AmTrust Financial Services Inc said it agreed to initially invest $42.5 million in a joint venture to acquire struggling GMAC's U.S. consumer property and casualty insurance business.

The joint venture is with American Capital Acquisition Corp, a newly formed acquisition corporation and an affiliate of American Capital Partners LLC, property and casualty insurer AmTrust said in a statement on Monday.

It's a nice move on their part to expand their scope, Fox-Pitt Kelton analyst Dan Schlemmer said.

They will have some significant benefits on the fee income side of their business as well, and it will increase their technology development which is something they've been strong in for a long time.

AmTrust is committed to make an additional payment of up to $22.5 million, it said in a regulatory filing, in a transaction expected to close in the first quarter of 2010.

Primarily it provides us immediate access to a new distribution force of 10,500 agents that will be equipped to cross sell our AmTrust products, AmTrust Chief Executive Barry Zyskind said in a statement.

The investment will also generate fee income from asset management services and underwriting profits through a contemplated reinsurance agreement, Zyskind said.

Detroit-based auto and mortgage lender GMAC has received $12.5 billion in government aid since December 2008, when it became a bank holding company, to combat mounting mortgage losses and falling vehicle sales.

GMAC has suffered heavy losses since the housing bubble burst in 2007 and more consumers defaulted on their loans. The company is the preferred lender to buyers of vehicles from General Motors and Chrysler.

GMAC's U.S. consumer property and casualty insurance business had a net written premium of more than $1 billion in 2008 and its coverage included standard and preferred auto, recreational vehicles, non-standard auto and commercial auto, AmTrust added.

GMAC said in its regulatory filing that its dealer-related insurance business, which includes extended service contracts and insurance for auto dealer inventories, was not affected by the deal and remained a part of GMAC's insurance platform.

AmTrust shares were up 21 cents at $11.98 in afternoon trade on Nasdaq. (Reporting by Anurag Kotoky and Matthias Williams in Bangalore; Editing by Ratul Ray Chaudhuri, Himani Sarkar)