UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-32705

CRM Holdings, Ltd.

Bermuda (State or other jurisdiction of incorporation or organization)		Not Applicable (I.R.S. Employer Identification No.)
PO Box HM 2062, Hamilton HM HX, Bermuda (Address of principal executive offices)		Not Applicable (Zip Code)

(441) 295-6689
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at November 12, 2009
Common Shares, $0.01 par value per share		16,467,362 shares
Class B Shares, $0.01 par value per share		395,000 shares

 

 

TABLE OF CONTENTS

		PAGE:
Part I. Financial Information			1
Item 1. Financial Statements			1
Item 2. Management’s Discussion and Analysis of Financial Results of Operations			31
Item 3. Quantitative and Qualitative Disclosures About Market Risk			54
Item 4. Controls and Procedures			54
Part II. Other Information			54
Item 1. Legal Proceedings			54
Item 1A. Risk factors			54
Item 6. Exhibits			55
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

CRM Holdings, Ltd.
Consolidated Balance Sheets

		Unaudited
		September 30,				December 31,
		2009				2008
		(Dollars in thousands)
Assets
Investments
Fixed-maturity securities, available-for-sale (amortized cost $300,020 and $308,607)		$	309,454			$	313,622
Short-term investments			9,261				113
Investment in unconsolidated subsidiary			1,083				1,083
Total investments			319,798				314,818
Cash and cash equivalents			35,734				28,044
Restricted cash and cash equivalents			874				2,000
Total cash and cash equivalents			36,608				30,044
Accrued interest receivable			2,491				3,184
Premiums receivable, net			7,876				11,935
Reinsurance recoverable and prepaid reinsurance			97,416				63,801
Accounts receivable, net			3,050				3,065
Receivable for investments sold			2,048				34
Deferred policy acquisition costs			894				1,084
Current income taxes, net			6,622				3,208
Deferred income taxes, net			—				7,809
Goodwill and other intangible assets			3,135				3,252
Prepaid expenses			1,863				1,836
Other assets			2,922				3,330
Total assets		$	484,723			$	447,400
Liabilities and shareholders’ equity
Reserve for losses and loss adjustment expenses		$	281,380			$	245,618
Reinsurance payable			12,892				9,424
Unearned premiums			12,648				13,090
Unearned management fees			77				26
Long-term debt and other secured borrowings			44,083				44,083
Payable for investments purchased			18,861				—
Other liabilities			29,777				26,299
Total liabilities			399,718				338,540
Common shares
Authorized 50 billion shares; $0.01 par value;
16.5 and 16.2 million common shares issued and outstanding			165				162
0.4 million Class B shares issued and outstanding			4				4
Additional paid-in capital			70,852				69,743
Retained earnings			7,852				35,619
Accumulated and other comprehensive gain, net of tax			6,132				3,332
Total shareholders’ equity			85,005				108,860
Total liabilities and shareholders’ equity		$	484,723			$	447,400

See Notes to Consolidated Financial Statements

CRM Holdings, Ltd.
Consolidated Statements of Operations
Comprehensive (Loss) Income (Unaudited)

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Amounts in thousand, except per share data)
Revenues
Net premiums earned		$	17,324			$	24,504			$	61,033			$	98,040
Fee-based management services			902				1,806				3,636				5,598
Investment income			3,529				2,922				9,561				9,272
Total revenues			21,755				29,232				74,230				112,910
Expenses
Losses and loss adjustment expenses			17,193				19,841				52,081				61,230
Policy acquisition costs			3,663				3,935				11,638				15,203
Fees paid to general agents and brokers			412				534				1,598				3,473
Selling, general and administrative expenses			6,880				9,275				28,500				22,189
Interest expense			952				922				2,739				2,799
Total expenses			29,100				34,507				96,556				104,894
(Loss) income from continuing operations before income taxes			(7,345	)			(5,275	)			(22,326	)			8,016
Tax provision (benefit) from continuing operations			8,313				(2,352	)			3,614				(254	)
(Loss) income from continuing operations			(15,658	)			(2,923	)			(25,940	)			8,270
Discontinued operations
Loss from discontinued operations before income taxes			(749	)			(1,307	)			(1,478	)			(6,008	)
Tax provision (benefit) from discontinued operations			594				(464	)			349				(1,997	)
Loss on discontinued operations			(1,343	)			(843	)			(1,827	)			(4,011	)
Net (Loss) Income		$	(17,001	)		$	(3,766	)		$	(27,767	)		$	4,259
(Loss) earnings per share from continuing operations
Basic		$	(0.93	)		$	(0.18	)		$	(1.55	)		$	0.50
Diluted		$	(0.93	)		$	(0.18	)		$	(1.55	)		$	0.50
Loss per share from discontinued operations
Basic		$	(0.08	)		$	(0.05	)		$	(0.11	)		$	(0.24	)
Diluted		$	(0.08	)		$	(0.05	)		$	(0.11	)		$	(0.24	)
Net (loss) earnings per share
Basic		$	(1.01	)		$	(0.23	)		$	(1.66	)		$	0.26
Diluted		$	(1.01	)		$	(0.23	)		$	(1.66	)		$	0.26
Weighted average shares outstanding
Basic			16,853				16,466				16,749				16,425
Diluted			16,853				16,466				16,749				16,425
Comprehensive (Loss) Income
Net (loss) income		$	(17,001	)		$	(3,766	)		$	(27,767	)		$	4,259
Other comprehensive gain (loss)
Gross unrealized investment holdings gains (losses) during the period			4,354				(2,608	)			6,221				(3,279	)
Less reclassification adjustment for gains included in net (loss) income			(1,058	)			(197	)			(1,801	)			(1,320	)
Income tax (provision) benefit on other comprehensive income			(1,157	)			948				(1,620	)			1,572
Total other comprehensive gain (loss)			2,139				(1,857	)			2,800				(3,027	)
Total comprehensive (loss) income		$	(14,862	)		$	(5,623	)		$	(24,967	)		$	1,232

See Notes to Consolidated Financial Statements

CRM Holdings, Ltd.
Consolidated Statements of Cash Flows (Unaudited)

		September 30,				September 30,
		2009				2008
		(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income		$	(27,767	)		$	4,259
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Depreciation and amortization			586				1,380
Amortization of unearned compensation, restricted stock			1,052				1,021
Amortization of premiums and discounts on available-for-sale investments			1,191				412
Net realized gains on sale and impairment of available-for-sale investments			(1,801	)			(1,320	)
Changes in deferred income taxes			6,190				56
Changes in:
Accrued interest receivable			693				(402	)
Premiums receivable			4,059				(2,338	)
Reinsurance recoverable and prepaid insurance			(33,615	)			(18,268	)
Accounts receivable, net			15				2,142
Deferred policy acquisition costs			190				(1,496	)
Goodwill and other intangible assets			—				196
Current income taxes, net			(3,414	)			(3,506	)
Prepaid expenses			(58	)			510
Other assets			63				(126	)
Reserve for losses and loss adjustment expenses			35,762				38,891
Reinsurance payable			3,468				12,356
Unearned premiums			(442	)			4,101
Unearned management fees			51				(95	)
Other liabilities			3,479				2,493
Net cash (used in) provided by operating activities			(10,298	)			40,266
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale investments			(294,544	)			(313,706	)
Proceeds from sales of available-for-sale investments			87,346				127,292
Proceeds from maturities of available-for-sale investments			216,395				138,134
Net purchase, sales and maturities for short-term investments			(9,148	)			694
(Increase) decrease in receivable for securities sold			(2,014	)			94
Increase in payable for investments purchased			18,861				10,862
Acquisition of intangible assets			—				(82	)
Purchases of fixed assets			(134	)			(674	)
Disposals of fixed assets			39				237
Payments on loans receivable, net			—				3
Net cash provided by (used in) investing activities			16,801				(37,146	)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in restricted cash and cash equivalents			1,126				—
Repayments under long-term debt and other secured borrowings			—				(1	)
Issuance of common shares — employee stock purchase plan			73				160
Retirement of common shares — share-based compensation			(12	)			(47	)
Net cash provided by financing activities			1,187				112
Net increase in cash			7,690				3,232
Cash and cash equivalents
Beginning			28,044				34,286
Ending		$	35,734			$	37,518

See Notes to Consolidated Financial Statements

CRM Holdings, Ltd.

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies

Organization

CRM Holdings, Ltd. (“CRM Holdings” or the “Company”) is a Bermuda holding company and 100% owner of CRM USA Holdings Inc. (“CRM USA Holdings”), a United States holding company, and Twin Bridges (Bermuda) Ltd. (“Twin Bridges”), a Bermuda company. The Company’s legal domicile is Bermuda, the jurisdiction in which it is incorporated.

CRM USA Holdings has two principal subsidiaries, Compensation Risk Managers of California, LLC (“CRM CA”), and Embarcadero Insurance Holdings, Inc. (“Embarcadero”). Embarcadero has one principal operating subsidiary, Majestic Insurance Company (“Majestic”), and has one dormant subsidiary, Great Western Insurance Services, Inc. (“Great Western”).

On May 6, 2009, Embarcadero sold its wholly-owned dormant subsidiary, Redhorse Insurance Company, Ltd. (“Redhorse”), to CRM Holdings. On May 14, 2009, Redhorse merged with Twin Bridges as the activities performed by Redhorse could be performed by Twin Bridges and there were no longer good economic reasons for the continued separate existence of Redhorse.

CRM USA Holdings has two other subsidiaries, Compensation Risk Managers, LLC (“CRM”) and Eimar, LLC (“Eimar”), neither of which has active business operations. The results of CRM and Eimar are reported as discontinued operations effective September 8, 2008, as more fully described in Note 2.

Former Co-Chief Executive Officers’ Severance

On March 13, 2009, Daniel G. Hickey Jr., resigned as the Company’s Chief Executive Officer, Chairman of the Board, and as a director and officer of the Company’s subsidiaries. The Company entered into a separation agreement with Mr. Hickey under which the Company (a) will make cash payments of $3.3 million over the next three years; (b) immediately vested and distributed 46 thousand shares of restricted stock; and (c) will pay medical and life insurance benefits for up to three years. The separation agreement prohibits Mr. Hickey from competing with the Company in the California self-insured market until March 13, 2012 and from soliciting employees and customers through March 13, 2011. In conjunction with Mr. Hickey’s separation agreement, the Company recorded $3.8 million of severance expense in the first quarter of 2009.

Previously, the Company recognized severance expense for Martin D. Rakoff, former Co-Chief Executive Officer and Deputy Chairman of the Board who resigned December 19, 2006, over the term of his non-complete/non-solicitation covenant, which expires December 2010. The Company accelerated the recognition of Mr. Rakoff’s severance expense and recorded the $1.5 million of remaining severance payments in the first quarter of 2009. Due to the Company’s decreased presence in the self-insured group market and the current economic and regulatory environment, the Company determined that there is not a significant ongoing economic benefit related to Mr. Hickey’s and Mr. Rakoff’s non-compete/non-solicitation covenants. Accordingly, $5.3 million of severance expense related to Mr. Hickey’s and Mr. Rakoff’s remaining severance payments was included in selling, general and administrative expenses in the first quarter of 2009.

CRM Holdings, Ltd.

Notes to Consolidated Financial Statements — (Continued)

Note 1. Nature of Business and Significant Accounting Policies, Continued

Basis of Accounting and Principles of Consolidation

The interim consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. The principles for condensed interim financial information do not require the inclusion of all the information and footnotes required by GAAP for complete financial statements. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (United States), but in the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial position and results of operations. The results of operations and cash flows for the nine months ended September 30, 2009 may not be indicative of the results that may be expected for the year ending December 31, 2009.

The interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The results of the fee-based operations of CRM and Eimar are presented as discontinued operations in the consolidated statements of operations. All significant inter-company transactions and balances have been eliminated upon consolidation. Business segment results are presented net of all material inter-segment transactions.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect certain reported amounts and disclosures. These estimates are inherently subject to change, and actual results may ultimately differ materially from those estimates.

Accounting Standards Codification

In June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 168, The FASB Accounting Standard Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (“FAS 168”) which establishes the Accounting Standards Codification (the “ASC”) and SEC interpretive releases as the sources for authoritative GAAP. The ASC supersedes all existing non-SEC accounting and reporting standards under GAAP effective July 1, 2009 and is effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009. The ASC is not intended to change existing GAAP. The adoption of the ASC changed the Company’s references to GAAP accounting standards but did not impact the Company’s financial condition and results of operations.

Reclassification

Certain prior period amounts have been reclassified to conform to the basis of presentation used in 2009.

CRM Holdings, Ltd.

Notes to Consolidated Financial Statements — (Continued)

Note 1. Nature of Business and Significant Accounting Policies, Continued

Recent Accounting Pronouncements Not Yet Effective

In June 2009, the FASB issued new guidance on accounting for the transfers of financial assets. The new guidance, which was issued as FASB Statement No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140, has not yet been adopted into the ASC. The new guidance eliminates the concept of a qualifying special-purpose entity (“QSPE”), clarifies and amends the derecognition criteria for a transfer to be accounted for as a sale, amends and clarifies the unit of account eligible for sale accounting and requires that a transferor initially measure at fair value and recognize all assets obtained and liabilities incurred as a result of a transfer of an entire financial asset or group of financial assets accounted for as a sale. Additionally, on and after the effective date, existing QSPEs must be evaluated for consolidation by reporting entities in accordance with the applicable consolidation guidance. The new guidance requires enhanced disclosures about, among other things, a transferor’s continuing involvement with transfers of financial assets accounted for as sales, the risks inherent in the transferred financial assets that have been retained, and the nature and financial effect of restrictions on the transferor’s assets that continue to be reported in the statement of financial position. The new guidance, effective for fiscal years beginning after November 15, 2009, affects financial asset transfers occurring on or after the effective date. Early adoption is prohibited. The Company is currently evaluating the potential impact, if any, of the adoption of the new guidance on its financial condition and results of operations.

In June 2009, the FASB issued revised guidance on the accounting for variable interest entities. The revised guidance, which was issued as FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R), has not yet been adopted into the ASC. The revised guidance amends the consolidation rules applicable to a variable interest entity (“VIE”). In addition, the revised guidance amends the rules governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is therefore required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis will include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE and requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Previous guidance required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. Finally, the revised guidance requires enhanced disclosures about an enterprise’s involvement with a VIE and is effective for fiscal years beginning after November 15, 2009, and for interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the potential impact, if any, of the adoption of the revised guidance on its financial condition and results of operations.

Note 2. Discontinued Operations

On September 8, 2008, the Company ceased operations of CRM and Eimar. Accordingly, the results of operations of CRM and Eimar are reported as loss from discontinued operations in the consolidated statements of operations and are excluded from our Fee-based Management Services segment.

CRM no longer has self-insured groups under management in New York. The administration of the claims for all of the New York self-insured groups was transferred to third party administrators appointed by the New York Workers’ Compensation Board, and in accordance with the terms of a settlement agreement entered into between CRM and the New York Workers’ Compensation Board, CRM surrendered its third-party administrator’s license in New York on September 8, 2008. The Company does not expect to derive any significant revenues from fee-based management services in New York currently or in the future and does not expect to incur any significant ongoing operating expenses, except for legal defense costs, in this component of fee-based management services. Furthermore, the surrendering of CRM’s administrator’s license prohibits CRM from actively engaging in this business in New York.

In conjunction with the voluntary termination of the New York self-insured groups, the Company has ceased the operations of Eimar, a provider of medical bill review and case management services, as historically, the majority of Eimar’s business was derived from these New York self-insured groups.

CRM Holdings, Ltd.

Notes to Consolidated Financial Statements — (Continued)

Note 2. Discontinued Operations, Continued

Results for discontinued operations were as follows:

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Dollars in thousands)
Revenues		$	3			$	517			$	(39	)		$	3,560
Expenses			752				1,824				1,439				9,568
Loss from discontinued operations before income taxes		$	(749	)		$	(1,307	)		$	(1,478	)		$	(6,008	)

Medical bill review services for Majestic and certain self-insured groups managed by CRM CA were performed by the Company until the medical bill review function was transitioned to a third party medical bill review provider. This transition was completed in the third quarter of 2009.

For the three and nine months ended September 30, 2009, expenses primarily consisted of $0.8 million and $1.4 million, respectively, of legal defense costs related to the pending regulatory proceedings and litigation described in Note 12.

Note 3. Earnings per Share

Basic earnings per share is calculated using the weighted average number of common and Class B shares outstanding and excludes any dilutive effects of warrants, options and convertible securities. As of September 30, 2009 and 2008, there were 461 thousand and 436 thousand restricted shares outstanding, respectively, and no warrants, options or convertible securities outstanding during the periods ended September 30, 2009 and 2008.

CRM Holdings, Ltd.

Notes to Consolidated Financial Statements — (Continued)

Note 3. Earnings per Share, Continued

The following tables show the computation of the Company’s earnings per share:

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Amounts in thousands, except per share amounts)
Net (loss) income from continuing operations (Numerator — Basic and diluted earnings per share from continuing operations)		$	(15,658	)		$	(2,923	)		$	(25,940	)		$	8,270
Net loss from discontinued operations (Numerator — Basic and diluted earnings per share from discontinued operations)			(1,343	)			(843	)			(1,827	)			(4,011	)
Net (loss) income allocated to common shares (Numerator — Basic and diluted earnings per share)			(17,001	)			(3,766	)			(27,767	)			4,259
Weighted-average basic shares outstanding (Denominator — basic earnings per share)			16,853				16,466				16,749				16,425
Dilutive effect of unvested shares			—				—				—				—
Weighted-average diluted shares outstanding (Denominator — diluted earnings per share)			16,853				16,466				16,749				16,425
Basic (loss) earnings per share from continuing operations		$	(0.93	)		$	(0.18	)		$	(1.55	)		$	0.50
Diluted (loss) earnings per share from continuing operations		$	(0.93	)		$	(0.18	)		$	(1.55	)		$	0.50
Basic loss per share from discontinued operations		$	(0.08	)		$	(0.05	)		$	(0.11	)		$	(0.24	)
Diluted loss per share from discontinued operations		$	(0.08	)		$	(0.05	)		$	(0.11	)		$	(0.24	)
Basic (loss) earnings per share		$	(1.01	)		$	(0.23	)		$	(1.66	)		$	0.26
Diluted (loss) earnings per share		$	(1.01	)		$	(0.23	)		$	(1.66	)		$	0.26

Diluted earnings per share is calculated assuming conversion of dilutive convertible securities and the exercise of all dilutive stock options and warrants using the treasury stock method. For the three and nine months ended September 30, 2009, 461 thousand and 331 thousand restricted shares, respectively, were excluded from the computation of diluted earnings per share because their effects were anti-dilutive. For the three and nine months ended September 30, 2008, 436 thousand and 404 thousand restricted shares, respectively, were excluded from the computation of diluted earnings per share because their effects were anti-dilutive.

CRM Holdings, Ltd.

Notes to Consolidated Financial Statements — (Continued)

Note 4. Investments

The amortized cost, gross unrealized gains, gross unrealized losses and fair value of the Company’s available-for-sale investments are shown in the tables below:

						Gross				Gross
		Amortized				Unrealized				Unrealized
As of September 30, 2009		Cost				Gains				Losses				Fair Value
		(Dollars in thousands)
U.S. Treasury securities		$	63,600			$	1,514			$	—			$	65,114
Government sponsored agency securities			18,862				873				—				19,735
Obligations of states and political subdivisions			81,847				3,728				21				85,554
Corporate and other obligations			76,186				2,306				147				78,345
Asset-backed obligations			9,036				387				—				9,423
Mortgage-backed obligations			50,489				794				—				51,283
Total investment securities, available-for-sale		$	300,020			$	9,602			$	168			$	309,454

						Gross				Gross
		Amortized				Unrealized				Unrealized
As of December 31, 2008		Cost				Gains				Losses				Fair Value
		(Dollars in thousands)
U.S. Treasury securities		$	48,649			$	2,576			$	—			$	51,225
Government sponsored agency securities			41,143				1,400				—				42,543
Obligations of states and political subdivisions			102,189				2,553				462				104,280
Corporate and other obligations			48,634				623				1,258				47,999
Asset-backed obligations			9,054				—				799				8,255
Mortgage-backed obligations			58,938				382				—				59,320
Total investment securities, available-for-sale		$	308,607			$	7,534			$	2,519			$	313,622

The amortized cost and estimated fair value of the Company’s available-for-sale investments at September 30, 2009 by contractual maturity are set forth below. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

		September 30, 2009
		(Dollars in thousands)
		Amortized Cost				Fair Value
Due in one year or less		$	34,081			$	34,577
Due after one year through five years			129,227				134,659
Due after five years through ten years			61,264				63,119
Due after ten years			15,923				16,393
			240,495				248,748
Mortgage and asset-backed			59,525				60,706
Total investment securities, available-for-sale		$	300,020			$	309,454

CRM Holdings, Ltd.

Notes to Consolidated Financial Statements — (Continued)

Note 4. Investments, Continued

The following table sets forth the gross unrealized losses included in accumulated other comprehensive losses as of September 30, 2009 and December 31, 2008 related to available-for-sale fixed-maturity securities. The table segregates investments that have been in a continuous unrealized loss position for less than 12 months from those that have been in a continuous unrealized loss position for twelve months or longer.

		Less than 12 months								12 months or more								Total
						Unrealized								Unrealized								Unrealized
As of September 30, 2009		Fair Value				Loss				Fair Value				Loss				Fair Value				Loss
		(Dollars in thousands)
Obligations of states and political subdivisions		$	6,447			$	20			$	101			$	1			$	6,548			$	21
Corporate and other obligations			7,972				7				2,063				140				10,035				147
Total investment securities, available-for-sale		$	14,419			$	27			$	2,164			$	141			$	16,583			$	168

		Less than 12 months								12 months or more								Total
						Unrealized								Unrealized								Unrealized
As of December 31, 2008		Fair Value				Loss				Fair Value				Loss				Fair Value				Loss
		(Dollars in thousands)
Obligations of states and political subdivisions		$	7,496			$	115			$	3,868			$	347			$	11,364			$	462
Corporate and other obligations			17,227				815				3,324				443				20,551				1,258
Asset-backed obligations			8,255				799				—				—				8,255				799
Total investment securities, available-for-sale		$	32,978			$	1,729			$	7,192			$	790			$	40,170			$	2,519

There were 10 and 48 available-for-sale investments whose fair values were less than their amortized cost at September 30, 2009 and December 31, 2008, respectively.

CRM Holdings, Ltd.

Notes to Consolidated Financial Statements — (Continued)

Note 4. Investments, Continued

In April 2009, the FASB issued new guidance for the accounting for other-than-temporary impairments. Under the new guidance, which is now part of ASC 320, Investments — Debt and Equity Securities, the Company is required to separate an other-than-temporary impairment of a debt security into two components when there are credit losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. The amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive loss.

The Company is holding one fixed-maturity security issued by Lehman Brothers Holdings Inc. (“Lehman”) that was determined to be other-than-temporarily impaired. In September 2008, the Company recorded impairment charges on this investment as a result of Lehman’s bankruptcy filing. Consequently, the Company has determined that the other-than-temporary impairment was entirely due to credit loss and the adoption of the new other-than-temporary impairment guidance did not result in any cumulative-effect adjustment to the Company’s beginning retained earnings at April 1, 2009 or any material impact on its financial condition or results of operations.

The Company regularly evaluates its fixed income securities to determine whether impairment represents other-than-temporary declines in the fair value of the investments. Criteria considered during this process includes but is not limited to:

•

the current fair value as compared to the cost of the security;

•

degree and duration of the security’s fair value being below cost;

•

the Company’s intent not to sell, or more likely than not be required to sell the security for a sufficient time period for it to recover its value;

•

financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations or earnings;

•

credit quality and any downgrades of the security by a rating agency; and

•

nonpayment of scheduled interest payments.

Part of the evaluation of whether particular securities are other-than-temporarily impaired involves assessing whether the Company has both the intent and ability to continue to hold securities in an unrealized loss position until recovery. Significant changes in these factors could result in a charge to net earnings for impairment losses. Impairment losses result in a reduction of the underlying investment’s cost basis. Impairment losses are included in realized losses and are a component of investment income in the consolidated statements of operations.

In order to maximize after tax yields of the investment portfolio, the Company began liquidating its municipal bond portfolio in the second quarter of 2009. Proceeds from the liquidation are being reinvested in taxable fixed-maturity securities. As a result, the Company recorded gross realized gains of $1.4 million for the nine months ended September 30, 2009. Realized losses included $0.1 million of impairment charges related to municipal securities that were determined to be other-than-temporarily impaired as the Company’s intent is to sell its remaining municipal bond securities.

The Company determined that the decline in fair value of its remaining available-for-sale investments is temporary based on the Company’s analysis of the securities, considering timing, liquidity, financial condition of the issuers, actual credit losses to date, severity and duration of the impairment and the Company’s intent not to sell, or more likely than not be required to sell, the securities for a sufficient period of time for anticipated recovery.

CRM Holdings, Ltd.

Notes to Consolidated Financial Statements — (Continued)

Note 4. Investments, Continued

Based upon changes in the investment environment and in order to protect its capital adequacy, the Company liquidated its equity securities portfolio during the second quarter of 2008. As a result, for the nine months ended September 30, 2008, the Company recorded gross realized gains of $3.2 million and gross realized losses of $2.2 million on the liquidation of its equity portfolio, including losses on equity securities that historically were determined to be other-than-temporarily impaired.

The sources of investment income from continuing operations were as follows:

		Nine months ended
		September 30,
		2009				2008
		(Dollars in thousands)
Interest income on cash and cash equivalents		$	54			$	885
Interest income on fixed-maturity securities			8,339				7,554
Interest income on other investments			70				70
Dividends			—				242
Realized gains on investments			2,052				4,382
Realized losses on investments			(251	)			(3,062	)
Investment income before investment expenses			10,264				10,071
Investment expenses			(703	)			(799	)
Total investment income		$	9,561			$	9,272

The Company had available-for-sale and short-term investments with a fair value of $181.0 million and $149.0 million, at September 30, 2009 and December 31, 2008, respectively, on deposit with various regulatory agencies as required by law. At September 30, 2009 and December 31, 2008, investments with a fair value of $0.8 million have been pledged as security under letter of credit facilities to secure reserves assumed under third party ceded quota share agreements.

Note 5. Fair Value of Financial Instruments

In April 2009, the FASB issued new guidance related to the disclosure of the fair value of financial instruments. The new guidance, which is now part of ASC 825, Financial Instruments, requires disclosures about fair value of financial instruments in interim financial statements, as well as in annual financial statements. The new guidance requires disclosure of fair value information about financial instruments for which it is practical to estimate such fair value and excludes certain insurance related financial assets and liabilities and all non-financial instruments. The adoption did not have a material effect on the Company’s consolidated financial condition and results of operations.

Fixed-maturity securities — Fair value disclosures have been categorized according to the fair value hierarchy prescribed within the “Fair Value Measurements” section below.

Short-term investments, investment in unconsolidated subsidiary and cash and cash equivalents — The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair value.

Premiums and accounts receivable and reinsurance payable — The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair value.

CRM Holdings, Ltd.

Notes to Consolidated Financial Statements — (Continued)

Note 5. Fair Value of Financial Instruments, Continued

Long-term debt and other secured borrowings — The carrying value and fair value of the Company’s long-term debt and other secured borrowings at September 30, 2009 were $44.1 million and $31.8 million, respectively. The fair value was estimated based on the average accepted price of successful tender offers for recent similar transactions of financial services companies.

Fair Value Measurement

Under the framework established in the fair value accounting guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants at the measurement date.

The fair value guidance establishes a three-level hierarchy for fair value measurements that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”) and requires that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

•

Level 1 — Valuation based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Financial assets utilizing Level 1 inputs include U.S. Treasury securities.

•

Level 2 — Valuation based on quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, etc.) or can be corroborated by observable market data. Financial assets utilizing Level 2 inputs include: U.S. government and agency securities; non-U.S. government obligations; corporate and municipal bonds; and mortgage-backed securities.

•

Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company’s own assumptions about assumptions that market participants might use. The Company has no Level 3 financial assets.

The Company outsources its investment accounting services to a third party. The third party uses nationally recognized pricing services to estimate fair value measurements for its available-for-sale investment portfolio. These pricing services include FT Interactive Data, Hub Data, J. J. Kenny, Standard & Poors, Reuters and the Bloomberg Financial Market Services. The pricing services use market quotations for securities that have quoted prices in active markets. When quoted prices are unavailable, other significant observable inputs are used, such as pricing models or other financial analytical methods. To validate the techniques or models used by the pricing services, the Company compares the fair value estimates to its perception of the current market and challenges any prices deemed not to be representative of fair value.

CRM Holdings, Ltd.

Notes to Consolidated Financial Statements — (Continued)

Note 5. Fair Value of Financial Instruments, Continued

The following table presents the level within the fair value hierarchy at which the Company’s financial assets are measured on a recurring basis at September 30, 2009:

		Total				Level 1				Level 2				Level 3
		(Dollars in thousands)
U.S. Treasury securities		$	65,114			$	65,114			$	—			$	—
Government sponsored agency securities			19,735				—				19,735				—
Obligations of states and political subdivisions			85,554				—				85,554				—
Corporate and other obligations			78,345				—				78,345				—
Asset-backed obligations			9,423				—				9,423				—
Mortgage-backed obligations			51,283				—				51,283				—
Total investment securities, available-for-sale		$	309,454			$	65,114			$	244,340			$	—

In February 2008, the FASB issued new guidance for the accounting for non-financial assets and non-financial liabilities. The new guidance, which is now part of ASC 820, Fair Value Measurements and Disclosure (“ASC 820”), requires nonfinancial assets and nonfinancial liabilities that are measured on a nonrecurring basis in periods subsequent to initial recognition to be classified and disclosed based on the three level hierarchy described above. No triggering events occurred for the nine months ended September 30, 2009 that would require additional disclosure prescribed by applying the provisions of FAS 157 to nonfinancial assets and nonfinancial liabilities.

In April 2009, the FASB issued new guidance for determining when a transaction is not orderly and for estimating fair value when there has been a significant decrease in the volume and level of activity for an asset or liability. Under the new guidance, which is now part of ASC 820, if an entity determines that there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any, weight on that transaction price as an indicator of fair value. The adoption of the new guidance did not have a material effect on the Company’s consolidated financial condition and results of operations.

Note 6. Deferred Policy Acquisition Costs

Changes in deferred policy acquisition costs are as follows:

		Nine months ended
		September 30,
		2009				2008
		(Dollars in thousands)
Balance at beginning of period		$	1,084			$	623
Policy acquisition costs deferred
Ceding commissions			(10,408	)			(2,933	)
Commissions			10,949				11,433
Premiums and federal excise taxes			2,772				3,111
Other			8,135				5,088
			11,448				16,699
Amortization of policy acquisition costs			(11,638	)			(15,203	)
Net change			(190	)			1,496
Balance at end of period		$	894			$	2,119

CRM Holdings, Ltd.

Notes to Consolidated Financial Statements — (Continued)

Note 7. Other Intangible Assets

In April 2008, the FASB issued revised guidance on determining the useful life of intangible assets. The revised guidance, which is now part of ASC 350, Intangibles — Goodwill and Other, amends the factors that an entity should consider in determining the useful life of a recognized intangible asset to include the entity’s historical experience in renewing or extending similar arrangements, whether or not the arrangements have explicit renewal or extension provisions. The amendment may result in the useful life of an entity’s intangible asset differing from the period of expected cash flows that was used to measure the fair value of the underlying asset using the market participant’s perceived value.

The Company’s information technology other intangible asset represents the prepaid costs for the outsourcing of its entity wide information technology function. The cost of the information technology other intangible asset is amortized over its contractual life. Should the Company renew or extend the term of the contract to outsource its entity wide information technology function, costs incurred would be amortized over the term of the renewal or extension contract.

Note 8. Losses and Loss Adjustment Expenses

Activity in the reserve for losses and loss adjustment expenses is as follows:

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Dollars in thousands)
Gross liability beginning of period		$	272,002			$	208,865			$	245,617			$	188,848
Less reinsurance recoverable			(77,127	)			(37,401	)			(55,502	)			(35,488	)
Net liability at beginning of period			194,875				171,464				190,115				153,360
Incurred losses and LAE relating to:
Current year			15,767				21,430				50,624				71,189
Prior years			1,426				(1,589	)			1,457				(9,959	)
Total incurred losses and LAE			17,193				19,841				52,081				61,230
Paid losses and LAE relating to:
Current year			(5,659	)			(4,915	)			(9,758	)			(10,126	)
Prior years			(12,549	)			(7,461	)			(38,578	)			(25,535	)
Total paid losses and LAE			(18,208	)			(12,376	)			(48,336	)			(35,661	)
Net liability at end of period			193,860				178,929				193,860				178,929
Plus reinsurance recoverable			87,520				48,809				87,520				48,809
Gross liability at end of period		$	281,380			$	227,738			$	281,380			$	227,738

As a result of changes in estimates of insured events in prior years, the Company had unfavorable development of $1.4 million for the three months ended September 30, 2009, as compared to $1.6 million of favorable development for the three months ended September 30, 2008. During the three months ended September 30, 2009, unfavorable development of $2.8 million in our primary insurance policy business was offset by favorable development of $1.5 million in our excess insurance policy business.

For the nine months ended September 30, 2009, the Company had unfavorable development of $1.5 million as compared to $10.0 million of favorable development for the nine months ended September 30, 2008. During the nine months ended September 30, 2009, unfavorable development of $3.1 million in our primary insurance policy business was offset by favorable development of $1.7 million in our excess insurance policy business.

CRM Holdings, Ltd.

Notes to Consolidated Financial Statements — (Continued)

Note 8. Losses and Loss Adjustment Expenses, Continued

During the nine months ended September 30, 2009, the Company changed its method of selecting the point estimate for loss reserves associated with excess insurance policies written in New York. Management historically established loss reserves on excess insurance policies at the actuary’s best estimate of expected outcomes for most assumed risks and at a higher, moderately conservative level for risks originating from excess insurance policies issued to self-insured groups in New York. Following the transfer of the claims administration of the New York self-insured groups, as discussed above in Note 2, the new third party administrators changed the underlying methodology used to establish reserves for losses and loss adjustment expenses which resulted in a significant increase in case reserves. In light of the new reserving methodology being used by the third party administrators of the New York self-insured groups, management determined that continuing to establish reserves for risks originating from excess insurance policies issued to self-insured groups in New York at a higher, moderately conservative level would lead to redundant reserves associated with these risks. Consequently, management now establishes reserves for losses and loss adjustment expenses originating from excess insurance policies issued to New York self-insured groups at the actuary’s best estimate. Favorable loss reserve development in prior accident years and this change in reserving methodology resulted in the recognition of favorable development from risks originating in New York for the three and nine months ended September 30, 2009.

Note 9. Insurance Activity

The Company’s financial statements reflect the effects of direct insurance and assumed and ceded reinsurance activity. The activities of Majestic are included in the Primary Insurance segment, and the activities of Twin Bridges are included in the Reinsurance segment. All inter-company transactions are eliminated upon consolidation.

A summary of direct insurance and ceded and assumed reinsurance transactions in the affected segment is as follows:

		For the three months ended September 30, 2009
		Primary
		Insurance				Reinsurance
		Segment				Segment				Eliminations				Consolidated
		(Dollars in thousands)
Written premiums
Direct		$	38,474			$	—			$	—			$	38,474
Assumed			288				3,322				(3,322	)			288
Ceded			(23,297	)			—				3,322				(19,975	)
Net written premiums		$	15,465			$	3,322			$	—			$	18,787
Earned premiums
Direct		$	40,061			$	1			$	—			$	40,062
Assumed			289				3,211				(3,211	)			289
Ceded			(26,238	)			—				3,211				(23,027	)
Net earned premiums		$	14,112			$	3,212			$	—			$	17,324
Losses and loss adjustment expenses
Direct		$	33,651			$	(22	)		$	—			$	33,629
Assumed			(71	)			1,351				(1,351	)			(71	)
Ceded			(17,716	)			—				1,351				(16,365	)
Net losses and loss adjustment expenses		$	15,864			$	1,329			$	—			$	17,193

CRM Holdings, Ltd.

Notes to Consolidated Financial Statements — (Continued)

Note 9. Insurance Activity, Continued

		For the three months ended September 30, 2008
		Primary
		Insurance				Reinsurance
		Segment				Segment				Eliminations				Consolidated
		(Dollars in thousands)
Written premiums
Direct		$	43,642			$	179			$	—			$	43,821
Assumed			51				(474	)			474				51
Ceded			(26,708	)			—				(474	)			(27,182	)
Net written premiums		$	16,985			$	(295	)		$	—			$	16,690
Earned premiums
Direct		$	42,484			$	45			$	—			$	42,529
Assumed			51				3,982				(3,982	)			51
Ceded			(22,058	)			—				3,982				(18,076	)
Net earned premiums		$	20,477			$	4,027			$	—			$	24,504
Losses and loss adjustment expenses
Direct		$	33,450			$	(81	)		$	—			$	33,369
Assumed			44				1,955				(2,001	)			(2	)
Ceded			(15,542	)			15				2001				(13,526	)
Net losses and loss adjustment expenses		$	17,952			$	1,889			$	—			$	19,841

		For the nine months ended September 30, 2009
		Primary
		Insurance				Reinsurance
		Segment				Segment				Eliminations				Consolidated
		(Dollars in thousands)
Written premiums
Direct		$	117,266			$	6			$	—			$	117,272
Assumed			2,006				9,001				(9,001	)			2,006
Ceded			(63,257	)			—				9,001				(54,256	)
Net written premiums		$	56,015			$	9,007			$	—			$	65,022
Earned premiums
Direct		$	114,887			$	97			$	—			$	114,984
Assumed			2,007				7,693				(7,693	)			2,007
Ceded			(63,651	)			—				7,693				(55,958	)
Net earned premiums		$	53,243			$	7,790			$	—			$	61,033
Losses and loss adjustment expenses
Direct		$	98,567			$	(22	)		$	—			$	98,545
Assumed			1,005				5,260				(5,260	)			1,005
Ceded			(52,729	)			—				5,260				(47,469	)
Net losses and loss adjustment expenses		$	46,843			$	5,238			$	—			$	52,081

CRM Holdings, Ltd.

Notes to Consolidated Financial Statements — (Continued)

Note 9. Insurance Activity, Continued

		For the nine months ended September 30, 2008
		Primary
		Insurance				Reinsurance
		Segment				Segment				Eliminations				Consolidated
		(Dollars in thousands)
Written premiums
Direct		$	128,186			$	179			$	—			$	128,365
Assumed			194				24,228				(24,228	)			194
Ceded			(56,962	)			—				24,228				(32,734	)
Net written premiums		$	71,418			$	24,407			$	—			$	95,825
Earned premiums
Direct		$	121,939			$	176			$	—			$	122,115
Assumed			194				24,981				(24,981	)			194
Ceded			(49,229	)			(21	)			24,981				(24,269	)
Net earned premiums		$	72,904			$	25,136			$	—			$	98,040
Losses and loss adjustment expenses
Direct		$	81,518			$	27			$	—			$	81,545
Assumed			126				12,023				(12,098	)			51
Ceded			(32,461	)			(3	)			12,098				(20,366	)
Net losses and loss adjustment expenses		$	49,183			$	12,047			$	—			$	61,230