RISK
FACTORS
You
should carefully consider the following risk factors and all other information
contained in this prospectus before investing in our common stock. Investing
in
our common stock involves a high degree of risk. Any of the following risks
could adversely affect our business, financial condition, results of operations,
performance, achievements and industry and could result in a complete loss
of
your investment. The risks and uncertainties described below are not the only
ones we may face. See also “Forward Looking Statements.”
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 entered in December
2005 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. We have not made any material adjustments.
However, during 2004, we increased our loss reserves for previous years by
$3.4
million, which constituted 3.8% of the total incurred loss and loss adjustment
expense incurred for 2004. In 2005, we recognized a $1.0 million
redundancy in the prior year’s reserves, and in 2006, we recognized a $0.5
million deficiency in the prior year’s reserves. The redundancy in 2005 resulted
in part from a decrease in our actuarially ultimate projected losses based
on
actual loss experience. The reserve deficiency recognized in 2006 related
primarily to the development of losses incurred as a result of our mandatory
participation in reinsurance pools which reinsure state assigned risk plans.
An
increase in reserves results in a reduction in our surplus which 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, RIC and WIC, our Irish subsidiary AIU,
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, which is the fourth highest
of
16 rating levels, 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, WIC, AIU 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 a more competitive market environment in which
underwriting capacity and price competition has increased. 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 experienced increased price competition in certain of our target
markets during 2005 and 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. 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 December 31, 2006, we had an aggregate amount of
approximately $44.0 million of recoverables from third party reinsurers on
paid
and unpaid losses.
Our
relationship with Maiden Holdings, Ltd. and its subsidiaries may present, and
make us vulnerable to, difficult conflicts of interest, related party
transactions, business opportunity issues and legal
challenges.
Maiden
Holdings, Ltd, (“Maiden”) is a Bermuda insurance holding company formed by
Michael Karfunkel, George Karfunkel and Barry D. Zyskind, our principal
shareholders, and, respectively, the Chairman of our Board of Directors, a
Director and our Chief Executive Officer. Messrs. Karfunkel, Karfunkel and
Zyskind own 57% of our outstanding shares of common stock and each owns 6.5%
of
Maiden’s outstanding shares of common stock. Mr. Zyskind serves as Chairman of
the Board of Maiden. Max G. Caviet, an executive officer of AmTrust, serves
as
President and Chief Executive Officer of Maiden and will continue to serve
as an
executive officer of both companies during a transitional period which will
not
extend beyond December 31, 2007. Following the transitional period, Mr. Caviet
is expected to resign his positions at AmTrust. Conflicts of interest could
arise with respect to business opportunities that could be advantageous to
Maiden or its subsidiaries, on the one hand, and us or our subsidiaries, on
the
other hand. In addition, potential conflicts of interest may arise should the
interests of AmTrust and Maiden diverge.
Mr. Zyskind's
service as our President and Chief Executive Officer and Chairman of the Board
of Maiden, and Mr. Caviet's service for a transitional period as an
executive officer of AmTrust and as Maiden’s President and Chief Executive
Officer, could also raise a potential challenge under anti-trust laws.
Section 8 of the Clayton Antitrust Act, or the Clayton Act, prohibits a person
from serving as a director or officer in any two competing corporations under
certain circumstances. If AmTrust and Maiden are in the future deemed to be
competitors within the meaning of the Clayton Act, certain thresholds relating
to direct competition between AmTrust and Maiden are met, and the Department
of
Justice and Federal Trade Commission challenge the arrangement, Messrs. Zyskind
and Caviet may be required to resign their positions with one of the companies,
and/or fines or other penalties could be assessed against Messrs. Zyskind and
Caviet and AmTrust.
We
are dependent on Maiden for commission and fee income.
We
are
dependent on Maiden for commission and fee income through the quota share
reinsurance agreement by which Maiden’s subsidiary, Maiden Insurance Company,
Ltd. (“Maiden Insurance”), reinsures AmTrust’s insurance subsidiaries; the asset
management agreement between Maiden and Maiden Insurance and our subsidiary,
AII
Insurance Management Ltd., by which we manage Maiden’s and Maiden Insurance’s
invested assets; and the reinsurance brokerage agreement, by which our
subsidiary, AII Reinsurance Broker Limited provides Maiden Insurance certain
reinsurance brokerage services. Effective July 1, 2007, Maiden Insurance
assumes, through the quota reinsurance, approximately 40% of our net business
premiums. The term of our quota share reinsurance agreement with Maiden
Insurance is for a period of three years, subject to certain early termination
rights. We receive a ceding commission of 31% of ceded written premiums, which
after the first year would be subject to adjustment (up to a maximum of 32%
and
a minimum of 30%) based on the loss ratio of the ceded business. Pursuant to
the
asset management agreement, we receive a quarterly fee equal to 0.0875% of
the
average value of Maiden’s and Maiden Insurance’s invested assets. The asset
management agreement has a one year term and will renew automatically for
successive one year terms unless notice of intent not to renew is provided.
Pursuant to the reinsurance brokerage agreement, we receive a brokerage
commission equal to 1.25% of the premium ceded to Maiden Insurance under the
quota share reinsurance agreement.
There
is
no assurance that these arrangements will remain in place beyond their current
terms and we may not be able to readily replace these arrangements if they
terminate. If we were unable to continue or replace our current reinsurance
arrangements on equally favorable terms, our underwriting capacity and
commission and fee income could decline, we could experience a downgrade in
our A.M. Best rating, and our results of operations may be adversely
affected.
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. In 2007, we started writing commercial property insurance in our
specialty middle-market property and casualty segment. 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
do not accurately assess the risks that we assume, we may not 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:
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collect
and properly analyze a substantial volume of data from our
insureds;
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develop,
test and apply appropriate rating formulae;
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closely
monitor and timely recognize changes in trends; and
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project
both frequency and severity of our insureds’ losses with reasonable
accuracy.
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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:
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insufficient
reliable data;
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incorrect
or incomplete analysis of available data;
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uncertainties
generally inherent in estimates and
assumptions;
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our
inability to implement appropriate rating formulae or other pricing
methodologies;
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regulatory
constraints on rate increases;
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unexpected
escalation in the costs of ongoing medical
treatment;
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our
inability to accurately estimate investment yields and the duration
of our
liability for loss and loss adjustment expenses;
and
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unanticipated
court decisions, legislation or regulatory
action.
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Our
workers’ compensation, commercial automobile, general liability, and commercial
property 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 acquire or integrate additional
business.
We
have
expanded our business historically through internally generated growth and
acquisitions of renewal rights to existing business and related distribution
networks, and the acquisition of whole companies. We plan to continue to seek
to
make opportunistic acquisitions. 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 or that we will be successful in integrating any business that we acquire.
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.
In
Florida, the state in which we write the most workers’ compensation insurance
premiums, insurance regulators set the premium rates we may charge. The Florida
insurance regulators may set rates below those that we require to maintain
profitability. For example, in October 2005, the Florida Office of Insurance
Regulation approved an overall average 13.5% decrease in premium rates for
all
workers’ compensation insurance policies written by Florida licensed insurers in
2006. In October 2007, the Florida Office of Insurance Regulation approved
an
18.4% overall rate reduction. We are unsure how these changes will affect our
business or results of operations.
In
March
2007, New York enacted new legislation to implement fundamental changes to
New
York’s workers’ compensation law. These changes, among other things, reflect an
increase in benefits and a limit on the number of years that permanent partial
disability claimants can receive benefits. The changes took effect immediately
with certain sections to be phased-in through February 2008. In July 2007,
the
New York Insurance Department approved an overall average 20.5% decrease in
workers’ compensation premium rates effective October 1, 2007. At present, we
are unsure how these changes will affect our business or results of operations.
In 2006, 11.7% of our workers’ compensation business was written in New York.
A
decline in the level of business activity of our policyholders could negatively
affect our earnings and profitability.
In
2006,
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. 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. In October 2007,
the Company and the Bank resumed correspondence in an effort to settle this
matter, and discussions are ongoing.
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:
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inaccessibility
of our network;
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long
response times;
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loss
of important data;
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viruses;
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power
outages; and
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terrorism.
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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
December 31, 2006, we provided small business workers’ compensation insurance in
37 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 year ended December 31, 2006, Florida, Georgia,
New
Jersey, New York and Pennsylvania accounted for approximately 68.3% of the
direct gross premiums written in our small business workers’ compensation
business, with Florida accounting for approximately 22.4% (the acquisition
of
AIIC in September 2007 will increase the percentage of our business in Florida
for 2007 and beyond). In Europe, approximately 49.5% of our gross premiums
written for the year ended December 31, 2006 were derived from policyholders
in
the United Kingdom. Consequently, 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.
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:
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rising
levels of claims costs, including medical and prescription drug costs,
that we cannot anticipate at the time we establish our premium
rates;
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fluctuations
in interest rates, inflationary pressures and other changes in the
investment environment that affect returns on invested
assets;
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changes
in the frequency or severity of
claims;
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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;
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new
types of claims and new or changing judicial interpretations relating
to
the scope of liabilities of insurance
companies;
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volatile
and unpredictable developments, including man-made, weather-related
and
other natural catastrophes or terrorist
attacks;
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downgrades
in the A.M. Best rating of one or more of our insurance
subsidiaries;
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cyclical
nature of the property and casualty insurance
market;
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negative
developments in the specialty property and casualty insurance sectors
in
which we operate; and
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reduction
in the business activities of our
policyholders.
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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 markets, 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. Except in connection with certain 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:
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identify
profitable new geographic markets for
entry;
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attract
and retain qualified personnel for expanded
operations;
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identify,
recruit and integrate new independent agencies and extended
warranty/service contract
administrators;
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identify
potential acquisition targets and successfully acquire
them;
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expand
existing agency relationships; and
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augment
our internal monitoring and control systems as we expand our
business.
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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, WIC and AIIC 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 stockholders’ equity.
Our
operating results may be adversely affected by currency
fluctuations.
Our
functional currency is the U.S. dollar. For the years ended December 31, 2006
and 2005, 13.6% and 19.2%, respectively, of our net premiums written were
written in currencies other than the U.S. dollar. As of December 31, 2006 and
2005, approximately 8% and 11%, respectively, of our cash and investments were
denominated in non-U.S. currencies. Because we write business in the EU and
the
United Kingdom, we hold investments denominated in Euros and British Pounds
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.
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 D. Zyskind, Ronald E. Pipoly, Jr., Michael Saxon, Stephen
Ungar, Christopher Longo and Max Caviet. We have entered into employment
agreements with all of our principal executive officers except for Stephen
Ungar. Mr. Caviet has entered into an employment agreement with Maiden Holdings,
Ltd. to be its president and chief executive officer, with the expectation
that
he will be a full time Maiden employee by the end of 2007 (Maiden was formed
to
provide customized reinsurance products to subsidiaries of AmTrust and small
insurance companies and managing general agents in the United States and
Europe). Should any of our other 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, and our business may be adversely affected. We do not
currently maintain life insurance policies with respect to our executive
officers or other employees.
Our
business is dependent upon third party service providers.
We
use
third-party claims administrators and other outside companies to underwrite
policies and manage claims on our behalf for some portions of our business,
including our specialty middle-market property and casualty insurance segment.
We are dependent on the skills and performance of these parties, and we cannot
control their actions although we provide underwriting guidelines and
periodically audit their performance. In addition, the loss of the services
of
key outside service providers could adversely impact our business prospects
and
operations. The loss of the services of these providers, or our inability to
contract and retain other skilled service providers from a limited pool of
qualified insurance service providers, could delay or prevent us from fully
implementing our business strategy or could otherwise adversely affect the
Company.
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, England 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. 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. As of December 31, 2006 AmTrust’s insurance subsidiaries
could pay dividends to AmTrust of $105.8 million without prior regulatory
approval. Any dividends paid by AmTrust’s subsidiaries would reduce their
surplus.
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. 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 $12.7 million
and
$17.7 million, respectively, for the years ended December 31, 2006 and 2005.
These mandatory pooling arrangements caused our net combined ratio to increase
by 1% and 2.6% for the twelve months ended December 31, 2006 and 2005,
respectively. 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 legislative 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 in December 2004 and responded
to
the inquiry in January 2005. Subsequent to TIC’s response to such request, TIC
has not received further inquiries or comments from the New Hampshire Insurance
Department.
Recently,
as a result of complaints related to claims handling practices by insurers
in
the wake of the 2005 hurricanes that struck the gulf coast states, Congress
has
examined a possible repeal of the McCarran-Ferguson Act, which exempts the
insurance industry from federal anti-trust laws. We cannot assure you that
the
McCarran-Ferguson Act will not be repealed, or that any such repeal, if enacted,
would not have a material adverse effect on our business and results of
operations.
We
may have exposure to losses from terrorism for which we are required by law
to
provide coverage
regarding
such losses
.
U.S.
insurers are required by state and federal law to offer coverage for terrorism
in certain commercial lines. In response to the September 11, 2001 terrorist
attacks, the United States Congress enacted legislation designed to ensure,
among other things, the availability of insurance coverage for foreign terrorist
acts, including the requirement that insurers offer such coverage in certain
commercial lines. The Terrorism Risk Insurance Act of 2002 (“TRIA”) requires
commercial property and casualty insurance companies to offer coverage for
certain acts of terrorism and established a federal assistance program through
the end of 2005 to help such insurers cover claims related to future
terrorism-related losses. The Terrorism Risk Insurance Extension Act of 2005
(“TRIEA”) extends the federal assistance program through 2007, but it also has
set a per-event threshold that must be met before the federal program becomes
applicable and also increases the insurers’ statutory deductibles.
Pursuant
to TRIA, AmTrust’s insurance companies must offer insureds coverage for acts of
terrorism that are certified as such by the U.S. Secretary of the Treasury,
in
concurrence with the Secretary of State and the Attorney General, for an
additional premium or decline such coverage. Under TRIA, the federal government
agreed to reimburse commercial insurers for up to 85% of the losses due to
certified acts of terrorism in excess of a deductible which, for 2007, was
set
at 20% of the insurer’s direct earned commercial lines premiums for the
immediately preceding calendar year,
i.e.
,
2006.
We estimate that our deductible would be approximately $74.2 million for 2007.
Because there are substantial limitations and restrictions on the protection
against terrorism losses provided to us by our reinsurance and 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.
Under
TRIEA, the Federal government now agrees to reimburse commercial insurers only
after a per-event threshold, referred to as the program trigger, has been
reached. In the case of certified acts of terrorism taking place after March
31,
2006, the program trigger has been set at $100 million for industry-wide insured
losses occurring in 2007.
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.
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.
The
federal terrorism risk assistance provided by TRIA and TRIEA will expire at
the
end of 2007 and although legislation has recently been introduced in Congress
to
expand and extend such assistance, it is not currently clear whether that
assistance will be renewed. Any renewal may be on substantially less favorable
terms.
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
Our
revenues and results of operations may fluctuate as a result of factors beyond
our control, which many cause the price of our shares to be
volatile.
Our
common stock is listed on the Nasdaq under the symbol “AFSI”. However, the
market price for shares of our common stock may be highly volatile. Our
performance, as well as government or 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:
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actual
or anticipated variations in our quarterly results of
operations;
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changes
on our earnings estimates or publications of research reports about
us or
the industry;
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increase
in market interest rates that may lead purchasers of common stock
to
demand a higher yield;
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changes
in market valuations of other insurance companies;
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adverse
market reaction to any increased indebtedness we incur in the
future;
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additions
or departures of key personnel;
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actions
by institutional stockholders;
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reaction
to the sale or purchase of company stock by our principal stockholders
or
our executive officers;
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changes
in the economic environment in the markets in which we
operate;
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changes
in tax law;
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speculation
in the press or investment community; and
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general
market, economic and political
conditions.
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Our
principal stockholders have the ability to control our business, which may
be
disadvantageous to other stockholders.
Based
on
the number of shares outstanding as of December 31, 2006, George Karfunkel,
Michael Karfunkel and Barry D. Zyskind, directly or indirectly, collectively
beneficially own or control approximately 59.5% 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). A majority of our board of directors are independent. As a
controlled company, 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 apply to us, and we
have
organized our audit committee to meet these requirements.
If
we
were to cease being a controlled company as a result of issuance of common
stock
by us or sales of common stock by George Karfunkel, Michael Karfunkel or Barry
D. Zyskind, we would have to comply with the board committee independence
requirements of the Nasdaq within specified periods, which would involve having
an entirely independent compensation and governance and nominating committees
within one year after ceasing to be a controlled company. If we are unable
to
achieve compliance with these requirements, our common stock could be de-listed
from the Nasdaq.
In
addition, George Karfunkel and Michael Karfunkel through entities which
each of them control 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.
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.
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.
In
November 2006, we registered the resale of 25,568,000 shares of common stock
by
persons who purchased common stock in a private placement in February 2006
and
16,000 restricted shares issued to certain employees on September 1, 2006
pursuant to the Plan. These shares are freely tradable under the Act, except
for
any shares purchased by a person who is an affiliate of AmTrust.
Applicable
insurance laws regarding the change of control of our company may impede
potential acquisitions that our stockholders might consider to be
desirable.
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.
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.
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.
AIIC
is
domiciled in Florida. Before a person may acquire control of a Florida insurance
company, prior written approval must be obtained from the Florida Insurance
Commissioner. Prior to granting approval of an application to acquire control
of
a Florida insurer, the Florida 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 Florida 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 Florida Office
of
Insurance Regulation, 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 AIIC, the insurance change of
control laws of Florida would apply to such a transaction.
IGI
is
domiciled and registered in England and Wales and authorised by the Financial
Services Authority (the “FSA”). Before a person may acquire control of an FSA
authorised company (a “controller”), prior written approval must be obtained
from the FSA. Prior to granting approval of an application to acquire control
of
an FSA authorised company, the FSA will consider such factors as the financial
strength of the applicant, the fitness and propriety of the applicant’s board of
directors and executive officers, the acquirer’s plans for the future operations
of the insurer and the prejudice to the interests of policyholders that may
arise from the acquisition of control. Pursuant to the Financial Services and
Markets Act of 2000, a controller
in
relation to IGI
is
defined as
a person
or entity who falls within any of the following cases: where the person or
entity (a) holds 10% or more of the shares in IGI; or (b) is able to exercise
significant influence over the management of IGI through his shareholding in
IGI; or (c) holds 10% or more of the shares in a parent undertaking of IGI;
or
(d) is able to exercise significant influence over the management of a parent
undertaking through his shareholding in a parent undertaking; or (e) is entitled
to exercise, or control the exercise of, 10% or more of the voting power in IGI;
or (f) is able to exercise significant influence over the management of IGI
through his voting power in IGI; or (g) is entitled to exercise, or control
the
exercise of, 10% or more of the voting power in a parent undertaking; or (h)
is
able to exercise significant influence over the management of a parent
undertaking through his voting power in a parent undertaking. A parent
undertaking is an undertaking which has, amongst others, the following
relationship to another undertaking (“S”): (i) it holds a majority of the voting
rights in S; or (ii) it is a member of S and has the right to appoint or remove
a majority of its board of directors; or (iii) it has the right to exercise
a
dominant influence over S through provisions contained in S's memorandum or
articles or a control contract; or (iv) it is a member of S and controls alone,
under an agreement with other shareholders or members, a majority of the voting
rights in S; or (v) it has the power to exercise, or actually exercises,
dominant influence or control over S or it and S are managed on a unified basis;
or (vi) it is a parent undertaking of a parent undertaking of S.
Because
a
person acquiring 10% or more of our common stock would indirectly control the
same percentage of the stock of IGI, the insurance change of control laws of
England and Wales would apply to such a transaction.
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.
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, Florida, Ireland, England 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. As of December 31, 2006 AmTrust’s insurance subsidiaries
collectively could pay dividends to AmTrust of $105.8 million without prior
regulatory approval. Any dividends paid by AmTrust’s subsidiaries would reduce
their surplus. On September 1, 2006 our board of directors approved the payment
of a cash dividend of $0.02 per share on October 15, 2006. On December 12,
2006
our Board of Directors approved the payment of a cash dividend of $0.02 per
share on January 16, 2007 to the shareholders of record on January 2, 2007.
On
March 9, 2007 our Board of Directors approved the payment of a cash dividend
of
$0.02 per share on April 16, 2007 to the shareholders of record on April 2,
2007. On June 8, 2007 our Board of Directors approved the payment of a cash
dividend of $0.025 per share on July 16, 2007 to the shareholders of record
on
July 2, 2007. On September 7, 2007 our Board of Directors approved the payment
of a cash dividend of $0.025 per share on October 15, 2007 to the shareholders
of record on October 1, 2007.