The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q.

Note on Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements that are intended to be covered by the safe harbors created by The Private Securities Litigation Reform Act of 1995. When we use words such as "anticipate," "intend," "plan," "believe," "estimate," "expect," or similar expressions, we do so to identify forward-looking statements. Examples of forward-looking statements include the plans and objectives of management for future operations, including those relating to future growth of our business activities and availability of funds, and are based on current expectations that involve assumptions that are difficult or impossible to predict accurately, many of which are beyond our control. There can be no assurance that actual developments will be those anticipated by us. Actual results may differ materially from those expressed or implied in these statements as a result of significant risks and uncertainties, including, but not limited to, non-receipt of expected payments from insureds or reinsurers, changes in interest rates, a downgrade in the financial strength ratings of our insurance subsidiaries, the effect of the performance of financial markets on our investment portfolio, our estimates of the fair value of our life settlement contracts, development of claims and the effect on loss reserves, accuracy in projecting loss reserves, the cost and availability of reinsurance coverage, the effects of emerging claim and coverage issues, changes in the demand for our products, our degree of success in integrating acquired businesses, the effect of general economic conditions, state and federal legislation, regulations and regulatory investigations into industry practices, risks associated with conducting business outside the United States, developments relating to existing agreements, disruptions to our business relationships with Maiden Holdings, Ltd., American Capital Acquisition Corporation, or third party agencies and warranty administrators, difficulties with technology or breaches in data security, heightened competition, changes in pricing environments, and changes in asset valuations. Additional information about these risks and uncertainties, as well as others that may cause actual results to differ materially from those projected, is contained in our filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2011, and our quarterly reports on Form 10-Q. The projections and statements in this report speak only as of the date of this report and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Overview

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

· Small Commercial Business. We provide workers' compensation, commercial package and other commercial insurance lines produced by wholesale agents, retail agents and brokers in the United States.

· Specialty Risk and Extended Warranty. We provide coverage for consumer and commercial goods and custom designed coverages, such as accidental damage plans and payment protection plans offered in connection with the sale of consumer and commercial goods, in the United States and Europe, and certain niche property, casualty and specialty liability risks in the United States and Europe, including general liability, employers' liability and professional and medical liability.

· Specialty Program. We write commercial insurance for narrowly defined classes of insureds, requiring an in-depth knowledge of the insured's industry segment, through general and other wholesale agents.

· Personal Lines Reinsurance. We reinsure 10% of the net premiums of the GMACI personal lines business, pursuant to a quota share reinsurance agreement ("Personal Lines Quota Share") with the GMACI personal lines insurance companies.

We transact business primarily through eleven insurance company subsidiaries:

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

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

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

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

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

Net Earned Premium.Net earned premium is the earned portion of our net written premiums. We earn insurance premiums on a pro-rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums, which are earned in subsequent periods over the remaining term of the policy. Our workers' compensation insurance and commercial package policies typically have a term of one year. Thus, for a one-year policy written on July 1, 2012 for an employer with a constant payroll during the term of the policy, we would earn half of the premiums in 2012 and the other half in 2013. We earn our specialty risk and extended warranty coverages over the estimated exposure time period. The terms vary depending on the risk and have an average duration of approximately 23 months, but range in duration from one month to 120 months.

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

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

· Product warranty registration and service - Our Specialty Risk and Extended Warranty business generates fee revenue for product warranty registration and claims handling services provided to unaffiliated third parties.

· Servicing carrier - We act as a servicing carrier for workers' compensation assigned risk plans in eight states. In addition, we also offer claims adjusting and loss control services for fees to unaffiliated third parties.

· Management services - We provide services to insurance consumers, traditional insurers and insurance producers by offering flexible and cost effective alternatives to traditional insurance tools in the form of various risk retention groups and captive management companies, as well as management of workers' compensation and commercial property programs.

· Installment and reinstatement fees - We recognize fee income associated with the issuance of workers' compensation policies for installment fees, in jurisdictions where it is permitted and approved, and reinstatement fees, which are fees charged to reinstate a policy after it has been cancelled for non-payment, in jurisdictions where it is permitted and approved.

· Broker services - We provide brokerage services to Maiden in connection with our reinsurance agreement for which we receive a fee.

· Asset management services - We currently manage the investment portfolios of Maiden, ACAC and ACP Re, Ltd. for which we receive a management fee.

· Information technology services - We provide information technology services to ACAC and its affiliates for a fee.

Net Investment Income and Realized Gains and (Losses). We invest our statutory surplus funds and the funds supporting our insurance liabilities primarily in cash and cash equivalents, fixed maturity and equity securities. Our net investment income includes interest and dividends earned on our invested assets. We report net realized gains and losses on our investments separately from our net investment income. Net realized gains occur when we sell our investment securities for more than their costs or amortized costs, as applicable. Net realized losses occur when we sell our investment securities for less than their costs or amortized costs, as applicable, or we write down the investment securities as a result of other-than-temporary impairment. We classify equity securities and our fixed maturity securities as available-for-sale. We report net unrealized gains (losses) separately within accumulated other comprehensive income on our balance sheet.

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

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

· Policy acquisition expenses comprise commissions directly attributable to those agents, wholesalers or brokers that produce premiums written on our behalf. In most instances, we pay commissions based on collected premium, which reduces our credit risk exposure associated with producers in case a policyholder does not pay a premium. We pay state and local taxes, licenses and fees, assessments and contributions to various state guaranty funds based on our premiums or losses in each state. Surcharges that we may be required to charge and collect from insureds in certain jurisdictions are recorded as accrued liabilities, rather than expense.

· Salaries and benefits expenses are those salaries and benefits expenses for employees that are directly involved in the origination, issuance and maintenance of policies, claims adjustment and accounting for insurance transactions. We classify salaries and benefits associated with employees that are involved in fee generating activities as other expenses.

· General and administrative expenses are comprised of other costs associated with our insurance activities, such as federal excise tax, postage, telephones and internet access charges, as well as legal and auditing fees and board and bureau charges.

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

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

Net Expense Ratio. The net expense ratio is a measure of an insurance company's operational efficiency in administering its business. Expressed as a percentage, this is the ratio of the sum of acquisition costs and other underwriting expenses less ceding commission revenue to net premiums earned. As we allocate certain acquisition costs and other underwriting expenses based on premium volume to our segments, net loss ratio on a segment basis may be impacted period over period by a shift in the mix of net written premium.

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

Net Premiums Earned less Expenses Included in Combined Ratio (Underwriting Income). Underwriting income is a measure of an insurance company's overall operating profitability before items such as investment income, interest expense and income taxes.

Return on Equity. We calculate return on equity by dividing net income by the average of shareholders' equity.

One of the key financial measures that we use to evaluate our operating performance is return on average equity. Our return on annualized average equity was 16.5% and 25.2% for the three months ended June 30, 2012 and 2011, respectively, and 16.8% and 24.7% for the six months ended June 30, 2012 and 2011, respectively. In addition, we target a net combined ratio of 95% or lower over the long term, while seeking to maintain optimal operating leverage in our insurance subsidiaries commensurate with our A.M. Best rating objectives. Our net combined ratio was 88.9% and 90.3% for the three months ended June 30, 2012 and 2011, respectively, and 88.7% and 88.8% for the six months ended June 30, 2012 and 2011, respectively.

Critical Accounting Policies

Our discussion and analysis of our results of operations, financial condition and liquidity are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities as of the date of the financial statements. As more information becomes known, these estimates and assumptions could change, which would have an impact on actual results that may differ materially from these estimates and judgments under different assumptions. We have not made any changes in estimates or judgments that have had a significant effect on the reported amounts as previously disclosed in our Annual Report on Form 10-K for the fiscal period ended December 31, 2011.

Results of Operations



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



                                             Three Months Ended June 30,           Six Months Ended June 30,
(Amounts in Thousands)                       2012                 2011                2012             2011
Gross written premium                    $     637,438       $       558,462     $    1,239,125     $ 1,002,489

Net written premium                      $     391,589       $       375,681     $      751,366     $   609,700
Change in unearned premium                     (57,595 )            (127,399 )         (103,348 )      (161,080 )
Net earned premiums                            333,994               248,282            648,018         448,620
Ceding commission - primarily related
party                                           44,550                35,414             90,824          71,098
Service and fee income (related
parties - three months $6,932; $4,459
and six months $13,024; $7,898)                 33,011                24,542             73,549          49,731
Net investment income                           16,344                13,167             30,862          27,359
Net realized gain on investments                 2,703                   616              1,555           1,031
Total revenues                                 430,602               322,021            844,808         597,839

Loss and loss adjustment expense               211,787               170,008            411,716         298,704
Acquisition costs and other
underwriting expenses                          129,713                89,580            253,738         170,814
Other                                           32,320                18,564             67,959          38,760
Total expenses                                 373,820               278,152            733,413         508,278
Income before other income (expense),
income taxes and equity in earnings
(loss) of unconsolidated subsidiary             56,782                43,869            111,395          89,561

Other income (expense):
Interest expense                                (6,994 )              (4,334 )          (14,085 )        (8,088 )
Foreign currency (loss) gain                    (2,455 )               2,520             (2,034 )         2,236
Net gain on investment in life
settlement contracts                             1,961                22,638              2,051          41,524
Total other income (expense)                    (7,488 )              20,824            (14,068 )        35,672
Income before income taxes and equity
in earnings (loss) of unconsolidated
subsidiary                                      49,294                64,693             97,327         125,233
Provision for income taxes                      11,742                 7,289             22,919          16,326
Income before equity in earnings
(loss) of unconsolidated subsidiary
and non-controlling interest                    37,552                57,404             74,408         108,907
Equity in earnings of unconsolidated
subsidiary - related party                       3,088                 2,514              5,452           4,333
Net income                                      40,640                59,918             79,860         113,240
Non-controlling interest                          (282 )              (9,756 )             (416 )       (17,895 )
Net income attributable to AmTrust
Financial Services, Inc.                 $      40,358       $        50,162     $       79,444     $    95,345

Net realized gain (loss) on
investments:
Total other-than-temporary impairment
loss                                     $      (1,208 )     $          (345 )   $       (1,208 )   $      (345 )
Portion of loss recognized in other
comprehensive income                                 -                     -                  -               -
Net impairment losses recognized in
earnings                                        (1,208 )                (345 )           (1,208 )          (345 )
Other net realized gain on investments           3,911                   961              2,763           1,376
Net realized investment loss             $       2,703       $           616     $        1,555     $     1,031

Key measures:
Net loss ratio                                    63.4 %                68.5 %             63.5 %          66.6 %
Net expense ratio                                 25.5 %                21.8 %             25.1 %          22.2 %
Net combined ratio                                88.9 %                90.3 %             88.7 %          88.8 %

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

Gross Written Premium. Gross written premium increased $78.9 million, or 14.1%, to $637.4 million from $558.5 million for the three months ended June 30, 2012 and 2011, respectively. The increase of $78.9 million was primarily attributable to growth in our Small Commercial Business and Specialty Program segments. The increase in Small Commercial Business resulted primarily from increases in workers' compensation policy counts, the acquisitions of Majestic and BTIS in 2011 and rate increases in some of our key states. The increase in Specialty Program resulted primarily from programs developed from new underwriting teams we hired in 2010 and 2011.

Net Written Premium. Net written premium increased $15.9 million, or 4.2%, to $391.6 million from $375.7 million for the three months ended June 30, 2012 and 2011, respectively. The increase(decrease) by segment was: Small Commercial Business - ($8.9) million, Specialty Risk and Extended Warranty - ($12.9) million, Specialty Program - $33.9 million and Personal Lines - $3.8 million. Net written premium increased for the three months ended June 30, 2012 compared to the same period in 2011 due to the increase in gross written premium in 2012 compared to 2011 partially offset by an increase in our assigned risk business in our small commercial business segment for which we cede 100 percent.

Net Earned Premium. Net earned premium increased $85.7 million, or 34.5%, to $334.0 million from $248.3 million for the three months ended June 30, 2012 and 2011, respectively. The increase by segment was: Small Commercial Business - $19.5 million, Specialty Risk and Extended Warranty - $32.0 million, Specialty Program - $30.8 million, and Personal Lines - $3.4 million.

Ceding Commission. Ceding commission represents commission earned primarily through the Maiden Quota Share, whereby AmTrust receives a ceding commission between 30% and 31%, depending on the mix of business ceded, for all business except retail commercial package business, and 34.375% for retail commercial package business, for written premiums ceded to Maiden. The ceding commission earned during the three months ended June 30, 2012 and 2011 was $44.6 million and $35.4 million, respectively. Ceding commission increased period over period as a result of increased premium writings.

Service and Fee Income. Service and fee income increased $8.5 million, or 34.7%, to $33.0 million from $24.5 million for the three months ended June 30, 2012 and 2011, respectively. The increase related to fee income of approximately $4 million produced from BTIS, which was acquired in December 2011, higher technology fee income from ACAC of approximately $3 million and fees generated by becoming a servicing carrier for workers' compensation assigned risk plans in three additional states.

Net Investment Income. Net investment income increased $3.1 million, or 23.5%, to $16.3 million from $13.2 million for the three months ended June 30, 2012 and 2011, respectively. The increase resulted primarily from having a higher average balance of fixed security investment securities during the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

Net Realized Gains (Losses) on Investments.We incurred net realized gains on investments of $2.7 million and $0.6 million for the three months ended June 30, 2012 and 2011, respectively. The increase resulted from our decision to sell certain positions that had market values that exceeded our cost basis.

Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $41.7 million, or 24.5%, to $211.7 million from $170.0 million for the three months ended June 30, 2012 and 2011, respectively. Our loss ratio for the three months ended June 30, 2012 and 2011 was 63.4% and 68.5%, respectively. The decrease in the loss ratio in 2012 resulted from lower current accident year selected ultimate losses as compared to selected ultimate losses from the prior accident year.

. . .