• premium rates;

• investment results;

• legislative and regulatory changes;

• the estimation of loss reserves and loss reserve development;

• 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 future 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. Effective September 8, 2008, the results of operations of our subsidiaries, CRM and Eimar, which historically were reported in the fee-based management services segment, are reported as discontinued operations for all periods presented. 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. In May 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 for policies written on or after June 30, 2008.
In August 2008, the Workers' Compensation Insurance Rating Bureau of California, or "WCIRB," an industry-backed private organization that provides statistical analysis, submitted a pure premium rate filing to the California Insurance Commissioner recommending a 16% increase in advisory pure premium rates for policies written on or after January 1, 2009. WCIRB's recommended increase was based primarily on rising medical costs and loss adjustment expenses. In October 2008, the California Insurance Commissioner announced a 5% increase in advisory pure premium rates for policies written on or after January 1, 2009. 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 since the legislative reforms adopted in March 2007. 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 an average of 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. In August 2008, it was announced that workers' compensation rates in New York will be reduced by an additional 5% percent for 2009, bringing the total reduction to about 25 percent from the 2007 pre-reform rates. The last change to the rate prior to the reform was an increase in July 2005 averaging 5% across all industry groups that took effect in October 2005.

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. Our fees are based on a percentage of premiums paid by members to the groups we manage. Our groups pay fees for claims management services directly to third party administrators.
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, which was 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 during the quarter ended June 30, 2008, so 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.

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 is assuming 40% of the first $500 thousand of losses and loss adjustment expenses from any single occurrence under Majestic's primary insurance policies and Majestic is ceding 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 is receiving 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. The 40% quota share agreement was effective for losses incurred and premiums earned by Majestic on or after July 1, 2008, and terminates as of June 30, 2009.
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%. Based on these actions and Majestic's July 1, 2008 renewal of its excess reinsurance treaty for losses in excess of $500,000, A.M. Best announced on July 18, 2008, 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 of Twin Bridges to "B++" (Good) from "A-" (Excellent). A.M. Best assigned a negative outlook to all ratings. A.M. Best's rating actions reflect Majestic's improved risk-adjusted capitalization following the implementation of our capital re-allocation plan, as well as the execution of a 40% quota share reinsurance arrangement with a third party reinsurer. Furthermore, the issues that were faced by CRM with the New York Workers' Compensation Board were settled with no admission of wrong doing, fines or penalties, although CRM agreed to surrender its third party administrator license. Despite this settlement, A.M Best remains concerned regarding our financial flexibility largely due to the significant decline in our stock market value, as well as the limited capital available through our insurance and non-insurance subsidiaries. The rating actions on Twin Bridges recognize the deterioration in its risk-adjusted capitalization primarily due to share dividends made in the second quarter of 2008 to us as part of our overall plan to re-allocate capital to Majestic.
Discontinued Operations - New York Fee-Based Management Services and Eimar 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 September 8, 2008, we no longer have any self-insured groups under management in New York. We have transferred administration of the claims for all of the self-insured groups to new third party administrators appointed by the New York Workers' Compensation Board, and in accordance with the terms of a settlement agreement entered into between us and the New York Workers' Compensation Board, we surrendered our third-party administrator's license in New York on September 8, 2008. We do not expect to derive any significant revenues from fee-based management services in New York going forward nor do we expect to incur any significant ongoing expenses in this component of fee-based management services. Furthermore, the surrendering of our administrator's license prohibits us from actively engaging in this business in New York. In addition, we do not expect to derive any significant primary insurance and reinsurance revenues from excess policies issued to New York self-insured groups as those policies were not renewed in 2008. In conjunction with the voluntary termination of the New York self-insured groups, the Company has ceased the operations of its Eimar division as historically, the majority of Eimar's business was derived from the New York self-insured groups under management.

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. For a further discussion of our discontinued operations, see "Item 1. Financial Statements - Note 2 Discontinued Operations" above. 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 nine months ended September 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                Nine months ended
                                                September 30,                    September 30,
                                           2008               2007            2008           2007
                                               (Amounts in thousands, except per share data)
Revenues
Net premiums earned - primary
insurance segment                      $      20,477       $    21,615      $  72,904      $  65,987
Net premiums earned - reinsurance
segment                                        4,027             7,310         25,136         19,275
Fee-based management services                  1,806             2,212          5,598          6,490
Net investment income                          2,922             2,944          9,272          7,831

Total revenues                                29,232            34,081        112,910         99,583

Expenses
Losses and loss adjustment expenses           19,841            14,201         61,230         47,180


(Loss) income from continuing
operations                                    (2,923 )           6,811          8,270         13,293

Loss on discontinued operations                 (843 )             340         (4,011 )        1,915


Net (loss) income                      $      (3,766 )     $     7,151      $   4,259      $  15,208


(Loss) earnings per share from
continuing operations
Basic                                  $       (0.18 )     $      0.42      $    0.50      $    0.82
Fully diluted                          $       (0.18 )     $      0.42      $    0.50      $    0.81

Loss per share from discontinued
operations
Basic                                  $       (0.05 )     $      0.02      $   (0.24 )    $    0.12
Fully diluted                          $       (0.05 )     $      0.02      $   (0.24 )    $    0.12

GAAP combined ratio - Primary
Insurance Segment
Loss and loss adjustment expense
ratio(1)                                        87.7 %            59.6 %         67.5 %         63.7 %
Underwriting expense ratio(2)                   47.7 %            30.5 %         33.2 %         27.7 %
GAAP combined ratio(3)                         135.4 %            90.1 %        100.7 %         91.4 %

GAAP combined ratio - Reinsurance
Segment
Loss and loss adjustment expense
ratio(1)                                        46.9 %            17.9 %         47.9 %         26.7 %
Underwriting expense ratio(2)                   29.6 %            16.6 %         28.7 %         22.9 %
GAAP combined ratio(3)                          76.5 %            34.5 %         76.6 %         49.6 %

(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 September 30, 2008 Compared to Three Months Ended September 30, 2007
Consolidated Results
Total Revenues. Consolidated total revenues decreased 14%, or $4.9 million, to $29.2 million for the three months ended September 30, 2008, from $34.1 million for the three months ended September 30, 2007. The decrease was primarily due to a decrease of $4.4 million, or 15%, in our consolidated net premiums earned and a $0.4 million, or 17% decrease in revenues from fee-based management services. Total Expenses. Consolidated expenses increased 25%, or $6.9 million, to $34.5 million for the three months ended September 30, 2008, from $27.6 million for the three months ended September 30, 2007. The increase was primarily attributable to increases in loss and loss adjustment expenses and selling, general and administrative expenses, somewhat offset by decreases in policy acquisition costs.
(Loss)Income from Continuing Operations before Taxes. Loss from continuing operations before taxes was $5.3 million for the three months ended September 30, 2008 as compared to income from continuing operations of $6.5 million for the three months ended September 30, 2007. Decreases in the operating results of our primary and reinsurance segments were somewhat offset by increases in the operating results of our fee-based management services and corporate and other segments. Provision for Income Taxes. We recorded an income tax benefit from continuing operations of $2.3 million and $0.3 million for the three months ended September 30, 2008 and 2007, respectively. Our income tax benefit represented the net income tax benefit on the loss for tax purposes of our U.S. domiciled subsidiaries that are included in continuing operations. CRM Holdings and Twin Bridges, our Bermuda domiciled subsidiaries, are not subject to U.S. income taxation. The income tax benefit for the three months ended September 30, 2008 included a current tax benefit of $1.8 million and a deferred tax benefit of $0.5 million. The deferred tax benefit 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 September 30, 2007 included a current tax provision of $0.1 million and a deferred tax benefit of $0.4 million. The deferred tax benefit of $0.4 million for the three months ended September 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 than for federal income tax purposes. Discontinued Operations. We recorded losses of $0.8 million and income of $0.3 million on discontinued operations for the three months ended September 30, 2008 and 2007, respectively. As of September 8, 2008 we no longer have any self-insured groups under management in New York and no longer provide bill review and case management services for self-insured groups or third party clients. Accordingly, the results of CRM and Eimar, which were historically reported in the fee-based management services segment, have been reclassified to discontinued operations for the three months ended September 30, 2008 and 2007. General and corporate overhead previously included in CRM and Eimar have been reclassified to continuing operations in our corporate and other segment as discussed in "Corporate and Other Segment - Selling, General and Administrative Expenses" below. Net (Loss) Income. Net loss for the three months ended September 30, 2008 was $3.8 million compared to net income of $7.2 million for the three months ended September 30, 2007. The decrease in net income in 2008 as compared with 2007 was due to a $6.5 million decrease in net income in our primary insurance segment, a $4.0 million decrease in our reinsurance segment and a $1.2 million loss from discontinued operations. These decreases were somewhat offset by an increase in net income of $0.9 million in our fee-based management services and corporate and other segments.

Primary Insurance Segment
Net Premiums Earned. Total net premiums earned decreased 5%, or $1.1 million, to $20.5 million for the three months ended September 30, 2008, from $21.6 million for the three months ended September 30, 2007. The decrease was primarily attributable to the effects of the 40% third party ceded quota share agreement which was effective July 1, 2008. While the gross earned premiums for our primary insurance segment increased by $4.1 million, or 14%, this increase was somewhat offset by a $5.3 million, or 18%, increase in ceded earned premiums under our various quota share reinsurance agreements, which are more fully described in "Item 1. Financial Statements - Note 8. Insurance Activity," for the three months ended September 30, 2008 as compared to the same period in 2007.
Geographically, California remained our largest market, accounting for . . .