr. Pipoly has been granted an option to purchase under the plan 343,750 shares of the Company’s common stock, subject to the terms and conditions of the 2005 Equity Incentive Plan. Mr. Pipoly’s salary is subject to review by the board of directors or the compensation committee annually, commencing on June 1, 2007.
 
In the event of disability, ANA may terminate his employment agreement upon five days’ written notice; however, Mr. Pipoly will be entitled to receive his salary and any unreimbursed expenses through the disability termination date and for three months thereafter. In the event Mr. Pipoly dies during his term of employment, his employment agreement shall terminate on the date of death and his heirs will be entitled to receive his salary and any unreimbursed expenses through the disability termination date.
 
We may terminate Mr. Pipoly’s employment agreement at any time for cause as defined in the employment agreement.
 
Christopher M. Longo. Under Mr. Longo’s employment agreement, dated as of June 1, 2005, Mr. Longo has agreed to serve as an officer of ANA. Mr. Longo’s term of employment under this agreement continues until May 31, 2008, at which time the employment agreement will automatically renew for successive one year terms, unless Mr. Longo or ANA provides 90 days’ written notice of an intention not to renew. Effective January 1, 2006, Mr. Longo will receive an annual base salary in the amount of $175,000, which shall be increased to $200,000 effective January 1, 2007 and $250,000 effective January 1, 2008. Mr. Longo is entitled to an annual profit bonus based on the profitability of the Company capped at one and one-half times Mr. Longo’s then current salary. Mr. Longo has been granted an option to purchase under the plan 343,750 shares of the Company’s common stock, subject to the terms and conditions of the 2005 Equity Incentive Plan. Mr. Longo’s salary is subject to review by the board of directors or the compensation committee annually, commencing on June 1, 2007.
 
In the event of disability, ANA may terminate his employment agreement upon five days’ written notice; however, Mr. Longo will be entitled to receive his salary and any unreimbursed expenses through the disability termination date and for three months thereafter. In the event Mr. Longo dies during his term of employment, his employment agreement will terminate on the date of death and his heirs will be entitled to receive his salary and any unreimbursed expenses through the disability termination date and for three months thereafter.
 
We may terminate Mr. Longo’s employment agreement at any time for cause as defined in the employment agreement.
 
2005 Equity Incentive Plan
 
The purpose of our 2005 equity incentive plan is to attract and retain directors, officers, other key employees and consultants and to provide them with appropriate incentives and rewards for superior performance. A summary of the provisions of the 2005 incentive plan is set forth below. Our board of directors and stockholders approved the 2005 incentive plan in December 2005.
 
 
Types of Awards and Eligibility. Our 2005 incentive plan permits awards in the form of incentive stock options, as defined in Section 422(b) of the Internal Revenue Code of 1986, non-qualified stock options and restricted shares of common stock. The aggregate number of shares of common stock for which awards may be issued under the 2005 incentive plan may not exceed 5,994,300 shares, and the aggregate number of shares of common stock for which restricted stock awards may be issued under the 2005 incentive plan may not exceed 1,998,100 shares, subject to the authority of our board to adjust this amount in the event of a merger, consolidation, reorganization, stock dividend, stock split, combination of shares, recapitalization or similar transaction affecting our common stock. Present and future officers, directors, employees and consultants are eligible to participate in the 2005 incentive plan.
 
Our board of directors approved grants of options to our officers and directors to purchase an aggregate of 1,175,000 shares of our common stock effective on the date of the closing of the private placement, including grants of options to purchase 62,500 shares to Mr. Caviet, 343,750 shares to Mr. Saxon, 343,750 shares to Mr. Pipoly, 343,750 shares to Mr. Longo and 31,250 shares to Mr. Ungar. These options will have an exercise price of $7.00, a 10-year term and will be subject to pro rata vesting over a four-year period after the date of grant with the initial vesting to occur on the first anniversary of the date of the grant.
 
Administration. The 2005 incentive plan will be administered either by its own committee of two or more directors elected by the board from time to time or by our compensation committee. Subject to the terms of the 2005 incentive plan, the committee may select participants to receive awards, determine the types of awards and terms and conditions of awards, and interpret provisions of the 2005 incentive plan.
 
Stock Options. Non-qualified stock options (“NSOs”) granted under the 2005 incentive plan will have an exercise price determined by the committee, which may not be less than 85% of the fair market value of our common stock on the date of grant; in the absence of such a determination by the committee, the exercise price shall be not less than 100% of the fair market value of our common stock on the date of grant. Incentive stock options (“ISOs”) granted under the 2005 incentive plan will have an exercise price determined by the committee, which may not be less than 100% of the fair market value of our common stock on the date of grant. However, any ISOs granted to holders of more than 10% of our voting stock will have an exercise price of not less than 110% of the fair value of our common stock on the date of grant. Both NSO and ISO grants are exercisable, subject to vesting requirements determined by the committee, for periods of up to ten years from the date of grant, except for any ISO grants to holders of more than 10% of our voting stock, which will have exercise periods limited to a maximum of five years. Stock options generally expire three months after the cessation of an optionee’s service as an employee. However, in the case of an optionee’s death or disability, the unexercised portion of a stock option remains exercisable for up to one year after the optionee’s death or disability. Stock options granted under the 2005 incentive plan are not transferable, except by will, the laws of descent and distribution or pursuant to a qualified domestic relations order. Generally, for as long as a stock option is subject to vesting, there is a risk of forfeiture if the individual leaves our employment prior to full vesting of the award.
 
Restricted Stock Awards. A restricted stock award is the grant or sale of common stock with restrictions on transferability, and subject to vesting as determined by the committee. Restricted stock awards under the 2005 incentive plan may be made by the committee to any participant without additional consideration. For as long as an award of restricted stock is subject to vesting, there is a risk of forfeiture if the individual leaves our employment prior to full vesting of the award. Restrictions may lapse separately or in combination at relevant times, such as after a specified period of employment or the satisfaction of pre-established criteria, in installments or otherwise, all as the compensation committee may determine. Except to the extent provided otherwise under the award agreement relating to the restricted stock award, a participant awarded restricted stock will have all of the rights of a stockholder, including, without limitation, the right to vote and the right to receive dividends. Restricted stock awards under the 2005 incentive plan cannot be transferred except as agreed by the committee, and in accordance with applicable U.S. federal and state securities laws.
 
 
Amendment or Termination. While our board of directors may terminate or amend the 2005 incentive plan at any time, no amendment may adversely impair the rights of any participant with respect to outstanding awards without consent of that participant. In addition, an amendment will be contingent upon approval of our stockholders to the extent required by law or if such amendment materially increases the benefits accruing to participants, increases the maximum number of shares which may be issued under the 2005 incentive plan (except for permissible adjustments provided therein) or materially modifies the requirements as to eligibility for participation in the 2005 incentive plan or the exercise of an option. Unless terminated earlier, the 2005 incentive plan will terminate in 2015, but will continue to govern unexpired awards.
 
Change of Control. At the discretion of the committee at the time of award, agreements for option and restricted stock awards may contain provisions providing for the acceleration of the options or restricted stock upon a change of control of our company.
 
Cashouts. In the event of an extraordinary dividend or other distribution, merger, reorganization or other extraordinary corporate transaction, the committee may make provision for a cash payment or for the substitution or exchange of any or all outstanding awards or the cash, securities or property deliverable to the holder of any or all outstanding awards based upon the distribution or consideration payable to holders of common stock upon such an event. However, with respect to any ISO no such adjustment may be made that would cause the 2005 incentive plan to violate § 422 of the Internal Revenue Code of 1986.
 
EXECUTIVE COMPENSATION
 
The following table sets forth information about the compensation of our Chief Executive Officer and each of the next four most highly compensated executive officers during the years ended December 31, 2005, 2004 and 2003.
 
Summary Compensation Table (1)

 
Name and Principal Position
 
 
Year
 
 
Salary(1)
 
 
Bonus
 
Other Annual
Compensation(1)
 
Total
Compensation
 
Barry Zyskind,
   
2005
 
$
600,000
   
550,000
   
—
 
$
1,150,000
 
Chief Executive Officer
   
2004
 
$
600,000
   
—
   
—
 
$
600,000
 
     
2003
 
$
500,000
   
—
   
—
 
$
500,000
 
Michael J. Saxon,
   
2005
 
$
250,000
   
205,000
   
—
 
$
455,000
 
Chief Operating Officer
   
2004
 
$
233,333
 
$
119,765
   
—
 
$
353,098
 
     
2003
 
$
200,000
 
$
50,000
   
—
 
$
250,000
 
Ronald Pipoly,
   
2005
 
$
175,000
 
$
205,000
   
—
 
$
380,000
 
Chief Financial Officer
   
2004
 
$
164,583
 
$
119,765
   
—
 
$
284,348
 
     
2003
 
$
126,000
 
$
40,000
   
—
 
$
166,000
 
 
 
 
 
Name and Principal Position
 
 
Year
 
 
Salary(1)
 
 
Bonus
 
Other Annual
Compensation(1)
 
Total
Compensation
 
Christopher Longo,
   
2005
 
$
109,000
 
$
205,000
   
—
 
$
314,000
 
Chief Information Officer
   
2004
 
$
87,499
 
$
119,765
   
—
 
$
207,264
 
     
2003
 
$
68,333
 
$
35,000
   
—
 
$
103,333
 
Max Caviet
   
2005
 
$
331,762(2
)
$
400,000(2)(3
)
 
—
 
$
731,762
 
President of AIU
   
2004
 
$
336,672(2
)
$
233,500(2
)
 
—
 
$
569,839
 
   
2003
 
$
297,260(2
)
$
55,180(2
)
 
—
 
$
352,440
 
                                 
(1)
Perquisites and other personal benefits paid to each named executive officer in each instance did not, in the aggregate, equal or exceed the lesser of either $50,000 or 10% of the total annual salary and bonus set forth in the columns entitled “Salary” and “Bonus” for each officer and, accordingly, are omitted from the table as permitted by the rules of the Securities and Exchange Commission.
 
(2)
Salary paid in British pounds, but converted to U.S. dollars using the spot market currency exchange rate in effect in New York City on December 31, 2003 which was $1.78 to £1.00 on December 31, 2004, $1.92 to £1.00, and on December 31, 2005, $1.72 to £1.00.
 
(3)
Estimate of amount to be paid.
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
We describe below certain transactions we have entered into with parties that are related to our Company. We believe that each of the transactions described below was on terms no less favorable to us than we could have obtained from unrelated parties.
 
 
·
New Gulf Holdings, Inc. (“NGH”), the holder of all the outstanding shares of our preferred stock (prior to the exchange of common stock for preferred stock) agreed to be paid a reduced dividend for the year 2005 equal to $1.2 million, which represents a reduction of $3.6 million. All the stock of NGH is owned indirectly by George Karfunkel and Michael Karfunkel. In February 2006, the Company exchanged 10,285,714 shares of common stock, par value $0.01 per share, for all of the outstanding shares of preferred stock.
 
 
·
Our transfer agent, American Stock Transfer & Trust Company (“AST”), is controlled by George Karfunkel and Michael Karfunkel. Pursuant to an agreement between AmTrust and AST, AST receives a fee equal to $1,000 per month.
 
·
In 2005 Barry Karfunkel, Vice President of Marketing and Sales for AMT Service Corp., a subsidiary of the Company, earned $125,000 in salary.  Barry Karfunkel is the son of Michael Karfunkel and the brother-in-law of Barry D. Zyskind.
 
 
·
In June 2002, we entered into a lease for approximately 9,000 square feet of office space at 59 Maiden Lane in downtown Manhattan from 59 Maiden Lane Associates, LLC, which is owned by George Karfunkel and Michael Karfunkel. We pay annual rent of approximately $308,000 for this space. The lease expires in August 2008.
 
 
·
In December 2002, we acquired 100% of the common stock of AmTrust Pacific Limited, a New Zealand real estate operating company, from NGH in exchange for 1,000 shares of our preferred stock. In 2005, all the real estate holdings for AmTrust Pacific Limited were sold and the net proceeds (consideration received less repayment of the outstanding mortgage notes and transaction costs) were placed in our investment portfolio.
 
 
·
Diversified Construction Management, LLC (“Diversified”) currently provides construction management and general contractor services for the renovation project at Rock Run South, ANA’s new corporate headquarters in the Cleveland, Ohio area. The work includes demolition of the existing approximately 35,000 sq. ft. interior space, reworking of electrical power and back-up generator, completion of a new data center, including raised platform floor and battery back up system with cooling, installation of new restrooms on lower floor, new lighting, ceiling, floors, and wall finishes and reworking of existing offices. The estimate for this project was approximately $750,000. The project started in October 2005 and is expected to be completed shortly. As of May 15, 2006, payments totaling $615,425 have been made to Diversified. Robert A. Saxon, Jr., principal of Diversified, is the brother of Michael J. Saxon, our chief operating officer.
 
 
 
 
·
In June 2002, Michael Karfunkel, George Karfunkel and their wives provided personal guaranties to JPMorgan Chase in connection with its extension of credit to AII in the form of the issuance of letters of credit on behalf of AII to RIC and TIC. The highest aggregate amount of indebtedness covered by these guaranties at any time was $8.5 million. These letters of credit were terminated, and the guaranties released, in December 2005. Neither the Karfunkels nor their spouses received any payment or other consideration in connection with the provision of these guaranties.
 
 
·
In December 2004, NGH made an interest free loan to AmTrust in the amount of $13.0 million. The Company repaid the loan, without interest, in July 2005.
 
 
·
AST is in the business of providing transfer agent and registrar services to public and private corporations. In the event that a stockholder of an AST client requests that AST issue a replacement stock certificate for a lost or missing certificate, AST generally requires that the stockholder represent that he or she is the owner of the shares and to provide a lost instrument bond, which protects AST from loss in the event that the person requesting the replacement certificate is not in fact the owner. Between 2001 and 2004 RIC issued lost instrument bonds to AST on behalf of stockholders seeking replacement certificates. RIC charged the stockholder a premium in the amount of 2% of the value of the shares. As is typical, RIC paid AST an administrative fee of 1% for administering the lost instrument bonds. RIC paid AST pursuant to this arrangement an aggregate of $0.7 million in 2001, $0.8 million in 2002, $0.9 million in 2003 and $1.1 million in 2004. In 2004, Travelers Casualty & Surety replaced RIC as the surety. We receive a 10% commission on the premiums retained by Travelers, which commissions aggregated approximately $97,000 in 2004 and $72,000 in 2005.
 
 
·
From time to time, the Company made short term advances and paid certain operating expenses on behalf of AFG, AWIG, Inc. and its subsidiaries, which, at the time of such advances or payments, were controlled by Michael Karfunkel and George Karfunkel. The maximum amount outstanding at any time under these arrangements totaled $5.7 million. The advances and payments were fully repaid on or before December 31, 2005 with interest at rates averaging 9.0% per annum.
 
 
·
In February 2006, we sold an aggregate of 25,568,000 shares of our common stock for an aggregate offering price of $178,976,000. The Hod Foundation, a charitable foundation controlled by Michael Karfunkel, our Chairman of the Board, purchased 669,643 shares of our common stock for a purchase price of $4,687,501 and the Chesed Foundation of America, a charitable foundation controlled by George Karfunkel, one of our directors, purchased 401,786 shares of our common stock for a purchase price of $2,812,502.
 
 

These shares were sold pursuant to an exemption from registration provided under Section 4(2) of the Securities Act.
 
We have adopted a policy that requires all modifications to the foregoing transaction and any future related transactions to be approved by our audit committee.
 
PRINCIPAL SHAREHOLDERS
 
The following table sets forth certain information with respect to the beneficial ownership of our equity securities as of June 9, 2006 by:
 
 
·
each security holder known by us to be the beneficial owner of more than 5% of the Company’s outstanding securities;
 
 
·
each of our directors;
 
 
·
each of our executive officers; and
 
 
·
all directors and executive officers as a group.
 
Unless otherwise stated, the address for all the persons listed below is: 59 Maiden Lane, 6th Floor, New York, New York 10038.
 
Name and Address
of Beneficial Owner
 
Amount and
Nature of
Beneficial Ownership(1)
 
Percent of Outstanding Shares
 
Barry Zyskind
   
24,089,286 (1
)
 
40.2
%
George Karfunkel
   
34,375,000 (1)(3)(5
)
 
57.0
%
Michael Karfunkel
   
34,375,000 (1)(2)(3)(4
)
 
57.0
%
Donald T. DeCarlo
   
10,000 (6
)
 
*
 
Abraham Gulkowitz
   
(6
)
 
—
 
Isaac M. Neuberger
   
(6
)
 
—
 
Jay J. Miller
   
(6
)
 
—
 
Max G. Caviet
   
(6
)
 
—
 
Michael J. Saxon
   
(6
)
 
—
 
Ronald E. Pipoly, Jr.
   
(6
)
 
—
 
Christopher M. Longo
   
(6
)
 
—
 
Eli Tisser
   
(6
)
 
—
 
Stephen B. Ungar
   
(6
)
 
—
 
G/MK Acquisition Corp
   
24,089,286
   
40.2
%
New Gulf Holdings, Inc
   
10,285,714
   
17.2
%
All executive officers and directors as a group (13) persons)
   
34,385,000
   
57
%
               
*
less than one percent.
 
 
 
(1)
Messrs. M. Karfunkel, G. Karfunkel and Zyskind directly or indirectly own approximately 37.5%, 37.5% and 25.0% of AFG (the ultimate parent of AmTrust), respectively, and each is a director of AFG. AFG owns 100% of the issued and outstanding stock of G/MK. Each of Messrs. M. Karfunkel, G. Karfunkel and Zyskind is a director of G/MK, and G/MK owns 24,089,286 shares of our common stock. Each of Messrs. M. Karfunkel, G. Karfunkel and Zyskind share voting and investment power with respect to the shares owned by G/MK.

(2)
The Hod Foundation, a charitable foundation controlled by Mr. M. Karfunkel, owns 669,643 shares of common stock. Mr. M. Karfunkel does not have a beneficial interest in the shares owned by Hod Foundation and, therefore, Mr. M. Karfunkel disclaims beneficial ownership of these shares of common stock.

(3)
Messrs. M. Karfunkel and G. Karfunkel each own 50.0% of Gulf USA Corporation (“Gulf”), which owns 100% of NGH. NGH owns 10,285,714 shares of common stock (after giving effect to the exchange of an aggregate of 10,285,714 shares of common stock for all the issued and outstanding shares of our preferred stock). Messrs. Karfunkel and Karfunkel share voting and investment power with respect to the shares owned by NGH.

(4)
Substantially all of the shares beneficially owned by Michael Karfunkel through G/MK Acquisition Corp. are owned by the Michael Karfunkel 2005 Grantor Retained Annuity Trust, of which Michael Karfunkel and his wife are sole trustees.

(5)
The Chesed Foundation of America, a charitable foundation controlled by Mr. G. Karfunkel, owns 401,786 shares of common stock. Mr. G. Karfunkel does not have a beneficial interest in the shares owned by Chesed Foundation of America and, therefore, Mr. G. Karfunkel disclaims beneficial ownership of these shares of common stock.

(6)
Granted options that are not exercisable within 60 days from the date hereof.
 
 
 
SELLING STOCKHOLDERS  
 
This prospectus covers shares sold in our private placement of common stock in February 2006 (the “February Private Placement”). Some of the shares s old in the February Private Placement were purchased by Friedman, Billings, Ramsey & Co., Inc., or FBR, as initial purchaser, and offered by it to qualified institutional buyers and non-U.S. persons in transactions that are exempt from registration under the Securities Act. The remaining shar es sold in the February Private Placement were sold directly to “accredited investors” as defined by Rule 501(a) under the Securities Act pursuant to an exemption from registration under the Securities Act. FBR acted as sole placement agent in the February Private Placement.

The following table sets forth information about the number of shares owned by each selling stockholder that may be offered from time to time under this prospectus. Certain selling stockholders may be deemed to be “underwriters” as defined in the Securities Act. Any profits realized by any such selling stockholders may be deemed to be underwriting commissions.

The table below has been prepared based upon the information furnished to us by the selling stockholders as of June 9, 2006. The selling stockholders identified below may have sold, transferred or otherwise disposed of some or all of their shares since the date on which the information in the following table is presented in transactions exempt from or not subject to the registration requirements of the Securities Act. Information concerning the selling stockholders may change from time to time and, if necessary, we will supplement this prospectus accordingly. We cannot give an estimate as to the amount of shares of common stock that will be held by the selling stockholders upon termination of this offering because the selling stockholders may offer some or all of their common stock under the offering contemplated by this prospectus.

We have been advised that as noted below in the footnotes to the table, one of the selling stockholders is a broker-dealer and certain of the selling stockholders are affiliates of broker-dealers. We have been advised that each of such selling stockholders purchased our common stock in the ordinary course of business, not for resale, and that none of such selling stockholders had, at the time of purchase, any agreements or understandings, directly or indirectly, with any person to distribute the common stock. If the shares are to be sold by transferees of the selling stockholders under this prospectus,  and the shares are not sold pursuant to the Plan of Distribution in the registration statement, then we must file a post-effective amendment to the registration statement that includes this prospectus or a prospectus supplement, amending the list of selling stockholders to include the transferee as a selling stockholder. Upon being notified by a selling stockholder that it intends to use an agent or principal to sell their shares, a post-effective amendment to the registration statement that includes this prospectus will be filed, naming the agent or principal as an underwriter and disclosing the compensation arrangement. All selling stockholders are subject to Rule 105 of Regulation M and are precluded from engaging in any short selling activities prior to effectiveness and for as long as they are participants in the offering.
 
To our knowledge, none of the selling stockholders has, or has had within the past three years, any position, office or other material relationship with us or any of our predecessors or affiliates, other than their ownership of shares described below.
 
 
Selling Stockholders
 
Shares of Common Stock Beneficially Owned Prior to Offering
 
Shares of Common Stock to be Sold
 
Beneficial Ownership After Offering if All Shares are Sold
 
Percent of Class Owned After Offering if All Shares are Sold
Leslie Lee Alexander  
 
343,000
 
343,000
 
—
 
—
Gerald J. Allen (1)
 
5,500
 
5,500
 
—
 
—
Gerald Allen Charles Schwab & Co Inc.
Cust IRA Rollover (1)
 
620
 
620
 
—
 
—
Allied Funding, Inc. (2)
 
28,600
 
28,600
 
—
 
—
Roland J. Anderson & Fanny M. Anderson (1)
 
1,490
 
1,490
 
—
 
—
T. Anderson & J. Anderson TTEE Anderson Family Rev. TR U/A DTD 9/23/02 (1)   2500   2500  
—
 
—
Apple Ridge Partners LP (3)
 
35,000
 
35,000
 
—
 
—
Maureen K. Aukerman Charles Schwab & Co. Inc. Cust IRA Rollover (1)
 
1,220
 
1,220
 
—
 
—
David Baker
 
35,000
 
35,000
 
—
 
—
Bamberger Ceccarelli Dicicco Sanders URSE TTEE Orthopedic Associates of Southwestern Ohio~Profit Sharing Plan (1)
 
4,570
 
4,570
 
—
 
—
John A Barron(1)
 
570
 
570
 
—
 
—
Baxer-Hazel Funeral Home (1)
 
610
 
610
 
—
 
—
Michael Baum
 
2,000
 
2,000
 
—
 
—
Bay Pond Partners L.P. (Bermuda) (4)
 
180,000
 
180,000
 
—
 
—
Bay Pond Partners, L.P. (4)
 
550,000
 
550,000
 
—
 
—
Bear Stearns Securities Corp Cust., Steven Emerson Roth IRA
 
47,200
 
47,200
 
—
 
—
Bear Stearns Securities Corp. Cust., Steven Emerson Roth R/O IRA II
 
300,000
 
300,000
 
—
 
—
Elaine S Berman SEP-IRA (1)
 
830
 
830
 
—
 
—
Elaine S. Berman Trust~DTD 6/30/95~Elaine S. Berman TTEE U/A DTD 6/30/95  (1)
 
860
 
860
 
—
 
—
Elaine S. Berman Benificiary Inherited IRA (1)
 
870
 
870
 
—
 
—
Bermuda Partners. L.P. (5)
 
84,500
 
84,500
 
—
 
—
Diana M Best Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
3,260
 
3,260
 
—
 
—
Vivan D. Bischel TTEE Vivan D. Bishel Rev Liv Trust U/A DTD 11/18/1993 (1)
 
1,790
 
1,790
 
—
 
—
Monte R. Black: Eubel Brady (1)
 
6,370
 
6,370
 
—
 
—
Blueprint Partners LP (6)
 
20,000
 
20,000
 
—
 
—
Howard C. Bluver
 
3,500
 
3,500
 
—
 
—
Boston Partners All Cap Value Fund (7)
 
4,740
 
4,740
 
—
 
—
Bow River Capital Fund, LP (8)
 
71,428
 
71,428
 
—
 
—
Bow River Capital Fund II, LP (8)
 
71,429
 
71,429
 
—
 
—
Michael Glenn Bradshaw Charles Schwab & Co. Inc. Cust. IRA Rollover (1)
 
2,900
 
2,900
 
—
 
—
Bridgette Helms IRA
 
1,250
 
1,250
 
—
 
-
 
 
 
Selling Stockholders
 
Shares of Common Stock Beneficially Owned Prior to Offering
 
Shares of Common Stock to be Sold
 
Beneficial Ownership After Offering if All Shares are Sold
 
Percent of Class Owned After Offering if All Shares are Sold
Brunswick Master Pension Trust (7)
 
41,800
 
41,800
 
—
 
—
Burlingame Equity Investors (Offshore), Ltd (9)
 
65,262
 
65,262
 
—
 
—
Burlingame Equity Investors, LP (9)
 
157,637
 
157,637
 
—
 
—
Burlingame Equity Investors II, LP (9)
 
20,001
 
20,001
 
—
 
—
Canyon Value Realization Fund (Cayman) Ltd. (10)
 
17,500
 
17,500
 
—
 
—
Canyon Value Realization Fund, L.P. (11)
 
7,500
 
7,500
 
—
 
—
Pamela S Carroll (1)
 
490
 
490
 
—
 
—
Caspan Capital Partners, L.P. (12)
 
23,000
 
23,000
 
—
 
—
Douglas S. Carson
 
500
 
500
 
—
 
—
CastleRock Fund Ltd (5)
 
406,400
 
406,400
 
—
 
—
CastleRock Partners, L.P. (13)
 
618,800
 
618,800
 
—
 
—
CastleRock Partners II LP (13)
 
51,800
 
51,800
 
—
 
—
Catalyst Master Fund Ltd (14) #
 
34,711
 
34,711
 
—
 
—
Chamberlain Investments Ltd. (14)
 
38,152
 
38,152
 
—
 
—
Chesed Foundation of America (15)  
401,786
 
401,786
 
—
 
—
Cindu International Pension Fund (7)
 
5,800
 
5,800
 
—
 
—
Coleman Family Revocable Trust (16)
 
6,250
 
6,250
 
—
 
—
Corsair Capital Investors Ltd (17)
 
80,000
 
80,000
 
—
 
—
Corsair Capital Partners LP (17)
 
566,857
 
566,857
 
—
 
—
Corsair Capital Partners 100, L.P. (17)
 
26,286
 
26,286
 
—
 
—
Corsair Long Short International Ltd (17)
 
12,572
 
12,572
 
—
 
—
Corsair Select, L.P.  (17) #
 
140,000
 
140,000
 
—
 
—
Paul R. Crnkovi Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
1,020
 
1,020
 
—
 
—
Cumber International S.A. (18)
 
280,153
 
280,153
 
—
 
—
Cumberland Benchmarked Partners L.P. (18)
 
626,459
 
626,459
 
—
 
—
Cumberland Long Partners LP (18)
 
2,414
 
2,414
 
—
 
—
Cumberland Partners (18)
 
924,363
 
924,363
 
—
 
—
DB Alternative Trading (19) #
 
1,200,000
 
1,200,000
 
—
 
—
DCM Limited (14)
 
4,858
 
4,858
 
—
 
—
Donald T. DeCarlo  
10,000
 
10,000
 
—
 
—
Deephaven Event Trading Ltd (Cayman Islands) (20)
 
1,005,000
 
1,005,000
 
—
 
—
Deephaven Growth Opportunities Trading Ltd. (20)
 
397,500
 
397,500
 
—
 
—
Paul Thomas Dell'Isola
 
40,000
 
40,000
 
—
 
—
Demetrios Diavatis #
 
7,500
 
7,500
 
—
 
—
Drake Associates LP (21)
 
50,000
 
50,000
 
—
 
—
EBS Partners, LP Primary Account A Partnership (1)
 
63,710
 
63,710
 
—
 
—
EJF Crossover Master Fund LP (22)
 
200,000
 
200,000
 
—
 
—
Electrical Workers Pension Fund Part A (7)
 
3,295
 
3,295
 
—
 
—
Electrical Workers Pension Fund Part B (7)
 
2,810
 
2,810
 
—
 
—
Electrical Workers Pension Fund Part C (7)
 
1,250
 
1,250
 
—
 
—
Emerson Electric Company (23)
 
65,000
 
65,000
 
—
 
—
Endurance Fund (23)
 
44,700
 
44,700
 
—
 
—
Thomas L. Falvey & Mary Leslie Falvey (1)
 
2,220
 
2,220
 
—
 
—
Far West Capital Partners LP (23)
 
638,345
 
638,345
 
—
 
—
 

 
 
Selling Stockholders
 
Shares of Common Stock Beneficially Owned Prior to Offering
 
Shares of Common Stock to be Sold
 
Beneficial Ownership After Offering if All Shares are Sold
 
Percent of Class Owned After Offering if All Shares are Sold
Thomas A. Faries #
 
1,100
 
1,110
 
—
 
—
Fabrizio J. Francis #
 
5,000
 
5,000
 
—
 
—
Farvane Limited (14)
 
3,156
 
3,156
 
—
 
—
Harold A. Ferguson Jr. & Lois Maire Ferguson (1)
 
1,490
 
1,490
 
—
 
—
First Financial Fund, Inc. (4)
 
350,000
 
350,000
 
—
 
—
Fleet Maritime, Inc (14)
 
77,208
 
30,504
 
—
 
—
Fort Mason Master, L.P. (24)
 
670,799
 
670,799
 
—
 
—
Fort Mason Partners, L.P. (24)
 
43,501
 
43,501
 
—
 
—
Found-Mor LLC(1)
 
7,110
 
7,110
 
—
 
—
Friedman, Billings, Ramsey Group, Inc. (25) #
 
2,556,002
 
2,556,002
 
—
 
—
Susan J. Gagnon TTEE Susan J. Gagon Revocable Lining Trust UA DTD 8/30/95 (1)
 
3,760
 
3,760
 
—
 
—
George Weiss Associates Inc. Profit Sharing Plan (26)
 
165,000
 
165,000
 
—
 
—
William I Gharst TTEE Jonell L. Gharst Rev Liv Trust OTO 3/18/1997 (1)
 
4,250
 
4,250
 
 
—
 
 
—
GMI Master Retirement Trust (7)
 
71,500
 
71,500
 
—
 
—
Carl William Goeckel Charles Schwab & Co Inc. Cust IRA (1)
 
3,840
 
3,840
 
—
 
—
James R. Goldstein (1)
 
810
 
810
 
—
 
—
David Greer
 
40,000
 
40,000
 
—
 
—
Jeffrey M. Grieco~Revocable Living Trust DTD 7/19/2001~Jeffrey M.
Grieco, TTEE (1)
 
1,290
 
1,290
 
—
 
—
Yvonne A. Grieco TTEE Trust UA
DTD 07/19/2001 (1)
 
1,210
 
1,210
 
—
 
—
Martin J. Grunder, Jr. Charles Schwab & Co Inc. Cust IRA Rollover(1)
 
670
 
670
 
—
 
—
Carmine Guerro Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
3,010
 
3,010
 
—
 
—
C. Guerro & W. Guerro TTEE Carmine & Wendy Guerro Living Trust U/A DTD 7/31/2000
 
1,530
 
1,530
 
—
 
—
Samantha Gumenick
 
14,200
 
14,200
 
—
 
—
Paul S. Guthrie & Cynthia J. Guthrie (1)
 
2,180
 
2,180
 
—
 
—
Stephen L. Harrison IRA
 
1,250
 
1,250
 
—
 
—
Bradley J. Hausfeld Charles Schwab & Co Inc. IRA Rollover (1)
 
880
 
880
 
—
 
—
Thomas L. Hausfeld Charles Schwab & Co Inc. IRA Rollover (1)
 
560
 
560
 
—
 
—
Thomas L. Hausfeld TTEE Auto Disposal Systems Inc. 401(k) DTD 1/1/95 All Cap Value A/C (1)   970   970    
—
 
—
Peter Helms IRA
 
1,250
 
1,250
 
—
 
—
Highbridge Event Driven/Relative Value Fund, LP (27)
 
159,525
 
159,525
 
—
 
—
Highbridge Event Driven/Relative Value Fund, Ltd. (27)
 
1,277,975
 
1,277,975
 
—
 
—
HFR HE Platinum Master Trust (18)
 
62,784
 
62,784
 
—
 
—
HFR HE Systematic Master Trust (5)
 
238,500
 
238,500
 
—
 
—
Highbridge Int'l LLC (27)
 
1,062,500
 
1,062,500
 
—
 
—
George W. Hicks (1)
 
1,220
 
1,220
 
—
 
—
Nosrat Makky Hillman (1)
 
660
 
660
 
—
 
—
 
 
 
Selling Stockholders
 
Shares of Common Stock Beneficially Owned Prior to Offering
 
Shares of Common Stock to be Sold
 
Beneficial Ownership After Offering if All Shares are Sold
 
Percent of Class Owned After Offering if All Shares are Sold
Nosrat M. Hillman Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
860
 
860
 
—
 
—
Hod Foundation (28)   669,643   669,643  
—
 
—
Thomas Holton TTEE Marjorie G. Kasch Irrevocable Trust U/A/ DTD 03/21/1980 (1)
 
990
 
990
 
—
 
—
Michael A. Houser & H. Stephen Wargo (1)
 
390
 
390
 
—
 
—
Stephen L. Hopf & Cynthia Hopf (1)
 
890
 
890
 
—
 
—
HSBC Guyerzeller Trust Co., as trustee for The Green Forest Trust (14)
 
28,020
 
28,020
 
—
 
—
Jane Hughes TTEE Giacomo Irrevocable Trust U/A/ DTD 11/30/00 (1)
 
5,710
 
5,710
 
—
 
—
Zachary Huke
 
5,000
 
5,000
 
—
 
—
Gregory Hull (1)
 
470
 
470
 
—
 
—
Gregory Hull Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
670
 
670
 
—
 
—
Victoria Peslak Hyman
 
57,000
 
57,000
 
—
 
—
Edward & Jill Im
 
3,125
 
3,125
 
—
 
—
IOU Limited Partnership (29)
 
165,000
 
165,000
 
—
 
—
Ironworkers District Council of New England Pension (7)
 
6,400
 
6,400
 
—
 
—
Eileen M. Jackson Designated Beneficiary Plan (1)
 
1,830
 
1,830
 
—
 
—
Lawrence K. Jackson Charles Schwab & Co Inc. Cust IRA Contributory (1)
 
450
 
450
 
—
 
—
Lawrence K. Jackson Designated Beneficiary Plan (1)
 
2,310
 
2,310
 
—
 
—
Johnson Revocable Living Trust  (30)
 
10,000
 
10,000
 
—
 
—
Andrew Frank Jose
 
17,857
 
17,857
 
—
 
—
Ann C. Karter (1)
 
11,430
 
11,430
 
—
 
—
Sonja K. Kasch TTEE Sonja K. Kasch Trust U/A/ DTD 10/26/2004 Kasch TTEE (1)
 
1,520
 
1,520
 
—
 
—
Stanley J. Katz Charles Schwab & Co Inc. Cust IRA Contributory (1)
 
620
 
620
 
—
 
—
Joseph C. Kavanagh
 
5,000
 
5,000
 
—
 
—
Kings Road Investments Ltd (31)
 
714,300
 
714,300
 
—
 
—
Anthony L. Kremer~ Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
1,460
 
1,460
 
—
 
—
Anthony L. Kremer TTEE Anthony L. Kremer Revocable Living Trust
U/A DTD 1/27/1998 (1)
 
1,250
 
1,250
 
—
 
—
Mary Ellen Kremer TTEE Mary Ellen Kremer U/A/ DTD 01/27/1998 (1)
 
1,500
 
1,500
 
—
 
—
John C. Kunesh & Sarah L. Kunesh (1)
 
1,210
 
1,210
 
—
 
—
Michael T. Kunesh TTEE Trust Agreement U/A/ DTD 02/10/1995 (1)
 
2,470
 
2,470
 
—
 
—



Selling Stockholders
 
Shares of Common Stock Beneficially Owned Prior to Offering
 
Shares of Common Stock to be Sold
 
Beneficial Ownership After Offering if All Shares are Sold
 
Percent of Class Owned After Offering if All Shares are Sold
David J Kunkel TTEE Bridge Technologies, LLC DBA FBO Timothy Jon Beach (1)
 
730
 
730
 
 
—
 
 
—
Raymond W. Lane (1)
 
2,450
 
2,450
 
—
 
—
Kathryn A. Leeper TTEE Kathryn Ann Leeper Trust U/A DTD 06/29/95 (1)
 
780
 
780
 
—
 
—
James T. Lehner Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
2,670
 
2,670
 
—
 
—
Christine F. Lindeman Thomas Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
1,340
 
1,340
 
 
—
 
 
—
Christine F. Lindeman Thomas Revocable Trust UA DTD 08/22/1991 (1)
 
3,870
 
3,870
 
—
 
—
Michael Lipson & Marilyn E. Lipson (1)
 
410
 
410
 
—
 
—
Longview Partners B LP (18)
 
217,300
 
217,300
 
—
 
—
Robert Lowry IRA (1)
 
460
 
460
 
—
 
—
Robert W. Lowry (1)
 
2,630
 
2,630
 
—
 
—
Sharon A. Lowry~IRA~Robert W.
Lowry, POA (1)
 
2,210
 
2,210
 
—
 
—
Loyola University Employee's Retirement Plan Trust (7)
 
16,000
 
16,000
 
—
 
—
Loyola University of Chicago Endowment Fund (7)
 
16,900
 
16,900
 
—
 
—
L. Peck & D Vockell & S. Brinn & Otilia Fernandez Pediatrics~PSC 401(k) (1)
 
1,520
 
1,520
 
—
 
—
Samuel W. Lumby (1)
 
2,050
 
2,050
 
—
 
—
Michael G. Lunsford Charles Schwab & Co Cust. IRA Rollover (1)
 
910
 
910
 
—
 
—
David A. Lyons
 
28,571
 
28,571
 
—
 
—
MA Deep Event LTD (20)
 
97,500
 
97,500
 
—
 
—
Magnetar Capital Master Fund, Ltd (29)
 
571,430
 
571,430
 
—
 
—
Raj Maheshwari & Sarita Singh
 
35,700
 
35,700
 
—
 
—
Mariner Opportunities Fund, LP (32)
 
23,000
 
23,000
 
—
 
—
Darryl Marshall-Inman & Jennifer Marshall-Inman
 
3,125
 
3,125
 
—
 
—
Jean C. Marten (1)
 
410
 
410
 
—
 
—
Jean C Marten. Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
970
 
970
 
—
 
—
Michael J. Mathile~Revocable Living Trust DTD 10/03/96 (1)
 
3,010
 
3,010
 
—
 
—
Barbara B. McCarty (1)
 
940
 
940
 
—
 
—
Patrick L. McGohan & Jackie L. McGohan (1)
 
1,380
 
1,380
 
—
 
—
John O. McManus. ROTH IRA
 
27,200
 
27,200
 
—
 
—
John O. McManus. SEP IRA
 
40,800
 
40,800
 
—
 
—
Michael J. McQuiston Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
1,750
 
1,750
 
—
 
—
 
 
 
Selling Stockholders
 
Shares of Common Stock Beneficially Owned Prior to Offering
 
Shares of Common Stock to be Sold
 
Beneficial Ownership After Offering if All Shares are Sold
 
Percent of Class Owned After Offering if All Shares are Sold
Melchor Capital (33)
 
50,000
 
50,000
 
—
 
—
Metal Trades (7)
 
22,400
 
22,400
 
—
 
—
John E. Meyer
 
64,270
 
64,270
 
—
 
—
Patricia Meyer-Dorn Charles Schwab & Co Inc. Cust IRA Contributory (1)
 
5,170
 
5,170
 
—
 
—
Miami Valley Cardiologists, Inc. Profit Sharing Plan Trust~EBS Equity 100 (1)
 
13,170
 
13,170
 
—
 
—
Ann K. Miller (1)
 
9,570
 
9,570
 
—
 
—
Grace G. Miller (1)
 
960
 
960
 
—
 
—
John J. Miller (1)
 
940
 
940
 
—
 
—
Minnesota Mining and Manufacturing Company (7)
 
351,400
 
351,400
 
—
 
—
MJJ, LLC (34) #
 
140,000
 
140,000
 
—
 
—
Mutual Finances Services Fund (35)
 
1,600,000
 
1,600,000
 
—
 
—
Neuhauser Capital LLC (36) #
 
150,000
 
150,000
 
—
 
—
Peter R. Newman Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
3,460
 
3,460
 
—
 
—
Sandra E. Nischwitz (1)
 
1,730
 
1,730
 
—
 
—
Milo Noble (1)
 
7,260
 
7,260
 
—
 
—
Virginia R. O’Neil & Edward J. O’Neil (1)
 
2,130
 
2,130
 
—
 
—
Aurelia Palcher~ Charles Schwab & Co Inc. Cust Roth Contributory IRA (1)
 
1,790
 
1,790
 
—
 
—
John E. Palcher Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
740
 
740
 
—
 
—
Juan M. Palomar Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
2,150
 
2,150
 
—
 
—
Park West Investors LLC (37)
 
539,665
 
539,665
 
—
 
—
Park West Partners International, Ltd. (37)
 
112,870
 
112,870
 
—
 
—
Nayann B Pazyniak Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
460
 
460
 
—
 
—
Timothy A. Pazyniak & Charles A. Pazyniak Charles Schwab & Co. Inc. IRA Rollover (1)
 
4,020
 
4,020
 
—
 
—
Peninsula Catalyst Fund, L.P. (38)
 
408,000
 
408,000
 
—
 
—
Peninsula Catalyst QP Fund, L.P. (38)
 
192,000
 
192,000
 
—
 
—
Peninsula Fund, L.P. (38)
 
600,000
 
600,000
 
—
 
—
Jeannine E. Phlipot (1)
 
1,190
 
1,190
 
—
 
—
Ronald E. Pipoly, Sr.
 
5,000
 
5,000
 
—
 
—
Michael Polachek
 
1,250
 
1,250
 
—
 
—
Portside Growth and Opportunity Fund (39) #
 
230,000
 
230,000
 
—
 
—
Producers-Writers Guild of America (7)
 
23,400
 
23,400
 
—
 
—
Rajnikant Ramji Shah and Dilroza Rajnikant Ramji Shah
 
25,000
 
25,000
 
—
 
—
Anita L. Rankin TTEE Anita L. Rankin Revocable Trust~U/A DTD
4/28/1995 (1)
 
540
 
540
 
—
 
—
Daniel J. Roach Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
560
 
560
 
—
 
—
 
 
 
Selling Stockholders
 
Shares of Common Stock Beneficially Owned Prior to Offering
 
Shares of Common Stock to be Sold
 
Beneficial Ownership After Offering if All Shares are Sold
 
Percent of Class Owned After Offering if All Shares are Sold
Robeco US Premium Equities Fund (EUR) (7)
 
12,460
 
12,460
 
—
 
—
Robeco US Premium Equities Fund (USD) (7)
 
52,800
 
52,800
 
—
 
—
Robert G. Schiro 2001 Trust (23)
 
213,600
 
213,600
 
—
 
—
Paul J. Routh Charles Schwab & Co Inc. Cust IRA Contributory (1)
 
660
 
660
 
—
 
—
Christopher M. Ruff Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
290
 
290
 
—
 
—
Melodee Ruffo
 
980
 
980
 
—
 
—
Dolores H. Russ TTEE Dolores H. Russ Trust DTD 4/20/2000 (1)
 
17,770
 
17,770
 
—
 
—
David L. Roer(1)
 
330
 
330
 
—
 
-
Jennifer A. Roer UTA Charles Schwab & Co. Inc. IRA (1)   510   510  
—
 
—
David Ross TTEE The David Russ Trust U/A DTD 11/04/2000 (1)
 
1,730
 
1,730
 
—
 
—
Savannah International Longshoremen's Assoc Employers Pension Trust (7)
 
20,500
 
20,500
 
—
 
—
Martha S. Senkiw TTEE Martha S. Senliw Revocable Living Trust U/A/ DTD 11/02/1998 (1)
 
690
 
690
 
—
 
—
Peter D. Senkiw~TTEE Peter D. Senkiw Revocable Living Trust U/A/ DTD 11/02/1998 (1)
 
700
 
700
 
—
 
—
Elizabeth Sexworth IRA
 
625
 
625
 
—
 
—
Jack Scherer & L. Sherer TTEE Jack R. Sherer Revocable Living Trust
UAD 4/3/1997 (1)
 
2,220
 
2,220
 
—
 
—
Schoenfield & Schoenfield TTEE Angler Construction Company~401(k) Profit Sharing Plan (1)
 
460
 
460
 
—
 
—
Sisters of St. Joseph Carondelet (7)
 
8,600
 
8,600
 
—
 
—
David Slyman Jr.(1)
 
340
 
340
 
—
 
—
Jacqueline Slyman (1)
 
2,500
 
2,500
 
—
 
—
Sphinx Long/Short Equity Fund SPC (18)
 
54,952
 
54,952
 
—
 
—
Peter Nicholas Stathis
 
14,000
 
14,000
 
—
 
—
Steamfitters (7)
 
6,000
 
6,000
 
—
 
—
Steamfitters Pension (7)
 
8,200
 
8,200
 
—
 
—
Kevin Stein
 
3,500
 
3,500
 
—
 
—
Stratford Partners LP (40)
 
50,000
 
50,000
 
—
 
—
Robert N. Sturwold Designated Beneficiary Plan (1)
 
910
 
910
 
—
 
—
Summer Street Cumberland Investors LLC (18)
 
92,109
 
92,109
 
—
 
—
Susan Schiro & Peter Manus Foundation (23)
 
10,500
 
10,500
 
—
 
—
Michael J. Suttman (1)
 
880
 
880
 
—
 
—
 
 
 
Selling Stockholders
 
Shares of Common Stock Beneficially Owned Prior to Offering
 
Shares of Common Stock to be Sold
 
Beneficial Ownership After Offering if All Shares are Sold
 
Percent of Class Owned After Offering if All Shares are Sold
Steven K. Suttman Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
900
 
900
 
—
 
—
N. Tabrah & A. Altman TTEE Obstetrics & Gynecology Inc. Profit Sharing Plan U/A/ DTD 10/1/1980~FBO S. Reddy (1)
 
710
 
710
 
—
 
—
Michelle L. Tagliamonte Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
930
 
930
 
—
 
—
The Catalyst Strategic Event Master Fund Ltd (15)
 
13,895
 
13,895
 
—
 
—
Gregory J. Thomas TTEE Trust U/A DTD 08/22/91  (1)
 
770
 
770
 
—
 
—
William M. Thorton & Carla D. Thornton (1)
 
2,140
 
2,140
 
—
 
—
Gregory J. Thomas SEP IRA C/O TK Harris Commercial (1)
 
550
 
550
 
—
 
—
Tivoli Partners LP (41)
 
71,430
 
71,430
 
—
 
—
TNM Investments LTD (1)
 
450
 
450
 
—
 
—
Town of Darien Employee Pension (7)
 
6,885
 
6,885
 
—
 
—
Town of Darien Police Pension (7)
 
5,945
 
5,945
 
—
 
—
United Capital Management (42)
 
35,715
 
35,715
 
—
 
—
University of Richmond Endowment Fund (7)
 
20,600
 
20,600
 
—
 
—
University of Southern California Endowment Fund (7)
 
46,200
 
46,200
 
—
 
—
Upnorth Investments, Ltd. Trust (1)
 
19,000
 
19,000
 
—
 
—
Verizon (7)
 
248,215
 
248,215
 
—
 
—
Verizon VEBA (7)
 
54,200
 
54,200
 
—
 
—
Philip H. Wagner TTEE Trust U/A Philip H. Wagner Revocable Trust DTD 11/01/2000 (1)
 
23,250
 
23,250
 
—
 
—
P. Wagner TTEE Philip H. Wagner Trust by~Eloise P. Wagner 12/06/1993 FBO P. Wagner (1)
 
390
 
390
 
—
 
—
Charles T. Walsh TTEE The Charles T. Walsh Trust U/A/ DTD 12/06/2000 (1)
 
3,590
 
3,590
 
—
 
—
John M. Walsh, Jr. Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
1,390
 
1,390
 
—
 
—
Maureen D. Weaver Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
770
 
770
 
—
 
—
Allison D. Weiss Irrevocable Trust DTD May 12, 1989 (43)
 
70,000
 
70,000
 
—
 
—
Michael J. Wenzler (1)
 
460
 
460
 
—
 
—
Wilbur L. Brown & Evilina A. Brown All Cap Value (1)
 
3,820
 
3,820
 
—
 
—
 
 
 
Selling Stockholders
 
Shares of Common Stock Beneficially Owned Prior to Offering
 
Shares of Common Stock to be Sold
 
Beneficial Ownership After Offering if All Shares are Sold
 
Percent of Class Owned After Offering if All Shares are Sold
Wildlife Conservation Society (7)
 
11,600
 
11,600
 
—
 
—
Brian Wilmovsky SEP IRA
 
1,875
 
1,875
 
—
 
—
Leo K. Wingate & Katherine H. Wingate
 
830
 
830
 
—
 
—
Joseph Wood & Rosemary Wood (1)
 
1,220
 
1,220
 
—
 
—
Gary M. Youra Charles Schwab & Co Inc. Cust IRA Rollover (1)
 
2,960
 
2,960
 
—
 
—
 
                           
*
Less than one percent
#
Broker-dealer Affiliate

(1)
We have been advised by the selling stockholder that each of Eubel Brady and Suttman Asset Management, Inc. (“EBS”) have voting and investment power over the shares of common stock. However, the selling stockholder is not precluded from directly exercising voting or dispositive authority over the shares common stock. EBS’ Investment Policy Committee sets investment policy and guidelines. The Research Group acts as the portfolio manager, determining individual security selections for client accounts. The individuals on these committees are: Mark E. Brady (IPC, RG), Ronald L. Bubel (IPC, RG), Robert J. Suttman II (IPC), Bernard J. Hollgreive (IPC, RG), William E. Hazel (IPC), Paul D. Crichioo (IPC, RG), Kenneth E. Leist (IPC, RG) and Aaron Hillman, Research Analyst (RG).
 
(2)
We have been advised by the selling stockholder that Ken Perry has voting and dispositive power over the shares of common stock.
 
(3)
We have been advised by the selling stockholder that Jay Spellman has voting and dispositive power over the shares of common stock.
 
(4)
We have been advised by the selling stockholder that Wellington Management Company, LLP, as investment advisor to the selling stockholder, has voting and dispositive power over the shares of common stock.
 
(5)
We have been advised by the selling stockholder that CastleRock Asset Management, Inc., as investment advisor to the selling stockholder, has voting and dispositive power over the shares of common stock.
 
(6)
We have been advised by the selling stockholder that Raj Iduani, as Manager of the selling stockholder, has voting and dispositive power over the shares of common stock.
 
(7)
We have been advised by the selling stockholder that Boston Partners Asset Management, LLC, acting in its capacity as investment adviser, has voting and dispositive power over the shares of common stock.
 
(8)
We have been advised by the selling stockholder that Bernard Darre, Blair Richardson and Eric Wolt have voting and dispositive power over the shares of common stock.
 
 

(9)
We have been advised by the selling stockholder that Burlingame Asset Management, LLC, as general partner and investment manager of the selling stockholder, has voting and dispositive power over the shares of common stock.
 
(10)
We have been advised by the selling stockholder that Canyon Capital Advisor LLC is its investment advisor. The managing partners of the investment advisor are Joshua S. Friedman, Mitchell R. Julis and K. Robert Turner. Joshua S. Friedman, Mitchell R. Julis and K. Robert Turner own all of the ordinary shares of selling stockholder and have voting and dispositive power over the shares of common stock.
 
(11)
We have been advised by the selling stockholders that Canpartners Investments III, L.P. and Canyon Capital Advisors LLC are the controlling entities of the selling stockholder. The general partner of the selling stockholder is Canpartners Investments III, L.P. and the general partner of Canpartners Investments III, L.P. is Canyon Capital Advisors LLC. The managing partners of Canyon Capital Advisors LLC are Joshua S. Friedman, Mitchell R. Julis and K. Robert Turner.
 
(12)
We have been advised by the selling stockholder that Mariner Investment Group Inc. is the investment manager. Charles Howe, as president of the investment manager, has voting and dispositive power over the shares of common stock.
 
(13)
We have been advised by the selling stockholder that CastleRock Management LLC, as general partner and investment advisor to the selling stockholder, has voting and dispositive power over the shares of common stock.
 
(14)
We have been advised by the selling stockholder that Frank Gallagher and Peter Drippe have voting and dispositive power over the shares of common stock. Frank Gallagher and Peter Drippe disclaim beneficial ownership over the shares of common stock.
 
(15)
We have been advised by the selling stockholder that George Karfunkel has voting and dispositive power over the shares of common stock.
 
(16)
We have been advised by the selling stockholder that Ron Coleman and Michelle Coleman, as the trustees of the selling stockholder, have voting and dispositive power over the shares of common stock.
 
(17)
We have been advised by the selling stockholder that Jay Petscheck and Steven Major have voting and dispositive power over the shares of common stock.  
 
(18)
We have been advised by the selling stockholder that Cumberland Associates acts as its investment manager. The investment manager has voting and dispositive control over the shares of common stock. The principals of the investment manager are Bruce Wilcox, Andrew Wallach and Brad Gendell. The investment manager, Bruce Wilcox, Andrew Wallach and Brad Gendell disclaim beneficial ownership of the shares of common stock.
 
(19)
We have been advised by the selling stockholder that David Baker has voting and dispositive power over the shares of common stock. The selling stockholder is an affiliate of Deutsche Bank AG London, which has a subsidiary Deutsche Bank Securities, Inc. which is an NASD member.
 
(20)
We have been advised by the selling stockholder that Deephaven Capital Management LLC (“Deephaven) is registered with the Securities and Exchange Commission as an investment advisor under the provisions of the Investment Advisors Act of 1940. Deephaven is the investment advisor to the selling stockholder. As investment advisor to the selling stockholder, Deephaven has indirect ownership of the shares of common stock with full voting and dispositive power with respect to the shares of common stock. Deephaven disclaims beneficial ownership of the shares of common stock.
 
 
 
(21)
We have been advised by the selling stockholder that Alexander Rutherford has voting and dispositive power over the shares of common stock.
 
(22)
We have been advised by the selling stockholder that Emanuel J. Friedman has voting and dispositive power over the shares of common stock.
 
(23)
We have been advised by the selling stockholder that Robert G. Schiro has voting and dispositive power over the shares of common stock.
 
(24)
We have been advised by the selling stockholder that Fort Mason Capital, LLC, as general partner of the selling stockholder, exercises sole voting and investment authority over the shares of common stock. Mr. Daniel German serves as the sole managing member of Fort Mason Capital, LLC. Fort Mason Capital, LLC and Mr. German each disclaim beneficial ownership of the shares of common stock, except to the extent of its or his pecuniary interest therein, if any.
 
(25)
We have been advised by the selling stockholder that Eric F. Billings, Chairman and CEO, FBR Group, and Richard J. Hendrix President and COO, FBR Group, have voting and dispositive power over the shares of common stock. Eric F. Billings and Richard J. Hendrix each disclaim beneficial ownership of the shares of common stock.
 
(26)
We have been advised by the selling stockholder that George A. Weiss, as trustee of the selling stockholder, has voting and dispositive power over the shares of common stock.
 
(27)
We have been advised by the selling stockholder that Highbridge Capital Management has voting and dispositive power over the shares of common stock.
 
(28)
We have been advised by the selling stockholder that Michael Karfunkel has voting and dispositive power over the shares of common stock.
 
(29)
We have been advised by the selling stockholder that George A. Weiss, as general partner of the selling stockholder, has voting and dispositive power over the shares of common stock.
 
(30)
We have been advised by the selling stockholder that Richard J. Johnson and Clasiria M. Johnson, as trustees of the selling stockholder, have voting and dispositive power over the shares of common stock..
 
(31)
We have been advised by the selling stockholder that it is a wholly-owned subsidiary of Polygon Global Opportunities Master Gund (“Master Fund”). Polygon Investment Partners Ltd. and Polygon Investment Partners LP (the “Investment Managers”), Polygon Investments Ltd. (the “Manager”), the Master Fund, Alexander Jackson, Reade Griffin and Paddy Dear share voting and dispositive powers of the common stock held by the selling stockholder. The Investment Managers, the Manager, Alexander Jackson, Reade Griffin and Paddy Dear disclaim beneficial ownership of the shares of common stock held by the selling stockholder.
 
 

(32)
We have been advised by the selling stockholder that Charles Howe, as president of Mariner Investment Group, Inc., has voting and dispositive power over the shares of common stock.
 
(33)
We have been advised by the selling stockholder that Gregory L. Melchor has voting and dispositive power over the shares of common stock.
 
(34)
We have been advised by the selling stockholder that Jonathan L. Billings and Elizabeth G. Billings have voting and dispositive power over the shares of common stock.
 
(35)
We have been advised by the selling stockholder the Franklin Mutual Advisers, LLC (“FMA”), an investment advisor registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940, is the investment advisor to the selling stockholder. Pursuant to an investment advisory agreement with the selling stockholder the Fund has sole voting and investment power over the shares of common stock. Certain of FMA’s executive officers have the power to (i) vote or direct the vote and (ii) dispose or direct the disposition of the shares of common stock. Nome of FMA’s executive officers, nor FMA itself, has any interest in dividends or proceeds from the sale of the shares of common stock and each disclaims beneficial ownership of any of the shares of common stock.
 
(36)
We have been advised by the selling stockholder that  James C. Newhauser, as managing member of the selling stockholder, has voting and dispositive power over the shares of common stock.
 
(37)
We have been advised by the selling stockholder that Peter A. Park. has voting and dispositive power over the shares of common stock.
 
(38)
We have been advised by the selling stockholder that Peninsula Capital Management, Inc. has voting and dispositive power over the shares of common stock.
 
(39)
We have been advised by the selling stockholder that Ramius Capital Group, L.L.C. (‘Ramius Capital”) is the investment adviser to the selling stockholder and consequently has voting control and investment discretion over the common stock. Ramius Capital disclaims beneficial ownership of the shares held by the selling stockholder. Peter A. Cohen, Morgan B. Stark, Thomas W. Strauss and Jeffery M. Solomon are the sole managing members of C4S & Co., L.L.C., the sole managing member of Ramius Capital. As a result Messrs. Cohen, Stark, Strauss and Solomon may be considered beneficial owners of any common stock to be beneficially owned by Ramius Capital. Messrs. Cohen. Stark, Strauss and Solomon disclaim beneficial ownership of these shares.
 
(40)
We have been advised by the selling stockholder that Chad Comiteau  has voting and dispositive power over the shares of common stock.
 
(41)
We have been advised by the selling stockholder that Peter Kenner has voting and dispositive power over the shares of common stock.
 
(42)
We have been advised by the selling stockholder that James A. Lustig has voting and dispositive power over the shares of common stock.
 
(43)
We have been advised by the selling stockholder the Steven C. Kleinman and David M. Call, as trustees of the selling stockholder, have has voting and dispositive power over the shares of common stock.
 
 

DESCRIPTION OF OUR CAPITAL STOCK
 
The following summary is a description of our capital stock.
 
Our authorized capital stock consists of 100,000,000 shares of common stock, $0.01 par value per share, and 10,000,000 shares of preferred stock, $0.01 par value per share. As of June 9, 2006, 59,943,000 shares of common stock were issued and outstanding and no shares of preferred stock were issued and outstanding.
 
The following summary of certain provisions of the common stock and preferred stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of our amended and restated certificate of incorporation and by the provisions of applicable law. See “Available Information.”
 
Com mon Stock
 
Each holder of our common stock is entitled to one vote for each share on all matters to be voted upon by the stockholders and there are no cumulative voting rights. Subject to preferences to which holders of preferred stock may be entitled, holders of common stock are entitled to receive ratably the dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor. See “Dividend Policy.” If there is a liquidation, dissolution or winding up of AmTrust, holders of common stock would be entitled to share in our assets remaining after the payment of liabilities, and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock. Holders of our common stock have no preemptive or conversion rights or other subscription rights and there are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of our common stock are fully paid and non-assessable. The rights, preferences and privileges of the holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock which we may designate in the future.
 
Preferred Stock
 
Our amended and restated certificate of incorporation authorizes our board of directors, subject to any limitations prescribed by law, to issue shares of preferred stock in one or more series without stockholder approval. Each series of preferred stock will have the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as will be determined by the board of directors. The purpose of authorizing the board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays and uncertainties associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisition and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or discourage a third party from acquiring, a majority of our outstanding voting stock. Our board of directors may issue preferred stock with voting and conversion rights that could adversely affect the voting power of the holders of our common stock. There are no current agreements or understandings for the issuance of preferred stock and our board of directors has no present intention to issue any shares of preferred stock.
 
 
Effect of Amended and Restated Certificate of Incorporation and Bylaws
 
Our amended and restated certificate of incorporation and bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us.
 
Our amended and restated certificate of incorporation provides that stockholder action can be taken only at an annual or special meeting of stockholders and cannot be taken by written consent in lieu of a meeting. In addition, our amended and restated certificate of incorporation and bylaws provide that, except as otherwise required by law, special meetings of the stockholders can only be called by a resolution adopted by a majority of our board of directors or by our chief executive officer. Stockholders are not permitted to call a special meeting or require our board of directors to call a special meeting.
 
Our bylaws establish an advance notice procedure for stockholder proposals to be brought before our annual meeting of stockholders, including proposed nominations of persons for election to our board of directors. Stockholders at an annual meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of our board of directors or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given to our secretary timely written notice, in proper form, of the stockholder’s intention to bring that business before the meeting. Although the bylaws do not give our board of directors the power to approve or disapprove stockholder nominations of director candidates or proposals regarding other business to come before a special or annual meeting, the bylaws may have the effect of precluding the conduct of proposed business at a meeting if the proper procedures are not followed or may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of us.
 
Delaware Law
 
We will be subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. In general, these provisions prohibit a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless:
 
 
·
prior to that date, the board approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;
 
 
·
upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or
 
 
·
on or after the date the business combination is approved by the board and authorized at a meeting of stockholders by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.
 
Section 203 defines “business combination” to include the following:
 
 
·
any merger or consolidation involving the corporation and the interested stockholder;
 
 
·
any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;
 
 

 
·
subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;
 
 
·
any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or
 
 
·
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.
 
In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any of these entities or persons.
 
Limitation of Liability and Indemnification of Directors and Officers
 
As permitted by the Delaware General Corporation Law, we have adopted provisions in our amended and restated certificate of incorporation that limit or eliminate the personal liability of our directors for a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director will not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for:
 
 
·
any breach of the director’s duty of loyalty to us or our stockholders;
 
 
·
any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
 
 
·
any act related to unlawful stock repurchases, redemptions or other distributions or payment of dividends; or
 
 
·
any transaction from which the director derived an improper personal benefit.
 
 
·
Our amended and restated certificate of incorporation also authorizes us to indemnify our officers, directors and other agents to the fullest extent permitted under Delaware law and we may advance expenses to our directors, officers and employees in connection with a legal proceeding, subject to limited exceptions. As permitted by the Delaware General Corporation Law, our amended and restated certificate of incorporation provides that:
 
 
·
we shall indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and
 
 
·
we may purchase and maintain insurance on behalf of our current or former directors, officers, employees or agents against any liability asserted against them and incurred by them in any such capacity, or arising out of their status as such.
 
Transfer Agent and Registrar
 
The transfer agent and registrar for the common stock will be American Stock Transfer & Trust Company. The address of the transfer agent and registrar is 59 Maiden Lane, Plaza Level, New York, New York 10038. The transfer agent/registrar is under common control with AmTrust. See “Certain Relationships and Related Transactions.”
 
 
SHARES ELIGIBLE FOR FUTURE SALE
 
Prior to the date of this prospectus, there has been no public market for our common stock. The sale of a substantial amount of our common stock in the public market or the perception that such sales may occur, could adversely affect the prevailing market price of our common stock. Furthermore, because some of our shares will not be available for sale shortly after the date of this prospectus due to the contractual and legal restrictions on resale described below and the fact that a substantial portion of our shares of common stock are registered for resale by our selling stockholders, the sale of a substantial amount of common stock in the public market after these restrictions lapse or in the future by these selling stockholders could adversely affect the prevailing market price of our common stock and our ability to raise equity capital in the future.

We have 59,943,000 shares of common stock outstanding as of June 8, 2006. Of those shares, all of the shares of our common stock sold under this prospectus will be freely tradable without restriction or further registration under the Securities Act, unless the shares are purchased by “affiliates” as that term is defined in Rule 144 under the Securities Act. Any shares purchased by an affiliate may not be resold except in compliance with Rule 144 volume limitations, manner of sale and notice requirements, pursuant to another applicable exemption from registration or pursuant to an effective registration statement.

In general, under Rule 144 as currently in effect, if one year has elapsed since the date of acquisition of restricted stock from us or any of our affiliates and we have been a public reporting company under the Exchange Act for at least 90 days, the holder of such restricted stock can sell the shares, provided that the number of shares sold by such person within any three-month period cannot exceed the greater of:
 
 
·
1% of the total number of shares of our common stock then outstanding; or
 
 
·
the average weekly trading volume of our common stock during the four calendar weeks preceding the date on which notice of the sale is filed with the SEC.
 
Sales under Rule 144 also are subject to certain manner of sale provisions, notice requirements and the availability of current public information about us. If two years have elapsed since the date of acquisition of restricted stock from us or any of our affiliates and the holder is not one of our affiliates at any time during the three months preceding the proposed sale, such person can sell such shares in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements.
 
No assurance can be given as to (i) the likelihood that an active market for our common stock will develop, (ii) the liquidity of any such market, (iii) the ability of the stockholders to sell the shares or (4) the prices that stockholders may obtain for any of the shares. No prediction can be made as to the effect, if any, that future sales of shares or the availability of shares for future sale will have on the market price prevailing from time to time. Sales of substantial amounts of common stock, or the perception that such sales could occur, may affect adversely prevailing market prices of the common stock. See “Risk Factors—Risks Related to Our Common Stock.”
 
 
Lock-Up Agreements
 
In connection with the February Private Placement, all of our directors, executive officers and existing stockholders agreed to be restricted in their ability to sell, pledge or otherwise dispose of or transfer their common stock until the later of 180 days from February 9, 2006 or 90 days after the effective date of our of registration statement providing for the resale of the securities covered hereby (of which this prospectus is a part). In addition, upon an initial public offering by us, our directors, executive officers and existing stockholders will not be able to sell our common stock for a period of 30 days before or 180 days following completion of the initial public offering.
 
In addition, we agreed, subject to various exceptions (including an initial public offering of common stock by us), not to sell or issue any common stock or any securities convertible into or exchangeable for common stock, or file any registration statement with the SEC, until the later of (i) 180 days after February 9, 2006 and (ii) 60 days after the effective date of our registration statement providing for the resale of the securities covered hereby (of which this prospectus is a party), without the prior written consent of FBR. See “Plan of Distribution.”
 
REGISTRATION RIGHTS
 
We entered into a registration rights agreement in connection with our February Private Placement. In the registration rights agreement we agreed, for the benefit of FBR and the purchasers of our common stock in the private placement, that we will, at our expense:

 
·
file with the SEC ( which occurred pursuant to the filing of the registration statement of which this prospectus is a part) no later than 150 days following the closing date of the private placement a registration statement registering for resale the shares of our common stock covered by this prospectus, and any additional shares of common stock issued in respect thereof whether by stock dividend, stock split or otherwise;

 
·
use all commercially reasonable efforts to cause the registration statement to become effective under the Securities Act as soon as practicable after the filing; and

 
·
continuously maintain the effectiveness of the registration statement under the Securities Act until the first to occur of:

 
·
the sale, transfer or other disposition of all of the shares of common stock covered by the registration statement or pursuant to Rule 144 under the Securities Act;

 
·
the shares covered by the registration statement are no longer outstanding; or

 
·
the second anniversary of the initial effective date of the registration statement.

We have filed the shelf registration statement of which this prospectus is a part to satisfy our obligations under the registration rights agreement. Pursuant to the terms of the registration rights agreement, we were required to file this registration statement by July 8, 2006 and we met this deadline.

Notwithstanding the foregoing, we will be permitted, under limited circumstances, to suspend the use, from time to time, of the prospectus that is part of a registration statement (and therefore suspend sales under the registration statement) for certain periods, referred to as “blackout periods,” if, among other things, any of the following occurs:
 
 
 
·
the representative of the underwriters of an underwritten offering of primary shares by us has advised us that the sale of our common stock under the shelf registration statement would have a material adverse effect on such primary offering;

 
·
a majority of the independent members of our board of directors, in good faith, determines that (i) the offer or sale of any shares of our common stock would materially impede, delay or interfere with any proposed financing, offer or sale of securities, acquisition, merger, tender offer, business combination, corporate reorganization or other significant transaction involving us; or (ii) after the advice of counsel, the sale of the shares covered by the shelf registration statement would require disclosure of non-public material information not otherwise required to be disclosed under applicable law and (a) we have a bona fide business purpose for preserving the confidentiality of the proposed transaction, (b) disclosure would have a material adverse effect on us or our ability to consummate the proposed transaction or (c) the proposed transaction renders us unable to comply with SEC requirements; or

 
·
a majority of the independent members of our board of directors, in good faith, after advice of counsel, determines that we are required by law, rule or regulation to supplement the shelf registration statement or file a post-effective amendment to the shelf registration statement in order to incorporate information into the shelf registration statement for the purpose of (i) including in the shelf registration statement any prospectus required under Section 10(a)(3) of the Securities Act; (ii) reflecting in the prospectus included in the shelf registration statement any facts or events arising after the effective date of the shelf registration statement (or of the most recent post-effective amendment) that, individually or in the aggregate, represents a fundamental change in the information set forth therein or the change in the information set forth in the prospectus or (iii) including in the prospectus included in the shelf registration statement any material information with respect to the plan of distribution not disclosed in the shelf registration statement or any material change to such information.

The cumulative blackout periods in any one year period commencing on the closing of the offering may not exceed an aggregate of 90 days and furthermore may not exceed 60 days in any rolling 90-day period.

A holder sells our common stock pursuant to a registration statement or as a selling stockholder pursuant to an underwritten public offering generally will be required to be named as a selling stockholder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the registration rights agreement that are applicable to such holder (including certain indemnification rights and obligations). In addition, each holder of our common stock will be required to deliver information to be used in connection with the shelf registration statement within a twenty business-day period following receipt of notice from us in order to have such holder’s shares of our common stock included in the shelf registration statement.

In connection with our filing of a registration statement, we will agree to use all commercially reasonable efforts to satisfy the criteria for listing and list or include (if we meet the criteria for listing on such exchange or market) our common stock on either the New York Stock Exchange or the Nasdaq National Market as soon as practicable and thereafter maintain the listing on such exchange or market.
 

PLAN OF DISTRIBUTION
 
General
 
The selling stockholders and any of their pledgees, donees, assignees and successors-in-interest s elling shares received from a named selling stockholder or as a gift, partnership distribution or other non-sale related transaction after the date of this prospectus (all of whom may be selling stockholders)  may, from time to time, sell any or all of their shares of our common stock on the trading market or any other stock exchange, market or trading facility on which our shares of common stock are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares:
 
 
·
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
 
 
·
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
 
 
·
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
 
 
·
an exchange distribution in accordance with the rules of the applicable exchange;
 
 
·
privately negotiated transactions;
 
 
·
settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;
 
 
·
broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;
 
 
·
a combination of any such methods of sale;
 
 
·
through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
 
 
·
any other method permitted pursuant to applicable law; or
 
 
·
under Rule 144 under the Securities Act, if available, rather than under this prospectus.
 
Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with NASDR Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with NASDR IM-2440.
 
In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of our common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge our common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
 
 
The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts. If a selling stockholder is deemed to be an underwriter, the selling stockholder may be subject to certain statutory liabilities including, but not limited to Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act. Selling stockholders who are deemed underwriters within the meaning of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act . The SEC staff is of a view that selling stockholders who are registered broker-dealers or affiliates of registered broker-dealers may be underwriters under the Securities Act. We will not pay any compensation or give any discounts or commissions to any underwriter in connection with the securities being offered by this prospectus. The selling stockholders have informed us that they do not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute our common stock.
 
We are required to pay certain fees and expenses incurred by us incident to the registration of the shares. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
 
Because some of the selling stockholders may be deemed to be "underwriters" within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. The stockholders have advised us that they have not entered into any written or oral agreements, understandings or arrangements with any underwriter or broker-dealer regarding the sale of the resale shares. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the selling stockholders.
 
The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
 
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the selling stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the selling stockholders or any other person. The anti-manipulation rules under the Exchange Act may apply to sales of common shares in the market and to the activities of the selling stockholders and their affiliates. Regulation M may restrict the ability of any person engaged in the distribution of the common shares to engage in market-making activities with respect to the particular common shares being distributed for a period of up to five business days before the distribution. These restrictions may affect the marketability of the common shares and the ability of any person or entity to engage in market-making activities with respect to the common shares. We will make copies of this prospectus available to the selling stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale.

CUSIP Number

The Committee on Uniform Securities Identification Procedures assigns a unique number, known as a CUSIP number, to a class or issue of securities in which all of the securities have similar rights. Upon issuance, the common shares covered by this prospectus included shares with three different CUSIP numbers, depending upon whether the sale of the shares to the selling stockholder was conducted (a) by us under Rule 506 of Regulation D , (b) by Friedman, Billings, Ramsey & Co., Inc., as the initial purchaser, under Rule 144A or (c) by the initial purchaser under Regulation S. Prior to any registered resale, all of the securities covered by this prospectus are restricted securities under Rule 144 and their designated CUSIP numbers refer to such restricted status.

Any sales of our common shares by means of this prospectus must be settled with common shares bearing our general (not necessarily restricted) common shares CUSIP number. A selling stockholder named in this prospectus may obtain shares bearing our general common shares CUSIP number for settlement purposes by presenting the shares to be sold (with a restricted CUSIP), together with a certificate of registered sale, to our transfer agent, The bank of New York. The form of certificate of registered sale is available from us upon request. The process of obtaining such shares might take a number of business days. SEC rules generally require trades in the secondary market to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, a selling stockholder who holds securities with a restricted CUSIP at the time of the trade might wish to specify an alternate settlement cycle at the time of any such trade to provide sufficient time to obtain the shares with an unrestricted CUSIP in order to prevent a failed settlement.
 
Lock-Up Arrangements
 
We have agreed that for a period beginning on February 9, 2006 and continuing until the later of (x) 180 days from such date and (y) 60 days after the effective date of the registration statement providing for the resale of the securities covered hereby (of which this prospectus is a party), we will not, without the prior written consent of FBR:
 
 
·
offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, lend or otherwise dispose of or transfer, directly or indirectly, any of our equity securities or any securities convertible into or exercisable or exchangeable for our equity securities (other
 
 

than shares of our common stock that are issued under our 2005 Equity Incentive Plan), except that we may conduct an initial public offering of our common stock; or
 
 
·
enter into any swap or other arrangement that transfers, in whole or in part, directly or indirectly, any of the economic consequences of ownership of any of our equity securities, whether any such transaction described above is to be settled by delivery of shares of our common stock or such other securities, in cash or otherwise.
 
For a period beginning on February 9, 2006 and continuing until (x) 180 days from such date and, if later, (y) 90 days after the effective date of the registration statement providing for the resale of the securities covered hereby (of which this prospectus is a party), all of our directors, executive officers and existing stockholders agreed, without the prior written consent of FBR, not to:
 
 
·
offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, lend or otherwise dispose of or transfer, directly or indirectly, any of our equity securities or any securities convertible into or exercisable or exchangeable for our equity securities, or
 
 
·
enter into any swap or other arrangement that transfers, in whole or in part, directly or indirectly, any of the economic consequences of ownership of any of our equity securities, whether any such transaction described above is to be settled by delivery of shares of our common stock or such other securities, in cash or otherwise.
 
The restricted period described in the immediately preceding paragraph is subject to extension such that, in the event that either (1) during the last 17 days of the restricted period we issue an earnings release or material news or a material event relating to us occurs, or (2) prior to the expiration of the restricted period, we announce that we will release earnings results during the 16-day period following the last day of the restricted period, the ‘lock-up’ restrictions described above will continue to apply until the expiration of the 18-day period beginning on the date of the issuance of the earnings release or the occurrence of the material news or material event, unless FBR waives such extension in writing.
 
Subject to applicable securities laws, our directors, executive officers and existing stockholders may transfer their shares of our common stock: (i) as a bona fide gift or gifts, provided that the donees agree to be bound by the same restrictions; (ii) to any trust for the direct or indirect benefit of the stockholder or the immediate family of the stockholder, provided that the trustee agrees to be bound by the same restrictions; (iii) as a distribution to its stockholders, partners or members, provided that such stockholders, partners or members agree to be bound by the same restrictions; (iv) as required under any of our benefit plans or our bylaws; (v) as collateral for any loan, provided that the lender agrees to be bound by the same restrictions; (vi) with respect to sales of securities acquired in the open market; or (vii) to an executor or heir in the event of the death of the stockholder, provided that the executor or heir agrees to be bound by the same restrictions. In addition, the restrictions described above do not apply to the exercise of any options or other convertible securities granted under any of our benefit plans.
 
In addition, upon an initial public offering by us, our directors, executive officers and existing stockholders generally will not be able to sell shares of our common stock for a period of 30 days prior to or 180 days following the effective date of the registration statement with respect to the initial public offering. See “Description of Capital Stock—Registration Rights.”
 
In addition, upon an initial public offering by us, the holders of our common stock that are beneficiaries of the registration rights agreement and not our employees or affiliates will not be able to sell shares of our common stock for a period of up to 30 days prior to, and 60 days following the effective date of the registration statement with respect to the initial public offering.
 
 
LEGAL MATTERS
 
The validity of the commons stock offered hereby will be passed upon for us by Troutman Sanders LLP, New York, New York.
 
EXPERTS
 
Our consolidated financial statements included in this prospectus for the fiscal year ended December 31, 2005 have been audited by BDO Seidman, LLP, an independent registered public accounting firm, as stated in their report with respect thereto, and is included in reliance upon the report of such firm given upon its authority as experts in accounting and auditing.
 
Our consolidated financial statements as of December 31, 2004 and for each of the two years in the period then ended included in this prospectus have been audited by Berenson LLP, an independent registered public accounting firm, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
 
Changes in Accountants

Prior to fiscal year ended December 31, 2005, our consolidated financial statement were audited by Berenson LLP. On February 10, 2006, Berenson LLP resigned and we engaged BDO Seidman, LLP, which continues as our independent registered public accounting firm.
 
Berenson LLP’s report on the consolidated financial statements for the fiscal year ended December 31, 2004 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles.
 
During 2004 and during the subsequent interim period through February 10, 2006, there were no disagreements with Berenson LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to Berenson LLP’s satisfaction, would have caused it to make reference to the subject matter of the disagreement in connection with its report. Berenson LLP has furnished a letter addressed to the Securities and Exchange Commission and filed as an exhibit to our registration statement stating its agreement with the statements made herein.
 
WHERE YOU CAN FIND MORE INFORMATION
 
We have filed with the SEC, under the Securities Act of 1933, as amended, or the Securities Act, a registration statement on Form S-1 with respect to the common stock offered by this prospectus. This prospectus, which constitutes part of the registration statement, does not contain all the information set forth in the registration statement or the exhibits and schedules that are part of the registration statement, portions of which are omitted as permitted by the rules and regulations of the SEC. Statements made in this prospectus regarding the contents of any contract or other documents are summaries of the material terms of the contract or document. With respect to each contract or document filed as an exhibit to the registration statement, reference is made to the corresponding exhibit. For further information pertaining to us and to the common stock offered by this prospectus, reference is made to the registration statement, including the exhibits and schedules thereto, copies of which may be inspected without charge at the public reference facilities of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of all or any portion of the registration statement may be obtained from the SEC at prescribed rates. Information on the public reference facilities may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site that contains reports, proxy and information statements and other information that is filed electronically with the SEC. The web site can be accessed at www.sec.gov .
 
 
Upon completion of this offering, we will be required to comply with the informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and, accordingly, will file current reports on Form 8-K, quarterly reports on Form 10-Q, annual reports on Form 10-K, proxy statements and other information with the SEC. Those reports, proxy statements and other information will be available for inspection and copying at the public reference facilities and internet site of the SEC referred to above.

GLOSSARY OF SELECTED REINSURANCE, INSURANCE AND INVESTMENT TERMS
 
Acquisition expense:
The aggregate of policy acquisition costs attributable to underwriting operations, including commissions as well as premium taxes and assessments.
   
Broker:
One who negotiates contracts of insurance or reinsurance, receiving a commission for placement and other service rendered, between (1) a policyholder and a primary insurer, on behalf of the insured party, (2) a primary insurer and reinsurer, on behalf of the primary insurer, or (3) a reinsurer and a retrocessionaire, on behalf of the reinsurer.
   
Casualty insurance:
Insurance that is primarily concerned with the losses caused by injuries to third persons (in other words, persons other than the policyholder) and the resulting legal liability imposed on the underlying insured resulting therefrom.
   
Catastrophe; Catastrophic:
A severe loss or disaster, typically involving multiple claimants. Common perils include earthquakes, hurricanes, hailstorms, severe winter weather, floods, fires, tornadoes, explosions and other natural or man-made disasters. Catastrophe losses may also arise from acts of war, acts of terrorism and political instability.
   
Catastrophe loss:
Loss and directly identified loss adjustment expense from catastrophes.
   
Cede; Cedent; Ceding company:
When a party reinsures its liability with another, it transfers or “cedes” business (premiums or losses) and is referred to as the “cedent” or “ceding company.”
   
Ceding commission:
A fee based upon the ceding company’s cost of acquiring the business being reinsured (including commissions, premium taxes, assessments and miscellaneous administrative expense), which also may include a profit factor.
   
Claim:
Request by an insured or reinsured for indemnification by an insurance company or a reinsurance company for loss incurred from an insured peril or event.
   
 
 
 
Commutation
The settlement by a reinsurer and ceding company of all obligations under a reinsurance contract through the estimation, payment and complete discharge of all future obligations for reinsurance losses incurred regardless of the continuing nature of certain losses.
   
Deductible:
With respect to an insurance policy, the amount of loss that an insured retains, although the insurer is legally responsible for losses within the deductible and looks to the insured for reimbursement for such losses. Contrast this with a self-insured retention (SIR), where the insurer is only responsible for claims in excess of the SIR, regardless of the financial status of the insured. With respect to a reinsurance agreement, an amount of loss that a ceding company retains within a layer of reinsurance and does not cede to the reinsurer.
   
Excess of loss:
A generic term describing insurance or reinsurance that indemnifies the insured or the reinsured against all or a specified portion of losses on underlying insurance policies in excess of a specified amount, which is called a “retention.” Also known as non-proportional insurance or reinsurance. Excess of loss insurance or reinsurance is written in layers. An insurer or reinsurer or group of insurers or reinsurers accepts a band of coverage up to a specified amount. The total coverage purchased by the cedent is referred to as a “program” and will typically be placed with predetermined insurers or reinsurers in pre-negotiated layers. Any liability exceeding the outer limit of the program reverts to the ceding company, which also bears the credit risk of an insurer’s or reinsurer’s insolvency.
   
Exclusions:
Provisions in an insurance or reinsurance policy excluding certain risks or otherwise limiting the scope of coverage.
   
Exposure:
The possibility of loss. A unit of measure of the amount of risk a company assumes.
   
Frequency:
The number of claims occurring during a given coverage period. This is sometimes quoted as number of claims per unit of exposure.
   
Generally accepted accounting principles (“GAAP”):
Generally accepted accounting principles as defined by the American Institute of Certified Public Accountants or statements of the Financial Accounting Standards Board. GAAP is the method of accounting to be used by AmTrust for reporting to stockholders.
   
Gross premiums written:
Total premiums for insurance written during a given period.
   
Incurred but not reported (“IBNR”):
Reserves for estimated losses that have been incurred by insureds and reinsureds but not yet reported to the insurer or reinsurer, including unknown future developments on losses which are known to the insurer or reinsurer.
   
Layer:
The interval between the retention or attachment point and the maximum limit of indemnity for which an insurer or reinsurer is responsible.
   
 
 
 
Loss reserves:
Liabilities established by insurers and reinsurers to reflect the estimated cost of claims payments and the related expenses that the insurer or reinsurer will ultimately be required to pay with respect to insurance or reinsurance it has written. Reserves are established for losses and for loss expenses.
   
Losses and loss adjustment expense:
The expense of settling claims, including legal and other fees and the portion of general expenses allocated to claim settlement costs (also known as claim adjustment expenses) plus losses incurred with respect to claims.
   
Losses incurred:
The total losses sustained by an insurer or reinsurer under a policy or policies, whether paid or unpaid. Incurred losses include a provision for IBNR.
   
Loss portfolio transfer
The transfer of incurred losses from one insurer to another. The transferor may enter into a loss portfolio transfer to exit from a line or class of insurance, among other reasons. The transferee may enter into a loss portfolio transfer to acquire a line of business, among other reasons, and further seeks to profit from the assumed business by investing the sale price it has received over the length of time it requires to settle the claims it has assumed.
   
Net combined ratio:
The net combined ratio is the sum of the net loss ratio and the net expense ratio, determined in accordance with either SAP or GAAP. A net combined ratio below 100% generally indicates profitable underwriting prior to the consideration of investment income. A net combined ratio over 100% generally indicates unprofitable underwriting prior to the consideration of investment income.
   
Net expense ratio:
The ratio of acquisition expenses, salaries and benefits and other insurance general and administrative expenses to net premiums earned, determined in accordance with either SAP or GAAP.
   
Net loss ratio:
The ratio of losses and loss adjustment expense to net premiums earned, determined in accordance with either SAP or GAAP.
   
Net premiums earned:
The portion of net premiums written during or prior to a given period that was actually recognized as income during such period.
   
Net premiums written:
Gross premiums written for a given period less premiums ceded to reinsurers during such period.
   
Premiums:
The amount charged during the term on policies and contracts issued, renewed or reinsured by an insurance company or reinsurance company.
   
Property insurance:
Insurance that provides coverage to a person with an insurable interest in tangible property for that person’s property loss, damage or loss of use.
   
Quota share reinsurance:
Reinsurance under which the insurer cedes a fixed or variable percentage of liabilities, premiums and losses for each policy covered on a pro rata basis.
   
 
 
 
Rates:
Amounts charged per unit of insurance and reinsurance (also sometimes shown per unit of exposure).
   
Reinsurance:
An arrangement in which an insurance company, the reinsurer, agrees to indemnify another insurance or reinsurance company, the ceding company, against all or a portion of the insurance or reinsurance risks underwritten by the ceding company under one or more policies. Reinsurance can provide a ceding company with several benefits, including a reduction in net liability on individual risks and catastrophe protection from large or multiple losses. Reinsurance also provides a ceding company with additional underwriting capacity by permitting it to accept larger risks and write more business than would be possible without a concomitant increase in capital and surplus, and facilitates the maintenance of acceptable financial ratios by the ceding company. Reinsurance does not legally discharge the primary insurer from its liability with respect to its obligations to the insured.
   
Reinsurance agreement:
A contract specifying the terms of a reinsurance transaction (also known as a reinsurance certificate).
   
Reserves:
Liabilities established by insurers and reinsurers to reflect the estimated costs of claim payments and the related expenses that the insurer or reinsurer will ultimately be required to pay with respect to insurance or reinsurance it has written. Reserves are established for losses, for loss expenses and for unearned premiums. Loss reserves consist of “case reserves,” or reserves established with respect to individual reported claims, and “IBNR reserves.” For reinsurers, loss expense reserves are generally not significant because substantially all of the loss expenses associated with particular claims are incurred by the primary insurer and reported to reinsurers as losses. Unearned premium reserves constitute the portion of premium paid in advance for insurance or reinsurance that has not yet been provided. See also “Loss Reserves.”
   
Retention:
The amount or portion of risk that an insurer retains for its own account. Losses in excess of the retention level up to the outer limit of the policy or program, if any, that do not fall within any applicable deductible are paid by the reinsurer. In proportional agreements, the retention may be a percentage of the original policy’s limit. In excess of loss business, the retention is a dollar amount of loss, a loss ratio or a percentage.
   
 
Retention may also mean that portion of the loss retained by the insured or policyholder. Most insureds do not purchase insurance to cover their entire exposure. Rather, they elect to take a deductible or self-insured retention, a portion of the risk that they will cover themselves.
   
Risk-based capital (“RBC”):
A measure adopted by the NAIC and enacted by states for determining the minimum statutory capital and surplus requirements of insurers with required regulatory and company actions that apply when an insurer’s capital and surplus is below these minimums.
   
Specialty lines:
Lines of insurance that provide coverage for risks that are often unusual or difficult to place and do not fit the underwriting criteria of standard commercial products carriers.
   
 
 
 
Statutory accounting principles (“SAP”):
Recording transactions and preparing financial statements in accordance with the rules and procedures prescribed or permitted by United States state insurance regulatory authorities including the NAIC, which in general reflect a liquidating, rather than going concern, concept of accounting.
   
Surplus:
As determined under SAP, the amount remaining after all liabilities, including loss reserves, are subtracted from all admitted assets. Admitted assets are assets of an insurer prescribed or permitted by a state to be recognized on the statutory balance sheet. Surplus is often referred to as “surplus as regards policyholders” for statutory accounting purposes.
   
Treaty reinsurance; Reinsurance treaties:
The reinsurance of a specified type or category of risks defined in a reinsurance agreement between a primary insurer or other reinsured and a reinsurer. Typically, in treaty reinsurance, the primary insurer or reinsured is obligated to offer, and the reinsurer is obligated to accept, a specified portion of all of that type or category of risks originally written by the primary insurer or reinsured.
   
Underwriter:
An employee of an insurance or reinsurance company who examines, accepts or rejects risks and classifies accepted risks in order to charge an appropriate premium for each accepted risk. The underwriter is expected to select business that will produce an average risk of loss no greater than that anticipated for the class of business.
   
Underwriting:
The insurer’s or reinsurer’s process of reviewing applications for coverage, and the decision whether to accept all or part of the exposure and determination of the applicable premiums; also refers to the acceptance of that coverage.
   
Workers’ compensation:
A system (established under state and federal laws) under which employers provide insurance for benefit payments to their employees for work-related injuries, deaths and diseases, regardless of fault.
 

 

INDEX TO FINANCIAL STATEMENTS
AMTRUST FINANCIAL SERVICES, INC.
 
 
Page  
Audited Annual Financial Statements
 
F-2
F-4
F-5
F-6
F-7
F-8
   
Supplementary Information
 
F-39
F-40
F-42
F-43
F-44
   
Unaudited Interim Financial Statements
 
Report of Independent Registered Public Accounting Firm
F-45
F-46
F-47
F-48
F-49
F-50
 
 

Report of Independent Registered Public Accounting Firm
 
Board of Directors and Stockholders
AmTrust Financial Services, Inc. and subsidiaries
New York, New York
 
We have audited the consolidated balance sheet of AmTrust Financial Services, Inc. and Subsidiaries as of December 31, 2005, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the year then ended. Our audit also included the financial statement schedules listed in the accompanying index. These financial statements and the financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Amtrust Financial Services, Inc. is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Amtrust Financial Services’ internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AmTrust Financial Services, Inc. and Subsidiaries as of December 31, 2005, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedules referred to above when considered in relation to the basic consolidated financial statements taken together as a whole, presently fairly in all material respect the information set forth therein.
 
/s/ BDO Seidman, LLP
 
Certified Public Accountants
New York, New York
April 28, 2006
 


 
Board of Directors and Stockholders
Amtrust Financial Services, Inc. and Subsidiaries
New York, NY

 
We have audited the consolidated balance sheet of Amtrust Financial Services, Inc. and Subsidiaries as of December 31, 2004, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of Amtrust Pacific Limited (“APL”), a wholly-owned subsidiary, for the years ending December 31, 2004 and 2003, which statements reflect total assets constituting 36% in 2004, of the related consolidated totals. APL’s income (loss) is reflected in discontinued operations for each of the years in the two year period ended December 31, 2004. These statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for APL, for the years ending December 31, 2004 and 2003, is based solely on the report of the other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Amtrust Financial Services, Inc. and Subsidiaries as of December 31, 2004, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.
 
Our audits of the consolidated financial statements referred to above also included an audit of the financial statement schedules included in item 16(b) as they relate to the years ending December 31, 2004 and 2003. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein for the years ended December 31, 2004 and 2003 when read in conjunction with the related consolidated financial statements.

/s/ Berenson LLP
New York, NY
May 20, 2005, except for notes 2r, 9, 10, 15, 17,
24a and 24b as to which the date is February 2, 2006.
 
 
F-3
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Consolidated Balance Sheets
(in thousands, except per share data)
December 31,
 
2005
 
2004
 
Assets
         
Investments:
         
Fixed maturities, held-to-maturity, at amortized cost
 
$
151,104
 
$
136,692
 
Fixed maturities, available-for-sale, at market value
   
39,876
   
8,609
 
Equity securities, available-for-sale, at market value
   
32,755
   
5,512
 
Short-term investments
   
74,732
   
16,820
 
Other investments
   
1,498
   
1,851
 
Total investments
   
299,965
   
169,484
 
Cash and cash equivalents
   
115,847
   
28,727
 
Real estate properties held for resale
   
—
   
161,555
 
Accrued interest and dividends
   
2,772
   
1,898
 
Premiums receivable, net
   
81,070
   
56,468
 
Receivables from discontinued operations
   
3,571
   
11,736
 
Reinsurance recoverable
   
17,667
   
14,445
 
Funds held with reinsured companies
   
—
   
350
 
Prepaid reinsurance premiums
   
19,281
   
12,981
 
Prepaid expenses and other assets
   
7,590
   
4,685
 
Deferred policy acquisition costs
   
23,751
   
17,936
 
Deferred tax asset
   
9,396
   
1,952
 
Property and equipment, net
   
9,651
   
798
 
Due from related parties
   
—
   
5,206
 
Goodwill and intangible assets
   
20,781
   
9,309
 
   
$
611,342
 
$
497,530
 
Liabilities and Stockholders’ Equity
             
Liabilities:
             
Note payable, bank
 
$
25,000
 
$
1,700
 
Mortgage debt, discontinued operations
   
—
   
92,919
 
Ceded reinsurance premiums payable
   
17,782
   
4,572
 
Loss and loss expense reserves
   
168,007
   
99,364
 
Reinsurance payable on paid losses
   
1,951
   
1,644
 
Funds held under reinsurance treaties
   
3,034
   
9,013
 
Unearned premiums
   
156,802
   
105,107
 
Accrued expenses and other current liabilities
   
61,430
   
43,194
 
Federal income tax payable
   
8,925
   
1,807
 
Other liabilities
   
—
   
6,409
 
Junior subordinate debt
   
50,000
   
—
 
Loans from ultimate stockholders
   
—
   
12,973
 
Total liabilities
   
492,931
   
378,702
 
Commitments and Contingencies
             
Stockholders’ Equity:
             
Common stock, $.01 par value; 100,000,000 shares authorized,
24,089,286 issued and outstanding
   
241
   
241
 
Preferred stock, $.01 par value; 10,000,000 shares authorized, 1,000 issued and outstanding
   
60,000
   
60,000
 
Additional paid-in capital
   
12,406
   
12,406
 
Accumulated other comprehensive income (loss)
   
(5,014
)
 
22,162
 
Retained earnings
   
50,778
   
24,019
 
     
118,411
   
118,828
 
   
$
611,342
 
$
497,530
 
 
See accompanying notes to consolidated financial statements.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Year ended December 31,
 
2005
 
2004
 
2003
 
Revenues:
             
Premium income:
             
Premiums written
 
$
259,213
 
$
187,498
 
$
81,923
 
Change in unearned premiums
   
(43,183
)
 
(48,684
)
 
(30,256
)
Net earned premium
   
216,030
   
138,814
   
51,667
 
Commission and fee income
   
8,196
   
5,202
   
1,052
 
Net investment income
   
11,534
   
3,929
   
2,305
 
Net realized gain (loss)
   
4,875
   
1,278
   
(1,004
)
Finance company revenues
   
—
   
510
    767  
Other
   
—
   
222
   
496
 
Total revenues
   
240,635
   
149,955
   
55,283
 
Expenses:
                   
Loss and loss adjustment expense
   
142,006
   
90,178
   
34,884
 
Salaries and benefits
   
13,903
   
10,945
   
4,063
 
Policy acquisition expenses
   
30,082
   
20,082
   
8,194
 
Other underwriting expenses
   
25,062
   
12,597
   
4,696
 
Total expenses
   
211,053
   
133,802
   
51,837
 
Operating income from continuing operations
   
29,582
   
16,153
   
3,446
 
Other income (expenses):
                   
Foreign currency gain
   
388
   
—
   
—
 
Interest expense
   
(2,784
)
 
(264
)
 
(221
)
Miscellaneous expense
   
—
   
(85
)
 
(545
)
Total other expenses
   
(2,396
)
 
(349
)
 
(766
)
Income from continuing operations before provision for income taxes
   
27,186
   
15,804
   
2,680
 
Provision for income taxes:
                   
Current
   
13,088
   
4,355
   
1,840
 
Deferred
   
(6,422
)
 
(527
)
 
(582
)
Total provision for income taxes
   
6,666
   
3,828
   
1,258
 
Income from continuing operations
   
20,520
   
11,976
   
1,422
 
Discontinued operations:
                   
Foreign currency gain from discontinued operations
   
21,745
   
—
   
—
 
Other income (loss) from discontinued operations
   
(4,706
)
 
2,134
   
(30
)
Income (loss) from discontinued operations
   
17,039
   
2,134
   
(30
)
Net income
 
 
37,559
 
 
14,110
   
1,392
 
Preferred stock divided accumulated     1,200      4,800      4,800   
Net income (loss) available to common stockholders  
$
36,359    $ 9,310   
$
(3,408  )
Earnings (loss) per common share:
                   
Income (loss) from continuing operations
 
$
.80
 
$
.30
   
(.14
)
Income (loss) from discontinued operations
   
.71
   
.09
   
—
 
Net income (loss) per common share
 
$
1.51
 
$
. 39
 
$
(.14
)
 
See accompanying notes to consolidated financial statements.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Years ended December 31, 2005, 2004 and 2003
       
Common Stock
 
Preferred stock
 
Additional paid-in capital
 
Accumulated other comprehensive income (loss)
 
Retained earnings
 
Total
 
Balance December 31, 2002
 
$
241
 
$
60,000
 
$
12,406
 
$
(2,116
)
$
8,517
 
$
79,048
 
Comprehensive income, net of tax:
                                     
Net income
   
—
   
—
   
—
   
—
   
1,392
   
1,392
 
Foreign currency translation
   
—
   
—
   
—
   
15,655
   
—
   
15,655
 
Unrealized holding gain on available-for sale securities
   
—
   
—
   
—
   
2,606
   
—
   
2,606
 
Deferred tax benefit
   
—
   
—
   
—
   
(410
)
 
—
   
(410
)
Reclassification adjustment for securities sold during the year
   
—
   
—
   
—
   
176
   
—
   
176
 
Comprehensive income
                                             
19,419
 
Balance, December 31, 2003
   
241
   
60,000
   
12,406
   
15,911
   
9,909
   
98,467
 
Comprehensive income, net of tax:
                                     
Net income
   
—
   
—
   
—
   
—
   
14,110
   
14,110
 
Foreign currency translation
   
—
   
—
   
—
   
6,606
   
—
   
6,606
 
Unrealized holding gain on available-for sale securities
   
—
   
—
   
—
   
75
   
—
   
75
 
Deferred tax benefit
   
—
   
—
   
—
   
(55
)
       
(55
)
Reclassification adjustment for securities sold during the year
   
—
   
—
   
—
   
(375
)
 
—
   
(375
)
Comprehensive income  
                                              
20,361
 
Balance, December 31, 2004
   
241
   
60,000
   
12,406
   
22,162
   
24,019
   
118,828
 
Comprehensive income, net of tax:
                                     
Net income
   
—
   
—
   
—
   
—
   
37,559
   
37,559
 
Foreign currency translation
   
—
   
—
   
—
   
(24,491
)
 
—
   
(24,491
)
Unrealized holding gain on available-for sale securities
   
—
   
—
   
—
   
(2,713
)
 
—
   
(2,713
)
Reclassification adjustment for securities sold during the year
   
—
   
—
   
—
   
28
   
—
   
28
 
Comprehensive income                                   
10,383
 
Preferred stock dividends
   
—
   
—
   
—
   
—
   
(10,800
)
 
(10,800
)
Balance, December 31, 2005
 
$
241
 
$
60,000
 
$
12,406
 
$
(5,014
)
$
50,778
 
$
118,411
 
 
See accompanying notes to consolidated financial statements.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Years ended December 31,
 
2005
 
2004
 
2003
 
Cash flows from operating activities :
             
Net income from continuing operations
 
$
20,520
 
$
11,976
 
$
1,422
 
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities of continuing operations:
                   
Depreciation and amortization
   
979
   
371
   
136
 
Realized (gain) loss on marketable securities
   
(4,875
)
 
(1,278
)
 
1,004
 
Bad debt expense
   
4,725
   
2,093
   
243
 
Change in deferred tax asset
   
(8,890
)
 
(822
)
 
(172
)
Foreign currency gain
   
(388
)
 
—
   
—
 
Income (loss) from discontinued operations
   
(4,706
)
 
2,134
   
(30
)
Changes in assets - (increase) decrease:
                   
Premiums receivable
   
(29,630
)
 
(32,419
)
 
(14,258
)
Reinsurance recoverable
   
(3,222
)
 
(10,402
)
 
2,655
 
Deferred policy acquisition costs
   
(5,815
)
 
(8,052
)
 
(7,350
)
Prepaid reinsurance premiums
   
(6,300
)
 
(1,269
)
 
(4,453
)
Prepaid expenses and other assets
   
1,777
   
(5,701
)
 
745
 
Receivable from discontinued operations
   
8,165
   
638
   
2,476
 
Changes in liabilities — increase (decrease):
                   
Reinsurance payable
   
13,210
   
461
   
1,924
 
Loss and loss expense reserves
   
68,643
   
61,922
   
17,534
 
Unearned premiums
   
51,695
   
50,715
   
34,474
 
Funds held under reinsurance treaties
   
(5,979
)
 
6,069
   
2,842
 
Accrued expenses and other current liabilities
   
18,088
   
22,111
   
16,440
 
Net cash provided in operating activities
   
117,997
   
98,547
   
55,632
 
Cash flows from investing activities:
                   
Purchases of securities with fixed maturities
   
(162,002
)
 
(135,003
)
 
(72,552
)
Purchases of equity securities
   
(82,240
)
 
(1,911
)
 
(997
)
Proceeds from sales of fixed maturity securities
   
59,127
   
40,977
   
23,137
 
Proceeds from sales of equity securities
   
55,573
   
1,549
   
2,712
 
Sales (purchases) of other investments
   
353
   
(1,296
)
 
(6
)
Sale of real estate - discontinued operations
   
161,555
   
—
   
—
 
Acquisition of assets by subsidiary
   
—
   
—
   
100
 
Acquisition of intangible assets and subsidiaries
   
(10,434
)
 
(2,209
)
 
(600
)
Capital expenditures
   
(9,417
)
 
(615
)
 
(240
)
Advances to/from affiliates
   
—
   
5,291
   
(2,291
)
Other liabilities
   
—
   
1,171
   
(761
)
Net cash provided (used) in investing activities
   
12,515
   
(92,046
)
 
(51,498
)
Cash flows from financing activities:
                   
Issuance of junior subordinate debentures
   
50,000
   
—
   
—
 
Stockholder loan
   
(12,973
)
 
12,973
   
—
 
(Repayments) borrowings on note payable, bank
   
23,300
   
(1,949
)
 
—
 
Repayment of mortgage - discontinued operations
   
(92,919
)
 
—
   
—
 
Dividends paid on preferred stock
   
(10,800
)
 
—
   
—
 
Net cash provided (used) by financing activities
   
(43,392
)
 
11,024
   
—
 
Net increase in cash and cash equivalents
   
87,120
   
17,525
   
4,134
 
Cash and cash equivalents, beginning year
   
28,727
   
11,202
   
7,068
 
Cash and cash equivalents, end of year
 
$
115,847
 
$
28,727
 
$
11,202
 
 
See accompanying notes to consolidated financial statements.
 

AmTrust Financial Services, Inc. and Subsidiaries
 
(in thousands, except per share data)
       
1.
 
Nature of
Operations
AmTrust Financial Services, Inc. (the “Company”) is an insurance holding company formed under the laws of Delaware. Through its wholly-owned subsidiaries, the Company provides specialty property and casualty insurance focusing on workers’ compensation for small business, specialty risk and extended warranty coverage, and specialty middle-market property and casualty coverages
       
2.
 
Significant
Accounting
Policies
(a)
Basis of Reporting
 
The consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries.
       
     
All significant intercompany transactions and accounts have been eliminated in the consolidated financial statements.
       
    (b)
Cash and Cash Equivalents
 
The Company maintains its cash accounts in several banks and brokerage institutions. At various times during the year, the Company’s cash balances may exceed the amount of $100 insured by the Federal Deposit Insurance Corporation (“FDIC”).
 
Cash equivalents consist of investments in money market funds and short-term investments with an original maturity of 90 days or less and are stated at cost, which approximates market.
 
    (c)
Property and Equipment
 
Property and equipment are recorded at cost. Maintenance and repairs are charged to operations as incurred. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, as follows:
     
Building
40 years
Furniture and fixtures
5 years
Computer equipment and software
3 to 5 years
Leasehold improvements
Lesser of lease
    
term or 15 years
 
     
The Company accounts for its internal use software under Statement of Position (“SOP”) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”. Accordingly, the Company capitalizes costs of computer software developed or obtained for internal use that are specifically identifiable, have determinable lives and relate to future use.
 
 
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
    (d)
Income Taxes
       
     
The Company joins its domestic subsidiaries in the filing of a consolidated Federal income tax return and is party to a Federal income tax allocation agreement. Under the tax sharing agreement, the Company pays to or receives from its subsidiaries the amount, if any, by which the group’s Federal income tax liability was affected by virtue of inclusion of the subsidiary in the consolidated Federal return
       
     
Effective for the year ended December 31, 2004, AmTrust International Insurance Ltd. (“AII”), which operates in Bermuda, joined the Company’s other eligible domestic subsidiaries in the filing of the consolidated tax return. This was due to the nature of the foreign subsidiary’s activities in the United States. Other foreign subsidiaries file in their respective country of domicile, as required.
       
     
Deferred income taxes reflect the impact of “temporary differences” between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The deferred tax asset primarily consists of the book versus tax differences for premiums earned, loss and loss adjustment expense reserve discounting, policy acquisition costs, earned but unbilled premiums, and unrealized holding losses on marketable equity securities. Changes in deferred income tax assets and liabilities that are associated with components of other comprehensive income, primarily unrealized investment gains and losses, are recorded directly to other comprehensive income. Otherwise, changes in deferred income tax assets and liabilities are included as a component of income tax expense. The Company evaluates the recoverability of deferred tax assets. A valuation allowance is recorded to reduce any portion of the deferred tax asset that is expected to more likely not be realized. Adjustments to the valuation allowance will be made if there is a change in management’s assessment of the amount of the deferred tax asset that’s realizable.
       
    (e)
Estimates
       
     
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions, which include the reserves for losses and LAE, are subject to considerable estimation error due to the inherent uncertainty in projecting ultimate claim amounts that will be reported and settled over a period of many years. In addition, estimates and assumptions associated with the amortization of deferred charges, the determination of fair value of invested assets and related impairments, and the determination of goodwill impairments require considerable judgment by management. On an on-going basis, management reevaluates its assumptions and the methods of calculating its estimates. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements.
       
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
   
(f)
Premiums
       
     
Insurance premiums are recognized as earned primarily on the straight-line basis over the contract period. Unearned premiums represent the portion of premiums written which is applicable to the unexpired term of policies in force. Premium adjustments on contracts and audit premiums are based on estimates made over the contract period. Premiums earned but not yet billed to insureds are estimated and accrued, net of related costs. These estimates are subject to the effects of trends in payroll audit adjustments. Although considerable variability is inherent in such estimates, management believes that the accrual for earned but unbilled premiums is reasonable. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations. The Company also estimates an allowance for doubtful accounts which amounted to $5,821 and $2,336 at December 31, 2005 and 2004, respectively.
       
   
(g)
Loss and LAE
       
     
Loss and loss adjustment expenses (“LAE”) represent the estimated ultimate net costs of all reported and unreported losses incurred through December 31. The reserves for unpaid losses and LAE are estimated using individual case-basis valuations and statistical analyses and are not discounted. Although considerable variability is inherent in the estimates of reserves for losses and LAE, management believes that the reserves for losses and LAE are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known. Such adjustments are included in current operations
       
   
(h)
Investments
       
     
The Company follows Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which requires categorization of fixed maturities as held-to-maturity, available-for-sale or trading and equity securities as available-for-sale or trading.
       
     
Fixed maturities (bonds and certificates of deposit) that the Company has the specific intent and ability to hold until maturity are carried at amortized cost. Fixed maturities that the Company does not have the positive intent and ability to hold to maturity and all equity securities (common stocks, mutual funds and non-redeemable preferred stock) are classified as available-for-sale and carried at fair value. Unrealized gains or losses on available-for-sale securities are reported as a component of accumulated other comprehensive income. The Company does not have any trading securities. In addition, the Company evaluates its investment securities for other-than-temporary declines based on quantitative and qualitative factors.
       
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
     
The Company uses the equity method of accounting for investments in limited partnerships in which its ownership interest of the limited partnership enables the Company to influence the operating or financial decisions of the investee company, but the Company’s interest in the limited partnership does not require consolidation. The Company’s proportionate share of equity in net income of these unconsolidated affiliates is reported in net investment income.
       
     
Short-term investments are carried at cost, which approximates fair value, and include investments with maturities of less than one year at date of acquisition.
       
     
Net investment income consists primarily of interest and dividends less expenses. Interest on fixed maturities, adjusted for any amortization of premium or discount, is recorded as income when earned. Investment expenses are accrued as incurred. Realized investment gains or losses are computed using the specific costs of securities sold, and, if applicable, include write-downs on investments having other-than-temporary decline in value.
       
     
Management evaluates whether temporary or other than temporary impairments (“OTTI”) have occurred on a case by case basis. Management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause and decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used by the Company in the other than temporary impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the market value has been below amortized cost; (ii) whether the issuer is experiencing significant financial difficulties; (iii) financial difficulties being experienced by an entire industry sector or sub-sector; (iv) economically depressed geographic locations; (v) situations where the issuer, series of issuers or industry has a catastrophic type of loss or has exhausted natural resources; (vi) situations where it is determined that an impairment is attributable to changes in market interest rates, the Company’s ability and intent to hold impaired securities until recovery of fair value at or above cost; and (vii) other subjective factors, including concentrations and information obtained from regulators and rating agencies.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
   
(i)
Goodwill and Intangible Assets
       
     
Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives. The Company evaluates the recoverability of its intangible assets whenever changes in circumstances warrant it. If it is determined that an impairment exists, the excess of the unamortized balance over the fair value of the intangible asset will be charged to income at that time.
       
     
Intangible assets with an indefinite life and goodwill are not amortized. The Company continues to review the carrying value of goodwill related to all of its investments for any impairment at least annually. If it is determined that an impairment exists, the Company adjusts the carrying value of goodwill to fair value. The impairment charge is recorded in income in the period in which it is determined.
       
   
(j)
Policy Acquisition Costs
       
     
Costs of acquiring new business, principally commissions, premium taxes and assessments relating to new and renewal insurance business are deferred and amortized over the terms of the underlying policies. The Company considers anticipated investment income in determining whether a premium deficiency relating to short duration contracts exists. Amortization of deferred acquisition costs was $5,815, $8,052 and $7,350 for the years ended December 31, 2005, 2004 and 2003, respectively.
       
   
(k)
Concentration and Credit Risk
       
     
Financial instruments that potentially subject the Company to concentration of credit risk are primarily cash and cash equivalents, investments and accounts receivable. Investments are diversified through many industries and geographic regions through the use of money managers who employ different investment strategies. The Company limits the amount of credit exposure with any one financial institution and believes that no significant concentration of credit risk exists with respect to cash and investments. At December 31, 2005 and 2004, the outstanding premiums and notes receivable balance is generally diversified due to the number of entities composing the Company’s customer base. To reduce credit risk, the Company performs ongoing evaluations of its customers’ financial condition. The Company also has receivables from its reinsurers. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company periodically evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. It is the policy of management to review all outstanding receivables at year end as well as the bad debt write-offs experienced in the past and establish an allowance for doubtful accounts, if deemed necessary.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
   
(l)
Assessments
       
     
Assessments represent a funding mechanism employed by states to provide funds to cover policyholder obligations of insolvent entities. Estimated liabilities for assessments, required under State Workers’ Compensation laws, are included in accrued expenses and other liabilities. Assessment expense for the years ended December 31, 2005, 2004 and 2003 was approximately $7,351, $4,048, and $2,104, respectively.
       
   
(m)
Earnings Per Share
       
   
Basic earnings per share are computed based on the weighted-average number of common shares outstanding. Net income has been adjusted for the effect of the dividends accumulated on the cumulative preferred stock.

      
2005
 
2004
 
2003
 
Net income
 
$
37,559
 
$
14,110
 
$
1,392
 
Less: Preferred stock
                   
Dividend (1)
   
(1,200
)
 
(4,800
)
 
(4,800
)
Net income (loss) available to common stockholders
 
$
36,359
  
$
9,310
  
$
(3,408
)
Weighted-average number of shares outstanding
    
24,089
    
24,089
    
24,089
 
Basic earnings per common share available to common stockholders:
                   
Income (loss) from continuing operations
 
$
.80
 
$
.30
   
(.14
)
Discontinued operations
    
.71
    
.09
    
—
 
Net income (loss) per common share
  
$
1.51
  
$
.39
  
$
(.14
)
                   
(1)
Dividends were declared in 2005 (See Note 18)
 
     
Giving pro forma effect to the subsequent issuance of an aggregate of 10,285,714 shares of common stock in exchange for all the issued and outstanding shares of preferred stock as described in Note 18(a), diluted earnings per share would be:
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
               
        
2005
  
2004
  
2003
 
Diluted earnings per common share equivalent:
             
Income from continuing operations
 
$
.60
 
$
.35
 
$
.04
 
Discontinued operations
    
.49
    
.06
    
—
 
Diluted net income per common share
  
$
1.09
  
$
.41
  
$
.04
 

   
(n)
Reinsurance
       
     
Reinsurance premiums, losses and LAE are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums earned and losses incurred ceded to other companies have been recorded as a reduction of premium revenue and losses and LAE. Commissions allowed by reinsurers on business ceded have been accounted for as a reduction of the related policy acquisition costs. Reinsurance recoverables are reported relating to the portion of reserves and paid losses and LAE that are ceded to other companies. The Company remains contingently liable for all loss payments, in the event of failure to collect from the reinsurer.
       
   
(o)
Fair Value of Financial Instruments
       
     
Fair value for fixed maturity and equity securities is based on quoted market prices or, if they are not actively traded, on estimated values obtained from independent pricing services. Fair values of other financial instruments approximate their carrying values.
       
   
(p)
Foreign Currency
       
     
The assets and liabilities of the Ireland subsidiary are translated from its functional currency (Euro) to the U.S. dollar using the exchange rate at the balance sheet date. Results of operations are translated from the designated functional currency to the U.S. dollar using average exchange rates during the period. Foreign currency translation gains or losses are included in stockholders’ equity as a component of accumulated other comprehensive income.
       
    (q)
Reclassifications
       
     
Certain accounts in the prior years’ consolidated financial statements have been reclassified for comparative purposes to conform to the current year’s presentation.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
   
(r)
Recent Accounting Pronouncements
       
     
In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“FSP 115-1”), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and how to measure such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 supersedes Emerging Issues Task Force (“EITF”) Issue No. 03-1. The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03-1”) and EITF Topic D-44, Recognition of Other-Than-Temporary Impairment on the Planned Sale of a Security Whose Cost Exceeds Fair Value (“Topic D-44”) and nullifies the accounting guidance on the determination of whether an investment is other-than-temporarily impaired as set forth in EITF 03-1. FSP 115-1 is required to be applied to reporting periods beginning after December 15, 2005. It is not expected to have a material impact on the Company’s consolidated financial statements in the coming year.
       
     
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), “Share-Based Payment”, which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”. Statement 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends FASB Statement No. 95, “Statement of Cash Flows”. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. In April 2005, the SEC amended the compliance dates for Statement 123(R) from fiscal periods beginning after June 15, 2005 to fiscal years beginning after December 15, 2005. The Company expects to adopt Statement 123(R) in its fiscal year commencing January 1, 2006, after the approval of Stock option plan in February 2006 by the Company's stockholders.
       
     
In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB No. 20 and SFAS No. 3” (“SFAS No. 154”). SFAS No. 154 replaces APB No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” and changes the requirements for the accounting for and reporting of a change in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. The Company is required to adopt SFAS No. 154 as of January 1, 2006, and does not expect that such adoption will have a significant impact on its financial position or results of operations.
       
     
In March 2005, the FASB issued FAS Staff Position (“FSP”) FIN 46(R)-5, “Implicit Variable Interests Under FASB Interpretation No. 46(R)” (“FSP FIN 46(R)-5”), which requires an enterprise to consider whether it holds an implicit variable interest in a Variable Interest Entity (“VIE”) and what effect this may have on the calculation of expected losses and residual returns of the VIE and the determination of which party, if any, is considered the primary beneficiary of the VIE. FSP FIN 46(R)-5 was effective for the first reporting period beginning after March 3, 2005 and did not have a material impact on the Company’s financial condition or results of operations.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
3.
 
Investments      
The original cost, estimated market value and gross unrealized appreciation and depreciation of equity securities are presented in the tables below:
       
   
(a)
Available-for-Sale Securities

Year ended December 31, 2005
  
Original
or
amortized
cost
  
Gross
unrealized
gains
  
Gross
unrealized
losses
  
Market
value
 
Preferred stock
 
$
60
 
$
—
 
$
—
 
$
60
 
Common stock
   
37,290
   
3,063
   
(7,658
)
 
32,695
 
Fixed maturities
    
40,007
    
660
    
(791
)
 
39,876
 
         
$
77,357
  
$
3,723
  
$
(8,449
)
$
72,631
 

           
Year ended December 31, 2004
  
Original
or
amortized
cost
  
Gross
unrealized
gains
  
Gross
unrealized
losses
 
Market
value
 
Preferred stock
 
$
50
   
—
 
$
(4
)
$
46
 
Common stock
   
5,844
   
204
   
(582
)
 
5,466
 
Fixed maturities
    
8,691
    
—
    
(82
)
 
8,609
 
      
$
14,585
  
$
204
  
$
(668
)
$
14,121
 

                      
Stockholders’ equity for the years ended December 31, 2005 and 2004 includes a net unrealized holding loss on equity securities and available-for-sale fixed maturities of $4,726 and $464, respectively (net of a deferred tax benefit of $1,678 and $101, respectively).
       
     
Proceeds from the sale of investments in available-for-sale securities during the years ended December 31, 2005, 2004 and 2003 were approximately $59,206, $2,622 and $371, respectively.
       
   
(b)
Held-to-Maturity Securities
       
   
The amortized cost, estimated market value and gross unrealized appreciation and depreciation of fixed maturity investments are presented in the tables below:
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
                   
Year ended
December 31, 2005
  
Amortized
cost
  
Unrealized
gains
  
Unrealized
losses
 
Fair
value
 
Obligations of U.S. Treasury, Government corporations and agencies
 
$
140,467
 
$
4
 
$
(1,843
)
$
138,628
 
Mortgage-backed securities
    
10,637
    
1
    
(362
)
 
10,276
 
        
$
151,104
  
$
5
  
$
(2,205
)
$
148,904
 

Year ended
December 31, 2004
  
Amortized
cost
  
Unrealized
gains
  
Unrealized
losses
  
Fair
value
 
Obligations of U.S. Treasury, Government corporations and agencies
 
$
126,619
 
$
124
 
$
(428
)
$
126,315
 
Obligations of foreign governments
   
250
   
—
   
—
   
250
 
Mortgage-backed securities
    
9,823
    
28
    
(154
)
 
9,697
 
       
$
136,692
  
$
152
  
$
(582
)
$
136,262
 

     
Proceeds from sale of investments in held-to-maturity securities during the years ended December 31, 2005, 2004 and 2003 were $55,494, $39,904 and $25,478, respectively.
       
     
A summary of the Company’s held-to-maturity and available-for-sale fixed maturity securities at December 31, 2005, by contractual maturity, is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
Amortized
cost
 
Fair Value
 
Due in one year or less
 
$
33,909
 
$
33,728
 
Due after one through five years
   
126,793
   
124,520
 
Due after five through ten years
   
19,758
   
19,933
 
Due after ten years
   
10,651
   
10,599
 
Total fixed maturities
 
$
191,111
 
$
188,780
 

     
At December 31, 2005 and 2004, bonds with an asset value of $5,799 and $4,999, respectively, were on deposit with state insurance departments to satisfy regulatory requirements.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
   
(c)
Investment Income
       
     
Net investment income for the years ended December 31, 2005, 2004 and 2003 was derived from the following sources:

        
2005
  
2004
  
2003
 
Fixed maturities
 
$
6,302
 
$
2,442
 
$
1,433
 
Equity securities
   
926
   
345
   
298
 
Cash and cash equivalents
   
4,255
   
1,049
   
155
 
Loans to affiliates
    
136
    
132
    
479
 
     
11,619
   
3,968
   
2,365
 
Less: Investment expenses
    
(85
)
 
(39
)
 
(60
)
        
$
11,534
  
$
3,929
  
$
2,305
 

   
(d)
Realized Gains and Losses
       
     
The table below indicates the gross realized gains and losses for the years ended December 31, 2005, 2004 and 2003.

       
Year ended
December 31, 2005
  
Gross gains on sales
  
Gross losses on sales
  
Net gains on sales
 
Debt securities
 
$
703
 
$
(624
)
$
79
 
Equity Securities
    
4,974
    
(178
)
 
4,796
 
       
$
5,677
  
$
(802
)
$
4,875
 

       
Year ended
December 31, 2004
 
Gross gains on sales
 
Gross losses on sales
 
Net gains
on sales
 
Debt securities
 
$
522
 
$
—
 
$
522
 
Equity Securities
   
827
   
71
   
756
 
     
$
1,349
 
$
71
 
$
1,278
 

       
Year ended
December 31, 2003
 
Gross gains on sales
 
Gross losses on sales
 
Net gains
on sales
 
Debt securities
 
$
255
 
$
(6
)
$
249
 
Equity Securities
   
169
   
(1,352
)
 
(1,183
)
Other invested assets
   
—
   
(70
)
 
(70
)
      
$
424
 
$
(1,428
)
$
(1,004
)
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
   
(e)
Unrealized Gains and Losses
       
     
Net unrealized gains on held-to-maturity fixed maturity securities were as follows:
 
Year ended December 31,
 
2005
 
2004
 
2003
 
Net unrealized (losses) gains
 
$
(2,200
)
$
(430
)
$
124
 
Increase in net unrealized losses
   
(1,770
)
 
(554
)
 
269
 

     
Net unrealized losses on available-for-sale securities were as follows:

Year ended December 31,
 
2005
 
2004
 
2003
 
Fixed maturities
 
$
(131
)
$
(82
)
$
233
 
Equity securities
   
(4,595
)
 
(382
)
 
(397
)
Total net unrealized
   
(4,726
)
 
(464
)
 
(164
)
Deferred income tax benefit
   
1,678
   
101
   
156
 
Net unrealized losses, net of deferred income tax
   
(3,048
)
 
(363
)
 
(8
)
Increase in net unrealized losses, net of deferred income tax
 
$
(2,685
)
$
(355
)
$
2,372
 

   
(f)
Other Than Temporary Impairment
       
     
The following table represents the amortized cost and gross unrealized losses for securities where the estimated fair value had declined and remained below amortized cost by less than 12 months, or 12 months or more as of December 31, 2005:

   
Less than 12 months
 
12 months or more
 
Total
 
   
Fair market
 
Unrealized
 
Fair market
 
Unrealized
 
Fair market
 
Unrealized
 
   
value
 
losses
 
Value
 
losses
 
value
 
losses
 
Available-for-sale securities:
                         
Common stock
 
$
7,700
 
$
(6,960
)
$
4,050
 
$
(698
)
$
11,750
 
$
(7,658
)
Fixed maturities
   
19,293
   
(645
)
 
7,962
   
(146
)
 
27,255
   
(791
)
Total temporarily impaired securities available-for-sale securities
 
$
26,993
 
$
(7,605
)
$
12,012
 
$
(844
)
$
39,005
 
$
(8,449
)
 
   
Less than 12 months
 
12 months or more
 
Total
 
   
Fair market
 
Unrealized
 
Fair market
 
Unrealized
 
Fair market
 
Unrealized
 
      
value
 
losses
 
Value
 
losses
 
value
 
losses
 
Held-to-maturity securities:
                         
Common stock
 
$
83,194
 
$
(826
)
$
51,754
 
$
(1,017
)
$
134,948
 
$
(1,843
)
Fixed maturities
    
4,457
   
(47
)
 
5,527
   
(315
)
 
9,984
   
(362
)
Total temporarily impaired securities — held-to- maturity securities
  
$
87,651
 
$
(873
)
$
57,281
 
$
(1,332
)
$
144,932
 
$
(2,205
)
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
4.
 
Intangible Assets
 
(a)
On December 30, 2002, the Company purchased all the issued and outstanding stock of The Princeton Agency Inc. The purchase price was comprised of $500 paid at closing, plus a specified percent of the gross premium relating to new and renewal business written during the period from the closing date through the fifth anniversary of the closing date. The minimum guaranteed purchase price is $5,500. Any additional amounts will be recorded as an intangible asset as these amounts become known. No such additional amount has been recorded as of December 31, 2005 and 2004. Goodwill recorded as a result of this transaction was $5,500. The Company recorded a liability for the unpaid portion of the purchase price of $5,000. The balance outstanding at December 31, 2005 and 2004 was $2,411 and $3,500, respectively, and is included in other liabilities on the accompanying consolidated balance sheets.
       
   
(b)
On December 14, 2003, the Company acquired certain assets (primarily contract renewal rights and agent relationships) from The Covenant Group, Inc. (“CGI”). The purchase price consisted of $600 ($100 paid at closing and $500 payable over sixty months). The minimum purchase price is $1,309. An intangible asset was recorded as a result of this transaction for $1,309. Additional purchase price will be based upon a specified percentage of new and renewal premium written for the three years commencing on the closing date, plus a percentage of CGI’s profit for the same three-year period. This additional purchase price is being recorded as an intangible asset as these amounts become known. An additional amount of $1,153 was recorded for 2005. The balance outstanding at December 31, 2005 and 2004 was $1,515 and $659, respectively, and is included in other liabilities in the accompanying consolidated balance sheets.
       
   
(c)
On August 31, 2004, the Company purchased insurance contract renewal rights from Associated Industries Insurance Company and Associated Industries Insurance Services. The purchase price is comprised of $250 paid at closing, plus a specified percent of all gross premiums written for each policy that is written or renewed prior to December 31, 2007. The minimum guaranteed purchase price is $2,500. An intangible asset was recorded as a result of this transaction for $2,500. The Company has recorded a liability for the unpaid portion of the purchase price. Any additional amounts will be recorded as an intangible asset as these amounts become known. An additional amount of $432 was recorded for 2005. The balance outstanding at December 31, 2005 and 2004 was $2,467 and $2,250, respectively, and is included in other liabilities on the accompanying consolidated balance sheets.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
   
(d)
On December 13, 2005, the Company acquired the renewal rights to Alea North America’s (“Alea”), a specialty property and casualty business whose primary lines of business are workers’ compensation, general liability, auto liability and property. The purchase price is equal to a percentage of gross premiums written through the fifth anniversary of the closing of this transaction. The Company paid a nonrefundable $12,000 advance at closing. $10,000 represent intangible assets and $2,000 represent the cost of fixed assets acquired. The ultimate purchase price cannot exceed $75,000 and will be recorded as an intangible asset as these amounts become known.
       
     
Goodwill and intangible assets consists of the following:

December 31,
  
2005
  
2004
 
Goodwill
 
$
5,500
 
$
5,500
 
Renewal rights and agent relationships, net of accumulated amortization (2005 - $112; 2004- $-0-)
    
15,281
    
3,809
 
      
$
20,781
  
$
9,309
 

     
The intangible assets for renewal rights and agent relationships are being amortized on a straight-line basis over their estimated useful life of forty years. Amortization expense for the years ended December 31, 2005, 2004 and 2003 was $112, $-0-, and $0-, respectively.
       
5.
Property and
Equipment, Net
Property and equipment, net consist of the following:

December 31,
 
2005
 
2004
 
Land
 
$
881
 
$
—
 
Building
   
4,992
   
—
 
Internal use software
   
3,199
   
281
 
Computer equipment
   
1,462
   
911
 
Furniture and fixtures
   
132
   
187
 
Leasehold improvement
   
74
   
—
 
     
10,740
   
1,379
 
Less: Accumulated depreciation and amortization
   
(1,089
)
 
(581
)
   
$
9,651
 
$
798
 
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
6.
Accrued Expenses and Other Current Liabilities
As of December 31, 2005 and 2004, accrued expenses and other current liabilities consisted of the following:

       
2005
  
2004
 
Premium taxes, assessments and surcharges payable
 
$
21,558
 
$
19,231
 
Accrued expenses
   
33,163
   
18,702
 
Premiums collected in advance
   
4,727
   
2,965
 
Premium audits, cancellations and
overpayments
    
1,982
    
2,296
 
       
$
61,430
  
$
43,194
 

7.
Liability for Unpaid Loss
and LAE
 
   
The following table provides a reconciliation of the beginning and ending balances for unpaid losses and LAE, reported in the accompanying consolidated balance sheets as of December 31, 2005 and 2004:

December 31
  
2005
  
2004
 
Unpaid losses and LAE, gross of related reinsurance recoverables at beginning of year
 
$
99,364
 
$
37,442
 
Less: Reinsurance recoverables at beginning of year
    
14,445
   
4,046
 
Net balance, beginning of year
    
84,919
    
33,396
 
Incurred related to:
             
Current year
   
142,968
   
86,762
 
Prior year
    
(962
)
 
3,416
 
Total incurred losses during the current year
    
142,006
    
90,178
 
Paid losses and LAE related to:
             
Current year
   
(53,988
)
 
(34,724
)
Prior year
    
(22,597
)
 
(3,836
)
Total payments for losses and LAE
    
(76,585
)
 
(38,560
)
Commuted loss reserves
    
—
    
(95
)
Net balance, December 31
   
150,340
   
84,919
 
Plus reinsurance recoverables at end of year
    
17,667
    
14,445
 
Unpaid losses and LAE, gross of related reinsurance recoverables at end of year
 
$
168,007
 
$
99,364
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
   
In 2005 the Company’s liabilities for unpaid losses and LAE attributable to prior years decreased by $962 as a result of favorable loss development. In 2004 and 2003, the Company’s liabilities for unpaid losses and LAE attributable to prior years increased by $3,416 and $368, respectively, as a result of unfavorable loss development. Management believes the historical experience of the Company is a reasonable basis for estimating future losses. However, future events beyond the control of management, such as changes in law, judicial interpretations of law, and inflation may favorably or unfavorably impact the ultimate settlement of the Company’s loss and LAE.
       
   
The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated changes in claim costs due to inflation are considered in estimating the ultimate claim costs, the increase in average severity of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modified if necessary.
       
8.
 
Reinsurance
 
 
   
The Company utilizes reinsurance agreements to reduce its exposure to large claims and catastrophic loss occurrences. These agreements provide for recovery from reinsurers of a portion of losses and LAE under certain circumstances without relieving the insurer of its obligation to the policyholder. Losses and LAE incurred and premiums earned are after deduction for reinsurance. In the event reinsurers are unable to meet their obligations under reinsurance agreements, the Company would not be able to realize the full value of the reinsurance recoverable balances. The Company periodically evaluates the financial condition of its reinsurers in order to minimize its exposure to significant losses from reinsurer insolvencies. Reinsurance does not discharge or diminish the primary liability of the Company; however, it does permit recovery of losses on such risks from the reinsurers.
       
   
The Company has coverage for its workers’ compensation line of business under these excess of loss reinsurance agreements. The agreements cover losses in excess of $500 through December 31, 2004 and $600 effective January 1, 2005, per occurrence up to a maximum $130,000 ($80,000 prior to 2004) in losses per occurrence. The Company also has an excess of loss reinsurance agreement for war and terror related losses covering losses in excess of $1,000 per occurrence up to a maximum of $10,000 per occurrence. Beginning with policies effective January 1, 2006, the Company retains the first $1,000 per occurrence.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
    The Company also cedes and assumes reinsurance under quota share reinsurance agreements.
       
   
Included in the Company’s loss reserves as of December 31, 2005 and 2004 is approximately $4,511 and $4,236, respectively, relating to assumed lines of business (written primarily by Rochdale Insurance Company (“Rochdale”) prior to its acquisition by the Company) that are in a run-off position. The Company continuously updates the reserves on these lines of business based on information available from the ceding insurers. During 2005, the Company did not commute any reinsurance contracts. During 2004, the Company commuted two reinsurance contracts resulting in a loss of approximately $95. The loss reserves transferred, as they relate to this commutation, were insignificant.
       
   
Technology Insurance Company (“Technology”), Rochdale and AII became participants in an intercompany reinsurance facility. Under this reinsurance agreement, all premiums written by the lead underwriting company for certain lines of business are ceded in accordance with the percentage share outlined in the reinsurance agreement. The premiums ceded are computed after giving effect to all other quota share and excess of loss agreements.
       
    The agreement was amended effective March 1, 2003 to change the net retention for each entity as follows:

   
Through
 
Beginning
 
   
February 28,
 
March 1,
 
      
2003
  
2003
 
Technology
   
42.50
%
 
20.00
%
AII
   
42.50
   
70.00
 
Rochdale
    
15.00
    
10.00
 

   
In addition, AmTrust International Underwriters, Ltd. (“AIU”), an Ireland subsidiary, cedes 60% of its net retained premium to AII. AII intercompany reinsurance transactions and balances due between these entities have been eliminated in the consolidated financial statements.
     
   
The effect of reinsurance with unrelated companies on premiums and losses for 2005, 2004 and 2003 are as follows:

Year ended December 31, 2005
  
Written
  
Earned
 
Premiums:
         
Direct
 
$
252,598
 
$
218,109
 
Assumed
   
33,533
   
27,977
 
Ceded
    
(26,918
)
 
(30,056
)
      
$
259,213
  
$
216,030
 
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
           
Year ended December 31, 2004
  
Written
 
Earned
 
Premiums:
         
Direct
 
$
197,522
 
$
148,160
 
Assumed
   
13,329
   
8,149
 
Ceded
     
(23,353
)
 
(17,495
)
      
$
187,498
  
$
138,814
 

Year ended December 31, 2003   
Written
  
Earned
 
Premiums:
         
Direct
 
$
93,611
 
$
58,916
 
Assumed
   
3,879
   
3,222
 
Ceded
    
(15,567
)
 
(10,471
)
      
$
81,923
  
$
51,667
 

December31, 2005
  
Assumed
  
Ceded
 
Loss and LAE reserves
 
$
21,910
 
$
(17,058
)
Unearned premiums
   
10,086
   
(19,281
)
Loss and LAE expense incurred
    
15,460
    
(11,674
)

December 31, 2004
 
Assumed
  
Ceded
 
Losses and LAE reserves
 
$
12,396
 
$
10,352
 
Unearned premiums
   
4,208
   
(12,832
)
Loss and LAE expense incurred
     
8,561
    
(19,716
)

December 31, 2003   
Assumed
  
Ceded
 
Losses and LAE reserves
 
$
6,607
 
$
2,222
 
Unearned premiums
   
1,138
   
(8,202
)
Loss and LAE expense incurred
    
2,717
    
(4,099
)
 

 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
9.
 
Bank
Financing
 
On December 27, 2005, the Company obtained a $25,000 line of credit from its bank. This advance was in the form of a master grid note which expired on April 14, 2006. Interest was charged at 5.97% per annum. The line was collateralized by certain assets of the Company. This line of credit was paid off in February 2006. AFS Capital Corp., a subsidiary of the Company, entered into a line of credit agreement with a bank for borrowings of up to $5,000. The credit agreement bore interest at the bank’s prime rate and was to expire in August 2007. The credit agreement was collateralized by all of AFS Capital Corp.’s assets. The balance outstanding on this line of credit agreement as of December 31, 2005 and 2004 was $0 and $1,700, respectively. This line of credit was fully repaid in conjunction with the sale of the assets of AFS Capital Corp. in 2005.
     
10.
 
Mortgage
Debt
At December 31, 2004, the Company’s real estate properties held for resale were encumbered by mortgages with interest rates ranging from 7.54% - 7.94%. These loans were repaid in their entirety in 2005.
     
11.
Junior Subordinated Debt
 
   
On March 17, 2005 and June 15, 2005, the Company participated in two separate private placements of $25,000 each (Trust Preferred I and II) of fixed/floating rate capital securities issued by wholly-owned trusts of the Company. The securities require interest-only payments to be made on a quarterly basis, with principal due at maturity date. The Company incurred $1,140 of placement fees in connection with this financing which will be amortized over thirty years. This amount is reflected in prepaid expenses and other assets in the accompanying consolidated balance sheets.

       
Trust
 
        
Trust Preferred I
 
Preferred II
 
Amount outstanding at year end
 
$
25,000
 
$
25,000
 
Interest rate first 10 years
   
8.275
%
 
7.71
%
Interest rate after 10 years
   
LIBOR + 3.4
%
 
LIBOR + 3.4
%
Maturity date
   
March 17, 2035
   
June 15, 2035
 

12.
Income Taxes
The provision for income taxes consists of the following:

Year ended December 31,
  
2005
  
2004
  
2003
 
Total current provision
 
$
13,088
 
$
4,355
 
$
1,840
 
Total deferred benefit
   
(6,422
)
 
(527
)
 
(582
)
Total provision
  
$
6,666
  
$
3,828
  
$
1,258
 
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
     
    The effective income tax rate differs from the statutory income tax rate as follows:

December 31,
 
2005
 
2004
 
2003
 
Income before income taxes
  
$
44,225
 
$
17,938
 
$
2,650
 
Tax at Federal statutory rate of 35%
 
$
15,479
 
$
6,278
 
$
928
 
Tax effects resulting from:
                   
Net income of non-includible foreign subsidiaries
   
(2,496
)
 
(1,670
)
 
(691
)
Foreign currency gain
   
(7,747
)
 
—
   
—
 
Other, net
   
1,430
 
$
(780
)
 
1,021
 
      
$
6,666
   
3,828
 
$
1,258
 

   
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 2005 and 2004 are shown below.

December 31,
   
2005
  
2004
 
Deferred tax assets:
         
Unrealized depreciation of investments
 
$
1,678
 
$
101
 
Losses and LAE reserves
   
7,611
   
3,627
 
Unearned premiums
   
9,626
   
5,120
 
Other
    
331
    
—
 
         
19,246
    
8,848
 
Deferred tax liabilities:
             
Earned but unbilled premiums
   
(1,537
)
 
(1,120
)
Deferred acquisition costs
   
(8,313
)
 
(5,412
)
Other
   
—
    
(364
)
        
(9,850
)
 
(6,896
)
Deferred tax asset, net
  
$
9,396
  
$
1,952
 

    The Company’s management believes that it will realize the benefits of its net deferred tax asset and, accordingly, no valuation allowance has been recorded for the periods presented.
     
    The Company does not provide for income taxes on the unremitted earnings of foreign subsidiaries where, in management’s opinion such earnings have been indefinitely reinvested. It is not practical to determine the amount of unrecognized deferred tax liabilities for temporary differences related to these investments.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
13.
 
Discontinued Operations
 
   
In 2005, the Company discontinued the operations of its subsidiary, AFS Capital, Inc., and the loss of $1,010 associated with the elimination of the investment was treated as discontinued operations.
       
 
In December 2002, the Company acquired 100% of the common stock of AmTrust Pacific Limited, a New Zealand real estate operating company, from New Gulf Holdings, Inc., a Delaware corporation, in exchange for 1,000 shares of preferred stock of the Company. The purpose of this transaction was to increase the surplus of the Company. During 2005, all the real estate holdings for AmTrust Pacific Limited were sold and the net proceeds (consideration received less repayment of the outstanding mortgage notes and transaction costs) were placed in the Company’s investment portfolio. The proceeds of the distribution were invested in accordance with investment guidelines. The Company recognized a $21,745 net gain from these transactions, all of which was attributable to gain from foreign currency.
       
   
The following results have been presented as other income (loss) from discontinued operations for the years ended December 31, 2005, 2004 and 2003.

Year ended December 31,
   
2005
  
2004
  
2003
 
Rental income
 
$
7,519
 
$
19,565
 
$
18,306
 
Gain (loss) on sale of property
   
(2,316
)
 
(730
)
 
463
 
Interest and other income
   
(252
)
 
1,669
   
912
 
Rental expenses
   
(5,795
)
 
(9,870
)
 
(10,585
)
Interest expense
   
(2,852
)
 
(8,500
)
 
(9,126
)
Write-off of investment in AFS Capital, Inc.
    
(1,010
)
 
—
    
—
 
       
$
(4,706
)
$
2,134
  
$
(30
)

14.
Supplemental Cash Flow
Information
 
 
December 31,   
2005
  
2004
  
2003
 
Supplemental disclosures of cash flow information:
             
Cash paid during the year for:
             
Interest
 
$
2,593
 
$
264
 
$
221
 
Income taxes
    
4,000
    
2,936
    
79
 
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
    Supplemental schedule of noncash investing and financing activities:
     
   
(a)
On December 1, 2003, the Company acquired certain assets from CGI for $600, plus potential future payments. The seller was issued a $500 note in addition to the $100 paid in cash. Accruals were made for 2005 totaling $933, which represent additional purchase price based on renewal premiums (see Note 4(b)).
       
   
(b)
On August 31, 2004, the Company acquired insurance contract renewal rights for $2,500, plus potential future payments. The seller was issued a $2,250 note in addition to the $250 paid in cash. Accruals were made for 2005 totaling $217, which represent additional purchase price based on renewal premiums (see Note 4(c)).
       
15.
Commitments and
Contingencies
 
 
   
(a)
Litigation
       
 
 
 
 
The Company’s insurance subsidiaries are named as defendants in various legal actions arising principally from claims made under insurance policies and contracts. Those actions are considered by the Company in estimating the loss and LAE reserves. The Company’s management believes the resolution of those actions will not have a material adverse effect on the Company’s financial position or results of operations.
       
    (b)
Lease Commitments
       
     
The Company is obligated under several leases for office space expiring at various dates through March 2009.
       
     
Future minimum lease payments as of December 31, 2005 under noncancellable operating leases for each of the next five years are approximately as follows:

Year ended December 31
         
2006
 
$
1,594
 
2007
   
1,504
 
2008
   
1,322
 
2009
   
588
 
2010
   
331
 
       
$
5,339
 

AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
     
The Company has subleased one of its leases to an unrelated entity expiring March 29, 2006. The Company is still the primary obligor on this lease. The minimum annual rentals to be received under this noncancellable sublease are approximately $320 per annum.
       
     
Rent expense, net of sublease rent, for the years ended December 31, 2005, 2004 and 2003 was $1,230, $637 and $541, respectively.
       
   
(c)
Employment Agreements
       
     
The Company has entered into employment agreements with eight employees, including five of its key executives. The agreements terminate on varying dates through December 31, 2009, contain annual minimum levels of compensation, and contain bonuses based on the Company’s achieving certain financial targets. The annual minimums in the aggregate are as follows:

Year ended December 31
          
2006
 
$
2,672
 
2007
   
2,239
 
2008
   
1,803
 
2009
   
600
 
        
$
7,314
 

16.
 
Concentration of Lines of Business
 
    For the years ended December 31, 2005, 2004 and 2003, 71%, 64% and 79%, respectively, of net premiums written were for the workers’ compensation line of business
       
17.
Related Party Transactions
 
 
   
( a)
Premiums
       
     
For the years ended December 31, 2005, 2004 and 2003, approximately $-0-, $790 and $1,289, respectively, of premiums written were for a company related under common ownership. Included in operating expenses for the years ended December 31, 2005, 2004 and 2003, are service fees for these policies paid to the related entity of approximately $-0-, $387 and $673, respectively.
       
   
(b)
Due to Stockholders
       
     
In December 2004, the Company’s ultimate stockholders loaned the Company $12,973. This loan was repaid in 2005.
       
   
(c)
Lease Agreement
       
   
 
In June 2002, we entered into a lease for approximately 9,000 square feet of office space at 59 Maiden Lane in downtown Manhattan from 59 Maiden Lane Associates, LLC, which is owned by stockholders. We pay annual rent of approximately $308 for this space. The lease expires in August 2008.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
18.
Stockholders’ Equity
 
 
   
(a)
Preferred Stock
       
     
On December 9, 2002, the Board of Directors authorized the issuance of 1,000 shares of preferred stock, no par value, (the “preferred shares”). The preferred shares were issued in exchange for all the issued and outstanding stock of AmTrust Pacific Limited.
       
     
Holders of the preferred shares were entitled to receive cumulative dividends out of any assets legally available at a rate of 8% of the liquidation value of $60,000 per share, per annum, commencing with the year ending December 31, 2003. As of December 31, 2005, there were no undeclared dividends on the preferred stock. Total dividends declared and paid in 2005 were $10,800, which represented cumulative payments for 2003 $(4,800), 2004 $(4,800) and 2005 $(l,200).
       
     
In February 2006 the Board of Directors approved that all outstanding and issued shares of preferred stock is to be converted into 10,285,714 shares of common stock. Also, as a result of this conversion, the preferred stockholders waived the rights to receive any further undeclared or accrued dividends.
       
   
(b)
Minimum Statutory Requirements
       
     
The Company’s domestic and foreign insurance subsidiaries have minimum statutory capital and surplus requirements set by the state or nation of domicile. At December 31, 2005 and 2004, the insurance subsidiaries capital and surplus exceeded these requirements.
       
   
(c)
Accumulated Other Comprehensive Income (Loss)

       
Unrealized
 
Accumulated
 
   
Foreign
 
gains
 
other
 
   
currency
 
(losses) on
 
comprehensive
 
         
items
  
securities
  
income (loss)
 
Balance, January 1, 2003
 
$
264
 
$
(2,380
)
$
(2,116
)
Current period changes
    
15,655
    
2,372
    
18,027
 
Balance, December 31, 2003
   
15,919
   
(8
)
 
15,911
 
Current period changes
    
6,606
    
(355
)
 
6,251
 
Balance, December 31, 2004
   
22,525
   
(363
)
 
22,162
 
Current period changes
    
(24,491
)
 
(2,685
)
 
(27,176
)
Balance, December 31, 2005
  
$
(1,966
)
$
(3,048
)
$
(5,014
)
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
   
The amounts transferred from cumulative translation adjustments and included in the determination of net income for the period as a result of the sale of its investment in APL was $21,745 for the year ended December 31, 2005.
     
19.
 
Dividend Restriction
and
Risk-Based Capital
 
The Company’s insurance subsidiaries are subject to statutory and regulatory restrictions, applicable to insurance companies, imposed by the states of domicile, which limit the amount of cash dividends or distributions that they may pay. The Company’s insurance subsidiaries did not pay any dividends in 2005, 2004 and 2003.
     
   
Property and casualty insurance companies in the United States are subject to certain Risk-Based Capital (“RBC”) requirements as specified by the National Association of Insurance Commissioners. Under such requirements, the amount of capital and surplus maintained by a property and casualty insurance company is to be determined on various risk factors. As of December 31, 2005 and 2004, the capital and surplus of the Company’s two insurance subsidiaries domiciled in the United States exceeded the RBC requirements.
     
20.
 
Geographic Information
 
 
   
Two of the Company’s insurance subsidiaries (AII and AIU) operate outside the United States. Their assets and liabilities are located principally in the countries where the insurance risks are written or assumed. Approximately 57% and 54% as of December 31, 2005 and 2004, respectively, of the consolidated assets, and 81%, 68% and 66%, respectively, of the consolidated revenues for the years ended December 31, 2005, 2004 and 2003 were located in or derived from foreign countries.
     
   
The Foreign and Domestic components of operating income from continuing operations before provision for income taxes are as follows:

December 31,
  
2005
  
2004
  
2003
 
Domestic
 
$
16,012
 
$
11,049
 
$
841
 
Foreign
     
13,570
    
5,104
    
2,605
 

 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
     
    The following table summarizes the Company’s operations by major geographic segment:
       

December 31, 2005
 
Domestic
 
Bermuda
 
Other
foreign
 
Revenue
 
$
45,670
 
$
173,804
 
$
21,161
 
Property and equipment
   
9,651
   
—
   
—
 
 
December 31, 2004
  
Domestic
  
Bermuda
  
Other
foreign
 
Revenue
 
$
45,071
 
$
91,591
 
$
13,293
 
Property and equipment
    
798
    
—
    
—
 
 
           
Other
 
December 31, 2003
  
Domestic
 
Bermuda
   
foreign
 
Revenue
 
$
18,825
  
$
33,945
 
$
2,513
 
Property and equipment
    
568
    
—
    
—
 

   
In addition, as of December 31, 2005 and 2004, the Company’s discontinued real estate segment included investment properties of approximately $-0- and $161,555, respectively, located in New Zealand.
     
21.
Segment Reporting
The Company currently operates two business segments, Workers’ Compensation Insurance and Specialty Risk and Extended Warranty Insurance. Its Commercial Real Estate segment has been discontinued, and is reflected as income (loss) from discontinued operations. These operating segments are segments of the Company for which separate financial information is available and for which operating results are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance.

       
Specialty
         
       
risk and
         
December31, 2005
 
Workers’ compensation segment
 
extended
warranty
segment
 
Other
 
Total
 
Earned premium
 
$
165,974
 
$
50,056
 
$
—
 
$
216,030
 
Investment income and other revenues
   
15,420
   
5,545
   
3,640
   
24,605
 
Operating income from continuing operations
   
18,510
   
7,434
   
3,638
   
29,582
 
Net income
   
25,375
   
10,556
   
1,628
   
37,559
 
Total assets
   
366,946
   
113,963
   
130,433
   
611,342
 
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
                   
       
Specialty
         
       
risk and
         
December31, 2004
  
Workers’ compensation segment
  
extended
warranty
segment
  
Other
  
Total
 
Earned premium
 
$
113,982
 
$
24,832
 
$
—
 
$
138,814
 
Investment income and other revenues
   
3,067
   
668
   
7,406
   
11,141
 
Operating income from continuing operations
   
8,138
   
1,773
   
6,242
   
16,153
 
Net income
   
7,390
   
1,990
   
4,730
   
14,110
 
Total assets
    
255,812
    
50,875
    
190,843
    
497,530
 

       
Specialty
         
       
risk and
         
December31, 2003
  
Workers’ compensation segment
  
extended
warranty
segment
  
Other
  
Total
 
Earned premium
 
$
42,774
 
$
8,893
 
$
—
 
$
51,667
 
Investment income and other revenues
   
1,861
   
387
   
1,368
   
3,616
 
Operating income from continuing operations
   
1,858
   
386
   
1,202
   
3,446
 
Net income
   
644
   
111
   
637
   
1,392
 
Total assets
    
109,054
    
21,405
    
210,935
    
341,394
 

22.
Statutory Financial Data
The Company’s insurance subsidiaries file financial statements in accordance with statutory accounting practices (“SAP”) prescribed or permitted by domestic or foreign insurance regulatory authorities. The differences between statutory financial statements and financial statements prepared in accordance with GAAP vary between domestic and foreign jurisdictions. The principal differences relate to (1) acquisition costs incurred in connection with acquiring new business which are charged to expense under SAP but under GAAP are deferred and amortized as the related premiums are earned; (2) limitation on net deferred tax assets created by the tax effects of temporary differences; (3) unpaid losses and loss expense, and unearned premium reserves are presented gross of reinsurance with a corresponding asset recorded; and (4) fixed maturity portfolios that qualify as available-for-sale are carried at fair value and changes in fair value are reflected directly in unassigned surplus, net of related deferred taxes. Statutory surplus and net income for insurance operations as reported to regulatory authorities were approximately as follows:
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
                   
 
December 31, 2005
  
Statutory
surplus
  
GAAP
Equity
  
Statutory
net income
  
GAAP net
income
 
Technology (domestic)
 
$
51,155
 
$
53,062
 
$
7,041
 
$
9,714
 
Rochdale (domestic)
   
17,220
   
18,790
   
1,930
   
3,415
 
AIU (Ireland)
   
16,880
   
18,749
   
4,285
   
6,146
 
AII (Bermuda)
    
129,243
    
150,539
    
35,207
    
35,207
 
 
December 31, 2004   
Statutory
surplus
  
GAAP
Equity
  
Statutory
net income
   
GAAP net
income
 
Technology (domestic)
 
$
31,692
 
$
34,318
 
$
3,295
 
$
7,093
 
Rochdale (domestic)
   
12,038
   
12,639
   
1,637
   
2,172
 
AIU (Ireland)
   
11,279
   
11,007
   
3,685
   
2,103
 
AII (Bermuda)
    
86,914
    
101,317
    
11,165
    
11,165
 
 
December 31, 2003   
Statutory
surplus
  
GAAP
Equity
  
Statutory
net income
  
GAAP net
income
 
Technology (domestic)
 
$
15,080
 
$
17,117
 
$
524
 
$
2,158
 
Rochdale (domestic)
   
5,880
   
6,444
   
869
   
1,003
 
AIU (Ireland)
   
6,360
   
6,360
   
316
   
316
 
AII (Bermuda)
    
77,626
    
85,959
    
5,513
    
5,513
 

23.
 
Fair Value Information
 
The following estimated fair value disclosures of financial instruments have been determined using available market information, current pricing information and appropriate valuation methodologies. If quoted market prices were not readily available for a financial instrument, management determined an estimated fair value. Accordingly, the estimates may not be indicative of the amounts the Company could have realized in a market transaction.
     
   
For fixed maturities and common stocks, estimated fair values were based primarily upon independent pricing services. The market value of short-term investments is estimated to approximate the carrying value.

 
December 31, 2005
  
Carrying
value
  
Estimated fair
value
 
Assets:
         
Fixed maturities:
         
Held-to-maturity
 
$
151,104
 
$
148,904
 
Available-for-sale
   
39,876
   
39,876
 
Common stock
   
32,695
   
32,695
 
Preferred stock
   
60
   
60
 
Other investments
   
1,498
   
1,498
 
Cash and short-term investments
    
190,579
    
190,579
 
Liabilities:
             
Note payable, bank
 
$
25,000
 
$
25,000
 
Junior subordinated debt
    
50,000
    
50,000
 
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
           
 
December 31, 2004
  
Carrying
value
  
Estimated fair
value
 
Assets:
         
Fixed maturities:
         
Held-to-maturity
 
$
136,692
 
$
136,262
 
Available-for-sale
   
8,609
   
8,609
 
Common stock
   
5,466
   
5,466
 
Preferred stock
   
46
   
46
 
Other investments
   
1,851
   
1,851
 
Cash and short-term investments
    
45,547
    
45,547
 
Liabilities:
             
Note payable, bank
 
$
1,700
 
$
1,700
 
Mortgage debt
   
92,919
   
92,919
 
Loans from ultimate stockholders
    
12,973
    
12,973
 

24.
Subsequent Events
(a)
Stock Option Plan
     
During February 2006, the Company’s 2005 Incentive Stock Plan became effective. The aggregate number of shares of common stock for which awards may be issued under this plan may not exceed 5,994,300 shares. Included in this amount is an aggregate number of shares of common stock for which restricted stock awards may be issued under this plan, not to exceed 1,998,100 shares.
       
     
The exercise price of non-qualified stock options issued shall be 85% or more of the fair market value of the Company’s common stock on the day the option is granted. Incentive stock options granted to a stockholder holding more than 10% of the voting stock of the Company will have an exercise price of not less than 110% of the fair value of the common stock on the day the option is granted. All options are exercisable for up to ten years, subject to vesting requirements.
       
     
Restricted stock awards under this plan may be made to any participant without additional consideration. These restricted stock awards are also subject to vesting requirements.
       
     
The Board of Directors approved grants of options to certain officers, directors and employees equal to 1,175,000 shares of common stock. These options have an exercise price of $7.00 and are subject to pro-rata vesting over a four- year period.
       
   
(b)
Sale Split and Change in Authorized Capital
       
     
The Company increased its authorized capital stock to 100,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share, and declared a 24,088-for-one stock split in the form of a stock dividend on its common stock. This resulted in the issuance of 24,088,286 shares of common stock. This split is reflected retroactively in these financial statements.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
   
(c)
Private Placement
       
     
On February 2, 2006, the Company issued 25,568,000 common shares as part of a private placement. In conjunction with the closing of the placement, 1,000 shares of preferred stock were converted into 10,285,714 of $.01 par value common stock. As of result of the offering, the Company has 59,943,000 of $.01 par value common stock outstanding. The net proceeds from the offering were approximately $166,000. Of the total proceeds, $100,000 was used to make surplus contributions to the Company’s insurance subsidiaries. $25,000 of the proceeds were used to pay off the Company’s short-term borrowing facility (see Note 9). The remaining proceeds will be used for general corporate purposes.
       
   
(d)
Business Acquisition
       
     
On March 9, 2006, the Company entered into a purchase agreement to acquire Wesco Insurance Company (“Wesco”). The Company agreed to pay the seller $7,500 plus the statutory surplus of Wesco of $15,000. All the existing liabilities of Wesco will be guaranteed by the seller. Wesco is a Delaware domiciled property and casualty insurance company licensed in all 50 states and the District of Columbia. According to the terms of the agreement, Wesco will continue to write business for seller subject to contractual maximums as prescribed by the agreement. This business will be completely reinsured by an insurance subsidiary of the seller. Wesco will also receive a fronting fee under this arrangement.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
(in thousands, except per share data)
       
25.
Quarterly Financial Data (Unaudited)
A summary of financial data by quarter for each of the last three years is presented in the following table. This information is unaudited.

Quarter ended
  
March 31,
2005
  
June 30,
2005
  
September 30,
2005
  
December 31,
2005
 
Earned premium
 
$
47,355
 
$
50,385
 
$
60,406
 
$
57,885
 
Investment Income
   
1,885
   
2,254
   
4,067
   
3,328
 
Net income
   
3,392
   
16,832
   
7,995
   
9,340
 
Earnings per share
    
.09
    
.70
    
.33
    
.39
 

Quarter ended  
  
March 31,
2004
  
June 30,
2004
  
September 30,
2004
  
December 31,
2004
 
Earned premium
 
$
25,157
 
$
35,026
 
$
36,476
 
$
42,155
 
Investment Income
   
932
   
716
   
1,065
   
1,216
 
Net income
   
2,519
   
423
   
1,878
   
9,290
 
Earnings (loss) per share from continuing operations
    
.05
    
(.03
)
 
.03
    
.34
 
 
 
 
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES

At December 31, 2005
(in thousands)
  
Cost*
  
Value
  
Amount at
Which Shown
in the Balance Sheet
 
Fixed Maturities:
             
Bonds:
             
United States government and government agencies & authorities
 
$
151,104
 
$
148,904
 
$
151,104
 
States, municipalities and political subdivisions
                   
Foreign governments
   
500
   
500
   
500
 
Public utilities
   
304
   
298
   
298
 
Banks, trust and insurance companies
   
9,981
   
9,797
   
9,797
 
All other corporate
    
29,222
    
29,281
    
29,281
 
Total bonds
    
191,111
    
188,780
    
190,980
 
Total fixed maturities
    
191,111
    
188,780
    
190,980
 
Equity securities:
                   
Common stock:
                   
Public utilities
                   
Banks, trust and insurance companies
                   
Mutual funds
   
4,617
   
4,178
   
4,178
 
Industrial, miscellaneous and all other
    
32,673
    
28,517
    
28,517
 
Total common stock
   
37,290
   
32,695
   
32,695
 
Preferred stock
    
60
    
60
    
60
 
Total equity securities
    
37,350
    
32,755
    
32,755
 
Short-term investments, at cost (approximates market value)
   
74,732
   
74,732
   
74,732
 
Other invested assets (approximates market value)
    
1,498
    
1,498
    
1,498
 
Total investments
  
$
304,691
  
$
297,765
  
$
299,965
 
                     
*
Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts.
 
 
AMTRUST FINANCIAL SERVICES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET - PARENT COMPANY ONLY

December 31,
(in thousands)
  
2005
  
2004
 
Assets:
         
Cash
 
$
551
 
$
(91
)
Invested Assets
   
100
   
100
 
Carrying Value of subsidiaries, at equity
   
207,895
   
135,768
 
Other Assets
    
13,367
    
2,070
 
Total Assets
    
221,913
    
137,847
 
Liabilities:
             
Due to affiliates - net
   
23,390
   
5,184
 
Due to ultimate shareholders
   
—
   
12,973
 
Junior Subordinated Debt
   
50,000
   
—
 
Bank Note
   
25,000
   
—
 
Other Liabilities
    
5,112
    
862
 
Total Liabilities
    
103,502
    
19,019
 
Stockholders’ equity
             
Common stock
   
241
   
241
 
Preferred stock
   
60,000
   
60,000
 
Paid-in and contributed capital
   
12,406
   
12,406
 
Accumulated other comprehensive income
   
(5,014
)
 
22,162
 
Retained earnings
    
50,778
    
24,019
 
Total Shareholders’ equity
    
118,411
    
118,828
 
Total Liabilities and shareholders’ equity
  
$
221,913
  
$
137,847
 

STATEMENT OF INCOME - PARENT COMPANY ONLY

Year Ended December 31,
(In thousands)
   
2005
  
2004
   
2003
 
Income:
               
Investment income
 
$
612
 
$
9
 
$
—
 
Equity in undistributed net income of consolidated subsidiaries and partially-owned companies
   
45,464
   
15,842
   
4,010
 
Total Income
   
46,076
   
15,851
   
4,010
 
Expenses:
               
 
Interest expense
   
4,189
   
431
   
—
 
Federal tax benefit
   
—
   
(650
)
 
(725)
 
Other expenses from operations
   
4,328
   
1,960
   
3,343
 
Total Expenses
   
8,517
   
1,741
   
2,618
 
Net Income
 
$
37,559
 
$
14,110
 
$
1,392
 

See accompanying notes to financial statements.
 
 
Schedule II
AMTRUST FINANCIAL SERVICES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS - PARENT COMPANY ONLY

December 31,
(in thousands)
  
2005
  
2004
  
2003
 
Cash flows from operating activities:
             
Net income from continuing operations
 
$
37,559
 
$
14,110
 
$
1,392
 
Adjustments to reconcile net income to net cash provided by
Changes in assets (increase) decrease:
                   
Carrying Value of Equity Interest in Subsidiaries
   
(99,339
)
 
(25,890
)
 
(2,917
)
Other Assets
   
(11,297
)
 
(1,995
)
 
79
 
Changes in liabilities increase (decrease):
                   
Due to affiliates
   
18,206
   
1,935
   
(546
)
Other liabilities
   
4,286
   
(1,085
)
 
1,911
 
                     
Net cash used in operating activities
   
(59,585
)
 
(12,925
)
 
(81
)
                     
Cash flows from investing activities
                   
Capital expenditures
   
—
   
(100
)
 
—
 
Net cash used in investing activities
   
—
   
(100
)
 
—
 
Cash flows from financing activities:
       
Issuance of junior subordinated debentures
   
50,000
   
—
       
Stockholder loan
   
(12,973
)
 
12,973
       
Borrowing under short term bank credit facility
   
25,000
   
—
       
Dividends paid on preferred stock
   
(10,800
)
 
—
       
Net cash provided by financing activities
    
51,227
    
12,973
    
—
 
Net increase (decrease) in cash and cash equivalents
   
642
   
(52
)
 
(81
)
Cash and cash equivalents, beginning of the year
   
(91
)
 
(39
)
 
42
 
Cash and cash equivalents, end of period
  
$
551
  
$
(91
)
$
(39
)
 
See accompanying notes to consolidated financial statements.
 
AMTRUST FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
 
At December 31, 2005, 2004 and 2003 and for the years then ended
 
Segment (in thousands)
 
Deferred Policy Acquisition Costs
 
Reserves for Losses and Loss Expenses, Future Policy Benefits
 
Reserves for Unearned Premiums
 
Premium Revenue
 
Net Investment Income
 
Losses and Loss Expenses Incurred, Benefits
 
Amortization of Deferred Policy Acquisition Costs
 
Other Operating Expenses
 
Net Premiums Written
 
2005
General Insurance
 
$
23,751
 
$
168,007
 
$
156,802
 
$
216,030
 
$
11,534
 
$
142,006
 
$
17,936
 
$
51,111
 
$
259,213
 
2004
General Insurance
 
$
17,936
 
$
99,364
 
$
105,107
 
$
138,814
 
$
3,929
 
$
90,178
 
$
9,855
 
$
33,739
 
$
187,498
 
2003
General Insurance
 
$
9,885
 
$
37,442
 
$
42,681
 
$
51,667
 
$
2,305
 
$
34,884
 
$
2,535
 
$
14,418
 
$
81,923
 

 
 
AMTRUST FINANCIAL SERVICES, INC. AND SUBSIDIARIES 
REINSURANCE
 
At December 31, 2005, 2004 and 2003 and for the years then ended
 
(dollars in thousands)
 
Gross
Amount
 
Ceded to Other Companies
 
Amount from Other Companies
 
Net Amount
 
Percent of Amount
Assumed to Net
 
2005
                     
Premiums:
General Insurance
 
$
252,598
 
$
26,918
 
$
33,533
 
$
259,213
   
12.9
%
2004
                               
Premiums:
General Insurance
 
$
197,522
 
$
23,353
 
$
13,329
 
$
187,498
   
7.1
%
2003
                               
Premiums:
General Insurance
 
$
93,611
 
$
15,567
 
$
3,879
 
$
81,923
 
4.7
%


 
AMTRUST FINANCIAL SERVICES, INC.
CONSOLIDATED SUPPLEMENTARY PROPERTY
AND CASUALTY INSURANCE INFORMATION
(in thousands)
 
 
   
Years Ended December 31
     
           
   
Losses and Loss
Adjustment
Expenses Incurred
Related to
     
      
Current
Year
  
Prior
Years
  
Paid Losses and
Loss Adjustment
Expenses
 
2005
 
$
142,968
 
$
(962
)
$
76,585
 
2004
 
$
86,762
 
$
3,416
 
$
38,560
 
2003
 
$
34,516
 
$
368
 
$
14,273
 
 
 

 
Board of Directors and Stockholders
AmTrust Financial Services, Inc.
New York, New York 10038
 
 
We have reviewed the accompanying condensed consolidated balance sheet of AmTrust Financial Services, Inc. and subsidiaries (“the Company) as of March 31, 2006, and the related condensed consolidated statements of income, changes in stockholder’s equity, and cash flows for the three-month periods ended March 31, 2006 and 2005. These interim financial statements are the responsibility of the Company’s management.
 
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
We have previously audited, in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as December 31, 2005, and the related consolidated statements of income, changes in stockholder’s equity, and cash flows for the year then ended (not presented herein); and in our report dated April 28, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2005 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
/s/ BDO Seidman, LLP
 
Certified Public Accountants
New York, New York
June 9, 2006
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share data)
           
   
March 31, 2006
 
December 31, 2005
 
Assets
 
(Unaudited)
     
Investments:
         
Fixed maturities, held-to-maturity, at amortized cost
 
$
234,870
 
$
151,104
 
Fixed maturities, available-for-sale, at market value
   
51,229
   
39,876
 
Equity securities, available-for-sale, at market value
   
37,618
   
32,755
 
Short-term investments
   
107,984
   
74,732
 
Other investments
   
2,189
   
1,498
 
Total investments
   
433,890
   
299,965
 
Cash and cash equivalents
   
164,248
   
115,847
 
Accrued interest and dividends
   
3,174
   
2,772
 
Premiums receivable, net
   
127,545
   
81,070
 
Receivables from discontinued operations
   
3,571
   
3,571
 
Reinsurance recoverable
   
19,711
   
17,667
 
Funds held with reinsured companies
   
890
   
-
 
Prepaid reinsurance premiums
   
24,457
   
19,281
 
Prepaid expenses and other assets
   
5,968
   
7,590
 
Deferred policy acquisition costs
   
33,925
   
23,751
 
Deferred tax asset
   
8,705
   
9,396
 
Property and equipment, net
   
10,017
   
9,651
 
Goodwill and intangible assets
   
22,058
   
20,781
 
   
$
858,159
 
$
611,342
 
Liabilities and Stockholders’ Equity
             
Liabilities:
             
Note payable, bank
 
$
—
 
$
25,000
 
Ceded reinsurance premiums payable
   
21,912
   
17,782
 
Loss and loss expense reserves
   
190,022
   
168,007
 
Reinsurance payable on paid losses
   
1,953
   
1,951
 
Funds held under reinsurance treaties
   
2,339
   
3,034
 
Unearned premiums
   
207,739
   
156,802
 
Accrued expenses and other current liabilities
   
78,658
   
61,430
 
Federal income tax payable
   
6,027
   
8,925
 
Junior subordinate debt
   
50,000
   
50,000
 
Total liabilities
   
558,650
   
492,931
 
Commitments and Contingencies
             
Stockholders’ Equity:
             
Common stock, $.01 par value; 100,000,000 shares authorized, 59,943,000 and 24,089,286 issued and outstanding in 2006 and 2005 respectively
   
599
   
241
 
Preferred stock, $.01 par value; 10,000,000 shares authorized, 1,000 issued and outstanding
   
—
   
60,000
 
Additional paid-in capital
   
238,588
   
12,406
 
Accumulated other comprehensive income (loss)
   
285
   
(5,014
)
Retained earnings
   
60,037
   
50,778
 
     
299,509
   
118,411
 
   
$
858,159
 
$
611,342
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Unaudited Condensed Consolidated Statements of Income
(in thousands, except share data)
           
Three Months Ended March 31,
 
2006
 
2005
 
 
(Unaudited)
 
(Unaudited)
 
Revenues:
         
Premium income:
         
Premiums written
 
$
110,753
 
$
81,914
 
Change in unearned premiums
   
(40,943
)
 
(34,559
)
Net earned premium
   
69,810
   
47,355
 
Commission and fee income
   
2,855
   
1,890
 
Net investment income
   
5,335
   
1,885
 
Net realized gain
   
1,576
   
26
 
Total revenues
   
79,576
   
51,156
 
Expenses:
             
Loss and loss adjustment expense
   
43,774
   
33,997
 
Salaries and benefits
   
5,119
   
3,000
 
Policy acquisition expenses
   
8,323
   
8,671
 
Other underwriting expenses
   
8,727
   
4,604
 
Total expenses
   
65,943
   
50,272
 
Operating income from continuing operations
   
13,633
   
884
 
Other income (expenses):
             
Foreign currency gain
   
98
   
—
 
Interest expense
   
(1,213
)
 
—
 
Total other expenses
   
(1,115
)
 
—
 
Income from continuing operations before provision for income taxes
   
12,518
   
884
 
Provision (benefit) for income taxes:
             
Current
   
4,179
   
(1,079
)
Deferred
   
(920
)
 
—
 
Total provision for income taxes
   
3,259
   
(1,079
)
Income from continuing operations
 
 
9,259
 
 
1,963
 
Discontinued operations:
             
Other income from discontinued operations
   
—
   
1,429
 
Income from discontinued operations
   
—
   
1,429
 
Net income
 
$
9,259
 
$
3,392
 
Earnings per common share:
             
Income from continuing operations
 
$
0.21
 
$
0.03
 
Income from discontinued operations
   
—
   
0.06
 
Net income per common share
 
$
0.21
 
$
0.09
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity
(in thousands)
 
Three Months Ended March 31, 2006 and 2005 (unaudited)

   
Common stock
 
Preferred stock
 
Additional
paid-in
capital
 
Accumulated other comprehensive income (loss)
 
Retained
earnings
 
Total
 
Balance, December 31, 2004
 
$
241
 
$
60,000
 
$
12,406
 
$
22,162
 
$
24,019
 
$
118,828
 
Comprehensive income, net of tax:
                                     
Net income
   
—
   
—
   
—
   
—
   
3,392
   
3,392
 
Conversion of Preferred Stock
                     
—
   
—
   
—
 
Unrealized holding loss on available-for-sale securities
   
—
   
—
   
—
   
(1,086
)
 
—
   
(1,086
)
Reclassification adjustment for securities sold during the year
   
—
   
—
   
—
   
—
   
—
   
—
 
Issuance of Common Stock
         
—
         
—
   
—
       
Comprehensive income
                                                 
2,306
 
Balance, March 31, 2005
 
$
241
 
$
60,000
 
$
12,406
 
$
21,076
 
$
27,411
 
$
121,134
 
                                       
                                                               
Balance, December 31, 2005
 
$
241
 
$
60,000
 
$
12,406
 
$
(5,014
)
$
50,778
 
$
118,411
 
Comprehensive income, net of tax:
                                     
Net income
   
—
   
—
   
—
   
—
   
9,259
   
9,259
 
Conversion of Preferred Stock
   
103
   
(60,000
)
 
59,897
   
—
   
—
   
—
 
   Foreign currency translation      —      —      —       485      —      —  
Unrealized holding gain on available-for-sale securities
   
—
   
—
   
—
   
4,686
   
—
   
5,299
 
Reclassification adjustments for the securities sold during the year
     —      —      —     128     —      —  
Comprehensive income
                                 
14,558
 
Stock Options Compensation
   
—
   
—
   
88
   
—
   
—
   
88
 
Issuance of Common Stock
   
255
   
—
   
166,197
   
—
   
—
   
166,452
 
Balance, March 31, 2006
 
$
599
 
$
—
 
$
238,588
 
$
285
 
$
60,037
 
$
299,509
 
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
               
Three months ended March 31,       
2006
    
2005
 
   
(Unaudited)
   
(Unaudited)
 
Cash flows from operating activities:              
Net income from continuing operations
 
$
9,259
 
$
3,392
 
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities of continuing operations:
             
Depreciation and amortization
   
328
   
34
 
Realized (gain) loss on marketable securities
   
(1,576
)
 
—
 
Bad debt expense
   
424
   
—
 
Change in deferred tax asset
   
691
   
(1,508
)
Foreign currency gain
   
(98
)
 
—
 
Changes in assets - (increase) decrease:
             
Premiums receivable
   
(46,899
)
 
(19,843
)
Reinsurance recoverable
   
(2,044
)
 
(237
)
Deferred policy acquisition costs
   
(10,174
)
 
(1,207
)
Prepaid reinsurance premiums
   
(5,176
)
 
(1,304
)
Prepaid expenses and other assets
   
330
   
(1,698
)
Receivables from discontinued operations
   
—
   
(5,103
)
Changes in liabilities - increase (decrease):
             
Reinsurance payable
   
4,130
   
13,072
 
Loss and loss expense reserves
   
22,015
   
18,600
 
Unearned premiums
   
50,937
   
35,408
 
Funds held under reinsurance treaties
   
(695
)
 
(7,671
)
Accrued expenses and other current liabilities
    
14,330
    
23,211
 
Net cash provided by operating activities
    
35,782
    
55,146
 
Cash flows from investing activities:
             
Purchases of securities with fixed maturities
   
(122,973
)
 
(5,205
)
Purchases of equity securities
   
(3,287
)
 
—
 
Purchases of other investments
   
(691
)
 
—
 
Acquisition of intangible assets and subsidiaries
   
(1,277
)
 
(704
)
Purchase of property and equipment
    
(693
)
 
—
 
Net cash used in investing activities
    
(128,921
)
 
(5,909
)
Cash flows from financing activities:
             
Issuance of common stock
   
255
   
—
 
Issuance of common stock additional paid in capital
   
166,197
   
—
 
Issuance of junior subordinated debt
         
25,000
 
Repayments on note payable, bank
   
(25,000
)
 
(1,700
)
Stock option compensation
       
88
    
—
 
Net cash provided by financing activities
     
141,540
    
23,300
 
Net increase in cash and cash equivalents
   
48,401
   
72,537
 
Cash and cash equivalents, beginning of year
    
115,847
    
28,727
 
Cash and cash equivalents, end of year
  
$
164,248
  
$
101,264
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share data)
     
1.
Basis of Reporting
The consolidated financial statements are unaudited and should be read in conjunction with AmTrust Financial Services, Inc.’s (the “Company”) audited financial statements for the year ended December 31, 2005. A summary of more significant accounting policies are set forth in the notes to the audited consolidated financial statements of the Company for the year ended December 31, 2005. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned domestic and foreign subsidiaries.
 
   
All significant intercompany transactions and accounts have been eliminated in the consolidated financial statements.
       
       
2.
Earnings per Share
Basic earnings per share are computed based on the weighted-average number of common shares outstanding. Net income has been adjusted for the effect of the dividends accumulated on the cumulative preferred stock.
 
Three Months ended March 31,
 
2006
 
2005
 
Net income
 
$
9,259
 
$
3,392
 
Less:   Preferred stock dividend (1)
   
—
   
(1,200
)
Net income (loss) available to common stockholders
 
$
9,259
 
$
2,192
 
Weighted-average number of shares outstanding
   
44,463,000
   
24,089,000
 
Basic earnings per common share available to common stockholders:
             
Income (loss) from continuing operations
 
$
0.21
 
$
0.03
 
Discontinued operations
   
—
   
0.06
 
Net income (loss) per common share
 
$
0.21
 
$
0.09
 
               
   
(1)
Dividends were declared in 2005 (see Note 8).
 
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share data)
     
3.
Investments
 
   
The original cost, estimated market value and gross unrealized appreciation and depreciation of equity securities are presented in the tables below:
       
   
(a)
Available-for-Sale Securities
 
March 31, 2006
 
       
Original or
amortized cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Market
value
 
Preferred stock
 
$
60
 
$
2
 
$
—
 
$
62
 
Common stock
   
35,318
   
9,637
   
(7,399
)
 
37,556
 
Fixed maturities
   
50,753
   
1,965
   
(1,489
)
 
51,229
 
        
$
86,131
 
$
11,604
 
$
(8,888
)
$
88,847
 
 
December 31, 2005  
    
Original or
amortized cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Market
value
 
                   
Preferred stock
 
$
60
 
$
—
 
$
—
 
$
60
 
Common stock
   
37,290
   
3,063
   
(7,658
)
 
32,695
 
Fixed maturities
   
40,007
   
660
   
(791
)
 
39,876
 
      
$
77,357
 
$
3,723
 
$
(8,449
)
$
72,631
 
 
     
Stockholders’ equity for the three months ended March 31, 2006 and the year ended December 31, 2005 includes a net unrealized holding gain or (loss) on equity securities and available-for-sale fixed maturities of $2,716 and $(4,726), respectively (net of a deferred tax (cost) or benefit of $(950) and $1,678, respectively).
       
    (b)
Held-to-Maturity Securities
       
     
The amortized cost, estimated market value and gross unrealized appreciation and depreciation of fixed maturity investments are presented in the tables below:
 
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share data)
   
March 31, 2006
 
     
Amortized cost
 
Unrealized gains
 
Unrealized losses
 
Fair value
 
Obligations of U.S. Treasury, Government corporations and agencies
 
$
224,736
 
$
76
 
$
(2,815
)
$
221,997
 
Mortgage-backed securities
     
10,134
    
—
    
(468
)
 
9,666
 
      
$
234,870
  
$
76
  
$
(3,283
)
$
231,663
 

December 31, 2005
 
       
Amortized cost
 
Unrealized gains
 
Unrealized losses
 
Fair value
 
Obligations of U.S. Treasury, Government corporations and agencies
 
$
140,467
 
$
4
 
$
(1,843
)
$
138,628
 
Mortgage-backed securities
    
10,637
    
1
    
(362
)
 
10,276
 
        
$
151,104
  
$
5
  
$
(2,205
)
$
148,904
 
 
The table below summarizes the gross unrealized losses of our fixed maturity and equity securities as of March 31, 2006.
 
       
Remaining Time to Maturity
     
   
Less than 12 Months
 
12 Months or Longer
 
Total
 
Type of Fixed Maturity Investment
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
   
($ in thousands)
 
U.S. Treasury securities
 
$
3,406
 
$
12
 
$
13,575
 
$
139
 
$
16,981
 
$
151
 
U.S. government agencies
   
60,869
   
251
   
76,984
   
1,791
   
137,853
   
2,042
 
Corporates
   
84,735
   
1,984
   
5,947
   
148
   
90,682
   
2,132
 
Mortgage backed
   
3,513
   
80
   
5,391
   
367
   
8,904
   
447
 
Common Stock
   
33,187
   
6,739
   
4,369
   
660
   
37,556
      7,399  
Total
 
$
185,710
 
$
9,066
 
$
106,266
 
$
3,105
 
$
291,976
 
$
12,171
 
 
As of March 31, 2006, we did not hold any fixed maturity securities with unrealized losses in excess of 20% of the security’s carrying value as of that date.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share data)
       
4.
Liability for Unpaid Loss
and LAE
 
   
The following table provides a reconciliation of the beginning and ending balances for unpaid losses and LAE, reported in the accompanying consolidated balance sheets as of March 31, 2006 and December 31, 2005.

 
March 31,
2006
 
December 31,
2005
 
Unpaid losses and LAE, gross of related reinsurance recoverables at beginning of year
 
$
168,007
 
$
99,364
 
Less:  Reinsurance recoverables at beginning of year
   
17,667
   
14,445
 
Net balance, beginning of year
   
150,340
   
84,919
 
Incurred related to:
             
Current period
   
44,842
   
142,968
 
Prior year
   
(1,068
)
 
(962
)
Total incurred losses during the current period
   
43,774
   
142,006
 
Paid losses and LAE related to:
             
Current period
   
(14,184
)
 
(53,988
)
Prior year
   
(9,619
)
 
(22,597
)
Total payments for losses and LAE
   
(23,801
)
 
(76,585
)
Net balance, end of period
   
170,311
   
150,340
 
Plus reinsurance recoverables at end of year
   
19,711
   
17,667
 
Unpaid losses and LAE, gross of related reinsurance recoverables at end of period
 
$
190,022
 
$
168,007
 
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share data)
     
5.
Junior Subordinate Debt
   
On March 17, 2005 and June 15, 2005, the Company participated in two separate private placements of $25,000 each (Trust Preferred I and II) of fixed/floating rate capital securities issued by wholly-owned trusts of the Company. The securities require interest-only payments to be made on a quarterly basis, with principal due at maturity date. The Company incurred $1,140 of placement fees in connection with this financing which will be amortized over thirty years. This amount is reflected in prepaid expenses and other assets in the accompanying consolidated balance sheets.
 
       
Trust Preferred I
 
Trust Preferred II
 
Amount outstanding at year end
 
$
25,000
 
$
25,000
 
Interest rate first 10 years
   
8.275
%
 
7.71
%
Interest rate after 10 years
   
LIBOR + 3.4
%
 
LIBOR + 3.4
%
Maturity date
   
March 17, 2035
   
June 15, 2035
 
 
6.
Share Based Compensation
 
   
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R) “Share-Based Payment” and began recognizing compensation expense for its share-based payments based on the fair value of the awards. Share-based payments include stock option grants under the Company’s stock plans. SFAS 123(R) requires share-based compensation expense recognized since January 1, 2006, to be based on the following: a) grant date fair value estimated in accordance with the original provisions of SFAS 123 for unvested options granted prior to the adoption date; and b) grant date fair value estimated in accordance with the provisions of SFAS 123(R) for unvested options granted subsequent to the adoption date.
 
   
Three Months Ended
 
 
 
March 31,
2006
 
March 31,
2005
 
Net income, as reported
 
$
9,259
 
$
3,392
 
Add: Share-based payments included in reported net income, net of related tax effects per SFAS 123(R)
   
88
   
—
 
Pro forma net income
 
$
9,347
 
$
3,392
 
Earnings per share
             
Basic - as reported
 
$
0.21
 
$
0.09
 
Basic - pro forma
 
$
0.21
 
$
0.09
 
 
             
Diluted - as reported
 
$
0.21
 
$
0.10
 
Diluted - pro forma
 
$
0.21
 
$
0.10
 
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share data)
     
   
Under SFAS 123(R) forfeitures are estimated at the time of calculation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
       
   
The adoption of SFAS 123(R)’s fair value method has resulted in additional share-based expense (a component of salaries and benefits) in the amount of $88 related to stock options for the quarter ended March 31, 2006. For the three months ended March 31, 2006, this additional share-based compensation lowered pre-tax earnings by $88.
       
   
The proposal to adopt the 2006 Stock Option Plan will be submitted to the shareholders of the Company for approval at the 2006 Annual Meeting of Shareholders, scheduled to be held in June 2006.
       
   
The Company generally issues new shares when options are exercised. The following schedule shows all options granted, exercised, expired and exchanged under the Company’s Incentive Stock Option Plan for the three month period ending March 31, 2006.
       
 
Information relating to the options is as follows:
               
 
Number of Shares
 
Amount Per Share
 
Total Price
 
Outstanding, December 31, 2005
   
—
   
—
 
$
0
 
Granted
   
1,175,000
 
$
7.00
 
$
8,225
 
Exercised
   
—
   
—
   
—
 
Cancelled
   
—
   
—
   
—
 
Outstanding, March 31, 2006
   
1,175,000
 
$
7.00
 
$
8,225
 
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share data)
       
   
The Company grants options to purchase common stock to its employees at prices equal to the market value of the stock on the dates the options were granted. The options have a term of ten years from grant date and vest in equal annual installments over the four-year period following the grant date for employee options. Employees have three months after the employment relationship ends to exercise all vested options. The fair value of each option grant is separately estimated for each vesting date. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the award and each vesting date. The Company has estimated the fair value of all stock option awards as of the date of the grant by applying the Black-Scholes-Merton multiple-option pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense. The Company did not award any options during the first quarter of 2006. The key assumptions used in determining the fair value of options granted in 2005 and a summary of the methodology applied to develop each assumption are as follows:

Expected price volatility
   
27.76
%
Weighted average expected lives in years
   
5.75
 
Risk-free interest rate
   
4.5
%
Forfeiture rate
   
3
%
 
   
Expected Price Volatility - This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. We use actual historical changes in market value of our stock to calculate the volatility assumption, as it is management’s belief that this is the best indicator of future volatility. We calculate weekly market value changes from the date of grant over a past period representative of the expected life of the options to determine volatility. An increase in the expected volatility will increase compensation expense.
     
   
Risk-Free Interest Rate - This is the U.S. Treasury rate for the week of the grant having a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share data)
       
   
Expected Lives - This is the period of time over which the options granted are expected to remain outstanding giving consideration to vesting schedules, historical exercise and forfeiture patterns. The Company uses the simplified method outlines in SEC Staff Accounting Bulletin No. 107 to estimate expected lives for option granted during the period. Options granted have a maximum term of five years. An increase in the expected life will increase compensation expense.
     
   
Forfeiture Rate - This is the estimated percentage of options granted that are expected to be forfeited or cancelled before becoming fully vested. This estimate is based on historical experience. An increase in the forfeiture rate will decrease compensation expense.
     
   
Dividend Yield - The expected dividend yield is based on the Company’s current dividend yield and the best estimate of projected dividend yields for future periods within the expected life of the option. An increase in the dividend yield will decrease the compensation expense.
     
   
There was no impact on cash provided by operating and/or financing activities related to increased tax benefits from stock based payment arrangements. During the quarter ended March 31, 2006, no options were exercised.
     
   
At March 31, 2006, the aggregate intrinsic value of all outstanding options was $8.5 million with a weighted average remaining contractual term of 5.7 years. The total compensation cost related to non-vested awards not yet recognized was $2.5 million with an expense recognition period of 4 years. During the three months ended March 31, 2006, no options vested.
       
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share data)
       
7.
Litigation
The Company’s insurance subsidiaries are named as defendants in various legal actions arising principally from claims made under insurance policies and contracts. Those actions are considered by the Company in estimating the loss and LAE reserves. The Company’s management believes the resolution of those actions will not have a material adverse effect on the Company’s financial position or results of operations.
 
8.
Stockholders’ Equity
Preferred Stock
 
   
On December 9, 2002, the Board of Directors authorized the issuance of 1,000 shares of preferred stock, no par value, (the “preferred shares”). The preferred shares were issued in exchange for all the issued and outstanding stock of AmTrust Pacific Limited.
 
   
Holders of the preferred shares were entitled to receive cumulative dividends out of any assets legally available at a rate of 8% of the liquidation value of $60,000 per share, per annum, commencing with the year ending December 31, 2003. As of December 31, 2005, there were no undeclared dividends on the preferred stock. Total dividends declared and paid in 2005 were $10,800, which represented cumulative payments for 2003 $(4,800), 2004 $(4,800) and 2005 $(1,200).
 
   
In February 2006 all issued and outstanding and issued shares of preferred stock were converted into 10,285,714 shares of common stock. Also, as a result of this conversion, the preferred stockholders waived the rights to receive any further undeclared or accrued dividends.
 
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share data)
     
9.
Effective Tax Rate
Income tax expense for the three months ended March 31, 2006 was $3,259 compared to a tax benefit of $(1,079) for the same period of 2005. The following table reconciles the Company’s statutory federal income tax rate to its effective tax rate.
     
 
        
For the three months
Ended March 31,
 
      
2006
  
2005
 
Earnings before income taxes
 
$
12,578
 
$
2,313
 
Income taxes at statutory rates
   
4,381
   
810
 
Effect of Income generated by companies not subject to U.S. taxation
    
(1,122
)
 
(1,889
)
Provision (benefit) for income taxes
  
$
3,259
  
$
(1,079
)
GAAP effective tax rate
    
26.0
%
 
(46.6
)%
 
 
10.
Supplemental Cash Flow Information
   

For the three months
Ended March 31,
  
2006
 
2005
 
Income tax payments
 
$
7,611
 
$
2,495
 
Interest payments on debt
    
1,229
   
—
 
 
 
AmTrust Financial Services, Inc. and Subsidiaries
 
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share data)
     
11.
Subsequent Events
 
   
Business Acquisition
       
   
On June 1, 2006, the Company acquired Wesco Insurance Company (“Wesco”). The Company paid the seller $7,500 plus the statutory surplus of Wesco of $15,000. All the existing liabilities of Wesco have been guaranteed by the seller. Wesco is a Delaware domiciled property and casualty insurance company licensed in all 50 states and the District of Columbia. According to the terms of the agreement, Wesco will continue to write business for seller subject to contractual maximums as prescribed by the agreement. This business will be completely reinsured by an insurance subsidiary of the seller. Wesco will also receive a fronting fee under this arrangement.
     
   
On June 1, 2006, the Company acquired the renewal rights to certain workers’ compensation business from Muirfield Underwriters, Ltd., a subsidiary of Aon Corporation. The business generated approximately $64 million in gross premiums written for Muirfield in 2005. Pursuant to the Renewal Rights and Asset Purchase Agreement entered into by the parties, the Company will not acquire any in-force business or historical liabilities associated with the acquired policies. The Company paid Muirfield $2.0 million at closing and is obligated to pay a specified percentage of gross premiums written on new policies and renewal policies through the three year period ending May 31, 2009. Of the $2.0 million paid, $500 is an advance against the quarterly payments
       
       
       
 
 
 
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
 
Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the costs and expenses, other than the underwriting discounts, payable by the Company in connection with the sale of the securities being registered. All amounts are estimates except the SEC registration fee.

SEC Registration Fee
 
$
20,519
 
Printing Costs
   
*
 
Legal Fees and Expenses
      100,000  
Accounting Fees and Expenses
   
*
 
Miscellaneous
 
$
*
 
Total
 
$
*
 
_____________________        
* to be supplied by amendment
       
 
Item 14. Indemnification of Directors and Officers.
 
Section 102(b)(7) of the General Corporation Law of the State of Delaware provides that a certificate of incorporation may contain a provision eliminating the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 (relating to liability for unauthorized acquisitions or redemptions of, or dividends on, capital stock) of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit.
 
Our certificate of incorporation provides that no director shall have any personal liability to us or to any of our stockholders for monetary damages for breach of fiduciary duty as a director; provided, however, that this provision eliminating personal liability of a director shall not eliminate or limit the liability of a director (i) for any breach of the director’s duty of loyalty to us or our stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit.
 
Our certificate of incorporation and bylaws also provide that we may indemnify, to the fullest extent permitted by law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he is or was our director or officer, or is or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), liability, loss, judgment, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner reasonably believed to be in or not opposed to our best interests, and, with respect to any criminal action or proceedings, had no reasonable cause to believe his conduct was unlawful. The termination of any action, upon a plea of nolo contendere or equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to our best interests, and, with respect of any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

In addition we have entered into indemnification agreements with our directors & officers containing provisions which are in some respects broader than the specific indemnification provisions contained in the General Corporation Law of the State of Delaware.
 
II-1
 
Under Section 145 of the General Corporation Law of the State of Delaware, in the case of actions by or in the right of Company, we are required to indemnify any director or officer and may indemnify any other person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was our director, officer, employee, or agent, or is or was serving at our request as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to our best interests and except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable to us unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the Court of Chancery or such other court shall deem proper.
 
Our bylaws also require expenses incurred in defending a civil or criminal action, suit, or proceeding to be paid by us in advance of the final disposition of the action, suit, or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee, or agent to repay the amount advanced if it shall ultimately be determined that he is not entitled to be indemnified by us under the bylaws.
 
 
We have insurance policies under which our directors and officers are insured, within the limits and subject to the limitations of these policies, against certain expenses in connection with the defense of, and certain liabilities which might be imposed as a result of, actions, suits or proceedings to which they are parties by reason of being or having been directors or officers.
 
Item 15. Recent Sales of Unregistered Securities.
 
On February 9, 2006 we issued an aggregate 25,568,000 shares of common stock to Freidman, Billings, Ramsey & Co., Inc., as the initial purchaser in a private placement for a price of $6.51 per share and directly to “accredited investors” (as defined in Rule 501 (a) under the Securities Act) for a price of $7.00 per share. The shares purchased by FBR were sold to investors at a price of $7.00 per share in a transaction not requiring registration under the Securities Act. FBR received a placement fee of $0.49 for providing services as a placement agent with respect to the shares sold directly to “accredited investors”. Michael Karfunkel, George Karfunkel and Barry Zyskind purchased through related parties an aggregate of 1,071,429 shares of our common stock in the private placement for a price of $7.00 per share. We did not pay FBR any placement fee with respect to those shares.
 
II-2
 
Item 16. Exhibits and Financial Statement Schedules
 
Exhibit No .
 
Description
3.1
 
Amended and Restated Certificate of Incorporation of the Company.
3.2
 
Amended and Restated By-Laws of the Company
4.1
 
Form of Common Stock Certificate
4.2
 
Indenture, dated as of March 17, 2005, between the Company and Wilmington Trust Company.
4.3
 
Indenture, dated as of June 15, 2005, between the Company and Wilmington Trust Company.
4.4
 
Registration Rights Agreement, dated as of February 9, 2006, by and between the Company and Friedman, Billings, Ramsey & Co. Inc.
5.1
 
Opinion of Troutman Sanders LLP
10.1
 
2005 Equity Incentive Plan
10.2
 
Intercompany Management Agreement, dated as of June 1, 2006, by and among the Company, Technology Insurance Company, Inc., Rochdale Insurance Company, Inc. and Wesco Insurance Company.
10.3
 
Tax Allocation Agreement, dated as of June 1, 2006, between the Company and Wesco Insurance Company
10.4
 
Tax Allocation Agreement for 1998 and for future calendar years, between the Company and Technology Insurance Company
10.5
 
Tax Allocation Agreement, dated July 1, 2002, is made for 2002 and future calendar years, between the Company and Rochdale Insurance Company, Inc
10.6
 
Intercompany Reinsurance Agreement, dated June 1, 2006, among the Company, Technology Insurance Company, Rochdale Insurance Company, AmTrust International Insurance Limited and Wesco Insurance Company.
10.7
 
Employment Agreement, dated as of January 1, 2005, by and between the Company and Barry D. Zyskind
10.8
 
Employment Agreement, dated as of January 1, 2005, by and between the Company and Max G. Caviet
10.9
 
Employment Agreement, dated as of January 1, 2005, by and between the Company and Christopher M. Longo
10.10
 
Employment Agreement, dated as of January 1, 2005, by and between the Company and Ronald E. Pipoly, Jr.
10.11
 
Employment Agreement, dated as of January 1, 2005, by and between the Company and Michael J. Saxon
10.12
  Form of Indemnification Agreement between the Company and its officers and directors
16.1
 
Letter from Berenson LLP
21.1
 
List of subsidiaries of the Company.
23.1
 
Consent of BDO Seidman LLP, Independent Registered Public Accounting Firm relating to the Financial Statements of the Company
23.2
 
Consent of Berenson LLP Independent Registered Public Accounting Firm relating to the Financial Statements of the Company
23.3
 
Consent of Troutman Sanders LLP (included in Exhibit 5.1)
24.1
 
Power of Attorney (set forth on the signature page to this registration statement)
______________________________
 
Item 17. Undertakings.
 
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
 
 
The undersigned registrant hereby undertakes that:
 
(1)   To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
 
(a)   to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
 
(b)   to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represents a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
 
(c)   To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
 
(2)   That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
 
(3)   To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
 
 
SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in The City of New York, State of New York, on June 12, 2006.
 
 
     
  AMTRUST FINANCIAL SERVICES, INC.
 
  		 
  		 
 
  By:   /s/ Barry D. Zyskind
 
 
Name:   Barry D. Zyskind
Title:     Chief Executive Officer and President

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors of Amtrust Financial Services, Inc., a Delaware corporation that is filing a registration statement on Form S-1 with the Securities and Exchange Commission under the provisions of the Securities Act of 1933, hereby constitute and appoint Barry D. Zyskind, Ronald E. Pipoly, Jr. and Stephen B. Ungar , and each of them, their true and lawful attorneys-in-fact and agents; with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign such amendment to registration statement and any or all amendments to the registration statement, including a prospectus or an amended prospectus therein, and all other documents in connection therewith to be filed with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all interests and purposes as they might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this registration statement has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
 
Title
 
Date
         
         
/s/ Barry D. Zyskind  
Chief Executive Officer, President and Directors
 
June 12, 2006
Barry D. Zyskind   (Principal Executive Officer)    
         
/s/ Ronald E. Pipoly, Jr.  
Chief Financial Officer
 
June 12, 2006
Ronald E. Pipoly, Jr.   (Principal Financial and Accounting Officer)    
         
/s/ Michael Karfunkel  
Chairman of the Board
 
June 12, 2006
Michael Karfunkel        
         
/s/ George Karfunkel  
Director
 
June 12, 2006
George Karfunkel        
         
   
Director  
 
June 12, 2006
Donald T. DeCarlo        
         
/s/ Abraham Gulkowitz  
Director
 
June 12, 2006
Abraham Gulkowitz        
         
/s/ Isaac M. Neuberger  
Director
 
June 12, 2006
Isaac M. Neuberger        
         
/s/ Jay J. Miller  
Director
 
June 12, 2006
Jay J. Miller        

 
 
E XHIBIT INDEX
 
Exhibit No.
 
Description
3.1
 
Amended and Restated Certificate of Incorporation of the Company.
3.2
 
Amended and Restated By-Laws of the Company
4.1
 
Form of Common Stock Certificate
4.2
 
Indenture, dated as of March 17, 2005, between the Company and Wilmington Trust Company.
4.3
 
Indenture, dated as of June 15, 2005, between the Company and Wilmington Trust Company.
4.4
 
Registration Rights Agreement, dated as of February 9, 2006, by and between the Company and Friedman, Billings, Ramsey & Co. Inc.
5.1
 
Opinion of Troutman Sanders LLP
10.1
 
2005 Equity Incentive Plan
10.2
 
Intercompany Management Agreement, dated as of June 1, 2006, by and among the Company, Technology Insurance Company, Inc., Rochdale Insurance Company, Inc. and Wesco Insurance Company.
10.3
 
Tax Allocation Agreement, dated as of June 1, 2006, between the Company and Wesco Insurance Company
10.4
 
Tax Allocation Agreement for 1998 and for future calendar years, between the Company and Technology Insurance Company
10.5
 
Tax Allocation Agreement, dated July 1, 2002, is made for 2002 and future calendar years, between the Company and Rochdale Insurance Company, Inc
10.6
 
Intercompany Reinsurance Agreement, dated June 1, 2006, among the Company, Technology Insurance Company, Rochdale Insurance Company, AmTrust International Insurance Limited and Wesco Insurance Company.
10.7
 
Employment Agreement, dated as of January 1, 2005, by and between the Company and Barry D. Zyskind
10.8
 
Employment Agreement, dated as of January 1, 2005, by and between the Company and Max G. Caviet
10.9
 
Employment Agreement, dated as of January 1, 2005, by and between the Company and Christopher M. Longo
10.10
 
Employment Agreement, dated as of January 1, 2005, by and between the Company and Ronald E. Pipoly, Jr.
10.11
 
Employment Agreement, dated as of January 1, 2005, by and between the Company and Michael J. Saxon
10.12
  Form of Indemnification Agreement between the Company and its officers and directors
16.1
 
Letter from Berenson LLP
21.1
 
List of subsidiaries of the Company
23.1
 
Consent of BDO Seidman LLP, Independent Registered Public Accounting Firm relating to the Financial Statements of the Company
23.2
 
Consent of Berenson LLP Independent Registered Public Accounting Firm relating to the Financial Statements of the Company
23.3
 
Consent of Troutman Sanders LLP (included in Exhibit 5.1)
24.1
 
Power of Attorney (set forth on the signature page to this registration statement)
 
 
 
 
 
 
































































































































































































 
Exhibit 5.1
 
 
 
T ROUTMAN S ANDERS LLP
 
ATTORNEYS AT LA W
THE CHRYSLER BUILDING
405 LEXINGTON AVENUE
NEW YORK, NEW YORK 10174
www.troutmansanders.com
TELEPHONE: 212-704-6000
FACSIMILE: 212-704-6288
 
June 9, 2006


Amtrust Financial Services, Inc.
59 Maiden Lane, 6 th Floor
New York, New York 10038

Ladies and Gentlemen:

We have acted as counsel to Amtrust Financial Services, Inc., a Delaware corporation (the “Company”), in connection with the filing of a Registration Statement on Form S-1 (the “Registration Statement”) with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Act”), relating to the resale from time to time of an aggregate of 25,568,000 shares of common stock, par value $0.01 per share (the “Common Stock”), to certain investors named therein.

In connection therewith, we have examined and relied upon the original or copies, certified to our satisfaction, of (i) the Amended and Restated Certificate of Incorporation of the Company, as amended to date; (ii) the Amended and Restated Bylaws of the Company, as amended to date; (iii) copies of resolutions of the Board of Directors of the Company regarding the authorization, issuance and sale of the Common Stock; (iv) the Registration Statement, and all exhibits thereto; and (v) such other documents and instruments as we have deemed necessary for the expression of the opinions herein contained. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with the original documents of all documents submitted to us as copies or facsimiles. As to any facts material to such opinion, we have, to the extent that relevant facts were not independently established by us, relied on certificates of public officials and certificates of officers or other representatives of the Company.

Based upon and subject to the foregoing, we are of the opinion that the shares of Common Stock are legally issued, fully paid and non-assessable.  

We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference made to us under the caption “Legal Matters” in the prospectus constituting part of the Registration Statement. In giving this consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Act, the rules and regulations of the Commission promulgated pursuant to Section 7 of the Act or Item 509 of Regulation S-K promulgated under the Act.
 
 
We are counsel admitted to practice in the State of New York and we express no opinions as to the applicable laws of any jurisdiction other than those of the State of New York, the corporate laws of the State of Delaware and the laws of the United States of America.  


Very truly yours,

/s/ Troutman Sanders LLP

TROUTMAN SANDERS L LP

EXHIBIT 10.1

AMTRUST FINANCIAL SERVICES, INC. 2005 EQUITY INCENTIVE PLAN

1.
Preamble .
 
AmTrust Financial Services, Inc., a Delaware corporation, hereby establishes the AmTrust Financial Services, Inc. 2005 Equity Incetive Plan as a means whereby the Company may, through awards of (i) incentive stock options within the meaning of section 422 of the Code, (ii) non-qualified stock options and (iii) restricted stock:
 
 
(a)
provide selected officers, directors, employees and consultants with additional incentive to promote the success of the Company’s business;
 
 
(b)
encourage such persons to remain in the service of the Company; and
 
 
(c)
enable such persons to acquire proprietary interests in the Company.
 
2.
Definitions and Rules of Construction .
 
2.01       “Award” means the grant of Options and/or Restricted Stock to a Participant.
 
2.02       “Award Date” means the date upon which an Option or Restricted Stock is awarded to a Participant under the Plan.
 
2.03       “Board” or “Board of Directors” means the board of directors of the Company.
 
2.04       “Cause” shall mean any willful misconduct by the Participant which affects the business reputation of the Company or willful failure by the Participant to perform his or her material responsibilities to the Company (including, without limitation, breach by the Participant of any provision of any employment, consulting, advisory, nondisclosure, non-competition or other similar agreement between the Participant and the Company or any Subsidiary). The Participant shall be considered to have been discharged for “Cause” if the Company determines, within 30 days after the Participant’s resignation, that discharge for Cause was warranted.
 
2.05       “Change of Control” shall be deemed to have occurred on the first to occur of any of the following:
 
 
(i)
any “person” (as such term is used in Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934), other than any Subsidiary or any employee benefit plan of the Company or a Subsidiary or former Subsidiary, is or becomes a beneficial owner, directly or indirectly, of stock of the Company representing 25% or more of the total voting power of the Company’s then outstanding stock;
 
 
 
 
 

 
(ii)
a tender offer (for which a filing has been made with the SEC which purports to comply with the requirements of Section 14(d) of the Securities Exchange Act of 1934 and the corresponding SEC rules) is made for the stock of the Company. In case of a tender offer described in this paragraph (ii), the “Change of Control” will be deemed to have occurred upon the first to occur of (A) any time during the offer when the person (using the definition in (i) above) making the offer owns or has accepted for payment stock of the Company with 25% or more of the total voting power of the Company’s outstanding stock or (B) three business days before the offer is to terminate unless the offer is withdrawn first, if the person making the offer could own, by the terms of the offer plus any shares owned by this person, stock with 50% or more of the total voting power of the Company’s outstanding stock when the offer terminates; or
 
 
(iii)
individuals who were the Board’s nominees for election as directors of the Company immediately prior to a meeting of the shareholders of the Company involving a contest for the election of directors shall not constitute a majority of the Board following the election.
 
2.06       “Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto.
 
2.07       “Committee” means two or more directors elected by the Board of Directors from time to time; provided, however, that in the absence of an election by the Board, the Committee shall mean the Compensation Committee of the Board of Directors, or if there is no such Committee, then the Board of Directors..
 
2.08       “Common Stock” means the $.01 par value Common Stock of the Company.
 
2.09       “Company” means AmTrust Financial Services, Inc., a Delaware corporation, and any successor thereto.
 
2.10       “Exchange Act” shall mean the Securities Exchange Act of 1934, as it exists now or from time to time may hereafter be amended.
 
2.11       “Fair Market Value” shall be as determined in good faith by the Committee or the Board until such time as the Common Stock is quoted or listed on the Nasdaq Stock Market System or a national securities exchange. Thereafter, Fair Market Value shall be the closing sale price on such market for the Common Stock on the date of the Award.
 
2.12       “Good Reason” shall mean any of the following:
 
 
(i)
any significant diminution in the Participant’s title, authority, or responsibilities from and after a Change of Control;
 
 
(ii)
any reduction in the base compensation payable to the Participant from and after a Change of Control; or
 
 
 
-2-
 

 
(iii)
the relocation after a Change of Control of the Company’s place of business at which the Participant is principally located to a location that is greater than 50 miles from the site immediately prior to the Change of Control.
 
2.13       “ISO” means an incentive stock option within the meaning of section 422 of the Code.
 
2.14       “NSO” means a non-qualified stock option, which is not intended to qualify as an incentive stock option under section 422 of the Code.
 
2.15       “Option” means the right of a Participant, whether granted as an ISO or an NSO, to purchase a specified number of shares of Common Stock, subject to the terms and conditions of the Plan.
 
2.16       “Option Price” means the price per share of Common Stock at which an Option may be exercised.
 
2.17       “Participant” means an individual to whom an Award has been granted under the Plan.
 
2.18       “Plan” means the AmTrust Financial Services, Inc. 2005 Equity Incetive Plan, as set forth herein and from time to time amended.
 
2.19       “Restricted Stock” means the Common Stock awarded to a Participant pursuant to Section 8 of this Plan.
 
2.20       “Subsidiary” means any entity during any period which the Company owns or controls more than 50% of (i) the outstanding capital stock, or (ii) the combined voting power of all classes of stock.
 
2.21       Rules of Construction:
 
2.21.1       Governing Law and Venue . The construction and operation of this Plan are governed by the laws of the State of New York without regard to any conflicts or choice of law rules or principles that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction, and any litigation arising out of this Plan shall be brought in the State of New York or the United States District Court for Southern District of New York.
 
2.21.2       Undefined Terms . Unless the context requires another meaning, any term not specifically defined in this Plan is used in the sense given to it by the Code.
 
2.21.3       Headings . All headings in this Plan are for reference only and are not to be utilized in construing the Plan.
 
2.21.4       Conformity with Section 422 . Any ISOs issued under this Plan are intended to qualify as incentive stock options described in section 422 of the Code, and
 
 
-3-
 
 
all provisions of the Plan relating to ISOs shall be construed in conformity with this intention. Any NSOs issued under this Plan are not intended to qualify as incentive stock options described in section 422 of the Code, and all provisions of the Plan relating to NSOs shall be construed in conformity with this intention.
 
2.21.5       Gender . Unless clearly inappropriate, all nouns of whatever gender refer indifferently to persons or objects of any gender.
 
2.21.6       Singular and Plural . Unless clearly inappropriate, singular terms refer also to the plural and vice versa.
 
2.21.7       Severability . If any provision of this Plan is determined to be illegal or invalid for any reason, the remaining provisions are to continue in full force and effect and to be construed and enforced as if the illegal or invalid provision did not exist, unless the continuance of the Plan in such circumstances is not consistent with its purposes.
 
3.
Stock Subject to the Plan .
 
Subject to adjustment as provided in Section 11 hereof, the aggregate number of shares of Common Stock for which Awards may be issued under this Plan may not exceed 5,994,300 shares, and the aggregate number of shares of Common Stock for which Restricted Stock Awards may be issued under this Plan may not exceed 1,998,100 shares. Reserved shares may be either authorized but unissued shares or treasury shares, in the Board’s discretion. If any Award shall terminate or expire, as to any number of shares of Common Stock, new Awards may thereafter be awarded with respect to such shares. Notwithstanding the foregoing, the total number of shares of Common Stock with respect to which Awards may be granted to any Participant in any calendar year shall not exceed 343,750 shares (subject to adjustment as provided in Section 11 hereof).
 
4.
Administration .
 
The Committee shall administer the Plan. All determinations of the Committee are made by a majority vote of its members. The Committee’s determinations are final and binding on all Participants. In addition to any other powers set forth in this Plan, the Committee has the following powers:
 
 
(a)
to construe and interpret the Plan;
 
 
(b)
to establish, amend and rescind appropriate rules and regulations relating to the Plan;
 
 
(c)
subject to the terms of the Plan, to select the individuals who will receive Awards, the times when they will receive them, the number of Options and Restricted Stock to be subject to each Award, the Option Price, the vesting schedule (including any performance targets to be achieved in connection with the vesting of any Award), the expiration date applicable to each Award and other terms, provisions and restrictions of the Awards (which need not be identical) and subject to Section 16 hereof, to amend or modify any of the terms of outstanding Awards;
 
 
 
-4-
 
 
 
(d)
to contest on behalf of the Company or Participants, at the expense of the Company, any ruling or decision on any matter relating to the Plan or to any Awards;
 
 
(e)
generally, to administer the Plan, and to take all such steps and make all such determinations in connection with the Plan and the Awards granted thereunder as it may deem necessary or advisable; and
 
 
(f)
to determine the form in which tax withholding under Section 14 of this Plan will be made ( i.e. , cash, Common Stock or a combination thereof).
 
Except to the extent prohibited by applicable law or the applicable rules of a stock exchange, the Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it. Any such allocation or delegation may be revoked by the Committee at any time.
 
5.
Eligible Participants .
 
Present and future directors, officers, employees and consultants of the Company or any Subsidiary shall be eligible to participate in the Plan. The Committee from time to time shall select those officers, directors and employees of the Company and any Subsidiary of the Company who shall be designated as Participants and shall designate in accordance with the terms of the Plan the number, if any, of ISOs, NSOs, and shares of Restricted Stock or any combination thereof, to be awarded to each Participant.
 
6.
Terms and Conditions of Non-Qualified Stock Options .
 
Subject to the terms of the Plan, the Committee, in its discretion, may award an NSO to any Participant. Each NSO shall be evidenced by an agreement, in such form as is approved by the Committee, and except as otherwise provided by the Committee in such agreement, each NSO shall be subject to the following express terms and conditions, and to such other terms and conditions, not inconsistent with the Plan, as the Committee may deem appropriate:
 
6.01       Option Period . Each NSO will expire as of the earliest of:
 
 
(i)
the date on which it is forfeited under the provisions of Section 10.1;
 
(ii)
10 years from the Award Date;
 
 
(iii)
in the case of a Participant who is an employee of the Company or a Subsidiary, three months after the Participant’s termination of employment with the Company and its Subsidiaries for any reason other than for Cause or death or total and permanent disability;
 
 
 
-5-
 

 
(iv)
in the case of a Participant who is a member of the board of directors of the Company or a Subsidiary, but not an employee of the Company or a Subsidiary, three months after the Participant’s retirement from the board for any reason other than for Cause or death or total and permanent disability or the sale, merger or consolidation, or similar extraordinary transaction involving the Company or Subsidiary, as the case may be;
 
 
(v)
immediately upon the Participant’s termination of employment with the Company and its Subsidiaries or service on a board of directors of the Company or a Subsidiary for Cause;
 
 
(vi)
12 months after the Participant’s death or total and permanent disability; or
 
 
(vii)
any other date specified by the Committee when the NSO is granted.
 
6.02       Option Price . At the time granted, the Committee shall determine the Option Price of any NSO, which may not be less than 85% of the Fair Market Value of the Common Stock subject to the NSO on the Award Date, and in the absence of such determination, the Option Price shall be 100 % of the Fair Market Value of the Common Stock subject to the NSO on the Award Date.
 
6.03       Vesting . Unless otherwise determined by the Committee and set forth in the agreement evidencing an Award, NSO Awards shall vest in accordance with Section 10.1.
 
6.04       Other Option Provisions . The form of NSO authorized by the Plan may contain such other provisions as the Committee may from time to time determine.
 
7.
Terms and Conditions of Incentive Stock Options .
 
Subject to the terms of the Plan, the Committee, in its discretion, may award an ISO to any employee of the Company or a Subsidiary. Each ISO shall be evidenced by an agreement, in such form as is approved by the Committee, and except as otherwise provided by the Committee, each ISO shall be subject to the following express terms and conditions and to such other terms and conditions, not inconsistent with the Plan, as the Committee may deem appropriate:
 
7.01       Option Period . Each ISO will expire as of the earliest of:
 
 
(i)
the date on which it is forfeited under the provisions of Section 10.1;
 
 
(ii)
10 years from the Award Date, except as set forth in Section 7.02 below;
 
 
(iii)
immediately upon the Participant’s termination of employment with the Company and its Subsidiaries for Cause;
 
 
 
-6-
 

 
(iv)
three months after the Participant’s termination of employment with the Company and its Subsidiaries for any reason other than for Cause or death or total and permanent disability;
 
 
(v)
12 months after the Participant’s death or total and permanent disability; or
 
 
(vi)
any other date (within the limits of the Code) specified by the Committee when the ISO is granted.
 
Notwithstanding the foregoing provisions granting discretion to the Committee to determine the terms and conditions of ISOs, such terms and conditions shall meet the requirements set forth in section 422 of the Code or any successor thereto.
 
7.02       Option Price and Expiration . The Option Price of any ISO shall be determined by the Committee at the time an ISO is granted, and shall be no less than 100% of the Fair Market Value of the Common Stock subject to the ISO on the Award Date; provided, however, that if an ISO is granted to a Participant who, immediately before the grant of the ISO, beneficially owns stock representing more than 10% of the total combined voting power of all classes of stock of the Company or its parent or subsidiary corporations, the Option Price shall be at least 110% of the Fair Market Value of the Common Stock subject to the ISO on the Award Date and in such cases, the exercise period specified in the Option agreement shall not exceed five years from the Award Date.
 
7.03       Vesting . Unless otherwise determined by the Committee and set forth in the agreement evidencing an Award, ISO Awards shall vest in accordance with Section 10.1.
 
7.04       Other Option Provisions . The form of ISO authorized by the Plan may contain such other provisions as the Committee may, from time to time, determine; provided, however, that such other provisions may not be inconsistent with any requirements imposed on incentive stock options under Code section 422 and the regulations thereunder.
 
8.
Terms and Conditions of Restricted Stock Awards .
 
Subject to the terms of the Plan, the Committee, in its discretion, may award Restricted Stock to any Participant at no additional cost to the Participant. Each Restricted Stock Award shall be evidenced by an agreement, in such form as is approved by the Committee, and all shares of Common Stock awarded to Participants under the Plan as Restricted Stock shall be subject to the following express terms and conditions and to such other terms and conditions, not inconsistent with the Plan, as the Committee shall deem appropriate:
 
 
(a)
Restricted Period . Shares of Restricted Stock awarded under this Section 8 may not be sold, assigned, transferred, pledged or otherwise encumbered before they vest.
 
 
(b)
Vesting . Unless otherwise determined by the Committee and set forth in the agreement evidencing an Award, Restricted Stock Awards under this Section 8 shall vest in accordance with Section 10.2.
 
 
 
-7-
 

 
(c)
Certificate Legend . Each certificate issued in respect of shares of Restricted Stock awarded under this Section 8 shall be registered in the name of the Participant and shall bear the following (or a similar) legend until such shares have vested:
 
“The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) relating to Restricted Stock contained in Section 8 of the AmTrust Financial Services, Inc. 2005 Incentive Stock Plan and an Agreement entered into between the registered owner and AmTrust Financial Services, Inc. Copies of such Plan and Agreement are on file at the principal office of AmTrust Financial Services, Inc.”
 
 
(d)
Escrow . Any Restricted Stock issued pursuant to this Section 8 shall be held by the Company in escrow for the benefit of the Participant to whom the Restricted Stock is awarded. Upon vesting, a certificate for the vested shares shall be issued to the participant free of the restrictive legend required by Section 8(c).
 
9.
Manner of Exercise of Options .
 
To exercise an Option in whole or in part, a Participant (or, after his death, his executor or administrator) must give written notice to the Committee on a form acceptable to the Committee, stating the number of shares with respect to which he intends to exercise the Option. The Company will issue the shares with respect to which the Option is exercised upon payment in full of the Option Price. The Committee may permit the Option Price to be paid in cash or shares of Common Stock held by the Participant having an aggregate Fair Market Value, as determined on the date of delivery, equal to the Option Price. The Committee may also permit the Option Price to be paid by any other method permitted by law, including by delivery to the Committee from the Participant of an election directing the Company to withhold the number of shares of Common Stock from the Common Stock otherwise due upon exercise of the Option having an aggregate Fair Market Value on that date equal to the Option Price. If a Participant pays the Option Price with shares of Common Stock which were received by the Participant upon exercise of one or more ISOs, and such Common Stock has not been held by the Participant for at least the greater of:
 
 
(a)
two years from the date the ISOs were granted; or
 
 
(b)
one year after the transfer of the shares of Common Stock to the Participant;
 
the use of the shares shall constitute a disqualifying disposition and the ISO underlying the shares used to pay the Option Price shall no longer satisfy all of the requirements of Code section 422.
 
 
 
-8-
 

To the extent that an Option is not exercised by a Participant when it becomes initially exercisable, it shall not expire but shall be carried forward and shall be exercisable, on a cumulative basis, until the expiration of the exercise period. No partial exercise may be for less than 100 full shares of Common Stock.
 
Notwithstanding any other term or provision of the Plan, no Option granted hereunder may be exercised and no Award of Restricted Stock shall take effect, in whole or in part, unless at the time that the Option or Award has vested (i) the Common Stock is quoted or listed on the Nasdaq Stock Market System or other national securities exchange, (ii) there has been a sale of in excess of twenty percent (20%) of its outstanding shares of the Company to persons not affiliated with the Company as the date of the adoption of the Plan, or (iii) all or substantially all of the Company’s assets and business have been acquired by another corporation or the Company has been merged or consolidated with another corporation and the Company is not the surviving corporation of such transaction.
 
10.
Vesting .
 
10.1       Options . A Participant may not exercise an Option until it has become vested. The portion of an Award of Options that is vested depends upon the period that has elapsed since the Award Date. The following schedule applies to any Award of Options under this Plan unless the Committee establishes a different vesting schedule on the Award Date:
 
Number of Months
Since Award Date
 
Vested Percentage
fewer than 12 months
 
0.0%
12 months
 
25.00%
15 months
 
31.25%
18 months
 
37.50%
21 months
 
43.75%
24 months
 
50.00%
27 months
 
56.25%
30 months
 
62.50%
33 months
 
68.75%
36 months
 
75.00%
39 months
 
81.25%
42 months
 
87.50%
45 months
 
93.75%
48 months or more
 
100.00%
 
Notwithstanding the above schedule, unless otherwise determined by the Committee and set forth in the agreement evidencing an Award, a Participant’s Awards shall become fully vested if a Participant’s employment with the Company and its Subsidiaries or service on the board of directors of the Company or a Subsidiary is terminated due to: (i) retirement on or after his sixty-fifth birthday; (ii) retirement on or after his fifty-fifth birthday with consent of the Company; (iii) retirement at any age on account of total and permanent disability as determined by the Company; or (iv) death. Unless the Committee otherwise provides in the applicable agreement evidencing an Award or Section 10.3 applies, if a Participant’s employment with or service to the Company or a Subsidiary terminates for any other reason, any Awards that are not yet vested are immediately and automatically forfeited.
 
 
-9-
 
 
A Participant’s employment shall not be considered to be terminated hereunder by reason of a transfer of his employment from the Company to a Subsidiary, or vice versa, or a leave of absence approved by the Participant’s employer. A Participant’s employment shall be considered to be terminated hereunder if, as a result of a sale or other transaction, the Participant’s employer ceases to be a Subsidiary (and the Participant’s employer is or becomes an entity that is separate from the Company and its Subsidiaries).
 
10.2       Restricted Stock . The Committee shall establish the vesting schedule to apply to any Award of Restricted Stock that is not associated with an ISO or NSO granted under the Plan to a Participant, and in the absence of such a vesting schedule, such Award shall vest in accordance with Section 10.1.
 
10.3       Effect of “Change of Control” . Notwithstanding Sections 10.1 and 10.2 above, if within 12 months following a “Change of Control” the employment of a Participant with the Company and its Subsidiaries is terminated, the Board of Directors may vest any Award issued to the Participant, and in the case of an Award other than a Restricted Stock Award, such Award shall be fully exercisable for 90 days following the date on which the Participant’s service with the Company and its Subsidiaries is terminated, but not beyond the date the Award would otherwise expire but for the Participant’s termination of employment.
 
11.
Adjustments to Reflect Changes in Capital Structure .
 
11.01       Adjustments . If there is any change in the corporate structure or shares of the Company, the Committee may make any appropriate adjustments, including, but limited to, such adjustments deemed necessary to prevent accretion, or to protect against dilution, in the number and kind of shares of Common Stock with respect to which Awards may be granted under this Plan (including the maximum number of shares of Common Stock with respect to which Awards may be granted under this Plan in the aggregate and individually to any Participant during any calendar year as specified in Section 3) and, with respect to outstanding Awards, in the number and kind of shares covered thereby and in the applicable Option Price. For the purpose of this Section 11, a change in the corporate structure or shares of the Company includes, without limitation, any change resulting from a recapitalization, stock split, stock dividend, consolidation, rights offering, separation, reorganization, or liquidation (including a partial liquidation) and any transaction in which shares of Common Stock are changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or another corporation.
 
11.02       Cashouts . In the event of an extraordinary dividend or other distribution, merger, reorganization, consolidation, combination, sale of assets, split up, exchange, or spin off, or other extraordinary corporate transaction, the Committee may, in such manner and to such extent (if any) as it deems appropriate and equitable make provision for a cash payment or for the substitution or exchange of any or all outstanding Awards or the cash, securities or property deliverable to the holder of any or all outstanding Awards based upon the distribution or consideration payable to holders of Common Stock upon or in respect of such event; provided, however, in each case, that with respect to any ISO no such adjustment may be made that would cause the Plan to violate section 422 of the Code (or any successor provision).
 
 
-10-
 
 
12.
Nontransferability of Awards .
 
ISOs are not transferable, voluntarily or involuntarily, other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code. During a Participant’s lifetime, his ISOs may be exercised only by him. All other Awards (other than an ISO) are transferable by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code. With the approval of the Committee, a Participant may transfer an Award (other than an ISO) for no consideration to or for the benefit of one or more Family Members of the Participant subject to such limits as the Committee may establish, and the transferee shall remain subject to all the terms and conditions applicable to the Award prior to such transfer. The transfer of an Award pursuant to this Section 12 shall include a transfer of the right set forth in Section 16 hereof to consent to an amendment or revision of the Plan and, in the discretion of the Committee, shall also include transfer of ancillary rights associated with the Award. For purposes of this Section 12, “Family Members” mean with respect to a Participant, any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Participant’s household (other than a tenant or employee), a trust in which these persons have more than 50% of the beneficial interest, a foundation in which these persons (or the Participant) control the management of assets, and any other entity in which these persons (or the Participant) own more than 50% of the voting interests.
 
13.
Rights as Stockholder .
 
No Common Stock may be delivered upon the exercise of any Option until full payment has been made. A Participant has no rights whatsoever as a stockholder with respect to any shares covered by an Option until the date of the issuance of a stock certificate for the shares.
 
14.
Withholding Tax .
 
The Committee may, in its discretion and subject to such rules as it may adopt, permit or require a Participant to pay all or a portion of the federal, state and local taxes, including FICA and Medicare withholding tax, arising in connection with any Awards by (i) having the Company withhold shares of Common Stock at the minimum rate legally required, (ii) tendering back shares of Common Stock received in connection with such Award or (iii) delivering other previously acquired shares of Common Stock having a Fair Market Value approximately equal to the amount to be withheld.
 
15.
No Right to Employment .
 
Participation in the Plan will not give any Participant a right to be retained as an employee or director of the Company or its parent or Subsidiaries, or any right or claim to any benefit under the Plan, unless the right or claim has specifically accrued under the Plan.
 
 
-11-
 
 
16.
Amendment of the Plan .
 
The Board, at any time and from time to time, may modify or amend the Plan in any respect, except that without the approval of the stockholders of the Company, the Board may not (a) materially increase the benefits accruing to Participants, (b) increase the maximum number of shares which may be issued under the Plan (except for permissible adjustments provided in the Plan) or (c) materially modify the requirements as to eligibility for participation in the Plan or exercise of an option. The termination or any modification or amendment of the Plan shall not, without the consent of the Pariticipant, affect the Participant’s rights under an Award previously granted to him or her. With the consent of the Participant affected, the Board may amend outstanding option agreements in a manner not inconsistent with the Plan. The Board hereby reserves the right to amend or modify the terms and provisions of the Plan and of any outstanding options under the Plan to the extent necessary to qualify any or all options under the Plan for such favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded ISO’s under Section 422A of the Code or any successor provision of the Code.
 
17.
Conditions Upon Issuance of Shares .
 
An Option shall not be exercisable and a share of Common Stock shall not be issued pursuant to the exercise of an Option, and Restricted Stock shall not be awarded until and unless the award of Restricted Stock, exercise of such Option and the issuance and delivery of such share pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or national securities association upon which the shares of Common Stock may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance.
 
As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the shares of Common Stock are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law.
 
18.
Substitution or Assumption of Awards by the Company .
 
The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (a) granting an Award under the Plan in substitution of such other company’s award, or (b) assuming such award as if it had been granted under the Plan if the terms of such assumed award could be applied to an Award granted under the Plan. Such substitution or assumption shall be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under the Plan if the other company had applied the rules of the Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award shall remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to section 424(a) of the Code). In the event the Company elects to grant a new Award rather than assuming an existing option, such new Award may be granted with a similarly adjusted exercise price.
 
 
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19.
Effective Date and Termination of Plan .
 
19.01       Effective Date . This Plan is effective as of the date of its adoption by the Board of Directors, subject to subsequent approval by the Company’s shareholders.
 
19.02       Termination of the Plan . Unless sooner terminated in accordance with Section 11.02 hereof, the Plan shall terminate upon the earlier of (i) the tenth anniversary of the date of its adoption by the Board or (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise or cancellation of options granted hereunder and/or the issuance of Restricted Stock. If the date of termination is determined under (i) above, then options outstanding on such date shall continue to have force and effect in accordance with the provisions of the instruments evidencing such options.
 
 
 
-13-
 
 
EXHIBIT 10.2

INTERCOMPANY MANAGEMENT AGREEMENT

This Intercompany Management Agreement (the “Agreement”) is entered into as of June 1, 2006, by and among AmTrust Financial Services, Inc. (“AmTrust”), a Delaware corporation, Technology Insurance Company, Inc. (“Technology”), a New Hampshire property/casualty insurer, Rochdale Insurance Company (“Rochdale”), a New York property/casualty insurer, and Wesco Insurance Company (“Wesco”), a Delaware property/casualty insurer.

WHEREAS, AmTrust is the sole shareholder of Technology and Wesco and Technology is the sole shareholder of Rochdale.

WHEREAS, Technology, Rochdale and Wesco desire that AmTrust provide management services and AmTrust desires to provide such services.

NOW, THEREFORE, AmTrust, Technology, Rochdale and Wesco agree as follows:

A.
Financial Services

AmTrust shall perform all required financial and accounting services for Technology, Rochdale and Wesco, including, but not limited to:

 
1.
Federal and state tax compliance (including premium and excise tax);
 
2.
Investment management;
 
3.
Statutory accounting;
 
4.
Loss reserving;
 
5.
GAAP accounting;
 
6.
Regulatory compliance;
 
7.
The development of premium and commission rates;
 
8.
Premium collections and refunds

AmTrust shall collect, directly or through appointed producers, premiums on all policies, contracts, binders, riders, and endorsements issued on behalf of Technology, Rochdale and Wesco and shall deposit such premiums in Fiduciary Accounts maintained on behalf of each Technology, Rochdale and Wesco, as the case may be. AmTrust shall pay any return premiums payable to policyholders, directly or through appointed producers, out of the Fiduciary Accounts.

9.
Maintenance of Fiduciary Accounts

AmTrust shall hold separate and apart from all other funds all monies collected or received pursuant to this Agreement. AmTrust shall further hold separate and apart from the other parties, monies collected or received on behalf of Technology, Rochdale or Wesco. AmTrust shall deposit such monies in accounts at a federal or state chartered financial institution that is a member of the Federal Reserve System. Such accounts shall be referred to as Fiduciary Accounts. The Technology Fiduciary Accounts shall be used for all payments that AmTrust makes on behalf of Technology. The Rochdale Fiduciary Account shall be used for all payments that AmTrust makes on behalf of Rochdale and the Wesco Fiduciary Account shall be used for all payments that AmTrust makes on behalf of Wesco.
 
 
 
 

10.
Maintenance of Books and Records

AmTrust shall maintain complete and orderly files, books, records and accounts of all transactions in accordance with generally accepted insurance and accounting practices. At a minimum, such files, books, records and accounts shall:
 
 
a)
show all accounts between AmTrust and Technology, AmTrust and Rochdale, AmTrust and Wesco and AmTrust and all producers;
 
b)
show all policies issued, all premiums written, collected, earned and unearned, all acquisition costs, all return premiums paid and owing, all commissions, charges, fees and expenses owed by, received by, or owing to AmTrust for Technology, Rochdale and Wesco, and the data necessary to support all such commissions, charges, fees and expenses;
 
c)
include the relevant statistical information required in any statement that must be provided to any regulatory authority.

AmTrust shall retain all such files, books, records and accounts in accordance with applicable insurance law.

B.
Administrative Services

AmTrust shall perform all required administrative services for Technology, Rochdale and Wesco, including, but not limited to:

1.
Form and rate filings

 
a)
obtain authorization to utilize standard policy forms and applications or shall develop forms and applications as required;
 
b)
make all required filings with regulatory authorities;
 
c)
The use and filing of forms and rates by AmTrust shall be subject to the approval of Technology, Rochdale and Wesco, as the case may be.

 
2.
Prepare and submit applications for certificates of authority;
 
 
 
-2-
 
 
 
3.
Prepare and submit applications for certificate of authority expansion;
 
4.
Maintain rating agency relationships;
 
5.
Correspondence with Policyholders and Producers;

C.
Underwriting Services

AmTrust shall perform the following underwriting services for Technology, Rochdale and Wesco:

 
1.
Appointment of Producers

AmTrust or a designated affiliate as set forth in appropriate agreement may enter into producer agreements on behalf of Technology, Rochdale and/or Wesco. Technology, Rochdale and Wesco agree to appoint such producers if required in a particular state. Prior to entering into any producer agreement, AmTrust or the designated affiliate shall ascertain that the producer is lawfully licensed to produce the type of insurance authorized by the producer agreement. Technology, Rochdale and Wesco shall each have the right to require cancellation of any producer agreement after appropriate notice.

 
2.
Marketing

AmTrust shall require that all producer agreements entered into on behalf of Technology, Rochdale and/or Wesco provide that the producer must obtain approval in writing from Technology, Rochdale and/or Wesco for any advertisement or promotional material.

D.
Compensation

 
1.
Expenses

 
a)
Technology, Rochdale and Wesco each shall reimburse AmTrust for all direct expenses that are attributable to it, including but not limited to:

 
·
Agents’ commissions
 
·
Reinsurance
 
·
Advertising
 
·
Boards, bureaus and associations
 
·
Surveys and underwriting reports
 
·
Audits of policyholder records
 
·
Salaries
 
·
Payroll taxes
 
·
Employee Relations and Welfare
 
·
Insurance
 
 
 
-3-
 
 
 
·
Directors’ fees
 
·
Travel and travel items
 
·
Rent and rent items
 
·
Equipment
 
·
Printing and stationery
 
·
Legal and auditing
 
·
Premium taxes
 
·
Insurance licenses and fees
 
·
Guaranty association assessments

 
b)
Quarterly, all common expenses incurred by AmTrust in connection with this Agreement shall be allocated between Technology, Rochdale and Wesco in a manner consistent with New Hampshire RSA 401-B:5(a) and New York Insurance Department Regulation 30 (11 NYCRR §§ 106.2, 106.3) and Delaware Insurance Code, § 5005(a). Salaries shall be allocated to each company based on the percentage of total premium written by each company.

 
2.
Fees

Technology, Rochdale and Wesco, collectively, shall pay to AmTrust an annual fee in an amount equal to 2% of the total written premium or $750,000, whichever is less. Within 30 days of the end of each calendar quarter, the fee shall be allocated to each company based on the percentage of total premium written by each company in that quarter.

3.
Remittance

   
Within 45 days of the end of each calendar quarter, each of the companies shall remit payment to AmTrust for expenses and the the part of the annual fee payable for that quarter. Notwithstanding the foregoing the total fee payable by the companies shall not exceed $187,500 for any quarter or $750,000 for the entire calendar year.

E.
General Provisions

 
1.
Effective Date

This Agreement shall be effective upon its approval by the New Hampshire Insurance Department, New York Insurance Department and Delaware Insurance Department.

 
2.
Termination

This Agreement may be terminated:
 
 
-4-
 
 
 
a)
by mutual agreement at any time;
 
b)
by any party upon giving the greater of thirty (30) days written notice or the minimum notice required by any applicable law;
 
c)
for cause upon fifteen (15) days written notice.

 
3.
Assignment; Binding Agreement

Neither this Agreement nor any of the rights or obligations hereunder may be assigned in whole or in part. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto.

 
4.
Severability and Modification

If any of the provisions of this Agreement shall be determined to be contrary to law or unenforceable by any court of competent jurisdiction, the remaining provisions shall be severable and shall remain enforceable in accordance with their terms. No other changes in, modifications of , or additions to this Agreement shall be valid unless the same shall be in writing and signed by all the parties hereto.

 
5.
Counterparts

This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

 
6.
Headings

The article and section headings contained in this Agreement are inserted for the convenience of the parties only and shall not affect in any way its meaning or interpretation.

 
7.
Governing Law

This Agreement, and any amendments hereto, shall be construed and interpreted in accordance with the substantive laws of the State of New York.

 
8.
Termination of Prior Management Agreement; Entire Agreement

   
Upon the effective date of this Agreement, the Intercompany Management Agreement entered into among AmTrust, Technology and Rochdale effective January 1, 2001 shall terminate. This Agreement shall thereafter constitute the entire agreement between the parties as to the provision of services hereunder.
 
 
 
-5-
 

 
9.
Waiver and Further Agreement
 
Any waiver of any breach of any terms or conditions of this Agreement shall only be effective if made in writing signed by the waiving party or parties and shall not operate as a waiver of any other breach of such terms or conditions or any other term or condition. No failure to enforce any provision hereof shall operate as a waiver of or estoppel with respect to such provision or of any other provisions hereof. No waiver shall act as a continuing waiver except to the extent specifically stated therein. Each of the parties hereto agrees to execute all such further instruments and documents and to take all such further action as the other parties may reasonably require in order to effectuate the terms and purposes of this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth above.


AMTRUST FINANCIAL SERVICES, INC.



____________________________________
Barry D. Zyskind
President


TECHNOLOGY INSURANCE COMPANY, INC.


 
___________________________________
Stephen Ungar
Secretary and General Counsel


ROCHDALE INSURANCE COMPANY



___________________________________
Stephen Ungar
Secretary and General Counsel
 
 
-6-
 


WESCO INSURANCE COMPANY
 

___________________________________
Barry D. Zyskind
Secretary and General Counsel
 
 
-7-
 
EXHIBIT 10.3

TAX ALLOCATION AGREEMENT

This Tax Allocation Agreement, dated June 1, 2006, between AmTrust Financial Services, Inc. (“AmTrust”), a Delaware corporation, and Wesco Insurance Company (“Wesco”), a Delaware corporation.

WITNESSETH

WHEREAS, AmTrust and Wesco are affiliates;

WHEREAS, AmTrust and Wesco are part of a consolidated tax filing group (the “Group”) in accordance with the relevant Internal Revenue Service regulations; and

WHEREAS, AmTrust is the agent of Wesco for the purpose of filing the consolidated tax return on behalf of the Group; and

WHEREAS, AmTrust and Wesco wish to set forth their obligations to each other as members of the Group in accordance with Delaware’s insurance laws and regulations.

NOW, THEREFORE, AmTrust and Wescp agree as follows:

A.       Determination of Tax Liability

Wesco’s liability for federal income tax payments or entitlement to federal income tax refunds shall be based on the amount of its tax liability or entitlement to a refund calculated on a separate return basis.

B.       Tax Payments

Wesco shall remit to AmTrust any amounts determined to be due in accordance with Section A of this Agreement at such time that the Group is legally obligated to make estimated or final tax payments.

C.       Tax Refunds

Upon receipt, AmTrust shall remit to Wesco that part of any tax refund received by the Group that results from tax savings to the Group generated by foreign credits, investment credits, losses or any loss carry overs available to Wesco.

D.       Scope

This Agreement shall apply only to the parties’ federal tax liability.
 
 
 
 
 
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the date set forth above.


AMTRUST FINANCIAL SERVICES, INC.



By:_________________________________
Barry D. Zyskind, President



WESCO INSURANCE COMPANY



By:_________________________________
Barry D. Zyskind, President
 
 
 
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EXHIBIT 10.4

TAX ALLOCATION AGREEMENT

This agreement is made for 1998 and future calendar years by and among AmTrust Financial Services, Inc. (AmTrust), a Delaware corporation and Technology Insurance Company (TIC), a New Hampshire corporation.

WITNESSETH

Whereas, AmTrust owns all the issued and outstanding shares of voting common stock of TIC.

Whereas, AmTrust and TIC may have taxable income in this and future years calendar years and would be liable for federal income tax if their incomes would be computed as though they would file separate returns.

Whereas, AmTrust shall file a consolidated tax return on behalf of itself and its subsidiaries, including TIC (AmTrust and its subsidiaries, including TIC, shall be referred to collectively as the “Group”).

Now, therefore, AmTrust and TIC agree as follows, each intending to be legally bound hereby:

1.      
AmTrust will file a consolidated tax return for this and future calendar years for the Group. TIC, for itself, agrees to file such consents, elections and other documents and take such other actions as may be necessary, or appropriate to effectuate the filing of such return as provided by the Internal Revenue Service Regulations, Section 1.1502-1(a) and 1.1502.33(d)(2)
2.      
The Group may have consolidated federal income tax liability for this and future calendar years. TIC agrees that, with respect to this and future calendar years, TIC shall remit to AmTrust such estimated and final tax payments as are legally required to be made in an amount equal to the federal income liability of TIC if its taxable income were computed as though it would file a separate return for each calendar year

Notwithstanding anything to the contrary contained herein, AmTrust and TIC specifically agree that this Allocation Agreement shall apply only with respect to federal tax liability.

In Witness Whereof, the parties hereto have caused this agreement to be executed on the date first above written.


AmTrust Financial Services, Inc.

By:

Title:
 
 
 
 
 
Technology Insurance Company

By:

Title:
 
 


EXHIBIT 10.5

TAX ALLOCATION AGREEMENT

This Agreement, dated July 1, 2002, is made for 2002 and future calendar years between AmTrust Financial Services, Inc. (“AmTrust”), a Delaware corporation, and Rochdale Insurance Company (“Rochdale”), a New York corporation.

WITNESSETH

WHEREAS, AmTrust and Rochdale are affiliates;

WHEREAS, AmTrust and Rochdale are part of a consolidated tax filing group (the “Group”) in accordance with the relevant Internal Revenue Service regulations; and

WHEREAS, AmTrust is the agent of Rochdale for the purpose of filing the consolidated tax return on behalf of the Group; and

WHEREAS, AmTrust and Rochdale wish to set forth their obligations to each other as members of the Group in accordance with New York’s insurance laws and regulations.

NOW, THEREFORE, AmTrust and Rochdale agree as follows:

A.       Determination of Tax Liability

Rochdale’s liability for federal income tax payments or entitlement to federal income tax refunds shall be based on the amount of its tax liability or entitlement to a refund calculated on a separate return basis.

B.       Tax Payments

Rochdale shall remit to AmTrust any amounts determined to be due in accordance with Section A of this Agreement at such time that the Group is legally obligated to make estimated or final tax payments.

C.       Credits

1.
AmTrust shall pay Rochdale an amount equal to the amount of tax savings to the Group generated by foreign credits, investment credits, losses or any loss carry overs (“Credits”) available to Rochdale. Rochdale shall record any such payment as contributed surplus.
 
2.
Once Rochdale receives payment from AmTrust for Credits, Rochdale cannot utilize such Credits in the calculation of its tax liabilities under Section A of this Agreement.
 
 
 
 
 

D.       Escrow

In the event that amounts paid by Rochdale to AmTrust for its tax liability determined in accordance with Section A exceeds the amount that AmTrust pays to the Internal Revenue Service, AmTrust shall establish and maintain an escrow account or accounts for Rochdale’s benefit in an amount equal to Rochdale’s excess payment or payments, as the case may be, funded by assets eligible as an investment under the New York insurance law. The purpose of the escrow accounts shall be to permit Rochdale to recoup federal income taxes in the event of future net losses. Escrow assets may be released to AmTrust from such escrow accounts at such time as the permissible period for loss carrybacks has expired.

E.       Tax Refunds

Upon receipt, AmTrust shall remit to Rochdale that part of any tax refund received by the Group that results from Credits generated by Rochdale for which Rochdale has not received payment pursuant to Section C.

F.       Scope

This Agreement shall apply only to the parties’ federal tax liability.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the date set forth above.


AMTRUST FINANCIAL SERVICES, INC.



By:_________________________________
Barry D. Zyskind, President



ROCHDALE INSURANCE COMPANY



By:_________________________________
Barry D. Zyskind, President
 
 
 
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EXHIBIT 10.6

AMTRUST INTERCOMPANY REINSURANCE AGREEMENT

among

(1)   Technology Insurance Company, Inc.;

(2)   Rochdale Insurance Company;

(3)   Wesco Insurance Company; and

(4)   AmTrust International Insurance Limited

Effective June 1, 2006

WHEREAS, each of the parties hereto is, directly or indirectly, a wholly-owned subsidiary of AmTrust Financial Services, Inc. (“AmTrust”); and

WHEREAS, AmTrust wishes the parties to enter into this Agreement to allocate retained premiums and losses within the Group in a manner consistent with applicable laws and regulations.

NOW, THEREFORE, in consideration of the mutual covenants, terms and conditions set forth herein, the Parties agree as follows:

ARTICLE I. TERM:

This Agreement shall be effective June 1, 2006, subject to all required regulatory approvals, with respect to Business subject hereto, and shall continue in effect until terminated in accordance with Article XVIII.

ARTICLE II. TERRITORY:

This Agreement provides reinsurance for Business in all territories in which the Companies issue Policies and/or insure risks thereunder.

ARTICLE III. BUSINESS REINSURED

All Policies issued by the Companies.

ARTICLE IV. DEFINITIONS

A.       “Business” means all Policies issued by the Companies.
 
 
 
 


B.       “Company” or “Companies” means each Technology Insurance Company, Inc. and Rochdale Insurance Company when issuing Policies and Wesco Insurance Company and all of them, collectively.

C.       “Gross Earned Premium” means Gross Written Premium plus the Companies’ Unearned Premium Reserves as of the commencement of the Term less the Companies’ Unearned Premium Reserves as of the Termination Date.

D.       “Gross Written Premium” means any and all amounts charged to a policyholder or other person on or with respect to a Policy less any such amounts returned for cancellation of any such Policy.

E.       “IBNR” means the Companies’ reserves for liability for Losses which have occurred, but have not yet been reported to the Companies, including expected development of Outstanding Loss Reserves.

F.       “Incurred Losses” means the sum of Losses Paid, Loss Adjustment Expenses Paid, Outstanding Loss Reserves, and IBNR.

G.       “Loss” means a claim for coverage under a Policy.

H.       “Losses Paid” means payment made for Losses under Policies less related salvage and subrogation recoveries.

I.       “Loss Adjustment Expenses” means all costs and expenses that are incurred by a Company in the investigation, defense or appeal of a specific claim covered under a Policy, including declaratory judgment expenses arising out of a coverage question under a Policy.

J.       “Net Earned Premium” means Gross Earned Premium less all original acquisition and administrative expenses, the cost of inuring reinsurance, Federal Excise Tax, ceding commission, etc.

K.       “Net Retained Liability” means each Company’s gross liability on each Loss reinsured hereunder after deducting recoveries from all inuring reinsurance, other than the reinsurance provided hereunder.

L.       “Net Written Premium” means Gross Written Premium less all original acquisition and administrative expenses, the cost of inuring reinsurance, Federal Excise Tax, ceding commission, etc.

M.       “Obligations” mean:

(i)       Losses and Loss Adjustment Expenses paid by the Companies, but not recovered from the Reinsurers;
 
 
-2-
 

(ii)       Outstanding Loss Reserves;

(iii)       IBNR;

(iv)       Loss Adjustment Expense Reserves; and

(v)       Any amount that the Companies deem necessary to fully secure the Companies as required by Article X.

N.       “Outstanding Loss Reserves” means, as of a specified date, losses reported to the Companies, which have been reserved, but not yet paid.

O.       “Policies” mean any and all binders, certificates, policies, contracts of insurance, accepted, held or covered, provisionally or otherwise.

P.       “Reinsurer” or “Reinsurers” means AmTrust International Insurance Limited and Technology Insurance Company, Inc. and Rochdale Insurance Company, when acting as reinsurers hereunder.

Q.       “Ultimate Net Loss” means (i) with respect to each Loss within the Companies Net Retained Liability, Losses and Loss Adjustment Expenses Paid less salvage and subrogation recoveries; and (ii) each Companies liability for bad debt resulting from unpaid premium or premium audits, whether actual or statutory. All salvage, subrogation or other recoveries made or received subsequent to Loss settlement hereunder shall be applied as if made or recovered prior to such settlement, and all necessary adjustments shall be made by the subject Parties. Nothing herein shall be construed to mean that losses are not recoverable hereunder until Ultimate Net Loss has been ascertained.

R.       “Unearned Premium Reserve” means, as of a specified date, the pro rata portion of premium represented by the unexpired portion of in-force Policies.

ARTICLE V. INSURING CLAUSE

The Companies shall cede to the Reinsurers and the Reinsurers shall assume from the Companies, the Companies’ Ultimate Net Loss as follows:

A.       Technology Insurance Company, Inc., as a Company, shall (i) cede to AmTrust International Insurance Limited and AmTrust International Insurance shall assume 70% of its Ultimate Net Loss; and (ii) cede to Rochdale Insurance Company and Rochdale Insurance Company shall assume 10% of its Ultimate Net Loss;

B.       Rochdale Insurance Company, as a Company, shall(i) cede to AmTrust International Insurance Limited and AmTrust International Insurance Limited shall assume 70% of its Ultimate Net Loss; and (ii) cede to Technology Insurance Company, Inc. and Technology Insurance Company, Inc. shall assume 20% of its Ultimate Net Loss ] ;
 
 
-3-
 

C.       Wesco Insurance Company shall (i) cede to AmTrust International Insurance Limited and AmTrust International Insurance Limited shall assume 70% of its Ultimate Net Loss;   and (ii) cede to Technology Insurance Company, Inc. and Technology Insurance Company, Inc. shall assume 20% of its Ultimate Net Loss;

D.       The Companies shall cede to AmTrust International Insurance Limited and AmTrust International Insurance Limited shall assume 100% of the Companies Ultimate Net Loss resulting from the Companies’ memberships in or reinsurance of any assigned risk or similar plans.

ARTICLE VI. PREMIUM

For the reinsurance provided hereunder, the Companies shall cede and the Reinsurers shall assume premiums as follows:

A.       Technology Insurance Company, Inc., as a Company, shall (i) cede to AmTrust International Insurance Limited and AmTrust International Insurance shall assume 70% of Net Written Premium and (ii) cede to Rochdale Insurance Company and Rochdale Insurance Company shall assume 10% of Net Written Premium;

B.       Rochdale Insurance Company, as a Company, shall(i) cede to AmTrust International Insurance Limited and AmTrust International Insurance Limited shall assume 70% of Net Written Premium; and (ii) cede to Technology Insurance Company, Inc. and Technology Insurance Company, Inc. shall assume 20% of Net Written Premium; and

C.       Wesco Insurance Company shall (i) cede to AmTrust International Insurance Limited and AmTrust International Insurance Limited shall assume 70% of Net Written Premium; and (ii) cede to Technology Insurance Company, Inc. and Technology Insurance Company, Inc. shall assume 20% of Net Written Premium.

D.       Ceding Commission. AmTrust International Insurance Limited shall allow the Companies a five percent ceding commission to cover deferred acquisition costs.

ARTICLE VII. EXCLUSIONS

None.

ARTICLE VIII. CLAIMS

The Reinsurers agree to abide by the Loss settlements made by the Companies; provided, that when so requested, the Companies, or any one of them, will afford the Reinsurers the opportunity, at the Reinsurers’ expense, to be associated in the defense of any claim, suit or proceeding involving this reinsurance.
 
 
-4-
 

ARTICLE IX. REPORTS AND REMITTANCES

Within 30 days of the end of each month, the Companies shall render to the Reinsurers an account current showing the Net Cede, which is the sum of the ceded Net Written Premium less Losses Paid and Loss Adjustment Expenses, and, if applicable, funds withheld and adjustments thereto, for the subject month. Within 30 days of the end of each calendar quarter, all net balances due shall be settled by the parties.

ARTICLE X. RESERVE DEPOSIT (NON-ADMITTED REINSURERS)

With respect to premium received with respect to an insured risk located in any jurisdiction in which a Reinsurer is non-admitted, the Companies or any of them may require that such Reinsurer secure an amount equal to the Reinsurers’ Obligations (the “Secured Amount”) through one or more of the following: (i) a Letter of Credit which meets the requirements of the NAIC and applicable state insurance laws and regulations; (ii) assets held in trust pursuant to reinsurance trust agreement, which meets the requirements of the NAIC and applicable state insurance laws and regulations (a “Reinsurance Trust”); or (iii) cash.

The Secured Amount shall be equal the Reinsurer’s Obligation, and shall be adjusted quarterly. Upon default by any Reinsurer of sums due and owing to a Company, the Company, as provided in this Article X, may appropriate as much of the Letter of Credit, Reinsurance Trust Assets and/or cash as necessary to eliminate the default. The Company may, however, at its discretion, require payment of any sum in default, and it shall be no defense to any such claim that the Company might have had recourse to the Letter of Credit, Reinsurance Trust assets and/or cash.

Each of the Companies and the Reinsurers hereby agree that the Letter of Credit, Reinsurance Trust and/or cash, provided pursuant to this Agreement may be drawn upon at any time, notwithstanding any other provisions herein contained. The Letter of Credit, Reinsurance Trust and/or cash may be utilized by Company or any successor by operation of law, including, without limitation, any liquidator, rehabilitator, receiver or conservator of the Company for any of the following reasons:

 
(i)
To reimburse the Company for the Reinsurer’s share of unearned premiums returned to the holders of Policy(ies) reinsured hereunder due to cancellations of said Policy(ies);

 
(ii)
To reimburse the Company for the Reinsurer’ share of Losses Paid by the Company under the terms and provisions of the Policy(ies) reinsured hereunder;

 
(iii)
To fund an account in an amount at least equal to the deduction from the Company’s liabilities for reinsurance ceded hereunder. Such account shall include, but not be limited to, amounts for Losses Paid, Outstanding Loss Reserves, IBNR and reserves for Loss Adjustment Expenses); and
 
 
 
-5-
 

 
(iv)
To pay any other amounts due to the Company under this Agreement.

All of the foregoing apply without diminution because of the insolvency of the Company or the Reinsurers.

ARTICLE XI: INDEMNIFICATION AND ERRORS AND OMISSIONS:

The Reinsurers are reinsuring to the extent of the amount herein provided, the obligations of the Companies under the Policies. The Company shall be the sole judge as to what constitutes a claim or loss covered under a Policy and the Reinsurers shall be bound by the judgment of the Company as to its liability under Policies.

Any inadvertent delay, error or omission in connection with this Agreement shall not relieve any party from any liability that would attach to it if such delay, error or omission had not been made; provided that such delay, error or omission is rectified as soon as possible.

ARTICLE XII. TAXES:

The Company will be liable for taxes (except Federal Excise Tax) on premiums reported to the Reinsurers hereunder. Federal Excise Tax applies only to those Reinsurers which are not exempt from Federal Excise Tax.

The Reinsurers have agreed to allow for the purpose of paying the Federal Excise Tax (if applicable) One Percent (1%) of the subject premium referenced in Article VII, or such other rate that may be in effect from time to time, to the extent such premium is subject to Federal Excise Tax.

ARTICLE XIII. INSPECTION:

Each Company shall place at the disposal of the Reinsurers, and the Reinsurers shall have the right to inspect, at all reasonable times, through its authorized representatives, all books, records and papers of each Company in connection with the reinsurance hereunder or any claims in connection herewith.

ARTICLE XIV. FOLLOW THE FORTUNES CLAUSE:

The Reinsurers’ liability shall attach simultaneously with that of the Company and all reinsurance for which the Reinsurers shall be liable by virtue of this Agreement shall be subject in all respects to the same risks, terms, rates, conditions, interpretations, assessments, waivers, and to the same modifications, alterations and cancellations, as the respective Policies of each of the Companies to which this Agreement relates.
 
 
-6-
 

This Agreement shall further protect the Company in connection with any Loss for which the Company may be legally liable to pay in excess of the Policy limit(s) or extra contractual obligations which have been incurred because of failure by the Company to settle within said limits or by reason of alleged negligence or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its Insured or in the preparation or prosecution of any appeal consequent upon such action.

The true intent of this Agreement being that the Reinsurers shall, in every case to which this Agreement applies and in the proportions specified herein, follow the fortunes of the Company.

Notwithstanding anything to the contrary herein, this Agreement shall not apply to any Loss in excess of Policy limits or extra contractual obligations incurred by a Company as a result of any fraudulent or criminal act by any officer of director of such Company, acting individually or collectively, or in collusion with any individual, corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

ARTICLE XV. INSOLVENCY

In the event of the insolvency of a Company, reinsurance under this Agreement shall be payable by the Reinsurers (on the basis of the liability of said Company under Policies reinsured hereunder without diminution because of the insolvency of the Company) to the Company or its liquidator, receiver, or statutory successor, except as provided by the applicable provisions of New Hampshire, New York or Delaware insurance laws.

It is agreed, however, that the liquidator or receiver or statutory successor of the insolvent Company shall give written notice to the Reinsurers of the pendency of a claim against the insolvent Company on the contract or contracts reinsured within a reasonable time after such claim is filed in the insolvency proceeding and that, during the pendency of such claim, the Reinsurers may investigate such claim and interpose at their own expense in the proceeding where such claim is to be adjudicated, any defenses which they may deem available to the Company or its liquidator to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurers.

ARTICLE XVI. ARBITRATION CLAUSE:

All disputes or differences arising out of the interpretation of this Agreement except as covered by Article XIX—Service of Suit, shall be submitted to the decision of two (2) disinterested and independent Arbitrators, one to be chosen by each party, and in the event the Arbitrators fail to agree, to the decision of an disinterested and independent Umpire to be chosen by the Arbitrators before they enter upon arbitration. The Arbitrators and Umpire shall be current or former executive officials of property/casualty insurance or reinsurance companies or otherwise certified by ARIAS-US. If either of the parties fails to appoint an Arbitrator within one (1) month after being required by the other party in writing to do so, the requesting party may choose two arbitrators who shall in turn choose an Umpire before they enter upon arbitration. If the Arbitrators fail to appoint an Umpire, within one (1) month of appointment, each Arbitrator shall nominate three candidates within 10 days thereafter, two of whom the other shall decline and the decision shall be made by drawing lots.
 
 
-7-
 

The Arbitration proceedings shall take place at New York, New York, unless otherwise agreed by the Parties. The applicant shall submit its case within one (1) month after the appointment of the Umpire, and the respondent shall submit his reply within one (1) month after receipt of a claim. The Arbitrators and Umpire are relieved from all judicial formality and may abstain from following the strict rule of law. They shall settle any dispute under this Agreement according to an equitable rather than a strictly legal interpretation of its terms and their decision shall be final and not subject to appeal. Judgment may be entered in any court of competent jurisdiction.

Each party shall bear the expenses of its Arbitrators and shall jointly and equally share with the other the expenses of the Umpire and of the Arbitration. This Article shall survive the termination of this Agreement.

ARTICLE XVII. RESERVES:

The Reinsurers will maintain legal reserves with respect to Outstanding Losses and Loss Expense Paid.

ARTICLE XVIII. TERMINATION:

A.       Any party shall have the right to terminate this Agreement upon sixty (60) days written notice to the other parties, as provided herein.

B.       Any party shall have the right to terminate this Agreement immediately by giving the other parties written notice:

 
1.
If the performance of the whole or any part of this Agreement be prohibited or rendered impossible de jure or de facto in particular and without prejudice to the generality of the preceding words in consequence of any law or regulation which is or shall be in force in any country or territory or if any law or regulation shall prevent directly or indirectly the remittance of any or all or any part of the balance or payments due to or from either party.

 
2.
If another party at any time shall:

(i)   Become insolvent, or
(ii)   Suffer any impairment of capital, or
(iii)   File a petition in bankruptcy, or
(iv)   Go into liquidation or rehabilitation, or
(v)   Have a receiver appointed, or
(vi)   Be acquired or controlled by any other insurance company or organization
 
 
-8-
 

C.       All notices of termination in accordance with any of the provisions of this paragraph shall be by certified mail return receipt requested or by overnight delivery by a recognized courier service and shall be deemed to be served upon dispatch. All notices of termination in accordance with any of the provisions of this Article shall be addressed to the party concerned at its head office or at any other address previously designated by that party.

D.       In the event of this Agreement being terminated at any date other than at an annual anniversary date then the Net Written Premium due to the Reinsurers shall be calculated up to date of termination. The rights and obligations of both parties to this Agreement shall remain in full force until the effective date of termination.

E.       As respects coverage hereunder, it is understood and agreed that upon termination of this Agreement, coverage will continue hereunder beyond such termination date until the natural expiration date, the cancellation date, or the date which the Company, as a matter of law, may terminate coverage with respect to Policies reinsured hereunder.

F.       Should this Agreement terminate while a loss occurrence is in progress, the Reinsurers shall be liable to the extent of their interests, subject to the other conditions of this contract, for all losses resulting from such loss occurrence whether such losses arise before or after such termination.

ARTICLE XIX. SERVICE OF SUIT:

It is agreed that in the event of the failure of the Reinsurers herein to pay any amount claimed to be due hereunder or the breach of any other term or condition of this Agreement and for which the Companies or any Company, in their or its sole discretion, choses not to file for Arbitration under Article XVI, the Reinsurers herein, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States and will comply with all requirements necessary to give such court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such court.

It is further agreed that service of process involving AmTrust International Insurance Limited in such suit may be made upon Bott and Associates,________, Attention: Michael Bott and that in any suit instituted against any of them upon this contract, the Reinsurers will abide by the final decision of such court or of any appellate court in the event of an appeal.

The above-mentioned are authorized and directed to accept service of process on behalf of the Reinsurers in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they will enter a general appearance upon Reinsurers’ behalf in the event such a suit shall be instituted.
 
 
-9-
 

Further, pursuant to any statute of any state, territory, or district of the United States which makes provisions therefor, Reinsurers herein hereby designate the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Agreement of Reinsurance, and hereby designate the above named as the person to whom the said office is authorized to mail such process or a true copy thereof.

ARTICLE XX. FOREIGN EXCHANGE:

All premium and loss payments hereunder shall be in the United States currency.

Premiums due hereunder in other than United States currency shall be paid by the Company in United States Dollars at the rates of exchange at which the original accounts were settled. Failing this the rate of exchange applied shall be that used by the Company in their own books of or in accordance with any subsequent adjustments thereto.

The amounts recoverable for losses in other than United States currency shall be converted into United States Dollars at the same rates of exchange as were applied in the settlement of the original losses. Failing this the rate of exchange applied shall be that used by the Company in their own books either at the time of the settlement or in accordance with any subsequent adjustments thereto.

ARTICLE XXI. OFFSET CLAUSE:

The Company and the Reinsurers shall have the right to offset any balance(s) due from one to the other under this Agreement. The party asserting the right of offset may exercise such right at any time whether the balance(s) due are on account of premiums or losses or otherwise. In the event of the insolvency of a party hereto, offsets shall only be allowed in accordance with the applicable sections of the insurance laws of the States of New Hampshire, New York and Delaware.
 
 
-10-
 
 
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duty authorized representatives.

Technology Insurance Company, Inc.

By:_______________________________
Barry D. Zyskind
President

Rochdale Insurance Company

By:_______________________________
Barry D. Zyskind
President

Wesco Insurance Company

By:_______________________________
Barry D. Zyskind

AmTrust International Insurance Limited

By: ______________________________
Michael Bott
Manager
 
 
-11-
 
EXHIBIT 10.7

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement”), made and entered into as of January 1, 2005, by and between AmTrust Financial Services, Inc. a Delaware corporation, with its principal office located at 59 Maiden Lane, 6 th Floor, New York, New York 10038 (“AmTrust” or “Company”) and Barry D. Zyskind (“Executive”).

WHEREAS, AmTrust has determined that it is in the best interests of the Company and its stockholders to employ Executive and to set forth in this Agreement the obligations and duties of both Company and Executive; and

WHEREAS, AmTrust wishes to assure itself of the services of Executive for the period hereinafter provided, and Executive is willing to be employed by Company for said period, upon the terms and conditions provided in this Agreement;

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, Company and Executive (individually a “Party” and together the “Parties”) agree as follows:

1.
Definitions

(a)
“Beneficiary” means the person or persons named by Executive pursuant to Section 15 below or, in the event that no such person is named who survives Executive, his estate.

(b)
“Board” means the Board of Directors of AmTrust.

(c)
“Cause” means:

(i)
Executive’s conviction of a felony involving an act or acts of dishonesty on his part and resulting in gain or personal enrichment at the expense of Company;

(ii)
willful and continued failure of Executive to perform his obligations under this Agreement, resulting in demonstrable material economic harm to Company;

(iii)
a willful and material breach by Executive of the provisions of Sections 12 or 13 below to the demonstrable and material detriment of Company.

Notwithstanding the foregoing, in no event shall Executive’s failure to perform the duties associated with his position caused by his mental or physical disability constitute Cause for his termination.

For the purposes of this Section 1(c), no act or failure to act on the part of Executive shall be considered “willful” unless it is done, or omitted to be done, by him in bad faith or without reasonable belief that his action or omission was in the best interests of Company. Any act or failure to act based upon authority given pursuant to a resolution adopted by the Board or based upon the advice of counsel for Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of Company.
 

(d)
“Code” means the Internal Revenue Code of 1986, as amended from time to time.

(e)
“Disability” means the illness or other mental or physical disability of Executive, as determined by a physician acceptable to Company and Executive, resulting in his failure during the Employment Term (i) to perform substantially his applicable material duties under this Agreement for a period of six consecutive months and (ii) to return to the performance of his duties within thirty (30) days after receiving written notice of termination.

(f)
“Employment Term” means the period specified in Section 2(b) below.

(g)
“Fiscal Year” means the fiscal year of the Company.

(h)
“Good Reason” means, at any time during the Employment Term, in each case without Executive’s prior written consent or his acquiescence:

(i)
reduction in his then current Salary;

(ii)
diminution, reduction or other adverse change in the bonus or incentive compensation opportunities available to Executive (with respect to the level of bonus or incentive compensation opportunities, the applicable performance criteria and otherwise the manner in which the bonuses and incentive compensation are determined) in the aggregate from those available as the date hereof in accordance with Section 4(a) below;

(iii)
Company’s failure to pay Executive any amounts otherwise vested and due him hereunder or under any plan or policy of Company;

(iv)
diminution of Executive’s titles, position, authorities or responsibilities, including not serving on the Board;

(v)
assignment to Executive of duties incompatible with his position of President;

(vi)
imposition of a requirement that Executive report other than to the full Board;

(vii)
a material breach of the Agreement by Company that is not cured within 10 business days after written notification by Executive of such breach; or
 
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(i)
“Salary” means the annual salary provided for in Section 3 below, as adjusted from time to time.

(j)
“Spouse” means, during the Term of Employment, the woman who as of any relevant date is legally married to Executive.

(k)
“Subsidiary” means any corporation of which Company owns, directly or indirectly, more than fifty percent (50%) of its voting stock.

2.
EMPLOYMENT TERM, POSITIONS AND DUTIES

(a)
Employment of Executive. Company hereby employs Executive, and Executive hereby accepts employment with Company, in the positions and with the duties and responsibilities set forth below and upon such other terms and conditions as are hereinafter stated. Executive shall render services to Company principally at Company’s corporate headquarters, but he shall do such traveling on behalf of Company as shall be reasonably required in the course of the performance of his duties hereunder.

(b)
Employment Term. The initial Employment Term shall commence as of January 1, 2005 and shall terminate on December 31, 2009 (the “Initial Employment Term”). Upon expiration of the initial Employment Term, this Agreement shall renew automatically for successive three year terms (“Successive Employment Terms”), unless either party has provided one hundred eighty (180) days written notice of its of his intention not to renew prior to the expiration of the Initial Employment Term or any Successive Employment Term. The Initial Employment Term and each Successive Employment Term, collectively, shall constitute the Employment Term.

(c)
Titles and Duties

(i)
Until the date of termination of his employment hereunder, Executive shall be employed as President and Chief Executive Officer reporting to the full Board. In his capacity as President and Chief Executive Officer, Executive shall have the customary powers, responsibilities and authorities of presidents of corporations of the size, type and nature of Company including, without limitation, authority, in conjuction with the Board as appropriate, to hire and terminate other employees of Company.

(ii)
During the Employment Term, Company shall use its best efforts to secure the election of Executive to the Board. During the Employment Term, if the Board forms an executive or similar committee, Executive shall serve thereon.
 
 
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(d)
Time and Effort

(i)
Executive recognizes that, during the Employment Term, he owes an undivided duty of loyalty to Company and agrees to devote substantially all of his business time and attention as is reasonably necessary to the performance of his duties and responsibilities and to use his best efforts to promote and develop the business of Company and its affiliates; and

(ii)
Nothwithstanding the foregoing, nothing shall preclude Executive from (a) serving on the boards of a reasonable number of trade associations, charitable organizations and/or businesses not in competition with Company, (b) engaging in charitable activities and community affairs and (c) managing his personal investments and affairs; provided, however, that, such activities do not materially interfere with the proper performance of his duties and responsibilities specified in Section 2 (c) above.

3.
SALARY

(a)
Initial Salary. Executive shall receive from Company a Salary, payable in accordance with the regular payroll practices of Company, in a minimum amount of $600,000.

(b)
Salary Increases. Executive shall be entitled to a salary review annually commencing on the first anniversary of the Effective Date of this Agreement. Such salary review shall be based entirely on merit and any salary adjustments shall be determined by the Board or compensation committee thereof. Any amount to which Executive’s Salary is increased, as provided in this Section 3(b) or otherwise, shall not thereafter be reduced without his consent, and the term “Salary” as used in this Agreement shall refer to his Salary as thus increased.

4.
BONUSES

(a)
Annual Profit Bonus. Provided that the pre-tax profit of Company equals or exceeds the target profit for the subject Fiscal Year set forth herein, Company shall pay Executive an amount equal to two percent (2%) of the Company’s pre-tax profit for each Fiscal Year or portion thereof during the Employment Term, subject to a maximum amount equal to two and one half times Executive’s Salary as of the end of the Fiscal Year. For purposes of computing the Profit Bonus, profit means Company’s revenues less expenses determined in accordance with generally accepted accounting principles on a consistent basis. The Annual Profit Bonus for each Fiscal Year shall be paid no later than one hundred twenty (120) days as of the end of the Fiscal Year. The target profit for each Fiscal Year of the Employment Term is as follows:

Fiscal Year 2005:   $20 million
Fiscal Year 2006:   $22 million
Fiscal Year 2007   $24.2 million
Fiscal Year 2008:   $26.6 million
Fiscal Year 2009:   $29.3 million
 
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The target profit for Successive Employment Terms shall be determined by the Board or the compensation committee thereof, provided that the target profit for any Fiscal Year may not be increased by more than 10% from the target profit for the prior Fiscal Year without the express written consent of Executive.

(b)
Special Bonus. Executive shall be eligible to receive additional bonuses during the Employment Term. The Board or the compensation committee thereof shall determine, in its discretion, the occasion for payment, and the amount, of any such bonus.

5.
LONG-TERM INCENTIVE

During the Employment Term, Executive shall be eligible to participate in any long-term incentive compensation plan established by Company for the benefit of Executive or, in the absence thereof, under any such plan established for the benefit of members of the senior management of Company.

6.
EQUITY OPPORTUNITY

During the Employment Term, Executive shall be eligible to receive grants of options to purchase shares of Company’s stock and awards of shares of Company’s stock, either or both as determined by the Board or Options Committee thereof, under and in accordance with the terms of applicable plans of Company and related option and award agreements. It is the intention of Company to grant stock options to Executive during the Employment Term.

7.
EXPENSE REIMBURSEMENT; CERTAIN OTHER COSTS

During the Employment Term, Executive shall be entitled to prompt reimbursement by Company for all reasonable out-of-pocket expenses incurred by him in performing services under this Agreement, upon his submission of such accounts and records as may be reasonably required by Company.

8.
PERQUISITES

During the Employment Term, Company shall provide Executive with the following perquisites:

(a)
an office of a size and with furnishings and other appointments, and personal secretarial and other assistance, at least equal to that provided to Executive by Company as of the date hereof; and

(b)
payment of and the use of an automobile and payment of related expenses on the same terms as in effect on the date hereof or, if more favorable to Executive, as made available generally to other executive officers of Company and its affiliates at any time thereafter, but in no event to exceed, in total, One Thousand Dollars ($1,000) per month.
 
 
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9.
EMPLOYEE BENEFIT PLANS

(a)
General. During the Employment Term, Executive shall be entitled to participate in all employee benefit plans and programs made available to Company’s senior executives or to its employees generally, as such plans or programs may be in effect from time to time, including, without limitation, pension and other retirement plans, profit-sharing plans, savings and similar plans, group life insurance, hospitalization insurance, surgical insurance, major and excess major medical insurance, dental insurance, short-term and long-term disability insurance, sick leave (including salary continuation arrangements), holidays, vacation (not less than four weeks in any calendar year) and any other employee benefit plans or programs that may be sponsored by Company from time to time, including plans that supplement the above-listed types of plans, whether funded or unfunded.

(b)
Medical Insurance. During the Employment Term, Company shall reimburse Executive for one hundred percent (100%) of the cost of health insurance through Company’s group health plan for himself, his Spouse and his dependent children.

(c)
Life Insurance Benefit. In addition to the group life insurance available to employees generally, Company shall provide Executive with an individual permanent life insurance benefit in an initial amount of not less than the Salary, the terms and conditions of such benefit to be more fully described in an insurance ownership agreement between Executive and Company.

10.
TERMINATION OF EMPLOYMENT

(a)
Termination by Mutual Agreement. The Parties may terminate this Agreement by mutual agreement at any time. If they do so, Executive’s entitlements shall be as the Parties mutually agree.

(b)
General. Notwithstanding anything to the contrary herein, in the event of termination of Executive’s employment under this Agreement, he or his Beneficiary, as the case may be, shall be entitled to receive (in addition to payments and benefits under, and except as specifically provided in, subsections (c) through (f) below as applicable):

(i)
his Salary through the date of termination;

(ii)
any annual or special bonus awarded or earned, including the Annual Profit Bonus earned through the date of termination, but not yet paid to him;
 
 
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(iii)
any deferred compensation under any incentive compensation plan or other deferred compensation plan of company;

(iv)
any other compensation or benefits, including without limitation long-term incentive compensation described in Section 5 above, benefits under equity grants and awards described in Section 6 above and employee benefits under plans described in Section 9 above, that have vested through the date of termination or to which he may then be entitled in accordance with the applicable terms and conditions of each grant, award or plan; and

(v)
reimbursement in accordance with Sections 9(a) above of any business expenses incurred by Executive, as applicable, through the date of termination but not yet paid to him.

(c)
Termination due to Death. In the event that Executive’s employment is terminated due to his death, his Beneficiary shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to his Salary payable for the remainder of the Employment Term or for one year, whichever is greater, at the rate in effect immediately before such termination.

(d)
Termination due to Disability. In the event of Disability, Company or Executive may terminate Executive’s employment. If Executive’s employment is terminated due to Disability, he shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to his Salary payable for the remainder of the Employment Term or one year, whichever is greater, at the rate in effect immediately before such termination, offset by any long-term disability insurance benefit that Company may have elected to provide for him.

(e)
Termination by Company for Cause. Company may terminate Executive’s employment hereunder for Cause only upon written notice to Executive not less than 30 days prior to an intended termination, which notice shall specify the grounds for such termination in reasonable detail. Cause shall in no event be deemed to exist except upon a finding reflected in a resolution approved by a majority (excluding Executive) of the members of the Board (whose findings shall not be binding upon or entitled to any deference by any court, arbitrator or other decision-maker ruling on this Agreement) at a meeting of which Company shall have been given proper notice and at which Executive (and his counsel) shall have a reasonable opportunity to present his case. In the event that Executive’s employment is terminated for Cause, he shall be entitled only to the compensation and benefits specified in Section 10(b).
 
 
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(f)
Termination Without Cause or by Executive for Good Reason.
 
(i)
Termination without Cause shall mean termination of Executive’s employment by Company and shall exclude termination (a) due to death, Disability or Cause or (b) by mutual written agreement of Executive and Company. Company shall provide Executive fifteen (15) days’ prior written notice of termination by it without Cause, and Executive shall provide Company fifteen (15) days’ prior written notice of his termination for Good Reason.

(ii)
In the event of termination by Company of Executive’s employment without Cause or of termination by Executive of his employment for Good Reason, he shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to:

(A)
A lump-sum payment equal to the Salary payable to him for the remainder of the Employment Term at the rate in effect immediately before such termination;

(B)
A lump-sum payment equal to the annual profit bonuses for the remainder of the Employment Term (including a prorated bonus for any partial Fiscal Year) equal to the greater of the average of the bonuses awarded to him during the three Fiscal Year preceding the Fiscal Year of termination or the bonus awarded to him for the Fiscal Year immediately preceding termination;

(C)
Continued participation in all employee benefit plans or programs available to Company employees generally in which Executive was participating on the date of termination of this employment until the end of the Employment Term; provided; however, that (x) if Executive is precluded from continuing his participation in any employee benefit plan or program as provided in this clause (C), he shall be entitled to the after-tax economic equivalent of the benefits under the plan or program in which he is unable to participate until the end of the Employment Term, and (y) the economic equivalent of any benefit foregone shall be deemed to be the lowest cost that Executive would incur in obtaining such benefit on an individual basis; and

(D)
Other benefits in accordance with applicable plans and programs of the Company.

(E)
Continued payment of one hundred percent (100%) of the cost of health insurance through Company’s group health plan for himself, his Spouse and his dependent children.

(iii)
Prior written consent by Executive to any of the events described in Section 1(h) above shall be deemed a waiver by him of his right to terminate for Good Reason under this Section 10(f) solely by reason of the events set forth by waiver.
 
 
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11.
CONFIDENTIAL INFORMATION

(a)
General

(i)
Executive understands and hereby acknowledges that as a result of his employment with Company he will necessarily become informed of and have access to certain valuable and confidential information of Company and any of is Subsidiaries, joint ventures and affiliates, including, without limitation, inventions, trade secrets, technical information, computer software and programs, know-how and plans (“Confidential Information”), and that any such Confidential Information, even though it may be developed or otherwise acquired by Executive, is the exclusive property of Company to be held by him in trust solely for Company’s benefit.

(ii)
Accordingly, Executive hereby agrees that, during the Employment Term and thereafter, he shall not, and shall not cause others to use, reveal, report, publish, transfer or otherwise disclose to any person, corporation or other entity any Confidential Information without prior written consent of the Board, except to (a) responsible officers and employees of Company or (b) responsible persons who are in a contractual or fiduciary relationship with Company or who need such information for purposes in the interest of Company. Notwithstanding, the foregoing, the prohibitions of this clause (ii) shall not apply to any Confidential Information that becomes of general public knowledge other than from Executive or is required to be divulged by court order or administrative process.

(b)
Return of Documents. Upon termination of his employment with Company for any reason, Executive shall promptly deliver to Company all plans, drawings, manuals, letters, notes, notebooks, reports, computer programs and copies thereof and all other materials, including without limitation those of a secret or confidential nature, relating to Company’s business that are then in his possession or control.

(c)
Remedies and Sanctions. In the event that Executive is found to be in violation of Section 11(a) or (b) above, Company shall be entitled to relief as provided in Section 13 below.
 
 
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12.
NONCOMPETITION/NONSOLICITATION

(a)
Prohibitions. Executive shall not, without prior written authorization of the Board, directly or indirectly, though any other individual or entity:

(i)
become an officer or employee of, or render any service to, and direct competitor of Company during the Employment Term;

(ii)
solicit or induce any customer of Company to cease purchasing goods or services from Company or to become a customer of any competitor of Company during the Employment Term or for a period of one year thereafter; or

(iii)
solicit or induce any employee of Company to become employed by any competitor of Company during the Employment Term or for a period of one year thereafter.

(b)
Remedies and Sanctions. In the event that Executive is found to be in violation of Section 12(a) above, Company shall be entitled to relief as provided in Section 13 below.

(c)
Exceptions. Notwithstanding, anything to the contrary in Section 12(a) above, its provisions shall not:

(i)
apply if Company terminates Executive’s employment without Cause or Executive terminates his employment for Good Reason, each as provided in Section 10(f) above; or

(ii)
be construed as preventing Executive from investing his assets in any business that is not a direct competitor of Company.

13.
REMEDIES/SANCTIONS

 
Executive acknowledges that the services he is to render under this Agreement are of a unique and special nature, the loss of which cannot reasonably or adequately be compensated for in monetary damages, and that irreparable injury and damage may result to Company in the event of any breach of this Agreement or default by Executive. Because of the unique nature of the Confidential Information and the importance of the prohibitions against competition and solicitation, Executive further acknowledges and agrees that Company will suffer irreparable harm if he fails to comply with his obligations under Section 11(a) or (b) above or Section 12(a) above and that monetary damages would be inadequate to compensate Company for any such breach. Accordingly, Executive agrees that, in addition to any other remedies available to either Party at law, in equity or otherwise, Company will be entitled to seek injunctive relief or specific performance to enforce the terms, or prevent or remedy the violation, of any provisions of this Agreement.
 
 
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14.
BENEFICIARIES/REFERENCES

 
Executive shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable under this Agreement following his death by giving Company written notice thereof. In the event of Executive’s death, or of a judicial determination of his incompetence, reference in this Agreement to Executive shall be deemed to refer, as appropriate, to his beneficiary, estate or other legal representative.

15.
WITHHOLDING TAXES

 
All payments to Executive or his Beneficiary under this Agreement shall be subject to withholding on account of federal, state and local taxes as required by law.

16.
INDEMNIFICATION AND LIAIBLITY INSURANCE

 
Nothing herein is intended to limit Company’s indemnification of Executive, and Company shall indemnify him to fullest extent permitted by applicable law consistent with Company’s Certificate of Incorporation and By-Laws as in effect at the beginning of the Employment Term, with respect to any action or failure to act on his part while he is an officer, director or employee of Company or any Subsidiary. Company shall cause Executive to be covered at all times by directors’ and officers’ liability insurance on terms no less favorable than the directors’ and officers’ liability insurance maintained by Company in effect on the date hereof in terms of coverage and amounts. Company shall continue to indemnify Executive as provided above and maintain such liability insurance coverage for him after the Employment Term for any claims that may be made against him with respect to his service as a director or officer of Company.

17.
EFFECT OF AGREEMENT ON OTHER BENEFITS

 
The existence of this Agreement shall not prohibit or restrict Executive’s entitlement to participate fully in compensation, employee benefit and other plans of Company in which senior executives are eligible to participate.

18.
ASSIGNABILITY; BINDING NATURE.

This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of Executive) and assigns. No rights or obligations of Company under this agreement may be assigned or transferred by Company except pursuant to (a) a merger or consolidation in which Company is not the continuing entity or (b) sale or liquidation of all or substantially all of the assets of Company, provided that the surviving entity or assignee or transferee is the successor to all or substantially all of the assets of Company and such surviving entity or assignee or transferee assumes the liabilities, obligations and duties of Company under this Agreement, either contractually or as a matter of law.
 
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Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall use its best efforts to have such assignee or transferee expressly agree to assume the liabilities, obligations and duties of Company hereunder; provided, however, that notwithstanding such assumption, Company shall remain liable and responsible for fulfillment of the terms and conditions of this Agreement. No rights or obligations of Executive under this Agreement may be assigned or transferred by him.

29.
REPRESENTATIONS.
 
The Parties respectively represent and warrant that each is fully authorized and empowered to enter into this Agreement and that the performance of its or his obligations, as the case may be, under this Agreement will not violate any agreement between such Party and any other person, firm or organization. Company represents and warrants that this agreement has been duly authorized by all necessary corporate actions and is valid, binding and enforceable in accordance with its terms.

20.
ENTIRE AGREEMENT.

Except to the extent otherwise provided herein, this Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes any prior agreements, whether written or oral, between the Parties concerning the subject matter hereof, including without limitation the Prior Agreement. Payments and benefits provided under this Agreement are in lieu of any payments or other benefits under any severance program or policy of Company to which Executive would otherwise be entitled.

21.
AMENDMENT OR WAIVER.

No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by both Executive and an authorized officer of Company. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Party to be charged with the waiver. No delay by either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof.
 
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22.
SEVERABILITY.

In the event that any provision or portion of this agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.

23.
SURVIVAL.
 
The respective rights and obligations of the Parties under this Agreement shall survive any termination of Executive’s employment with Company.

24.
GOVERNING LAW/JURISDICTION.

This agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York, without reference to the principles of conflict of laws.

25.
COSTS OF DISPUTES.
 
Company shall pay, at least monthly, all costs and expenses, including attorney’s fees and disbursements, of Executive in connection with any proceeding, whether or not instituted by Company or Executive, relating to any provision of this agreement, including but nor limited to the interpretations, enforcement or reasonableness thereof; provided, however, that, if Executive instituted the proceeding and the judge or other decision-maker presiding over the proceeding affirmatively finds that his claims were frivolous or were made in bad faith, he shall pay his own costs and expenses and, if applicable, return any amounts theretofore paid to him or on his behalf under this Section 25. Pending the outcome of any proceeding, Company shall pay Executive all amounts due to him without regard to the dispute; provided, however, that if Company shall be the prevailing party in such a proceeding, Executive shall promptly repay all amounts that he received during pendency of the proceeding (other than amounts received pursuant to this Section 25).

26.
NOTICES.
 
Any notice given to either Party shall be in writing and shall be deemed to have been given when delivered either personally, by fax, by overnight delivery service (such as Federal Express) or sent by certified or registered mail postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as the Party may subsequently give notice of.
 
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If to Company or the Board:
 
AmTrust Financial Services, Inc.
59 Maiden Lane
New York, NY 10038
Attention: General Counsel

FAX: (212) 220-7130

If to Executive:

Barry D. Zyskind
5423 17 th Avenue
Brooklyn, NY 11204

27.
HEADINGS.
 
The headings and sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.

28.
COUNTERPARTS.

This Agreement may be executed in counterparts, each of which when so executed and delivered shall be an original, but all such counterparts together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the dates set forth below:
 
AmTrust Financial Services, Inc.      
     
By:________________________________________   Date:_________  
Michael Karfunkel
     
Chairman of the Board of Directors
     
       
       
              Date:_________  
Barry D. Zyskind
     
 
 
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EXHIBIT 10.9

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT dated as of June 1, 2005 (the “Effective Date”), by and between AmTrust North America, Inc., 59 Maiden Lane, 6 th Floor, New York, New York, a Delaware corporation (the “Company”) and Christopher M. Longo, an individual residing at 1269 Gaynelle Avenue, Streetsboro, Ohio 44241 (“Executive”).

WITNESSETH

WHEREAS , The Company and Executive desire to enter into this Employment Agreement (the “Agreement”) in order to set forth the terms and conditions of Executive’s employment, intending to supersede any prior employment agreement, written or oral, whether with the Company or other affiliates.

NOW, THEREFORE , in consideration of the mutual covenants and promises contained herein and other good and valuable consideration, receipt of which is acknowledged, the parties hereto agree as follows:

1.       Duties and Responsibilities. The duties and responsibilities of Executive shall be those of a senior executive of the Company as the same shall be assigned to him, from time to time, by the Board of Directors of the Company. Executive recognizes that, during the period of his employment hereunder, he owes an undivided duty of loyalty to the Company and agrees to devote all of his business time and attention to the performance of his duties and responsibilities and to use his best efforts to promote and develop the business of the Company. Subject to the approval of the Board of Directors, which shall not be unreasonably withheld, Executive shall be entitled to serve on corporate, civic, and/or charitable boards or committees and to otherwise reasonably participate as a member in community, civic, or similar organizations and the pursuit of personal investments which do not present any material conflicts of interest with the Company.

It is the intention of the Company that Executive shall be appointed as an officer to serve in such position at the pleasure of the Board of Directors, reporting on a day-to-day basis directly to the president of Company and the president of the Company’s parent corporation, AmTrust Financial Services, Inc. (“AFS”). If elected, Executive shall serve as a member of the Board of Directors of the Company or such of its affiliates to which he may be elected, in each case, without additional compensation.

2.       Employment Period. For a period commencing on the Effective Date hereof and ending on May 31, 2008 (the “Employment Period”), the Company hereby employ Executive in
 
 
 
 

the capacities herein set forth. Executive agrees, pursuant to the terms hereof, to serve in such capacities for the Employment Period. This Agreement shall renew for successive one year periods unless one of the parties provides written notice to the other more than ninety days prior to end of the Employment Period or any successive Employment Period that the party will not renew the Agreement.

3.       Compensation and Benefits.

(a)       Salary. The Company, collectively, shall pay Executive a salary at the rate of On Hundred Thousand Dollars ($100,000) per annum (“Salary”) through December 31, 2005, One Hundred Seventy-Five Thousand Dollars ($175,000) per annum effective January 1, 2006, Two Hundred Thousand Dollars ($200,000) per annum effective January 1, 2007 and Two Hundred Fifty Thousand Dollars ($250,000) per annum effective January 1, 2008, payable in accordance with the Company’ normal payroll process. In the event of the renewal of this Agreement for a successive Employment Period, Executive shall be entitled to a salary review annually commencing on the fourth anniversary of the Effective Date during the term of this Agreement. Such salary review shall be based entirely on merit and any salary adjustments shall be determined by the Board of Directors of the Company solely at its discretion.

(b)       Profit Bonus. Executive shall receive an annual bonus equal to one percent (1%) of the profit, as defined herein, of AFS during the Employment Period or any successive Employment Period (the “Profit Bonus”). Effective as of the Calendar year ending December 31, 2006, the Profit Bonus shall not exceed one and one-half times Executive’s then current Salary. For purposes of computing the Profit Bonus, profits shall mean AFS’ after tax net income, excluding extraordinary income and all income of AmTrust Pacific Limited, as determined by AFS’s independent public accountants whose determination thereof shall be final, binding and conclusive. The Profit Bonus for each year shall be paid within sixty (60) days after the completion and issuance of AFS’s consolidated financial statements for the prior calendar year. The Profit Bonus shall be payable only if Executive is employed by the Company on the date that the bonus is payable.

(c)       Special Bonus. It is understood and agreed that AFS intends to adopt a 2005 Incentive Stock Plan (the “Plan”). Upon such adoption and based upon a proposed capitalization of thirty million issued and outstanding shares of common stock, Executive shall be granted an incentive stock option to purchase under the Plan 300,000 shares of AFS common stock, subject to the terms and conditions of the Plan. The number of shares covered by the option shall be adjusted upward or downward, as the case may be, to an amount equal to one percent of the issued and outstanding shares of common stock if the number of said shares is greater or lesser than thirty million. In the event that AFS, during the term of the option, does not have a liquidity event, such as an initial public offering, a sale of in excess of twenty percent (20%) of its outstanding shares to persons currently not affiliated with AFS or a merger or sale of AFS to a non-affiliated third party, exercise of the option, in whole or in part, shall be deferred indefinitely unless and until such event occurs.
 
 
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(d)       Executive may also receive other bonus payments determined at the sole discretion of the Board of Directors (“Discretionary Bonus”).

(e)       Executive shall also be entitled to the following benefits:

 
(i)
three weeks (3) weeks of paid vacation for each twelve (12) months of the Employment, or such greater period as may be approved from time to time by Board of Directors. Unused vacation time shall not be carried over to any subsequent calendar year;

 
(ii)
paid holidays and any and all other work-related leave (whether sick leave or otherwise) as provided to the Company’ other executive employees; and

 
(iii)
participation in such employee benefit plans to which executive employees of the Company, their dependents and beneficiaries generally are entitled during the Employment Period and, including, without limitation, health insurance, disability and life insurance, retirement plans and other present or successor plans and practices of Company for which executive employees, their dependents and beneficiaries are eligible.

4.       Reimbursement of Expenses. The Company recognizes that Executive, in performing Executive’s functions, duties and responsibilities under this Agreement, may be required to spend sums of money in connection with those functions, duties and responsibilities for the benefit of the Company and, accordingly, shall reimburse Executive for travel and other out-of-pocket expenses reasonably and necessarily incurred in the performance of his functions, duties and responsibilities hereunder upon submission of written statements and/or bills in accordance with the regular procedures of the Company in effect from time to time.

5.       Disability. In the event that Executive shall be unable to perform because of illness or incapacity, physical or mental, all the functions, duties and responsibilities to be performed by him hereunder for a consecutive period of two (2) months or for a total period of three (3) months during any consecutive twelve (12) month period, the Company may terminate this Agreement effective on or after the expiration of such period (the “Disability Period”) upon five (5) business days’ written notice to Executive specifying the termination date (the “Disability Termination Date”). Executive shall be entitled to receive his Salary and any unreimbursed expenses to the Disability Termination Date. Disability under this paragraph, shall be determined by a physician who shall be selected by the Company and approved by Executive. Such approval shall not be unreasonably withheld or delayed, and a physician shall be deemed to be approved unless he or she is disapproved in writing by Executive within ten (10) days after his or her name is submitted. The Company may obtain disability income insurance for the benefit of Executive in such amounts as the Company may determine.
 
 
-3-
 

6.       Death. In the event of the death of Executive during the Employment Period, this Agreement and the employment of Executive hereunder shall terminate on the date of death of Executive. Executive’s heirs or legal representatives shall be entitled to receive his Salary earned to the date of his death and any unreimbursed expenses.

 
7.
Termination.  

The Company may discharge Executive for Cause at any time. Cause for discharge shall include (i) a material breach of this Agreement by Executive, but only if such breach is not cured within thirty (30) days following written notice by the Company to Executive of such breach, assuming such breach may be cured; (ii) Executive is convicted of any act or course of conduct involving moral turpitude; or (iii) Executive engages in any willful act or willful course of conduct constituting an abuse of office or authority which significantly adversely affects the business or reputation of the Company. No act, failure to act or course of conduct on Executive’s part shall be considered “willful” unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action, omission or course of conduct was in the best interest of the Company. Any written notice by the Company to Executive pursuant to this paragraph 7 shall set forth, in reasonable detail, the facts and circumstances claimed to constitute the Cause. If Executive is discharged for Cause, the Company, without any limitations on any remedies it may have at law or equity, shall have no liability for salary or any other compensation and benefits to Executive after the date of such discharge.

8.       Non-Disclosure of Confidential Information. “Confidential Information” means all information known by Executive about the Company’ business plans, present or prospective customers, vendors, products, processes, services or activities, including the costing and pricing of such services or activities, employees, agents and representatives. Confidential Information does not include information generally known, other than through breach of a confidentiality agreement with any of the Company’, in the industry in which the Company engages or may engage. Executive will not, while this Agreement is in effect or after its termination, directly or indirectly, use or disclose any Confidential Information, except in the performance of Executive’s duties for the Company, or to other persons as directed by the Board of Directors. Executive will use reasonable efforts to prevent unauthorized use or disclosure of Confidential Information. Upon termination of employment with the Company, Executive will deliver to the Company all writings relating to or containing Confidential Information, including, without limitation, notes, memoranda, letters, drawings, diagrams, and printouts, including any tapes, discs or other forms of recorded information. If Executive violates any provision of this Section while this Agreement is in effect or after termination, the Company specifically reserve the right, in appropriate circumstances, to seek full indemnification from Executive should the Company suffer any monetary damages or incur any legal liability to any person as a result of the disclosure or use of Confidential Information by Executive in violation of this Section.

 
-4-
 

9.       Restrictive Covenant.

(a)       Prohibited Activities . Executive agrees that he shall not (unless he has received the prior written consent of the Company), during the period beginning on the date of termination of employment and during the term of this Agreement and ending three (3) years thereafter (the “Restriction Period”), directly or indirectly, for any reason, for his own account or on behalf of or together with any other person or firm:

 
(i)
engage in any capacity or as an owner or co-owner of or investor in, whether as an independent contractor, consultant or advisor, or as a representative of any kind, in any business selling any products or providing any services in competition with the Company based on the lines of business being written by the Company as of the termination of this Agreement except in the States of North Dakota, South Dakota and Wyoming; provided, however, that Executive may own not more than five percent (5%) of the outstanding securities of any class of any corporation engaged in any such business, if such securities are listed on a national securities exchange or regularly traded in the over-the-counter market by a member of a national securities association;

 
(ii)
hire or solicit for employment or call, directly or indirectly, through any person or firm, on any person who is at that time (or at any time during the one year prior thereto) employed by or representing the Company with the purpose or intent of attracting that person from the employ of the Company;

 
(iii)
call on, solicit or perform services for, directly or indirectly through any person or firm, any person or firm that at that time is, or at any time within one year prior to that time was, a customer of the Company or any prospective customer that had or, to the knowledge of Executive, was about to receive a business proposal from the Company, for the purpose of soliciting or selling any product or service in competition with the Company; or

 
(iv)
call, directly or indirectly through any person or firm, on any entity which has been called on by the Company in connection with a possible acquisition by the Company with the knowledge of that entity’s status as such an acquisition candidate, for the purpose of acquiring that entity or arranging the acquisition of that entity by any person or firm other than the Company.

 
 
-5-
 

(b)       Damages . Because of (i) the difficulty of measuring economic losses to the Company as a result of any breach by Executive of the covenants in Sections 9(a), and (ii) the immediate and irreparable damage which could be caused to the Company for which they would have no other adequate remedy, Executive agrees that the Company may enforce the provisions of Paragraph 9(a) by injunction and restraining order against Executive if he breaches any of said provisions, without necessity of providing a bond or other security.

(c)       Reasonable Restraint . The parties hereto agree that Sections 9(a) and 9(b) impose a reasonable restraint on Executive in light of the activities and business of the Company on the date hereof and the current business plans of the Company.

10.       Ownership of Inventions. Executive shall promptly disclose in writing to the Board of Directors all inventions, discoveries, and improvements conceived, devised, created, or developed by Executive in connection with his employment (collectively, “Invention”), and Executive shall transfer and assign to the Company all right, title and interest in and to any such Invention, including any and all domestic and foreign patent rights, domestic and foreign copyright rights therein, and any renewal thereof. Such disclosure is to be made promptly after the conception of each Invention, and each Invention is to become and remain the property of the Company, whether or not patent or copyright applications are filed thereon by the Company. Upon request of the Company, Executive shall execute from time to time during or after the termination of employment such further instruments including, without limitation, applications for patents and copyrights and assignments thereof as may be deemed necessary or desirable by the Company to effectuate the provisions of this Section.

11.       Construction. If the provisions of paragraph 9 should be deemed unenforceable, invalid, or overbroad in whole or in part for any reason, then any court of competent jurisdiction designated in accordance with paragraph 13 is hereby authorized, requested, and instructed to reform such paragraph to provide for the maximum competitive restraint upon Executive’s activities (in time, product, geographic area and customer or employee solicitation) which shall then be legal and valid.

12.       Damages and Jurisdiction. Executive agrees that violation of or threatened violation of any of paragraphs 8, 9 or 10 would cause irreparable injury to the Company for which any remedy at law would be inadequate, and the Company shall be entitled in any court of law or equity of competent jurisdiction to preliminary, permanent and other injunctive relief against any breach or threatened breach of the provisions contained in any of said paragraphs 8, 9 or 10 hereof, and such compensatory damages as shall be awarded. Further, in the event of a violation of the provisions of paragraph 9, the Restriction Period referred to therein shall be extended for a period of time equal to the period that any violation occurred.
 
 
-6-
 

13.       Jurisdiction and Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. The Company and Executive hereby each consents to the exclusive jurisdiction of the Supreme Court of the State of New York or the United States District Court for the Southern District of New York with respect to any dispute arising under the terms of this Agreement and further consents that any process or notice of motion therewith may be served by certified or registered mail or personal service, within or without the State of New York, provided a reasonable time for appearance is allowed. Each party acknowledges and agrees that any controversy which may arise under this Agreement is likely to involve complicated and difficult issues, and therefore each party hereby irrevocably and unconditionally waives any right such party may have to a trial by jury in respect or any litigation directly or indirectly arising out of or relating to this agreement, or the breach, termination or validity of this Agreement, or the transactions contemplated by this Agreement.

14.       Indemnification. To the fullest extent permitted by, and subject to, the Company’ Certificates of Incorporation and By-laws, the Company shall indemnify and hold harmless Executive against any losses, damages or expenses (including reasonable attorney’s fees) incurred by him or on his behalf in connection with any threatened or pending action, suit or proceeding in which he is or becomes a party by virtue of his employment by the Company or any affiliates or by reason of his having served as an officer or director of the Company or any other corporation at the express request of the Company, or by reason of any action alleged to have been taken or omitted in such capacity.

15.       Severability. If any provision of this Agreement is held to be invalid, illegal, or unenforceable, that determination will not affect the enforceability of any other provision of this Agreement, and the remaining provisions of this Agreement will be valid and enforceable according to their terms.

16.       Successors to Company. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of Executive and the Company and any successor or assign of the Company, including, without limitation, any corporation acquiring, directly or indirectly, all or substantially all of the assets of the Company, whether by merger, consolidation, sale or otherwise (and such successor shall thereafter be deemed embraced within the term “Company” for the purposes of this Agreement), but shall not otherwise be assignable by the Company. The services to be provided by Executive hereunder may not be delegated nor may Executive assign any of his rights hereunder.

17.       No Restrictions . Executive represents and warrants that as of the date of this Agreement Executive is not subject to any contractual obligations or other restrictions, including, but not limited to, any covenant not to compete, that could interfere in any way with his employment hereunder.
 
 
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18.       Miscellaneous.

(a)       This Agreement constitutes the entire understanding of the parties with respect to the subject hereof, may be modified only in writing, is governed by laws of New York, without giving effect to the principles of conflict of laws thereof, and will be binding and inure to the benefit of Executive and Executive’s personal representatives, and the Company, their successors and assigns.

(b)       If Executive should die while any amount would still be payable to him under this Agreement if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive’s estate or legal representative.

(c)       The failure of any of the parties hereto to enforce any provision hereof on any occasion shall not be deemed to be a waiver of any provision or succeeding breach of such provision or any other provision.

(d)       All notices under this Agreement shall be given by registered or certified mail, return receipt requested, directed to parties at the following addresses or to such other addresses as the parties may designate in writing:
 
If to the Company:

AmTrust North America, Inc.
59 Maiden Lane, 6 th Floor
New York, New York 10038
Attention: Barry D. Zyskind

If to Executive

Christopher M. Longo
1269 Gaynelle Avenue
Streetsboro, Ohio 44241

(e)       In furtherance and not in limitation of the foregoing, this Agreement supersedes any employment agreement between the Company and Executive, written or oral, and any such agreement hereby is terminated and is no longer binding on either party.

19.       Key Man Insurance Authorization . At any time during the term of this Agreement, the Company will have the right (but not the obligation) to insure the life of Executive for the sole benefit of the Company and to determine the amount of insurance and type of policy. The Company will be required to pay all premiums due on such policies. Executive will cooperate with the Company in taking out the insurance by submitting to physical examination, by supplying all information required by the insurance company, and by executing all necessary documents. Executive, however, will incur no financial obligation by executing any required document, and will have no interest in any such policy.
 
 
-8-
 

21.       Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be deemed to be duplicate originals.

AMTRUST NORTH AMERICA, INC.    
     
     
By:_______________________________________        
Barry D. Zyskind
 
Christopher M. Longo
 
 
 
-9-
 
 
EXHIBIT 10.10

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT dated as of December 1, 2005 (the “Effective Date”), by and between AmTrust North America, Inc., 59 Maiden Lane, 6 th Floor, New York, New York, a Delaware corporation (the “Company”) and Ronald E. Pipoly, Jr., an individual residing at 6571 Deer Haven Drive, Ohio 44077 (“Executive”).

WITNESSETH

WHEREAS , The Company and Executive desire to enter into this Employment Agreement (the “Agreement”) in order to set forth the terms and conditions of Executive’s employment, intending to supersede any prior employment agreement, written or oral, whether with the Company or other affiliates.

NOW, THEREFORE , in consideration of the mutual covenants and promises contained herein and other good and valuable consideration, receipt of which is acknowledged, the parties hereto agree as follows:

1.       Duties and Responsibilities. The duties and responsibilities of Executive shall be those of a senior executive of the Company as the same shall be assigned to him, from time to time, by the Board of Directors of the Company. Executive recognizes that, during the period of his employment hereunder, he owes an undivided duty of loyalty to the Company and agrees to devote all of his business time and attention to the performance of his duties and responsibilities and to use his best efforts to promote and develop the business of the Company. Subject to the approval of the Board of Directors, which shall not be unreasonably withheld, Executive shall be entitled to serve on corporate, civic, and/or charitable boards or committees and to otherwise reasonably participate as a member in community, civic, or similar organizations and the pursuit of personal investments which do not present any material conflicts of interest with the Company.

It is the intention of the Company that Executive shall be appointed as an officer to serve in such position at the pleasure of the Board of Directors, reporting on a day-to-day basis directly to the president of Company and the president of the Company’s parent corporation, AmTrust Financial Services, Inc. (“AFS”). If elected, Executive shall serve as a member of the Board of Directors of the Company or such of its affiliates to which he may be elected, in each case, without additional compensation.

2.       Employment Period. For a period commencing on the Effective Date hereof and ending on May 31, 2008 (the “Employment Period”), the Company hereby employ Executive in the capacities herein set forth. Executive agrees, pursuant to the terms hereof, to serve in such

 
 
 

capacities for the Employment Period. This Agreement shall renew for successive one year periods unless one of the parties provides written notice to the other not less than ninety days prior to end of the Employment Period or any successive Employment Period that the party will not renew the Agreement.

3.       Compensation and Benefits.

(a)       Salary. The Company, collectively, shall pay Executive a salary at the rate of One Hundred Seventy-Five Thousand Dollars ($175,000) per annum through December 31, 2005 and Two Hundred Twenty Five Thousand Dollars ($225,000) per annum effective January 1, 2006 (“Salary”), payable in accordance with the Company’ normal payroll process. Executive shall be entitled to a salary review annually commencing on the second anniversary of the Effective Date of this Agreement. Such salary review shall be based entirely on merit and any salary adjustments shall be determined by the Board of Directors of the Company solely at its discretion.

(b)       Annual Bonus. Executive shall receive an annual bonus in an amount comparable to the other senior executives of Company . Provided that AFS has met the targets set forth in its business plan for the subject annual period, the annual bonus payable to Executive shall be no less than thirty percent (30%) of Executive’s then current Salary. The Annual Bonus for each year shall be paid within sixty (60) days after the completion and issuance of AFS’s consolidated financial statements for the prior calendar year. The Annual Bonus shall be payable only if Executive is employed by the Company on the date that the bonus is payable.

(c)       Special Bonus. It is understood and agreed that AFS intends to adopt a 2005 Incentive Stock Plan (the “Plan”). Upon such adoption and based upon a proposed capitalization of thirty million issued and outstanding shares of common stock, Executive shall be granted an incentive stock option to purchase under the Plan 300,000 shares of AFS common stock, subject to the terms and conditions of the Plan. The number of shares covered by the option shall be adjusted upward or downward, as the case may be, to an amount equal to one percent of the issued and outstanding shares of common stock if the number of said shares is greater or lesser than thirty million. In the event that AFS, during the term of the option, does not have a liquidity event, such as an initial public offering, a sale of in excess of twenty percent (20%) of its outstanding shares to persons currently not affiliated with AFS or a merger or sale of AFS to a non-affiliated third party, exercise of the option, in whole or in part, shall be deferred indefinitely unless and until such event occurs.

(d)       Executive may also receive other bonus payments determined at the sole discretion of the Board of Directors (“Discretionary Bonus”).

(e)       Executive shall also be entitled to the following benefits:

 
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(i)
three weeks (3) weeks of paid vacation for each twelve (12) months of the Employment, or such greater period as may be approved from time to time by Board of Directors. Unused vacation time shall not be carried over to any subsequent calendar year;

 
(ii)
paid holidays and any and all other work-related leave (whether sick leave or otherwise) as provided to the Company’ other executive employees; and

 
(iii)
participation in such employee benefit plans to which executive employees of the Company, their dependents and beneficiaries generally are entitled during the Employment Period and, including, without limitation, health insurance, disability and life insurance, retirement plans and other present or successor plans and practices of Company for which executive employees, their dependents and beneficiaries are eligible.

4.       Reimbursement of Expenses. The Company recognizes that Executive, in performing Executive’s functions, duties and responsibilities under this Agreement, may be required to spend sums of money in connection with those functions, duties and responsibilities for the benefit of the Company and, accordingly, shall reimburse Executive for travel and other out-of-pocket expenses reasonably and necessarily incurred in the performance of his functions, duties and responsibilities hereunder upon submission of written statements and/or bills in accordance with the regular procedures of the Company in effect from time to time.

5.       Disability. In the event that Executive shall be unable to perform because of illness or incapacity, physical or mental, all the functions, duties and responsibilities to be performed by him hereunder for a consecutive period of two (2) months or for a total period of three (3) months during any consecutive twelve (12) month period, the Company may terminate this Agreement effective on or after the expiration of such period (the “Disability Period”) upon five (5) business days’ written notice to Executive specifying the termination date (the “Disability Termination Date”). Executive shall be entitled to receive his Salary and any unreimbursed expenses to the Disability Termination Date. Disability under this paragraph, shall be determined by a physician who shall be selected by the Company and approved by Executive. Such approval shall not be unreasonably withheld or delayed, and a physician shall be deemed to be approved unless he or she is disapproved in writing by Executive within ten (10) days after his or her name is submitted. The Company may obtain disability income insurance for the benefit of Executive in such amounts as the Company may determine.

6.       Death. In the event of the death of Executive during the Employment Period, this Agreement and the employment of Executive hereunder shall terminate on the date of death of Executive. Executive’s heirs or legal representatives shall be entitled to receive his Salary earned to the date of his death and any unreimbursed expenses.

 
7.
Termination.  

 
-3-
 
 
The Company may discharge Executive for Cause at any time. Cause for discharge shall include (i) a material breach of this Agreement by Executive, but only if such breach is not cured within thirty (30) days following written notice by the Company to Executive of such breach, assuming such breach may be cured; (ii) Executive is convicted of any act or course of conduct involving moral turpitude; or (iii) Executive engages in any willful act or willful course of conduct constituting an abuse of office or authority which significantly adversely affects the business or reputation of the Company. No act, failure to act or course of conduct on Executive’s part shall be considered “willful” unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action, omission or course of conduct was in the best interest of the Company. Any written notice by the Company to Executive pursuant to this paragraph 7 shall set forth, in reasonable detail, the facts and circumstances claimed to constitute the Cause. If Executive is discharged for Cause, the Company, without any limitations on any remedies it may have at law or equity, shall have no liability for salary or any other compensation and benefits to Executive after the date of such discharge.

8.       Non-Disclosure of Confidential Information. “Confidential Information” means all information known by Executive about the Company’ business plans, present or prospective customers, vendors, products, processes, services or activities, including the costing and pricing of such services or activities, employees, agents and representatives. Confidential Information does not include information generally known, other than through breach of a confidentiality agreement with any of the Company’, in the industry in which the Company engages or may engage. Executive will not, while this Agreement is in effect or after its termination, directly or indirectly, use or disclose any Confidential Information, except in the performance of Executive’s duties for the Company, or to other persons as directed by the Board of Directors. Executive will use reasonable efforts to prevent unauthorized use or disclosure of Confidential Information. Upon termination of employment with the Company, Executive will deliver to the Company all writings relating to or containing Confidential Information, including, without limitation, notes, memoranda, letters, drawings, diagrams, and printouts, including any tapes, discs or other forms of recorded information. If Executive violates any provision of this Section while this Agreement is in effect or after termination, the Company specifically reserve the right, in appropriate circumstances, to seek full indemnification from Executive should the Company suffer any monetary damages or incur any legal liability to any person as a result of the disclosure or use of Confidential Information by Executive in violation of this Section.

 
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9.       Restrictive Covenant.

(a)       Prohibited Activities . Executive agrees that he shall not (unless he has received the prior written consent of the Company), during the period beginning on the date of termination of employment and during the term of this Agreement and ending three (3) years thereafter (the “Restriction Period”), directly or indirectly, for any reason, for his own account or on behalf of or together with any other person or firm:

 
(i)
engage in any capacity or as an owner or co-owner of or investor in, whether as an independent contractor, consultant or advisor, or as a representative of any kind, in any business selling any products or providing any services in competition with the Company based on the lines of business being written by the Company as of the termination of this Agreement, except in the States of South Dakota, North Dakota and Wyoming; provided, however, that Executive may own not more than five percent (5%) of the outstanding securities of any class of any corporation engaged in any such business, if such securities are listed on a national securities exchange or regularly traded in the over-the-counter market by a member of a national securities association;

 
(ii)
hire or solicit for employment or call, directly or indirectly, through any person or firm, on any person who is at that time (or at any time during the one year prior thereto) employed by or representing the Company with the purpose or intent of attracting that person from the employ of the Company;

 
(iii)
call on, solicit or perform services for, directly or indirectly through any person or firm, any person or firm that at that time is, or at any time within one year prior to that time was, a customer of the Company or any prospective customer that had or, to the knowledge of Executive, was about to receive a business proposal from the Company, for the purpose of soliciting or selling any product or service in competition with the Company; or

 
(iv)
call, directly or indirectly through any person or firm, on any entity which has been called on by the Company in connection with a possible acquisition by the Company with the knowledge of that entity’s status as such an acquisition candidate, for the purpose of acquiring that entity or arranging the acquisition of that entity by any person or firm other than the Company.

 
-5-
 

(b)       Damages . Because of (i) the difficulty of measuring economic losses to the Company as a result of any breach by Executive of the covenants in Sections 9(a), and (ii) the immediate and irreparable damage which could be caused to the Company for which they would have no other adequate remedy, Executive agrees that the Company may enforce the provisions of Paragraph 9(a) by injunction and restraining order against Executive if he breaches any of said provisions, without necessity of providing a bond or other security.

(c)   Reasonable Restraint . The parties hereto agree that Sections 9(a) and 9(b) impose a reasonable restraint on Executive in light of the activities and business of the Company on the date hereof and the current business plans of the Company.

10.       Ownership of Inventions. Executive shall promptly disclose in writing to the Board of Directors all inventions, discoveries, and improvements conceived, devised, created, or developed by Executive in connection with his employment (collectively, “Invention”), and Executive shall transfer and assign to the Company all right, title and interest in and to any such Invention, including any and all domestic and foreign patent rights, domestic and foreign copyright rights therein, and any renewal thereof. Such disclosure is to be made promptly after the conception of each Invention, and each Invention is to become and remain the property of the Company, whether or not patent or copyright applications are filed thereon by the Company. Upon request of the Company, Executive shall execute from time to time during or after the termination of employment such further instruments including, without limitation, applications for patents and copyrights and assignments thereof as may be deemed necessary or desirable by the Company to effectuate the provisions of this Section.

11.       Construction. If the provisions of paragraph 9 should be deemed unenforceable, invalid, or overbroad in whole or in part for any reason, then any court of competent jurisdiction designated in accordance with paragraph 13 is hereby authorized, requested, and instructed to reform such paragraph to provide for the maximum competitive restraint upon Executive’s activities (in time, product, geographic area and customer or employee solicitation) which shall then be legal and valid.

12.       Damages and Jurisdiction. Executive agrees that violation of or threatened violation of any of paragraphs 8, 9 or 10 would cause irreparable injury to the Company for which any remedy at law would be inadequate, and the Company shall be entitled in any court of law or equity of competent jurisdiction to preliminary, permanent and other injunctive relief against any breach or threatened breach of the provisions contained in any of said paragraphs 8, 9 or 10 hereof, and such compensatory damages as shall be awarded. Further, in the event of a violation of the provisions of paragraph 9, the Restriction Period referred to therein shall be extended for a period of time equal to the period that any violation occurred.

13.       Jurisdiction and Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. The Company and Executive hereby each

 
-6-
 

consents to the exclusive jurisdiction of the Supreme Court of the State of New York or the United States District Court for the Southern District of New York with respect to any dispute arising under the terms of this Agreement and further consents that any process or notice of motion therewith may be served by certified or registered mail or personal service, within or without the State of New York, provided a reasonable time for appearance is allowed. Each party acknowledges and agrees that any controversy which may arise under this Agreement is likely to involve complicated and difficult issues, and therefore each party hereby irrevocably and unconditionally waives any right such party may have to a trial by jury in respect or any litigation directly or indirectly arising out of or relating to this agreement, or the breach, termination or validity of this Agreement, or the transactions contemplated by this Agreement.

14.       Indemnification. To the fullest extent permitted by, and subject to, the Company’ Certificates of Incorporation and By-laws, the Company shall indemnify and hold harmless Executive against any losses, damages or expenses (including reasonable attorney’s fees) incurred by him or on his behalf in connection with any threatened or pending action, suit or proceeding in which he is or becomes a party by virtue of his employment by the Company or any affiliates or by reason of his having served as an officer or director of the Company or any other corporation at the express request of the Company, or by reason of any action alleged to have been taken or omitted in such capacity.

15.       Severability. If any provision of this Agreement is held to be invalid, illegal, or unenforceable, that determination will not affect the enforceability of any other provision of this Agreement, and the remaining provisions of this Agreement will be valid and enforceable according to their terms.

16.       Successors to Company. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of Executive and the Company and any successor or assign of the Company, including, without limitation, any corporation acquiring, directly or indirectly, all or substantially all of the assets of the Company, whether by merger, consolidation, sale or otherwise (and such successor shall thereafter be deemed embraced within the term “Company” for the purposes of this Agreement), but shall not otherwise be assignable by the Company. The services to be provided by Executive hereunder may not be delegated nor may Executive assign any of his rights hereunder.

17.       No Restrictions . Executive represents and warrants that as of the date of this Agreement Executive is not subject to any contractual obligations or other restrictions, including, but not limited to, any covenant not to compete, that could interfere in any way with his employment hereunder.

18.       Miscellaneous.

(a)       This Agreement constitutes the entire understanding of the parties with respect to the subject hereof, may be modified only in writing, is governed by laws of New York, without giving effect to the principles of conflict of laws thereof, and will be binding and inure to the benefit of Executive and Executive’s personal representatives, and the Company, their successors and assigns.
 
 
-7-
 

(b)       If Executive should die while any amount would still be payable to him under this Agreement if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive’s estate or legal representative.

(c)       The failure of any of the parties hereto to enforce any provision hereof on any occasion shall not be deemed to be a waiver of any provision or succeeding breach of such provision or any other provision.

(d)       All notices under this Agreement shall be given by registered or certified mail, return receipt requested, directed to parties at the following addresses or to such other addresses as the parties may designate in writing:
 
If to the Company:

AmTrust North America, Inc.
59 Maiden Lane, 6 th Floor
New York, New York 10038
Attention: Barry D. Zyskind

If to Executive

Ronald E. Pipoly, Jr.
6571 Deer Haven Drive
Concord, Ohio 44077

(e)       In furtherance and not in limitation of the foregoing, this Agreement supersedes any employment agreement between the Company and Executive, written or oral, and any such agreement hereby is terminated and is no longer binding on either party.

19.       Key Man Insurance Authorization . At any time during the term of this Agreement, the Company will have the right (but not the obligation) to insure the life of Executive for the sole benefit of the Company and to determine the amount of insurance and type of policy. The Company will be required to pay all premiums due on such policies. Executive will cooperate with the Company in taking out the insurance by submitting to physical examination, by supplying all information required by the insurance company, and by executing all necessary documents. Executive, however, will incur no financial obligation by executing any required document, and will have no interest in any such policy.
 
 
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21.       Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be deemed to be duplicate originals.

AMTRUST NORTH AMERICA, INC.    
     
     
By:______________________________________
    
Barry D. Zyskind
 
Ronald E. Pipoly, Jr.
 
 
 
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EXHIBIT 10.11

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT dated as of June 1, 2005 (the “Effective Date”), by and between AmTrust North America, Inc., 59 Maiden Lane, 6 th Floor, New York, New York, a Delaware corporation (the “Company”) and Michael J. Saxon, an individual residing at 514 Brookstone Court, Copley, Ohio 44321 (“Executive”).

WITNESSETH

WHEREAS , The Company and Executive desire to enter into this Employment Agreement (the “Agreement”) in order to set forth the terms and conditions of Executive’s employment, intending to supersede any prior employment agreement, written or oral, whether with the Company or other affiliates.

NOW, THEREFORE , in consideration of the mutual covenants and promises contained herein and other good and valuable consideration, receipt of which is acknowledged, the parties hereto agree as follows:

1.       Duties and Responsibilities. The duties and responsibilities of Executive shall be those of a senior executive of the Company as the same shall be assigned to him, from time to time, by the Board of Directors of the Company. Executive recognizes that, during the period of his employment hereunder, he owes an undivided duty of loyalty to the Company and agrees to devote all of his business time and attention to the performance of his duties and responsibilities and to use his best efforts to promote and develop the business of the Company. Subject to the approval of the Board of Directors, which shall not be unreasonably withheld, Executive shall be entitled to serve on corporate, civic, and/or charitable boards or committees and to otherwise reasonably participate as a member in community, civic, or similar organizations and the pursuit of personal investments which do not present any material conflicts of interest with the Company.

It is the intention of the Company that Executive shall be appointed President to serve in such position at the pleasure of the Board of Directors, reporting on a day-to-day basis directly to the president of Company’s parent corporation, AmTrust Financial Services, Inc. (“AFS”). If elected, Executive shall serve as a member of the Board of Directors of the Company or such of its affiliates to which he may be elected, in each case, without additional compensation.

2.       Employment Period. For a period commencing on the Effective Date hereof and ending on May 31, 2008 (the “Employment Period”), the Company hereby employ Executive in the capacities herein set forth. Executive agrees, pursuant to the terms hereof, to serve in such

 
 
 

capacities for the Employment Period. This Agreement shall renew for successive one year periods unless one of the parties provides written notice of not less than ninety days prior to the end of the Employment Period or any successive Employment Period that the party will not renew the Agreement.

3.       Compensation and Benefits.

(a)       Salary. The Company, collectively, shall pay Executive a salary at the rate of Two Hundred Fifty Thousand Dollars ($250,000) per annum through December 31, 2005 and Three Hundred Twenty-Five Thousand Dollars ($325,000) per annum effective January 1, 2006 (“Salary”), payable in accordance with the Company’ normal payroll process. Executive shall be entitled to a salary review annually commencing on the second anniversary of the Effective Date of this Agreement. Such salary review shall be based entirely on merit and any salary adjustments shall be determined by the Board of Directors of the Company solely at its discretion.

(b)       Profit Bonus. Executive shall receive an annual bonus equal to one percent (1%) of the profit, as defined herein, of AFS during the Employment Period or any successive Employment Period (the “Profit Bonus”). Effective as of the Calendar year ending December 31, 2006, the Profit Bonus shall not exceed Executive’s then current Salary. For purposes of computing the Profit Bonus, profits shall mean AFS’ after tax net income, excluding extraordinary income and all income of AmTrust Pacific Limited, as determined by AFS’s independent public accountants whose determination thereof shall be final, binding and conclusive. The Profit Bonus for each year shall be paid within sixty (60) days after the completion and issuance of AFS’s consolidated financial statements for the prior calendar year. The Profit Bonus shall be payable only if Executive is employed by the Company on the date that the bonus is payable.

(c)       Special Bonus. It is understood and agreed that AFS intends to adopt a 2005 Incentive Stock Plan (the “Plan”). Upon such adoption and based upon a proposed capitalization of thirty million issued and outstanding shares of common stock, Executive shall be granted an incentive stock option to purchase under the Plan 300,000 shares of AFS common stock, subject to the terms and conditions of the Plan. The number of shares covered by the option shall be adjusted upward or downward, as the case may be, to an amount equal to one percent of the issued and outstanding shares of common stock if the number of said shares is greater or lesser than thirty million. In the event that AFS, during the term of the option, does not have a liquidity event, such as an initial public offering, a sale of in excess of twenty percent (20%) of its outstanding shares to persons currently not affiliated with AFS or a merger or sale of AFS to a non-affiliated third party, exercise of the option, in whole or in part, shall be deferred indefinitely unless and until such event occurs.

(d)       Executive may also receive other bonus payments determined at the sole discretion of the Board of Directors (“Discretionary Bonus”).

 
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(e)       Executive shall also be entitled to the following benefits:

 
(i)
three weeks (3) weeks of paid vacation for each twelve (12) months of the Employment, or such greater period as may be approved from time to time by Board of Directors. Unused vacation time shall not be carried over to any subsequent calendar year;

 
(ii)
paid holidays and any and all other work-related leave (whether sick leave or otherwise) as provided to the Company’ other executive employees; and

 
(iii)
participation in such employee benefit plans to which executive employees of the Company, their dependents and beneficiaries generally are entitled during the Employment Period and, including, without limitation, health insurance, disability and life insurance, retirement plans and other present or successor plans and practices of Company for which executive employees, their dependents and beneficiaries are eligible.

4.       Reimbursement of Expenses. The Company recognizes that Executive, in performing Executive’s functions, duties and responsibilities under this Agreement, may be required to spend sums of money in connection with those functions, duties and responsibilities for the benefit of the Company and, accordingly, shall reimburse Executive for travel and other out-of-pocket expenses reasonably and necessarily incurred in the performance of his functions, duties and responsibilities hereunder upon submission of written statements and/or bills in accordance with the regular procedures of the Company in effect from time to time.

5.       Disability. In the event that Executive shall be unable to perform because of illness or incapacity, physical or mental, all the functions, duties and responsibilities to be performed by him hereunder for a consecutive period of two (2) months or for a total period of three (3) months during any consecutive twelve (12) month period, the Company may terminate this Agreement effective on or after the expiration of such period (the “Disability Period”) upon five (5) business days’ written notice to Executive specifying the termination date (the “Disability Termination Date”). Executive shall be entitled to receive his Salary and any unreimbursed expenses to the Disability Termination Date and for a period of the three months thereafter. Disability under this paragraph, shall be determined by a physician who shall be selected by the Company and approved by Executive. Such approval shall not be unreasonably withheld or delayed, and a physician shall be deemed to be approved unless he or she is disapproved in writing by Executive within ten (10) days after his or her name is submitted. The Company may obtain disability income insurance for the benefit of Executive in such amounts as the Company may determine.

6.       Death. In the event of the death of Executive during the Employment Period, this Agreement and the employment of Executive hereunder shall terminate on the date of death of Executive. Executive’s heirs or legal representatives shall be entitled to receive his Salary earned to the date of his death and for a period of three months thereafter and any unreimbursed expenses.
 
 
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7.
Termination.  
 
The Company may discharge Executive for Cause at any time. Cause for discharge shall include (i) a material breach of this Agreement by Executive, but only if such breach is not cured within thirty (30) days following written notice by the Company to Executive of such breach, assuming such breach may be cured; (ii) Executive is convicted of any act or course of conduct involving moral turpitude; or (iii) Executive engages in any willful act or willful course of conduct constituting an abuse of office or authority which significantly adversely affects the business or reputation of the Company. No act, failure to act or course of conduct on Executive’s part shall be considered “willful” unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action, omission or course of conduct was in the best interest of the Company. Any written notice by the Company to Executive pursuant to this paragraph 7 shall set forth, in reasonable detail, the facts and circumstances claimed to constitute the Cause. If Executive is discharged for Cause, the Company, without any limitations on any remedies it may have at law or equity, shall have no liability for salary or any other compensation and benefits to Executive after the date of such discharge.

8.       Non-Disclosure of Confidential Information. “Confidential Information” means all information known by Executive about the Company’ business plans, present or prospective customers, vendors, products, processes, services or activities, including the costing and pricing of such services or activities, employees, agents and representatives. Confidential Information does not include information generally known, other than through breach of a confidentiality agreement with any of the Company’, in the industry in which the Company engages or may engage. Executive will not, while this Agreement is in effect or after its termination, directly or indirectly, use or disclose any Confidential Information, except in the performance of Executive’s duties for the Company, or to other persons as directed by the Board of Directors. Executive will use reasonable efforts to prevent unauthorized use or disclosure of Confidential Information. Upon termination of employment with the Company, Executive will deliver to the Company all writings relating to or containing Confidential Information, including, without limitation, notes, memoranda, letters, drawings, diagrams, and printouts, including any tapes, discs or other forms of recorded information. If Executive violates any provision of this Section while this Agreement is in effect or after termination, the Company specifically reserve the right, in appropriate circumstances, to seek full indemnification from Executive should the Company suffer any monetary damages or incur any legal liability to any person as a result of the disclosure or use of Confidential Information by Executive in violation of this Section.

9.       Restrictive Covenant.

(a)       Prohibited Activities . Executive agrees that he shall not (unless he has received the prior written consent of the Company), during the period beginning on the date of termination of employment and during the term of this Agreement and ending three (3) years thereafter (the “Restriction Period”), directly or indirectly, for any reason, for his own account or on behalf of or together with any other person or firm:
 
 
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(i)
engage in any capacity or as an owner or co-owner of or investor in, whether as an independent contractor, consultant or advisor, or as a representative of any kind, in any business selling any products or providing any services in competition with the Company based on the lines of business being written by the Company as of the termination of this Agreement except in the states of North Dakota, South Dakota and Wyoming; provided, however, that Executive may own not more than five percent (5%) of the outstanding securities of any class of any corporation engaged in any such business, if such securities are listed on a national securities exchange or regularly traded in the over-the-counter market by a member of a national securities association;

 
(ii)
hire or solicit for employment or call, directly or indirectly, through any person or firm, on any person who is at that time (or at any time during the one year prior thereto) employed by or representing the Company with the purpose or intent of attracting that person from the employ of the Company;

 
(iii)
call on, solicit or perform services for, directly or indirectly through any person or firm, any person or firm that at that time is, or at any time within one year prior to that time was, a customer of the Company or any prospective customer that had or, to the knowledge of Executive, was about to receive a business proposal from the Company, for the purpose of soliciting or selling any product or service in competition with the Company; or

 
(iv)
call, directly or indirectly through any person or firm, on any entity which has been called on by the Company in connection with a possible acquisition by the Company with the knowledge of that entity’s status as such an acquisition candidate, for the purpose of acquiring that entity or arranging the acquisition of that entity by any person or firm other than the Company.

(b)       Damages . Because of (i) the difficulty of measuring economic losses to the Company as a result of any breach by Executive of the covenants in Sections 9(a), and (ii) the immediate and irreparable damage which could be caused to the Company for which they would have no other adequate remedy, Executive agrees that the Company may enforce the provisions of Paragraph 9(a) by injunction and restraining order against Executive if he breaches any of said provisions, without necessity of providing a bond or other security.

 
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(c)       Reasonable Restraint . The parties hereto agree that Sections 9(a) and 9(b) impose a reasonable restraint on Executive in light of the activities and business of the Company on the date hereof and the current business plans of the Company.

10.       Ownership of Inventions. Executive shall promptly disclose in writing to the Board of Directors all inventions, discoveries, and improvements conceived, devised, created, or developed by Executive in connection with his employment (collectively, “Invention”), and Executive shall transfer and assign to the Company all right, title and interest in and to any such Invention, including any and all domestic and foreign patent rights, domestic and foreign copyright rights therein, and any renewal thereof. Such disclosure is to be made promptly after the conception of each Invention, and each Invention is to become and remain the property of the Company, whether or not patent or copyright applications are filed thereon by the Company. Upon request of the Company, Executive shall execute from time to time during or after the termination of employment such further instruments including, without limitation, applications for patents and copyrights and assignments thereof as may be deemed necessary or desirable by the Company to effectuate the provisions of this Section.

11.       Construction. If the provisions of paragraph 9 should be deemed unenforceable, invalid, or overbroad in whole or in part for any reason, then any court of competent jurisdiction designated in accordance with paragraph 13 is hereby authorized, requested, and instructed to reform such paragraph to provide for the maximum competitive restraint upon Executive’s activities (in time, product, geographic area and customer or employee solicitation) which shall then be legal and valid.

12.       Damages and Jurisdiction. Executive agrees that violation of or threatened violation of any of paragraphs 8, 9 or 10 would cause irreparable injury to the Company for which any remedy at law would be inadequate, and the Company shall be entitled in any court of law or equity of competent jurisdiction to preliminary, permanent and other injunctive relief against any breach or threatened breach of the provisions contained in any of said paragraphs 8, 9 or 10 hereof, and such compensatory damages as shall be awarded. Further, in the event of a violation of the provisions of paragraph 9, the Restriction Period referred to therein shall be extended for a period of time equal to the period that any violation occurred.

13.       Jurisdiction and Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. The Company and Executive hereby each consents to the exclusive jurisdiction of the Supreme Court of the State of New York or the United States District Court for the Southern District of New York with respect to any dispute arising under the terms of this Agreement and further consents that any process or notice of motion therewith may be served by certified or registered mail or personal service, within or without the State of New York, provided a reasonable time for appearance is allowed. Each party acknowledges and agrees that any controversy which may arise under this Agreement is

 
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likely to involve complicated and difficult issues, and therefore each party hereby irrevocably and unconditionally waives any right such party may have to a trial by jury in respect or any litigation directly or indirectly arising out of or relating to this agreement, or the breach, termination or validity of this Agreement, or the transactions contemplated by this Agreement.

14.       Indemnification. To the fullest extent permitted by, and subject to, the Company’ Certificates of Incorporation and By-laws, the Company shall indemnify and hold harmless Executive against any losses, damages or expenses (including reasonable attorney’s fees) incurred by him or on his behalf in connection with any threatened or pending action, suit or proceeding in which he is or becomes a party by virtue of his employment by the Company or any affiliates or by reason of his having served as an officer or director of the Company or any other corporation at the express request of the Company, or by reason of any action alleged to have been taken or omitted in such capacity.

15.       Severability. If any provision of this Agreement is held to be invalid, illegal, or unenforceable, that determination will not affect the enforceability of any other provision of this Agreement, and the remaining provisions of this Agreement will be valid and enforceable according to their terms.

16.       Successors to Company. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of Executive and the Company and any successor or assign of the Company, including, without limitation, any corporation acquiring, directly or indirectly, all or substantially all of the assets of the Company, whether by merger, consolidation, sale or otherwise (and such successor shall thereafter be deemed embraced within the term “Company” for the purposes of this Agreement), but shall not otherwise be assignable by the Company. The services to be provided by Executive hereunder may not be delegated nor may Executive assign any of his rights hereunder.

17.       No Restrictions . Executive represents and warrants that as of the date of this Agreement Executive is not subject to any contractual obligations or other restrictions, including, but not limited to, any covenant not to compete, that could interfere in any way with his employment hereunder.

18.       Miscellaneous.

(a)       This Agreement constitutes the entire understanding of the parties with respect to the subject hereof, may be modified only in writing, is governed by laws of New York, without giving effect to the principles of conflict of laws thereof, and will be binding and inure to the benefit of Executive and Executive’s personal representatives, and the Company, their successors and assigns.
 
 
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(b)       If Executive should die while any amount would still be payable to him under this Agreement if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive’s estate or legal representative.

(c)       The failure of any of the parties hereto to enforce any provision hereof on any occasion shall not be deemed to be a waiver of any provision or succeeding breach of such provision or any other provision.

(d)       All notices under this Agreement shall be given by registered or certified mail, return receipt requested, directed to parties at the following addresses or to such other addresses as the parties may designate in writing:
 
If to the Company:

AmTrust North America, Inc.
59 Maiden Lane, 6 th Floor
New York, New York 10038
Attention: Barry D. Zyskind

If to Executive

Michael J. Saxon
514 Brookstone Court
Copley, Ohio 44321

(e)       In furtherance and not in limitation of the foregoing, this Agreement supersedes any employment agreement between the Company and Executive, written or oral, and any such agreement hereby is terminated and is no longer binding on either party.

19.       Key Man Insurance Authorization . At any time during the term of this Agreement, the Company will have the right (but not the obligation) to insure the life of Executive for the sole benefit of the Company and to determine the amount of insurance and type of policy. The Company will be required to pay all premiums due on such policies. Executive will cooperate with the Company in taking out the insurance by submitting to physical examination, by supplying all information required by the insurance company, and by executing all necessary documents. Executive, however, will incur no financial obligation by executing any required document, and will have no interest in any such policy.


 
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21.       Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be deemed to be duplicate originals.
 
 
AMTRUST NORTH AMERICA, INC.    
     
     
By:__________________________________     
Barry D. Zyskind
 
Michael J. Saxon
 
 
 
 
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EXHIBIT 10.12

INDEMNIFICATION AGREEMENT

This Agreement, made and entered into as of this 7 th day of March, 2006 (“Agreement”), among and between AmTrust Financial Services, Inc., a Delaware corporation (the “Company”), and the individual listed on the signature page hereof (the “Indemnitee”);

WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify such persons to the fullest extent permitted by applicable law so that he will serve or continue to serve the Company free from undue concern that he will not be so indemnified; and

WHEREAS, Indemnitee is willing to serve, for or on behalf of the Company, on the condition that he be so indemnified;

NOW THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:

SECTION 1.   Service by Indemnitee. Indemnitee agrees to continue to serve as a director and/or officer of the Company. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law).

SECTION 2.   Indemnification - General. The Company shall indemnify, and advance Expenses (as hereinafter defined) to Indemnitee as provided by applicable law in effect on the date hereof and to such greater extent as applicable law may thereafter from time to time permit. The rights of Indemnitee provided under the preceding sentence shall include, but shall not be limited to, the rights set forth in the other Sections of this Agreement.

The indemnification provided under this Agreement is in addition to and not in lieu of any other indemnification provided to Indemnitee by any other agreement or by operation of law.

SECTION 3. Proceedings Other Than Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 3 if, by reason of his Corporate Status (as hereinafter defined), he is, or is threatened to be made, a party to any threatened, pending, or completed Proceeding (as hereinafter defined), other than a Proceeding by or in the right of the Company. Pursuant to this Section 3, Indemnitee shall be indemnified against Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful.
 
 
 
 

SECTION 4.   Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be made, party to any threatened, pending or completed Proceeding brought by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section, Indemnitee shall be indemnified against Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. Notwithstanding the foregoing, no indemnification against such expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company if applicable law prohibits such indemnification; provided, however, that, if applicable law so permits, indemnification against Expenses shall nevertheless be made by the Company in such event if and only to the extent that the Court in which such Proceeding shall have been brought or is pending, shall determine.

SECTION 5.   Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding, but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For the purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by settlement or dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

SECTION 6.   Indemnification for Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.

SECTION 7.   Advancement of Expenses. The Company shall advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding within twenty (20) days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses.
 
 
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SECTION 8.   Procedure for Determination of Entitlement to Indemnification.
 
(a)       To obtain indemnification under this Agreement, Indemnitee shall submit to the Secretary of the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification.

(b)       Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 8(a) hereof, a determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto shall be made in the specific case: (i) if a Change in Control (as hereinafter defined) shall have occurred, by Independent Counsel (as hereinafter defined) unless Indemnitee shall request that such determination be made by the Board of Directors or the stockholders, in which case by the person or persons or in the manner provided for in clauses (ii) or (iii) of this Section 8(b) in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee; (ii) if a Change of Control shall not have occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee or (C) by the stockholders of the Company; or (iii) as provided in Section 9(b) of this Agreement; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination.

Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorney’s fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.

(c)       In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 8(b) hereof, the Independent Counsel shall be selected as provided in this Section 8(c). If a Change of Control shall not have occurred, the Independent Counsel shall be selected by the Board of Directors, and the
 
 
-3-
 

Company shall give written notice to the Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change of Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may within seven (7) days after such written notice of selection shall have been given, deliver to the Company or the Indemnitee, as the case may be, a written objection to such selection. Such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 17 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is made, the Independent Counsel so selected may not serve as Independent Counsel unless and until a court has determined that such objection is without merit. If, within twenty (20) days after submission by Indemnitee of a written request for indemnification pursuant to Section 8(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Supreme Court of the State of New York in New York County or other court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court or by such other person as the court shall designate, and the person with respect to whom an objection is so resolved or the person so appointed shall act as Independent Counsel under Section 8(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 8(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 8(c), regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 19(a)(iii) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).

SECTION 9.   Presumptions and Effect of Certain Proceedings.

(a)       If a Change of Control shall have occurred, in making a determination with respect to entitlement to indemnification hereunder, the person, persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement, if Indemnitee has submitted a request for indemnification in accordance with Section 8(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person or entity or any determination contrary to that presumption.

(b)       If the person or entity empowered or selected under Section 8 of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within sixty (60) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to
 
 
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have been made and Indemnitee shall be entitled to such indemnification, absent (i) misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such sixty (60) day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating thereto; and provided further, that the foregoing provisions or this Section 9(b) shall not apply (i) if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 8(b) of this Agreement and (A) within fifteen (15) days after receipt by the Company of the request for such determination the Board of Directors has resolved to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy (70) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders (i) is called within fifteen (15) days after such receipt for the purposes of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat, or (ii) if the determination of entitlement to indemnification is to made by the Independent Counsel pursuant to Section 8(b) of this Agreement.

(c)       The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendre or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely effect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any Criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful.

SECTION 10.   Remedies of Indemnitee

(a)       In the event that (i) a determination is made pursuant to Section 8 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 7 of this Agreement, (iii) the determination of entitlement of indemnification is to be made by Independent Counsel pursuant to Section 8(b) of this Agreement and such determination shall not have been made and delivered in a written opinion within ninety (90) days after receipt by the Company of the request for indemnification, or (iv) payment of indemnification is not made pursuant to Section 6 of this Agreement within ten (10) days after receipt by the Company of a written request therefore, or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 8 or 9 of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of New York, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. Alternatively,
 
 
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Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 10(a). The Company shall not oppose Indemnitee’s right to seek any such adjudication or award in arbitration.

(b)       In the event that a determination shall have been made pursuant to Section 8 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration, commenced pursuant to this Section 10 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. If a Change of Control shall have occurred, in any judicial proceeding or arbitration commenced pursuant to this Section 10 the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be.

(c)       If a determination shall have been made or deemed to have been made pursuant to Section 8 or 9 of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 10, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.

(d)       The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 10 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before such arbitrator that the Company is bound by all the provisions of this Agreement.

(e)       In the event that Indemnitee, pursuant to this Section 10, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expense (of the types described in the definition of Expense in Section 17 of this Agreement) actually and reasonably incurred by him, but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.

SECTION 11.   Non-Exclusivity; Survival of Rights; Insurance; Subrogation.

(a)       The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the certificate of
 
 
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Incorporation, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or termination of this Agreement or any provision hereof shall be effective as to any Indemnitee with respect to any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or termination.

(b)       To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, agents or fiduciaries of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies.

(c)       In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

(d)       The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

SECTION 12.   Duration of Agreement. This Agreement shall continue until and terminate upon the later of: (a) 10 years after the date that Indemnitee shall have ceased to serve as a director and/or officer, or (b) the final termination of all pending Proceedings in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 10 of this Agreement relating thereto. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators.

SECTION 13.   Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reasons whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provisions held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.
 
 
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SECTION 14.   Exception to Right of Indemnification or Advancement of Expenses. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification or advancement of Expenses under this Agreement with respect to any Proceeding, or any claim therein, brought or made by him against the Company.

SECTION 15. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.

SECTION 16. Heading. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

SECTION 17. Definitions. For purposes of this Agreement:

(a)       “Change in Control” means a change in control of the Company shall be deemed to have occurred if after the Effective Date (i) any “person” other than principal shareholders or an affiliate thereof as of the Effective Date is or becomes the “beneficial owner” directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities; or (ii) the Company is a party to a merger, consolidation, sale of assets or other reorganization, as a consequence of which members of the Board of Directors in office immediately prior to such a transaction or event constitute less than a majority of the Board of Directors thereafter.

Company in this Section 17(a) shall mean AmTrust Financial Services, Inc. and any related or affiliated company in which the Indemnitee is an officer, director or employee.

(b)       “Corporate Status” describes the status of a person who is or was a director, officer, employee, agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company.
 
(c)       “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.
 
(d)       “Effective Date” means January __, 2006.

(e)      “Expenses” shall include all reasonable attorney’s fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding.
 
 
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(f)       “Independent Counsel” means a law firm, or member of a law firm, which is experienced in matters of corporation law and neither currently is, nor in the past five years has been retained to represent: (i) the Company in any material matter, or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the forgoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

(g)       “Proceeding” includes any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding whether civil, criminal, administrative or investigative, except one initiated by an Indemnitee pursuant to Section 10 of this Agreement to enforce his rights under this Agreement.

SECTION 18. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

SECTION 19. Notice by Indemnitee. Indemnitee agrees as promptly as practicable to notify the Company in writing upon being served with any summons, citation , subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder.

SECTION 20. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipt for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:

 
(a)
If to the Indemnitee, to:

The address of the respective Indemnitee located on the signature page at the end of this Agreement.

 
(b)
If the Company, to:

59 Maiden Lane
6 th Floor
New York, NY 10038
Attn: General Counsel
 
 
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SECTION 21. Governing Law. The parties agree that this Agreement shall be Governed by, and construed and enforced in accordance with, the laws of the State of New York.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.
 
ATTEST   AMTRUST FINANCIAL SERVICES, INC.
     
     
By: _____________________________________   By: ___________________________________
Secretary
 
President and CEO
   
     
   
INDEMNITEE
     
          
     
 
Address:   
         
         
 
 
 
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Subsidiaries List
     
Entity Name
 
Jurisdiction of Incorporation or Formation
     
AmTrust International Insurance Limited
 
Bermuda
Technology Insurance Company, Inc.
 
Hampshire
Rochdale Insurance Company
 
New York
Wesco Insurance Company
 
Delaware
AmTrust International Underwriters Limited
 
Ireland
AmTrust North America, Inc.
 
Delaware
The Princeton Agency, Inc.
 
New Jersey
AmTrust South, Inc. (f/k/a Covenant Management, Inc.)
 
Delaware
United Underwriting Agency, Inc.
 
New York
AmTrust Managers, Inc.
 
Delaware
AmTrust Management Services Limited
 
United Kingdom
AMT Service Corp.
 
Delaware
North American Risk Management, Inc.
 
Florida
AmTrust New Gulf Holdings, LLC
 
Delaware
Rock Run South, LLC
 
Delaware
AmTrust Underwriters, Inc.
 
Delaware
AII Insurance Management Limited
 
Bermuda
AII Reinsurance Broker Limited
 
Bermuda
Property Securities Holdings Limited (f/k/a AmTrust Pacific Limited)
 
New Zealand
AFS Capital Corporation
 
Texas
AmTrust Nordic AB
 
Sweden

 
 
Consent of Independent Registered Public Accounting Firm

 

 
AmTrust Financial Services, Inc.
New York, New York
 
We consent to the use in this Registration Statement on Form S-1 of our reports dated April 28, 2006 and June 9, 2006, relating to the consolidated financial statements of AmTrust Financial Services, Inc., which is a part of this Registration Statement.
 
We also consent to the reference to us under the caption “Experts” in the Prospectus.
 
 

/s/ BDO Seidman, LLP

BDO Seidman, LLP
New York, New York
 
June 9, 2006

 
 
CONSENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
 
We consent to the use in this Registration Statement on Form S-1 of our report dated May 20, 2005, relating to the year ending December 31, 2004 and 2003 financial statements and financial statement schedules of Amtrust Financial Services, Inc. appearing in the Prospectus, which is part of this Registration Statement.

We also consent to the reference to us under the heading “Experts” in such Prospectus.






BERENSON LLP
June 9, 2006