• premium rates;

• investment results;

• legislative and regulatory changes;

• the estimation of loss reserves and loss reserve development;

• the ability to retain our ratings;

• reinsurance may be unavailable on acceptable terms, and we may be unable to collect reinsurance;

• the occurrence and effects of wars and acts of terrorism;

• the possibility that the outcome of any litigation or arbitration proceedings is unfavorable;

• the effects of competition;

• failure to retain key personnel;

• economic downturns; and

• natural disasters.

These forward-looking statements involve risks and uncertainties. You should carefully consider the risks described in our Annual Report on Form 10-K for the year ended December 31, 2007 and the risks described in our other filings with the SEC, together with all of the information included in this quarterly report. We qualify all of our forward looking statements by these cautionary statements. We undertake no obligation to update any of the forward looking statements after the date of this quarterly report to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law. Overview
We are a provider of workers' compensation insurance products. Our main business activities include underwriting primary workers' compensation policies, underwriting workers' compensation reinsurance and excess insurance policies, and providing fee-based management and other services to self-insured entities. We provide primary workers' compensation insurance to employers in California, Arizona, Florida, Nevada, New Jersey, New York, and other states. We reinsure some of the primary business we underwrite and provide excess workers' compensation coverage for self-insured organizations. We provide fee-based management services to self-insured groups in California.

We report our business in the following four segments: (1) primary insurance;
(2) reinsurance; (3) fee-based management services; and (4) corporate and other. Our primary insurance segment was added with our acquisition of Embarcadero on November 14, 2006. Drivers of Profitability
Industry Trends
Our business segments are affected by the trends of the workers' compensation insurance market. The workers' compensation insurance market has historically fluctuated with periods of low premium rates and excess underwriting capacity resulting from increased competition, followed by periods of high premium rates and shortages of underwriting capacity resulting from decreased competition. Our revenues have historically been generated primarily in California and New York. California's Premium Rates. Prior to the recent developments in the California market, we had experienced a downward trending in the premium rates charged by insurers. California Bill 899 was passed in April 2004 with the goal of reducing over time the medical and indemnity expenses incurred by insurance companies under workers' compensation policies. This legislation allowed insurers to reduce rates. During 2006 and the first half of 2007, the California Insurance Commissioner approved three workers' compensation advisory pure premium rate decreases. The California Insurance Commissioner first approved a 16% rate decrease for policies written after June 30, 2006, followed by a 9% rate decrease for policies written after December 31, 2006, which was followed by another 14.2% rate decrease for policies written after June 30, 2007. In November 2007, the California Insurance Commissioner recommended that there be no overall change in workers' compensation advisory pure premium rates for policies written on or after January 1, 2008. This was the first recommendation of no rate decrease by the California Insurance Commissioner since the adoption of the reforms of 2003 and 2004. Most recently, in March 2008, the Workers' Compensation Insurance Rating Bureau of California, or "WCIRB," an industry-backed private organization that provides statistical analysis, announced that it would not propose a July 1, 2008 pure premium rate change to the California Insurance Commissioner. The WCIRB concluded that recent indications did not warrant a rate change at this time. On May 9, 2008, the California Insurance Commissioner announced that stability in the workers' compensation insurance marketplace had eliminated the immediate need for an interim pure premium rate advisory. WCIRB data indicates that insurer pay-outs for workers' compensation benefit costs have been relatively level since 2005. The California Insurance Commissioner's decisions are advisory only and insurance companies may choose whether or not to adopt the new rates. New York's Premium Rates. Workers' compensation rates in New York have experienced significant pricing pressure because of declines in the regulatory rates. Following almost two years of relatively stable rates, in July 2007, the New York State Superintendent of Insurance ordered that overall policyholders' costs for workers' compensation be reduced by 20.5% effective October 1, 2007. This 20.5% reduction included both changes in the workers' compensation rates set by the New York State Workers' Compensation Board as well as a change to the New York State Assessment. The rate reduction was based upon an analysis of the impact of the reforms and market trends associated with New York's 2007 Workers' Compensation Reform Act signed into law in March 2007, which was intended to create a significantly less expensive system of workers' compensation in New York while increasing the weekly benefits paid to injured workers. The last change to the New York Workers' Compensation rates, prior to this rate reduction, was an increase in July 2005 averaging 5% across all industry groups that took effect in October 2005.
We believe that the self-insured group product which we offered was not as attractive during periods of low premium rates and excess underwriting capacity, as we are currently experiencing in New York, because of the risks associated with the joint and several liability of the members. The increased market competition and pricing pressure, combined with certain of the self-insured groups' status as being underfunded, were significant factors motivating our New York self-insured groups to voluntarily terminate their active operations during the second half of 2007 and first quarter of 2008. The groups' decisions to terminate stemmed from several factors that, when combined, would make the groups' remediation from underfunded to funded status difficult. The factors included significant reductions in the workers' compensation rates set by the New York State Workers' Compensation Board that are attributable to the employers of the groups, increased market competition and pricing pressures, past and anticipated member attrition, regulatory restrictions on discounts offered to the members and regulatory restrictions against adding new members.

As of April 1, 2008, we no longer have any self-insured groups under management in New York with active operations. We are continuing to administer claims for three of the self-insured groups, one of the groups until August 11, 2008 and the remaining two groups until September 8, 2008. A new third party administrator will thereafter be assigned to administer the claims of these groups. We have ceased to manage five of the self-insured groups, which are now being managed by a third-party administrator appointed by the New York Workers' Compensation Board. During the transitional period, we will not earn any fees in connection with the administration of these self-insured groups. In accordance with the terms of a settlement agreement entered into between us and the New York Workers' Compensation Board (as described in Part II. Other Information - Item 1 Legal Proceedings), we will surrender our third-party administrator's license in New York on September 8, 2008. We expect that revenues from our fee-based management services in New York will be minimal in 2008 and we do not expect to derive any significant revenues from fee-based management services in New York thereafter. In addition, we expect that primary insurance and reinsurance revenues from excess policies issued to these New York self-insured groups will be minimal in 2008 and thereafter as those policies were not renewed in 2008. We are seeking to replace lost revenue by identifying profitable opportunities through geographic and business diversification. This includes the geographic expansion of our primary insurance business into New York, by leveraging our strong broker distribution network to offer primary insurance policies for both new businesses as well as for former members of group self-insured programs.
Revenues
Our revenues consist primarily of the following:
Primary Insurance Net Premiums Earned. Primary insurance premiums earned are the elapsed portion of our net premiums written. Net premiums written is the difference between gross premiums written and premiums ceded or paid to reinsurers. Gross premiums written is the sum of both direct premiums and assumed premiums before the effect of ceded reinsurance. Premiums are earned over the terms of the related policies. At the end of each accounting period, the portion of the premiums that are not yet earned is included in unearned premiums and is realized as revenue in subsequent periods over the remaining terms of the policies.
Reinsurance Net Premiums Earned. Reinsurance premiums are earned over the terms of the related policies. At the end of each accounting period, the portion of the premiums that are not yet earned is included in unearned premiums and is realized as revenue in subsequent periods over the remaining terms of the policies. These premiums are reported in our reinsurance segment. Management Fees. Our fee-based management service revenues include management fees received from our groups for management and other services. Prior to the voluntary termination of our self-insured groups in New York, the fees we received from our New York groups were based on a percentage of the workers' compensation rates set by the New York Workers' Compensation Board that were attributable to the members of the groups we manage, and included fees for claims management services. With respect to our groups in California, our fees are based on a percentage of premiums paid by members to the groups we manage. Our groups in California pay fees for claims management services directly to third party administrators. In addition, we receive fees for medical bill review and case management services provided to the self-insured groups we manage and other third-parties, which are based on the specific services rendered. Investment Income. Our investment income is dependent upon the average invested assets in our portfolio and the yield that we earn on those invested assets. Our investment yield depends on market interest rates and the credit quality and maturity period of our invested assets. In addition, we realize capital gains or losses on sales of investments as a result of changing market conditions, including changes in market interest rates and changes in the credit quality of our invested assets.

Expenses
Our expenses consist primarily of the following:
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses reflect our best estimate, using various actuarial analyses, of ultimate losses and loss adjustment expenses, net of any reinsurance recoverables, that we expect to incur on each primary insurance and reinsurance contract written. Actual losses and loss adjustment expenses will depend on actual costs to settle our claims. Policy Acquisition Costs. Policy acquisition costs consist principally of commissions, premium taxes and certain underwriting and other policy issuance costs related to the production of new and renewal business.
Fees Paid to General Agents and Brokers. Fees paid to general agents and brokers consist primarily of commissions paid to general agents and brokers for binding the coverage of members in the self-insured groups we manage. Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of personnel expenses, professional fees and other operating costs.
Income Taxes. CRM USA Holdings and its U.S. subsidiaries are subject to U.S. federal, state and local income taxes, which reduce our net income. CRM Holdings and Twin Bridges have each received an undertaking from the Bermuda government exempting each company from all 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 until March 28, 2016.
A.M. Best Ratings & Reinsurance Agreements In April 2008, A.M. Best Co., Inc. ("A.M. Best") placed the financial strength ratings of Majestic and Twin Bridges under review with negative implications. The under review status stemmed from, among other things, limited capital being available in our insurance subsidiaries to support their anticipated growth and the 2007 capitalization levels at Majestic falling somewhat short of the requirement by A.M. Best for the ratings based on higher premium growth, partially attributable to previously self-insured business being written on a first dollar basis. In response to A.M. Best's concerns, we reallocated capital between our insurance subsidiaries, such that approximately $34.5 million was contributed as additional capital to Majestic. In addition to this, Majestic executed certain transactions relating to its reinsurance coverage. Majestic purchases reinsurance to reduce its net liability on individual risks and to protect against possible catastrophes. Reinsurance involves an insurance company transferring to, or ceding, a portion of the exposure on a risk to a reinsurer. The reinsurer assumes the exposure in return for a portion of our premium. Under excess of loss reinsurance, covered losses in excess of the retention level up to the limit of the program are paid by the reinsurer. Under quota share reinsurance, the reinsurer, or assuming company, accepts a pro rata share of the insurer's, or ceding company's, losses and an equal share of the applicable premiums. The assuming company also pays the ceding company a fee, known as a ceding commission, which is usually a percentage of the premiums ceded. Quota share reinsurance allows the ceding company to increase the amount of business it could otherwise write by sharing the risks with the assuming company. The effect of the quota share reinsurance on the ceding company is similar to increasing its capital, the principal constraint on the amount of business an insurance company can prudently write.
Based on A.M. Best's concern over limited capital being available to support its anticipated growth, Majestic entered into a 40% ceded quota share agreement with a securely rated third party reinsurer effective July 1, 2008. Under this 40% quota share agreement, the third party reinsurer will assume 40% of the first $500 thousand of losses and loss adjustment expenses from any single occurrence under Majestic's primary insurance policies and Majestic will cede 40% of the applicable premiums to the third party reinsurer. The agreement allows Majestic the option to decrease the percentage ceded to the third party reinsurer on the first day of each calendar quarter, although the percentage cannot be reduced below 5%. The reinsurer's losses are capped at 150% of the premiums ceded by Majestic. Majestic receives a 30% ceding commission from the reinsurer on all ceded premiums to cover Majestic's costs associated with the policies, including dividends, commissions, taxes, assessments and all other expenses other than allocated loss adjustment expenses. This 40% quota share agreement is effective for losses incurred and premiums earned by Majestic on or after July 1, 2008 through June 30, 2009. Under the terms of the quota share agreement, underwriting profit and investment income ceded to outside reinsurers could amount to $5.9 million annually. In addition, the domestication of the $34.5 million of invested assets will add substantially to investment income subject to U.S. taxation.

In addition, effective April 1, 2008, the 40% ceded quota share agreement between Majestic and Twin Bridges was amended to (i) decrease Twin Bridges proportional participation from 40% to 5% of the first $500,000 of losses and loss adjustment expenses of Majestic's primary insurance policies and
(ii) reduce the ceded premiums from Majestic to Twin Bridges from 40% to 5%. Majestic also renewed its excess of loss reinsurance treaty program effective July 1, 2008. This excess of loss reinsurance treaty program continues to provide $99.5 million of reinsurance protection, per occurrence, for workers' compensation losses in excess of a $500 thousand retention limit. Majestic retains liability for any amounts of losses and loss adjustment expenses that exceed $100 million up to the applicable statutory limit. The reinsurance program covers losses incurred between July 1, 2008 and the date on which the reinsurance agreements are terminated. Following the execution of these agreements, on July 18, 2008, A.M. Best announced that it had removed from under review with negative implications and affirmed the financial strength rating of "A-" (Excellent) of Majestic. Concurrently, A.M. Best removed from under review with negative implications and downgraded the financial strength rating to "B++" (Good) from "A-" (Excellent) of Twin Bridges.
Critical Accounting Policies and Estimates We have prepared a current assessment of our critical accounting policies and estimates in connection with preparing our interim unaudited consolidated financial statements as of and for the three and six months ended June 30, 2008 and 2007. Other than the adoption of FAS 157 and FSP FAS157-2, we believe that the accounting policies set forth in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2007 ("2007 Form 10-K") and "Critical Accounting Policies and Estimates" in the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations in our 2007 Form 10-K continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements.

Results of Operations
The table below summarizes certain operating results and key measures we use in
monitoring and evaluating our operations.

                                               Three Months Ended                Six Months Ended
                                                    June 30,                         June 30,
                                             2008               2007            2008          2007
                                                (Amounts in thousands, except per share data)
Revenues
Net premiums earned - primary
insurance segment                        $      34,910       $    27,521      $  52,427     $  44,373
Net premiums earned - reinsurance
segment                                          6,275             5,994         21,109        11,964
Fee-based management services                    3,088             8,094          6,840        17,607
Net investment income                            4,700             2,624          6,346         4,939

Total revenues                                  48,973            44,233         86,722        78,883

Expenses
Losses and loss adjustment expenses             26,172            19,969         40,137        32,979


Net Income                               $       3,050       $     5,159      $   8,025     $   8,056


Earnings per share - basic               $        0.19       $      0.32      $    0.49     $    0.49
Earnings per share - fully diluted       $        0.19       $      0.32      $    0.49     $    0.49

GAAP combined ratio - Primary
Insurance Segment
Loss and loss adjustment expense
ratio(1)                                          63.2 %            65.6 %         59.6 %        65.7 %
Underwriting expense ratio(2)                     24.1 %            21.5 %         27.5 %        26.3 %
GAAP combined ratio(3)                            87.3 %            87.1 %         87.1 %        92.0 %

GAAP combined ratio - Reinsurance
Segment
Loss and loss adjustment expense
ratio(1)                                          74.2 %            32.0 %         48.1 %        32.0 %
Underwriting expense ratio(2)                     27.1 %            23.4 %         28.5 %        25.7 %
GAAP combined ratio(3)                           101.3 %            55.4 %         76.6 %        57.7 %

(1) The loss and loss adjustment ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned.

(2) The underwriting expense ratio is calculated by dividing underwriting and certain other operating costs, commissions and salaries and benefits by the current year's net premiums earned.

(3) The GAAP combined ratio is the sum of the loss and loss adjustment expense ratio and the net underwriting expense ratio.

Segment Results Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Consolidated Results
Total Revenues. Consolidated total revenues increased 11%, or $4.8 million, to $49.0 million for the three months ended June 30, 2008, from $44.2 million for the three months ended June 30, 2007. The increase was primarily due to an increase of $7.7 million, or 23%, in our consolidated net premiums earned and a $2.1 million, or 80% increase in consolidated net investment income from 2007 to 2008. This increase was somewhat offset by decreases in revenues from our fee-based management services.
Total Expenses. Consolidated total expenses increased 17%, or $6.5 million, to $44.7 million for the three months ended June 30, 2008, from $38.2 million for the three months ended June 30, 2007. The increase was primarily attributable to increases in loss and loss adjustment expenses and policy acquisition costs, somewhat offset by decreases in selling, general and administrative expenses and fees paid to general agents and brokers.

Income before Taxes. Consolidated income before taxes decreased 30%, or $1.8 million, to $4.3 million for the three months ended June 30, 2008, from $6.1 million for the three months ended June 30, 2007. Decreases in our reinsurance and fee-based management services segments were somewhat offset by increases in our primary insurance segment.
Provision for Income Taxes. We recorded income tax expense of $1.2 million and $0.9 million for the three months ended June 30, 2008 and 2007, respectively. Our income tax provision represented the net income tax provision on taxable income of U.S. domiciled subsidiaries. CRM Holdings and Twin Bridges, our Bermuda domiciled subsidiaries, are not subject to U.S. income taxation. The income tax provision for the three months ended June 30, 2008 included a current tax provision of $1.1 million and a deferred tax provision of $0.1 million. The deferred tax provision was primarily due to temporary differences from net loss reserves, unearned premium reserves and deferred policy acquisition costs being reported differently for financial statement purposes than for federal income tax purposes.
The income tax provision for the three months ended June 30, 2007 included a current tax provision of $1.8 million and a deferred tax benefit of $0.9 million. The deferred tax benefit of $0.9 million for the three months ended June 30, 2007 was primarily due to temporary difference from net loss reserves, unearned premium reserves and deferred policy acquisition costs being reported differently for financial statement purposes for federal income tax purposes.
Net Income. Net income for the three months ended June 30, 2008 decreased 41%, or $2.1million, to $3.1 million from $5.2 million for the three months ended June 30, 2007. Net income as a percentage of revenues was 6.2% for the three months ended June 30, 2008 compared to 11.7% for the three months ended June 30, 2007. The decrease in net income in 2008 as compared with 2007 was due to a $3.0 million decrease in net income in our reinsurance segment and a $1.5 million decrease in net income at our fee-based management services segment. These decreases were somewhat offset by an increase in net income of $2.4 million in our primary insurance segment. Primary Insurance Segment
Net Premiums Earned. Total net premiums earned increased 27%, or $7.4 million, to $34.9 million for the three months ended June 30, 2008, from $27.5 million for the three months ended June 30, 2007. The increase was primarily attributable to the growth of primary insurance business in New York, California and New Jersey. These increases were somewhat mitigated because premiums for the three months ended June 30, 2007 included the one time effect of the Novation Agreement more fully described in our Form 10-K filing for the year ended December 31, 2007. This transaction resulted in $9.2 million of additional premiums in 2007. The increase in net premiums earned was also offset by a decrease in premiums due to the run off of the United States Longshore and Harbor Workers' business that we voluntarily ceased writing in 2007. Geographically, California remained our largest market, accounting for approximately $20.7 million, or 59%, of the total net primary insurance premiums earned during the three months ended June 30, 2008. Our Majestic east coast operations are continuing to develop business primarily in New Jersey and New York. The east coast operations contributed approximately $13.3 million, or 38%, of our net primary insurance premiums earned for the three months ended June 30, 2008. The remaining states in our active operating markets accounted for approximately $0.9 million, or 3%, of our net primary insurance premiums earned for the three months ended June 30, 2008.
Net Investment Income. Net investment income increased 137%, or $2.6 million, . . .