UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2010

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________

Commission file number: 001-32705

Majestic Capital, Ltd.

(Exact name of registrant as specified in its charter)

Bermuda		98-0521707
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

P.O. Box HM 2062, Hamilton HM HX Bermuda		Not Applicable
(Address of principal executive offices)		(Zip Code)

(441) 295-6689

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, $1.00 par value per share		The NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No ý

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 o No ý

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

As of June 30, 2010, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $4,661,826 based on the closing sale price as reported on the National Association of Securities Dealers Automated Quotation System Capital Market.

The number of shares of the registrant’s common shares outstanding as of April 21, 2011 was 1,668,070.

INCORPORATION BY REFERENCE

Portions of the proxy statement for the registrant’s annual meeting of shareholders to be filed subsequently with the Securities and Exchange Commission pursuant to Regulation 14A, are incorporated by reference in Part III of this Annual Report on Form 10-K.

TABLE OF CONTENTS
Page
Information Concerning Definitions and Financial Information			i
Forward Looking Statements			i
Part I			3
	Item 1.	Business	3
	Item 1A.	Risk Factors	33
	Item 1B.	Unresolved Staff Comments	51
	Item 2.	Properties	52
	Item 3.	Legal Proceedings	52
	Item 4.	Reserved	62
Part II			62
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	62
	Item 6.	Selected Financial Data	63
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	66
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	95
	Item 8.	Financial Statements and Supplementary Data	97
	Item 9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	150
	Item 9A.	Controls and Procedures	150
	Item 9B.	Other Information	150
Part III			151
	Item 10.	Directors, Executive Officers and Corporate Governance	151
	Item 11.	Executive Compensation	151
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	151
	Item 13.	Certain Relationships and Related Transactions	152
	Item 14.	Principal Accounting Fees and Services	152
Part IV			152
	Item 15.	Exhibits, Financial Statement Schedules	152

INFORMATION CONCERNING DEFINITIONS AND FINANCIAL INFORMATION

In this report, we use the terms “Company,” “we,” “us” or “our” to refer to Majestic Capital Ltd. (formerly CRM Holdings, Ltd.) and its subsidiaries on a consolidated basis, unless otherwise indicated or unless the context otherwise requires. All references in this report to our entity names are set forth in the following table, unless otherwise indicated or unless the context otherwise requires:

Reference		Entity’s Legal Name
Majestic Capital (formerly CRM Holdings)		Majestic Capital, Ltd. (formerly CRM Holdings, Ltd.)
Twin Bridges		Twin Bridges (Bermuda) Ltd.
Majestic USA (formerly CRM USA Holdings)		Majestic USA Capital Inc. (formerly CRM USA Holdings, Inc.)
CRM		Compensation Risk Managers, LLC
CRM CA		Compensation Risk Managers of California, LLC
Eimar		Eimar, LLC
Majestic Insurance		Majestic Insurance Company
Embarcadero		Collectively: Embarcadero Insurance Holdings, Inc.; Majestic Insurance Company; and Great Western Insurance Services, Inc.

References to our common shares include our non-voting Class B shares, unless the context indicates otherwise. All amounts in this report are expressed in U.S. dollars and the financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP, except as otherwise indicated.

FORWARD LOOKING STATEMENTS

This document contains forward looking statements, which include, without limitation, statements about our plans, strategies and prospects. These statements are based on our current expectations and projections about future events and are identified by terminology such as “may,” “will,” “should,” “expect,” “scheduled,” “plan,” “seek,” “intend,” “anticipate,” “believe,” “estimate,” “aim,” “potential,” or “continue” or the negative of those terms or other comparable terminology. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Although we believe that our plans, intentions and expectations are reasonable, we may not achieve such plans, intentions or expectations.

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, the following factors that could affect financial performance or could cause actual results to differ materially from estimates contained in or underlying our forward-looking statements:

·	our inability to function as a going concern;

·	actions by insurance regulators seizing or otherwise taking control of our insurance company subsidiaries or their assets;

·	actions by our creditors or securities holders commencing liquidation or similar proceedings against us, our subsidiaries or their assets;

·	the effects of mergers, acquisitions and divestitures;

·	the cyclical nature of the insurance industry;

·	premium rates;

·	investment results;

·	legislative and regulatory changes;

·	the estimation of loss reserves and loss reserve development;

·	reinsurance may be unavailable on acceptable terms, or even if available, we may be unable to collect reinsurance;

·	the status or outcome of legal and/or regulatory proceedings;

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

·	the effects of competition;

·	failure to retain key personnel;

·	economic downturns; and

·	natural disasters;

as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may appear throughout this report, including without limitation, the following sections: Item 1 “Business,” Item 1A “Risk Factors,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You should carefully read this Annual Report on Form 10-K, the documents that we reference herein and the documents we have filed as exhibits, together with all other documents we have filed with the SEC, with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect and that these differences may be material. 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 report to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.

PART I

ITEM 1.

BUSINESS

Overview

We are a specialty provider of workers’ compensation insurance products. Through our subsidiaries, we seek to provide quality products and services that fit the needs of our insureds and clients and are dedicated to developing and maintaining a mutually beneficial, long-term relationship with them. Our workers’ compensation insurance coverage is offered to employers in California, New York, New Jersey, Arizona, Nevada, and other states.

CRM Holdings Ltd. is a holding company formed in September 2005 under the laws of Bermuda. At our 2010 Annual General Meeting of Shareholders, the shareholders of CRM Holdings voted on and approved changing the name of CRM Holdings, Ltd. to Majestic Capital Ltd.

We completed our initial public offering in December 2005. In the offering, we sold 6,000,000 shares of common shares and raised $68.7 million, net of underwriting and offering expenses of $9.3 million. We contributed $47.0 million of the IPO proceeds to Twin Bridges to support the growth of our reinsurance business and $6.5 million to CRM to repay the entire amount outstanding under a credit facility and for general working capital. CRM Holdings’ common shares were listed on the Nasdaq Global Select Market under the symbol CRMH. In February 2007, we completed a public offering of 2,882,643 shares of common shares. All of these shares were offered by existing shareholders, and we did not receive any of the proceeds from this offering. In May 2010, we obtained approval from The Nasdaq Stock Market to transfer our stock listing from the NASDAQ Global Select Market to the NASDAQ Capital Market, and our stock is now trading on the NASDAQ Capital Market under the symbol “MAJC.”

We provide workers’ compensation insurance products through Majestic Insurance, which was incorporated in California in 1980. We offer primary workers’ compensation insurance through independent insurance brokers and agents to various size businesses. We believe that Majestic Insurance’s experience in underwriting complex risks allows it to target potential accounts with attractive premiums relative to exposure, good employee relations and effective risk management policies. We acquired Majestic Insurance in November 2006. Before the acquisition, Majestic Insurance provided coverage under the United States Longshore and Harbor Workers’ Compensation Act (USL&H Act), although we stopped offering this type of coverage in March 2007. Majestic Insurance also provides excess and frequency coverage policies to self-insured entities, including those self-insured groups that were formerly managed by CRM and CRM CA.

Majestic Insurance is currently rated “B” (Fair) by A.M. Best Company, Inc. (A.M. Best), and the rating has been placed under review with negative implications. A.M. Best downgraded Majestic’s rating from “B++” (Good) on March 28, 2011, based on A.M. Best’s concern over the termination of the merger agreement with Bayside Capital Partners LLC (Bayside), the continued deterioration of Majestic’s earnings and surplus, and the recent announcement of a potential conservation of Majestic Insurance by the Conservation and Liquidation Office of the California Department of Insurance (CA DOI). For further information regarding Majestic’s rating, see ‘‘Ratings ” below and for further information regarding the potential conservation of Majestic Insurance in California, see “California Department of Insurance - Conservation and Rehabilitation of Majestic Insurance” below.

We formed Twin Bridges, a Class 3 exempted insurance company, in 2003 to underwrite reinsurance on a portion of the excess and frequency workers’ compensation coverage purchased by the self-insured groups managed by CRM. Twin Bridges provided quota share reinsurance to NY Marine & General, an independent U.S. admitted insurance carrier, on a portion of the risk assumed by NY Marine & General for the excess and frequency coverage policies purchased by the self-insured groups managed by CRM and CRM CA and reinsurance coverage on Majestic’s primary workers’ compensation insurance policies.

Our affiliated reinsurance coverage is underwritten through Twin Bridges. After our acquisition of Majestic Insurance in November 2006, Twin Bridges began providing Majestic Insurance with reinsurance coverage. Twin Bridges ceased providing coverage on December 31, 2010, but until that point in time, provided reinsurance coverage to Majestic Insurance on its workers’ compensation insurance policies, including primary insurance policies and excess and frequency coverage issued to self-insured entities. Twin Bridges provided the coverage through participating in Majestic’s excess of loss reinsurance treaty and through quota share reinsurance agreements. Twin Bridges is currently rated “B” (Fair), with negative implications, by A.M. Best.

CRM USA Holdings, the holding company for our U.S. operations, was incorporated in Delaware in December 2005. In conjunction with the name change of CRM Holdings to Majestic Capital described above, the name of CRM USA Holdings was changed to Majestic USA Capital, Inc. in May 2010. Embarcadero is the holding company for Majestic Insurance and was formed in 1986 under the laws of California.

We previously reported our results in four operating segments: primary insurance (Majestic Insurance), reinsurance (Twin Bridges), fee-based management services (CRM CA), and corporate and other (Majestic Capital, Majestic USA and Embarcadero). Effective January 1, 2010, we have reflected changes in segment reporting and no longer report multiple segments. The change from reporting four reportable segments to a single segment reflects our current business activities and organizational changes. The prior periods have been restated to conform to the current period presentation.

The changes in segment reporting include aggregating our primary insurance and reinsurance segments, Majestic Insurance and Twin Bridges, into a single “risk-bearing” segment in accordance with the framework established by segment reporting guidance. Further, the operations of CRM CA, along with CRM and Eimar, are now presented as discontinued operations as we no longer provide administrative services to third parties or affiliates. Lastly, Majestic Capital, Majestic USA and Embarcadero have no revenues and are not viewed as a discrete operation for decision-making purposes and therefore are not a reportable segment.

Significant Developments

We did not achieve our overall business, financial and shareholder performance expectations for the past several years as a result of the following significant developments which negatively impacted our operating results for the years ended December 31, 2008, 2009 and 2010. Our operating results and these significant developments led to the conservation of Majestic Insurance by the CA DOI as described below and may result in our non-insurance companies seeking relief through a filing under the U.S. Bankruptcy Code or Bermuda Companies Act.

Closure of New York Fee-Based Management Services Business

In 2008, we voluntarily surrendered our third-party administrator’s license and ceased providing fee-based management services in New York as described in “Item 1 – Business – Discontinued Operations – Fee-Based Management Services.” The closure of our New York fee-based operations and resulting litigation continues to negatively impact our business reputation, results of operations, financial condition and cash flows.

Unfavorable Loss Reserve Development – 2009 and forward

We entered the New York and New Jersey primary workers’ compensation insurance markets in 2007. We believed our past experience in providing underwriting services for self-insured groups in New York would provide a solid foundation for the offering of primary insurance through Majestic Insurance in New York and New Jersey. Our decisions to expand into New York and New Jersey and to aggressively grow our California business in 2007-2008 resulted in our expansion into riskier industries/classes of business and lowering of certain of our underwriting and pricing standards. Despite corrective underwriting actions commencing in 2008, the resulting unfavorable current year loss reserve trends and adverse development of our prior year losses beginning in fiscal year 2009 has significantly contributed to our losses from continuing operations for the years ended December 31, 2010 and 2009.

Full Valuation Allowance on our Net Deferred Tax Asset

As described in “Item 7 – Critical Accounting Policies and Estimates – Deferred Income Taxes,” in the third quarter of 2009, we determined that it was more likely than not that our net deferred tax assets would not be realizable in the foreseeable future. Accordingly we recorded a net deferred tax valuation allowance of $17.1 million or ($10.19) loss per diluted share for the year ended December 31, 2009. We continue to carry a full net deferred tax valuation allowance of $32.4 million at December 31, 2010.

New York State Office of the Attorney General – Notice of Imminent Enforcement Action

In December 2009, we received a “Notice of Imminent Enforcement Action” from the New York State Office of the Attorney General as further described in “Item 3 – Pending Litigation – Litigation Involving New York Self-Insured Groups – New York State Office of the Attorney General Investigation.” This notification and the overhang of related pending litigation was a primary factor in the 2009 downgrade of our financial strength rating described in “Item 1 – Business – Ratings,” and increased regulatory oversight by the CA DOI described in “Item 1 – Business – Regulation – State Insurance Department Examinations,” and hampered our ability to consummate strategic alternatives to improve our competitive, capital and regulatory positions in 2010.

2009 A.M. Best Downgrade of Majestic Insurance

In December 2009, A.M. Best downgraded the financial strength rating of Majestic Insurance from “A-“ (Excellent) to “B++” (Good) as described in “Item 1 – Business – Ratings.” The downgrade (1) impeded our ability to renew existing business that requires an “A” or better rating and to attract new business in an already highly competitive market; and (2) required us to enter into ceded quota share agreements described in “Item 1 – Business – Reinsurance – External Ceded Quota Share Reinsurance” whereby we ceded up to 47% of our premiums and losses to third parties in order to improve our capital adequacy ratios – all of which negatively impacted our premiums written, operating results and loss and underwriting expense ratios.

Further Deterioration of Our Business – 2009 A.M. Best Downgrade, the Recession and Increased Competition

The aforementioned corrective underwriting actions initiated in 2008, the A.M. Best downgrade, including the effects of ceded quota share agreements with third parties were further compounded by the weakened business and economic conditions in the U.S. and competitive marketing and pricing conditions in California, our largest market. These factors combined to adversely affect our net premiums earned, loss ratios, and underwriting expense ratios, results of operations and cash flows. Net premiums earned decreased $29.3 million or 36% in 2010 compared to 2009 and were $41.4 million or 34% lower in 2009 compared to 2008. Our combined ratio, a measure of profitability of insurance operations, as described in “Item 7 – Results of Operations” was 161%, 146% and 103% for the years ended December 31, 2010, 2009 and 2008, respectively.

2010 Announcement of and 2011 Termination of Bayside Amalgamation

In the third quarter of 2010, we announced that we entered into an agreement to merge with Bayside Equity Holdings LLC (Bayside), an affiliate company of Lancer Financial Group (Lancer) as described in Item 7 – Liquidity and Capital Resources – Capital Resources - Previously Announced and Subsequent Termination of the Bayside Amalgamation Agreement.” The merger, subject to certain closing conditions, would have allowed us to benefit from Lancer’s financial condition, reputation and regulatory and rating agency good standing. The agreement was terminated due to the material deterioration in our surplus and the failure to satisfy certain of the closing conditions.

Withdrawal from New York/New Jersey Market

In the first quarter of 2011, we decided to withdraw from the New York and New Jersey workers’ compensation insurance markets as described in “Item 1 – Business – Decision to Exit the New York/New Jersey Market.” Given the current market conditions, we were not able to continue our expansion and underwrite east coast risks profitably. Direct written premiums in New York/New Jersey were 20%, 27% and 35% of Majestic Insurance’s total direct written premiums for the years ended December 31, 2010, 2009 and 2008, respectively.

2011 A.M. Best Downgrade of Majestic Insurance

In March 2010, A.M. Best further downgraded the financial strength rating of Majestic Insurance from “B++“ (Good) to “B” (Fair) as described in “Item 1 – Business – Ratings” which places us in the “non-secure’ category within A.M. Best’s rating scheme. The “non-secure” rating could cause significant negative effects to our ability to underwrite business and further negatively impact our business reputation, results of operations, financial condition and cash flows.

California Department of Insurance - Conservation and Rehabilitation of Majestic Insurance

The California Department of Insurance applied to the Superior Court of San Francisco County, California (the Conservation Court) for an order to place Majestic Insurance into a statutory conservation proceeding on April 21, 2011. Upon the execution of the order of conservation, the Insurance Commissioner of the State of California (the Commissioner) took over the operations of Majestic Insurance as conservator. The court order granted the Commissioner a broad range of discretionary authority, and provides the Commissioner with the ability to, among other things, conduct the business of Majestic Insurance, dispose of any or all of the assets and liabilities of Majestic Insurance, and act in all ways and exercise all powers necessary for the purpose of carrying out the court order.

The conservation order allows the Commissioner to begin an investigation that will determine if the insurer and its business can be rehabilitated, or if continuing the business would be hazardous to Majestic Insurance’s policyholders, creditors or the public. If, following the issuance of the conservation order, it appears that it would be futile to proceed with the conservation of Majestic Insurance, the Commissioner will apply for an order to liquidate Majestic Insurance’s business (the Estate).

The CA DOI cites the following reasons for the statutory conservation of Majestic Insurance: (1) the termination of the Bayside amalgamation as described above; (2) the findings of the CA DOI examination of Majestic Insurance which indicate that Majestic Insurance’s carried statutory loss reserves at December 31, 2010 are understated by $41 million, which if recorded, would result in the failure of Majestic Insurance to meet minimum regulatory requirements; for a further discussion of the findings of the CA DOI examination see Item 7 – Critical Accounting Policies and Estimates – Reserves for Losses and Loss Adjustment Expenses – Loss Reserve Adequacy – California Department of Insurance Examination of Majestic Insurance;” (3) the continuing material deterioration of the financial condition of Majestic Insurance due to consecutive operating losses; (4) the potential impact on Majestic Insurance of the ongoing regulatory and litigation issues faced by its affiliates, Majestic Capital, CRM and CRM CA; and (5) the possibility that Majestic Capital and its non-insurance subsidiaries could seek protection under applicable United States and Bermuda Companies bankruptcy laws.

In conjunction with the statutory conservation, the CA DOI has structured a comprehensive plan which is subject to approval by the Conservation Court.

The following transactions (AmTrust Transactions) are an integral part of the CA DOI’s comprehensive rehabilitation plan for Majestic Insurance and once executed are considered to be in the best interest of Majestic Insurance’s policyholders, brokers, vendors and other creditors.

AmTrust Financial Services, Inc. (AmTrust) would assume 100% of Majestic Insurance’s loss reserves through a loss portfolio transfer (LPT) whereby (1) AmTrust would assume the gross reserves for the loss and loss adjustment expenses of Majestic Insurance; (2) AmTrust would also assume the related reinsurance recoverables; and (3) Majestic Insurance would transfer to AmTrust cash and securities equal to the net reserves transferred under the LPT and an additional $26 million. The additional $26 million represents the transaction value that AmTrust has attributed to the exposure to potential adverse development in excess of the carried reserves that it will assume under the LPT. This amount gave consideration to the loss reserve deficiency indicated by the CA DOI.

AmTrust would assume 100% of Majestic Insurance’s in-force business through a 100% quota share reinsurance agreement (100% Quota Share) whereby AmTrust will assume from Majestic (1) all liabilities under the in-force workers’ compensation policies issued by Majestic Insurance. This assumption includes, but is not limited to Majestic Insurance’s unearned premiums; (2) all quota share and excess of loss reinsurance agreements of Majestic Insurance, including prepaid reinsurance; and (3) all other liabilities arising under any other workers’ compensation insurance policy issued by Majestic Insurance, including the run-off USL&H policies issued by Majestic Insurance. The assumption of the non-workers’ compensation insurance liabilities of Majestic by AmTrust is subject to certain limitations that will be agreed upon prior to closing of the transaction.

·	The rights to renew Majestic Insurance’s expiring book of business would be transferred to AmTrust.

·	Certain of Majestic Insurance’s other insurance liabilities, operating assets and other contractual obligations would be transferred to AmTrust. This transfer will allow AmTrust to continue operating from the west coast office currently occupied by Majestic Insurance.

Majestic Insurance has granted AmTrust an exclusivity period until the earlier of June 20, 2011 or the commencement of a conservation proceeding within which to consummate the AmTrust Transactions described above.

Prior to the regulatory approval of the AmTrust Transactions, Majestic Insurance will continue to participate in the fronting arrangement with AmTrust described in “Item 1 – Reinsurance – External Assumed Quota Share Reinsurance” whereby workers’ compensation insurance policies are underwritten by the AmTrust group of companies and reinsured by Majestic Insurance. Post regulatory approval of the AmTrust Transactions, the Commissioner will liquidate the remaining Estate in an expeditious fashion.

Possible Bankruptcy, Insolvency or Liquidation of the Non-Insurance Companies

The conservation and proposed rehabilitation plan described above are not expected to yield any monetary benefits to the shareholders of Majestic Capital. Accordingly, there is substantial doubt surrounding our ability to continue as a going concern as described in “Item 7 - Critical Accounting Policies and Estimates – Going Concern.” Consequently, our non-insurance companies may be forced to seek relief through a filing under the U.S. Bankruptcy Code or Bermuda Companies Act (bankruptcy filing) in the near future.

Our auditors have issued a disclaimer of opinion with respect to our financial statements of and for the year ended December 31, 2010.

Industry Background

Workers’ compensation is a statutory system under which an employer is required to pay for its employees’ costs of medical care and other statutorily prescribed benefits for work-related injuries or illnesses. Most employers comply with this requirement by purchasing workers’ compensation insurance. The principal concept underlying workers’ compensation laws is that employees injured in the course of their employment have only the legal remedies available under those laws and do not have any other claims against their employers. Generally, workers are covered for injuries that occur in the course and within the scope of their employment. The employers’ obligation to compensate injured workers does not depend on any negligence or wrongdoing of the employer and exists even for injuries that result from the negligence or wrongdoing of others, including the injured employee. The benefits payable and the duration of such benefits are set by statute and vary by state and with the nature and severity of the injury or disease and the wages, occupation and age of the employee.

Workers’ compensation insurance policies obligate the carrier to pay benefits that the insured employer may become obligated to pay under applicable workers’ compensation laws. Each state has a regulatory and adjudicatory system that quantifies the level of wage replacement to be paid, determines the level of medical care required to be provided and the cost of permanent impairment, and specifies the options in selecting healthcare providers available to the injured employee or the employer.

State laws generally require two types of benefits for injured employees: medical benefits and indemnity payments. Medical benefits include expenses related to diagnosis and treatment of the injury and any required rehabilitation. Indemnity payments consist of temporary wage replacement, permanent disability payments and death benefits to surviving family members. To fulfill this mandated financial obligation, employers may purchase workers’ compensation insurance from a private insurance carrier, a state-sanctioned assigned risk pool or a self-insurance group (an entity that allows employers to obtain workers’ compensation coverage on a pooled basis, typically subjecting each employer to joint and several liability for the entire fund) or, if permitted by the state in which they operate, may self-insure, thereby retaining all risk.

Policyholders

We seek to underwrite better than average risks in a diversity of classifications which have been in business no less than three years. As of December 31, 2010, we had more than 1,032 policyholders with average annual workers’ compensation primary insurance policy premium of $87 thousand. As of December 31, 2010, 2009 and 2008, our ten largest primary insurance policyholders accounted for 5%, 7% and 7%, respectively, of our gross premiums. Our primary insurance policy renewal rate on voluntary business that we quoted and renewed was 41%, 60% and 65% in 2010, 2009 and 2008, respectively.

While not limited to a specific list of classification codes, we focus on contractors, transportation, healthcare, wholesale and retail, manufacturing, hospitality, colleges and universities and other classes on a case by case basis. The following table sets forth our direct premiums written by the industries that we focus on and as a percentage of total direct written premiums for the last three fiscal years:

					Year Ended December 31,
	2010				2009				2008
	(Dollars in thousands)
Construction	$	20,672	23	%	$	45,867	30	%	$	55,898	33	%
Healthcare		13,140	14	%		22,895	15	%		26,218	15	%
Manufacturing		10,251	11	%		22,198	14	%		16,098	9	%
Wholesale and Retail		15,182	17	%		13,850	9	%		12,176	7	%
Services		9,675	11	%		10,979	7	%		9,325	5	%
Transportation		4,929	5	%		7,204	5	%		8,319	5	%
Hospitality		1,802	2	%		2,303	2	%		1,231	1	%
Others		15,044	16	%		22,630	14	%		22,575	13	%
Total Primary		90,695	99	%		147,926	96	%		151,840	88	%

Total Excess		814	1	%		5,545	4	%		19,746	12	%
Total	$	91,509	100	%	$	153,471	100	%	$	171,586	100	%

Majestic Insurance is licensed to write workers’ compensation insurance in 16 states: Alaska, Arizona, California, Florida, Hawaii, Idaho, Illinois, Montana, Nevada, New Jersey, New Mexico, New York, Oregon, Utah, Virginia and Washington. For further information regarding our decision to exit the New York/New Jersey market in 2011, see “Decision to Exit the New York/New Jersey Market” below.

During 2010, we wrote workers’ compensation insurance in 10 states. Majestic Insurance, before our acquisition, issued policies primarily to businesses located in California. Following our acquisition, we expanded Majestic Insurance’s coverage to include excess and frequency coverage to self-insured entities beginning in January 2007. We began offering primary workers’ compensation policies in New Jersey in April 2007, in New York in October 2007 and in Florida in December 2007. The following table sets forth direct premiums written by state and as a percentage of total direct written premiums for the last three fiscal years:


						Year Ended December 31,
	2010					2009					2008
	(Dollars in thousands)
California	$	69,060		76	%	$	105,112		68	%		103,896		61	%
New York		9,418		10	%		23,234		15	%		41,004		24	%
New Jersey		9,573		10	%		18,323		12	%		19,006		11	%
Arizona		2,841		3	%		4,398		3	%		4,097		2	%
Florida		319		0	%		1,221		1	%		2,149		1	%
Nevada		450		1	%		1,131		1	%		1,259		1	%
Washington		(110	)	0	%		(109	)	0	%		121		0	%
Alaska		3		0	%		93		0	%		(93	)	0	%
Others		(45	)	0	%		68		0	%		147		0	%
Total	$	91,509		100	%	$	153,471		100	%	$	171,586		100	%

Decision to Exit the New York/New Jersey Market

Despite attempts to reposition ourselves in New York and New Jersey following the downgrade of our A.M. Best rating, intense competition and poor underwriting results in those states have caused us to withdraw from the workers’ compensation insurance markets of New York and New Jersey in 2011. Accordingly, we have informed the New York State Department of Insurance and the New Jersey Division of Banking and Insurance of our intentions and have begun to initiate a program of policy non-renewals in those states. We ceased issuing new policies in New York and New Jersey in the first quarter of 2011. Commencing April 1, 2011, we will non-renew policies written in New York that renew on or after April 1, 2011, and commencing on June 1, 2011, we will non-renew policies written in New Jersey that renew on or after June 1, 2011.

Production of Business

We sell our primary workers’ compensation insurance solutions through independent agents and brokers. After deciding to withdraw from the New York/New Jersey market in 2011, Majestic Insurance will maintain its marketing presence in California, Arizona and Nevada where policies will continue to be placed through independent agents and brokers. In evaluating our agent and broker relationships, we give strong consideration to the business segments in which an agent or broker operates and we are careful to limit the geographic overlap of our agents and brokers. We also monitor premium and account loss activity on a monthly basis and conduct an annual review of all of our brokers on the basis of production and loss results. We compensate these independent agents and brokers by paying a commission based on the premium collected from the policyholder. Our independent agents and brokers do not have the authority to underwrite or bind coverage. Our ten largest independent agents and brokers produced approximately 39%, 28% and 14% of its premiums in-force as of December 31, 2010, 2009 and 2008, respectively.

Underwriting and Pricing

Our underwriting strategy for primary workers’ compensation insurance is to underwrite individual risks as opposed to focusing on a specific group of industries. We seek to identify businesses with, among other things, above average wage and benefit levels, below average employee turnover, low claims frequency and existing loss control and return-to-work programs.

Majestic Insurance offers three types of workers’ compensation insurance products and services:

Guaranteed Cost Plans. These plans are fixed-cost insurance products in which the policy’s premium charges do not vary as a result of the loss experience of the insured. Premiums are developed by: (1) applying the applicable industry rate to the policyholder’s aggregate payroll; (2) adjusting for the historical modification factor applicable to the policyholder; (3) making further adjustments based on the policyholder’s loss history; and (4) adjusting for our premium/discount factors based on considerations such as the insured’s safety record, length of time in business and other underwriting metrics.

Risk-Sharing Products. Our risk-sharing products generally consist of retrospective rate plans and large deductible plans. With retrospective rate plans, our premiums are adjusted based upon the actual loss experience of the policyholder during the policy period. The policyholder will receive returned premium if the actual loss experience is lower than expected or pay additional premium if the actual loss experience is higher than expected, subject to minimum and maximum premium. With respect to large deductible plans, we provide claims handling, risk control and other administrative services; however, we only pay policyholder claims in excess of a deductible. The deductible level is typically intended to cover a large majority of estimated losses.

Excess and Frequency Coverage. Self-insured groups and entities are generally required to purchase excess and frequency workers’ compensation coverage from U.S. admitted insurers. This “excess coverage” insures the self-insured group or entities for claims that exceed a minimum level of retention. The self-insured groups or entities also purchase coverage to insure against the risk that a large number of claims will occur and result in losses that are each less than retention level but in the aggregate result in such losses that could exhaust their resources. This “frequency coverage” is triggered if the aggregate amount of losses and loss adjustment expenses during the coverage period exceeds a percentage of the premiums paid to the groups by their members. If triggered, the frequency coverage will insure up to a specified amount of losses and loss adjustment expenses of the group during the coverage period. Due to increased competition and a decline in the self-insured group product, we have decided to exit the excess and frequency workers’ compensation insurance policy business at the end of 2010.

Risk Assessment and Loss Control Services

We place a strong emphasis on our loss control function as an integral part of the underwriting process as well as a competitive differentiator. Our loss control department delivers risk level evaluations to our underwriters with respect to the degree of an employer’s management commitment to safety and acts as a resource for our customers to support the promotion of a safe workplace. We believe that this experience benefits us by allowing us to serve our customers more efficiently and effectively. On a case by case basis, as necessary, our loss control staff evaluates each prospective customer’s safety program elements and key loss control measures, supported with explanations in an internal report to the appropriate underwriter. Our loss control staff develops detailed policyholder service plans outlining corrective actions needed to address potentially hazardous conditions or safety program deficiencies and proactively monitors policyholder actions to ensure compliance.

Claims Management

Our claims management services involve the administration and management of a claim from the time it is brought to our attention until the claim is finally settled. We have established procedures to record reported insurance claims, regardless of size, in a claims database upon receipt of notice of the claim. We attempt to make contact with the injured worker, treating physician and employer within 24 hours after receiving a claim. This focus on timely reporting and follow-up allows us to mitigate claims and loss adjustment expenses and identify potential fraud. Majestic Insurance periodically updates its database for any developments affecting a claim.

Novation Agreement

On June 28, 2007, Majestic Insurance consummated a novation agreement with New York Marine & General Insurance Company (Novation Agreement). Under the terms of the Novation Agreement, Majestic Insurance was substituted as the insurance company for almost all of the excess policies previously issued by New York Marine & General Insurance Company (NY Marine & General) to certain of the self-insured groups we managed. NY Marine & General transferred and assigned to Majestic Insurance all of its respective rights, duties and obligations under the excess workers’ compensation policies issued to certain of our self-insured groups during the policy years 2003 through 2006. In connection with this, NY Marine & General also transferred and assigned its rights, duties and obligations to Majestic Insurance under two quota share reinsurance agreements between NY Marine & General and Twin Bridges.

Reserves for Losses and Loss Adjustment Expenses

We record reserves for unpaid losses and loss adjustment expenses, referred to as loss reserves, related to the insurance policies we write. These loss reserves are balance sheet liabilities representing estimates of future amounts we expect to pay for claims occurring on or before the balance sheet date. This estimate includes not only claims already reported to us as of the balance sheet date, but also an estimate of the claims for injury that have occurred but have not been reported to us. We take into consideration the facts and circumstances for each claim as then known by our claims department, as well as actuarial estimates of aggregate unpaid losses and loss expense.

Our loss reserves do not represent an exact calculation of liability, but instead represent management’s best estimates, generally utilizing actuarial expertise and projection techniques, at a given accounting date. Reserves for losses and loss adjustment expenses are estimates and are inherently uncertain; they do not and cannot represent an exact measure of liability.

The three main components of our loss reserves are case reserves, reserves for losses “incurred-but-not-reported,” and loss adjustment expenses.

When a claim is reported, we establish, individually, a “case reserve” for the estimated amount of its ultimate settlement and its estimated loss adjustment expenses. Amounts are established based upon knowledge of the severity of the injury and may subsequently be supplemented or reduced as our claims department receives new information. At any point in time, the amount paid on a claim, plus the reserve for future amounts to be paid represents the estimated total cost of the claim, or the case incurred amount. The estimated amount of loss for a reported claim is based upon various factors, including:

·	type of loss;

·	severity of the injury;

·	age and occupation of the injured employee;

·	estimated length of temporary disability;

·	anticipated permanent disability;

·	expected medical procedures, costs and duration;

·	our knowledge of the circumstances surrounding the claim;

·	insurance policy provisions, including coverage, related to the claim;

·	jurisdiction of the occurrence; and

·	other benefits defined by applicable statute.

The case incurred amount can vary due to uncertainties with respect to medical treatment and outcome, length and degree of disability, employment availability and wage levels and judicial determinations. As changes occur, the case incurred amount is adjusted. The initial estimate of the case incurred amount can vary significantly from the amount ultimately paid, especially in circumstances involving severe injuries with comprehensive medical treatment. Changes in case incurred amounts, or case development, are an important component of our historical claim data.

In addition to our case reserves, at the end of any financial reporting period, there are a number of claims that have not yet been reported but will arise out of accidents that have already occurred. These are referred to in the insurance industry as “incurred-but-not-reported,” or IBNR. IBNR is the estimated ultimate losses for each accident year less amounts that have been paid and case reserves. IBNR reserves, unlike case reserves, do not apply to a specific claim, but rather apply to the entire body of claims arising from a specific time period. IBNR primarily provides for costs due to:

·	future claim payments in excess of case reserves on recorded open claims;

·	additional claim payments on closed claims; and

·	the cost of claims not yet reported to us.

Most of our IBNR reserves relate to estimated future claim payments over and above the case reserves on recorded open claims. For workers’ compensation, most claims are reported to the employer and to the insurance company relatively quickly, and relatively small amounts are paid on claims that already have been closed. Consequently, late reporting and reopening of claims are a less significant part of IBNR for us.

We rely upon actuarial estimates to establish our IBNR reserves for loss amounts, including expected development of reported claims. These IBNR reserves include estimated loss adjustment expenses. We calculate our IBNR reserves by using generally accepted actuarial techniques, relying on the most recent information available, including pricing information, industry information and our historical development patterns. These reserves for losses and loss adjustment expenses are revised as additional information becomes available and as claims are reported and paid.

The third component of our loss reserves is reserves for loss adjustment expenses. Our reserves for loss adjustment expenses is our estimate of the diagnostic, legal, administrative and other similar expenses that we will spend in the future managing claims that have occurred on or before the balance sheet date.

A portion of our loss reserves are ceded to both unaffiliated and affiliated reinsurers. We establish our loss reserves both gross and net of reinsurance. The determination of the amount of reinsurance that will be recoverable on our loss reserves includes reinsurance recoveries from our excess of loss and ceded quota share reinsurance policies. Our reinsurance arrangements also include intercompany quota share and excess of loss reinsurance agreements between Majestic Insurance and Twin Bridges. Under these agreements, Majestic Insurance cedes some of its premiums, losses and loss adjustment expenses to Twin Bridges, but these intercompany reinsurance agreements do not affect our consolidated financial statements because on a consolidated basis, we retain 100% of the risks not ceded to unaffiliated reinsurers.

Our best estimate of our ultimate liability for our total unpaid losses and loss adjustment expenses as of December 31, 2010, net of reinsurance receivables, was $189.9 million. As of December 31, 2010, we had 4,386 open claims. Our reserve for losses and loss adjustment expenses (gross and net), as well as our case and IBNR reserves, as of December 31, 2010, 2009 and 2008, respectively, are shown below.

	As of and for the Year Ended December 31,
	2010			2009			2008
	(Dollars in thousands)
Case reserves	$	160,467		$	165,251		$	114,926
IBNR		119,649			119,307			105,657
Loss adjustment expenses		37,672			36,716			29,429
Fair value adjustment of loss reserves		(3,251	)		(3,777	)		(4,394	)
Gross unpaid losses and loss adjustment expenses		314,537			317,497			245,618
Reinsurance recoverables on unpaid losses and loss adjustment expenses, gross		(130,236	)		(117,268	)		(61,954	)
Fair value adjustment of reinsurance recoverables		5,578			5,687			6,453
Net unpaid losses and loss adjustment expenses	$	189,879		$	205,916		$	190,117

We produce a point estimate for our loss reserves using the results of various methods of actuarial estimation. We use our historical claims data broken out by accident year and paid and incurred claim amounts broken out by medical, indemnity, expense, subrogation, and individual large loss information. We then select and apply a variety of generally accepted actuarial methods to the data which produce estimates of ultimate losses by accident year. The methods applied vary somewhat according to the type of policy (primary or excess) and claim benefit being analyzed. We estimate our loss reserves using the following actuarial methods:

Paid Loss Development Method. A method using historical, cumulative paid losses by accident year and develops those actual losses to estimated ultimate losses based upon the assumption that each accident year will develop to estimated ultimate cost in a manner that is analogous to prior years. The paid method does not rely on case reserves or claim reporting patterns in making projections. The validity of the results from using a paid loss development approach can be affected by many conditions, such as internal claim department processing changes, legal changes or variations in a company’s mix of business from one year to the next. Also, since the percentage of losses paid for immature years is often low, development factors are more volatile. A small variation in the number of claims paid can have a leveraging effect that can lead to significant changes in estimated ultimate liability for losses and loss adjustment expenses.

Incurred Loss Development Method. A method using historical, cumulative incurred losses by accident year and develops those actual losses to estimated ultimate losses based upon the assumption that each accident year will develop to estimated ultimate cost in a manner that is analogous to prior years. The incurred (case incurred) loss development method relies on the assumption that, at any given state of maturity, ultimate losses can be predicted by multiplying cumulative reported losses (paid losses plus case reserves) by a cumulative development factor. The validity of the results of this method depends on the stability of claim reporting and settlement rates, as well as the consistency of case reserve levels. Case reserves do not have to be adequately stated for this method to be effective; they only need to have a fairly consistent level of adequacy at all stages of maturity.

Bornhuetter-Ferguson Method. The Bornhuetter-Ferguson Method is a blended method that explicitly takes into account both actual loss development to date and expected future loss emergence. There are two versions of this method: one based on paid loss and one based on incurred loss. This method uses the selected loss development patterns from either the paid or incurred loss development methods to calculate the expected percentage of unpaid (or unreported) loss. The expected component of the Bornhuetter-Ferguson method is calculated by multiplying earned premium for the given exposure period by a selected prior loss ratio. The resulting dollars are then multiplied by the expected percentage of unpaid (or unreported) loss. This provides an estimate of future loss payments (or reporting) that is then added to actual paid (or incurred) loss data to produce estimated ultimate loss.

The methods described above use expected loss payment and reporting patterns for losses and our actual paid and reported losses and loss adjustment expenses to estimate the reserve. The expected payment and reporting patterns are based on our historical patterns as well as state specific industry patterns. For losses incurred in California and under USL&H policies, where we have a significant amount of historical claims data, we rely on our historical claims patterns, which take into account an analysis of our more than 70 thousand claims in our 24-year history. In the other jurisdictions where we write policies, we rely heavily on industry wide loss development factors in combination with price and exposure information. The determination to assign particular weights to ultimate losses developed through application of our loss development factors and industry-wide loss development factors is made by the actuary and is a matter of actuarial judgment. The expected payment and reporting patterns can change whenever there is new information that leads us to believe that the pattern of future loss payments will be different from what has historically been expected.

For the most current accident year, we rely heavily on an expected loss ratio method. This method is based on an analysis of historical loss ratios adjusted for current pricing levels, exposure growth, anticipated trends in claim frequency and severity, the impact of reform activity and any other factors that may have an impact on the loss ratio. This adjusted loss ratio is applied to the earned premium for the current accident year to derive the ultimate estimated claims liability for the current accident year which becomes one of the components of the overall estimated claims liability reflected on our balance sheet. Our estimate of the ultimate claims liability for the current accident year is reviewed quarterly and is adjusted throughout the current year.

For loss reserves associated with excess and frequency insurance policies issued to self-insured entities, including groups formerly managed by us, we first complete an annual estimated ground-up analysis of the premiums and losses of each of the self-insured entities using reported losses, historical data of the self-insured entities, and industry development data. Through this ground up analysis, the gross losses of each self-insured entity is developed to ultimate losses and then netted down to reflect the excess of loss insurance policies. Actual large losses and industry excess of loss factors are used to calculate the portion of insured losses assumed by us.

Our loss reserves do not represent an exact calculation of liability, but instead represent management’s best estimates. Loss reserve estimates are based on estimates of the ultimate cost of individual claims and on actuarial estimation techniques. Several factors contribute to the uncertainty in establishing these estimates, and judgment is required in actuarial estimation to determine the ultimately liability of our insurance policies. The factors contributing to the uncertainty in our loss reserves include:

Our obligations with respect to an injured worker may include medical care and disability-related payments for the duration of the injured worker’s disability, in accordance with state workers’ compensation statutes, all of which payments are considered as part of a single workers’ compensation claim. The duration of the injured worker’s disability, the course and cost of medical treatment, as well as the lifespan of dependents, are uncertain and are difficult to determine in advance. We seek to minimize this risk by closing claims promptly, to the extent feasible. However, although we update and monitor our case reserves frequently as appropriate to reflect current information, it is very difficult to set precise case reserves for an individual claim. Therefore, in addition to establishing case reserves on a claim-by-claim basis, we, like other workers’ compensation insurance companies, establish IBNR reserves based on analyses and projections of aggregate claims data.

·	There are no policy limits on our liability for workers’ compensation claims as there are for other forms of insurance. We seek to mitigate this risk by purchasing reinsurance that will provide us with financial protection against the impact of very large claims and catastrophes.

Our loss reserves can be affected by our reinsurance. Our loss reserves are estimated on a gross and net basis, accounting for reductions in our claims liabilities as a result of reinsurance receivables and amounts recoverable through subrogation. Our reinsurance program significantly influences the level of net retained losses, because under the reinsurance program, the reinsurers assume a portion of our loss and loss adjustment expenses incurred in excess of certain loss thresholds or share on a proportional basis in certain losses. Receivables from reinsurers are a function of estimated loss reserves and are calculated using an actuarial analysis, and as such, they are subject to similar uncertainties.

The adequacy of our loss reserves can also be impacted by trends in the frequency and severity of claims, changes in the legal environment, claim inflation, the cost of claim settlements, and legislative reforms. While the actuarial methods employed factor in amounts for these circumstances, they may prove to be inadequate. For example, there may be a number of claims for which the estimate of the unpaid loss and loss adjustment expenses associated with future medical treatment proves to be inadequate because the injured worker does not respond to medical treatment as expected by the claims examiner. Another example is claim inflation, which can result from medical cost inflation or wage inflation. The actuarial methods employed include an amount for claim inflation based on historical experience. To the extent that the historical factors, and the actuarial methods used, are inadequate to recognize future inflationary trends, our reserve for losses and loss adjustment expenses may be inadequate. The amount of any such inadequacy would depend on the mix of medical and indemnity payments and the length of time over which the claims are paid.

Our loss reserves can be also affected by changes to the key assumptions in our actuarial estimation process. Key assumptions to estimation process include the average cost of claims over time (referred to as severity trends which can include an increasing level of medical, legal and rehabilitation costs); frequency risks; fluctuations in inflation; prevailing economic, social and judicial trends; legislative changes; third party claims handling procedures; costs associated with fraud or other abuses of the medical claim process; and other third party factors outside of our control.

Loss reserves can also be affected by adjustments to our loss development patterns and the various method weights or the expected loss ratios used in our analyses to reflect current information. Our actuarial methods look at historical paid losses at various points in time, claim counts and average costs of incurred losses, counts and average values of unpaid losses, as well as variations of such techniques. Estimates of ultimate claims liability for each accident year are derived using the actuarial techniques, and we adjust the ultimate estimated claims liability for prior accident years during the year (to the extent that there is enough overall evidence that a material change has occurred that would result in a material change in a prior year-end estimate of ultimate claims liability).

Our loss reserves can also be affected by greater uncertainty resulting from our workers’ compensation liability insurance as compared to other lines of insurance business. A significant delay can elapse between the occurrence of the insured event and the time the claim is finally closed. The time period between the occurrence date and payment date of a loss is referred to as the “claim-tail.” Workers’ compensation is considered to be a ‘‘long-tail’’ line of insurance, meaning that there can be an extended elapsed period between when a claim occurs (when the worker is injured on the job) and the final payment and resolution of the claim. The ‘‘long tail’’ for workers’ compensation is not usually caused by a delay in the reporting of the claim (the vast majority of our workers’ compensation claims are reported very promptly); rather, the ‘‘long tail’’ for workers’ compensation is usually caused by the fact that benefits are often paid over a long period of time, and many of the benefit amounts are difficult to determine in advance of their payment. This long tail adds greater uncertainty to determining our ultimate liability.

Based on the above factors, estimating reserves for workers’ compensation claims may be more uncertain than estimating reserves for other lines of insurance with shorter or more definite periods between occurrence of the claim and final determination of the ultimate loss and with policy limits on liability for claim amounts. Accordingly, our reserves may prove to be inadequate to cover our actual losses and loss adjustment expenses. The adequacy of our ultimate loss reserves, which are based on estimates, is inherently uncertain and represents a significant risk to our business, which we attempt to mitigate through our claims management process, by monitoring and reacting to statistics relating to the cost and duration of claims, and by consulting with outside actuarial firms. However, no assurance can be given as to whether our ultimate liability will be more or less than our loss reserve estimates.

Although many factors influence the actual cost of claims and the corresponding unpaid losses and loss adjustment expenses estimates, we do not measure and estimate values for all of the individual variables. This is because many of the factors that are known to impact the cost of claims cannot be measured directly. In most instances, we rely on historical experience or industry information to estimate values for the variables that are explicitly used in the unpaid loss and loss adjustment expenses analysis. We assume that the historical effect of these unmeasured factors, which is embedded in our experience or industry experience, is representative of future effects of these factors. In the event that Majestic Insurance has reason to expect a change in the effect of one of these factors, we perform analyses to quantify the necessary adjustments.

Reconciliation of Loss Reserves. The following table provides a reconciliation of our beginning and ending reserve balances, net of reinsurance receivables, for the years ended December 31, 2010, 2009, and 2008, to the gross of reinsurance amounts reported in our balance sheets as of December 31, 2010, 2009 and 2008:

	As of and for the Year Ended December 31,
	2010			2009			2008
	(Dollars in thousands)
Gross balance at January 1	$	317,497		$	245,618		$	188,848
Less reinsurance recoverable		(111,581	)		(55,502	)		(35,488	)
Net balance at January 1		205,916			190,116			153,360

Fair value adjustment of loss reserves		526			617			570
Fair value adjustment of reinsurance recoverable		(109	)		(766	)		(787	)
Total fair value adjustment		417			(149	)		(217	)

Incurred related to:
Current year		48,362			75,825			91,140
Prior years		2,409			5,978			(5,417	)
Total incurred		50,771			81,803			85,723

Paid related to:
Current year		(11,192	)		(16,968	)		(16,959	)
Prior years		(56,033	)		(48,886	)		(31,791	)
Total paid		(67,225	)		(65,854	)		(48,750	)

Net balance at December 31		189,879			205,916			190,116
Plus reinsurance recoverable		124,658			111,581			55,502
Gross balance – December 31	$	314,537		$	317,497		$	245,618

Loss reserves are established by management using actuarial indications based upon our historical data and industry experience regarding claim emergence and claim payment patterns, claim cost trends (adjusted for future anticipated changes in claims-related and economic trends), as well as regulatory and legislative changes. As we receive new information and updates in our assumptions over time regarding its ultimate liabilities, our loss reserves may prove to be inadequate to cover its actual losses or they may prove to exceed the ultimate amount of its actual losses. The amount by which estimated losses, measured subsequently by reference to payments and additional estimates, differ from those originally reported for a period is known as “development” in the insurance industry.

In 2010 and 2009, our estimates of incurred losses and loss adjustment expenses attributable to insured events of prior years increased. We refer to such increases as unfavorable development. Excluding unfavorable fair value adjustments to our net reserves, the increase in prior year reserves was $2.4 million and $6.0 million for the years ended December 31, 2010 and 2009, respectively. This increase was primarily the result of actual incurred and paid losses being greater than originally expected and revised assumptions used to project future losses and loss adjustment expenses payments based on more current information. The unfavorable development in 2010 was predominantly from California accident years 2007 and 2008, for which reported indemnity claims and average cost per claim (severity) developed worse than expected. The unfavorable development in 2009 was the result of loss cost trends in California and New Jersey, predominantly from accident year 2008.

In 2008, our estimates of incurred losses and loss adjustment expenses attributable to insured events of prior years decreased for past accident years. We refer to such decreases as favorable development. Excluding fair value adjustments to our net reserves, the reduction in reserves was $5.4 million for the year ended December 31, 2008. The decrease in the prior year reserves was primarily the result of actual paid losses being less than expected, and revised assumptions used in projection of future losses and loss adjustment expenses payments based on more current information. The favorable development was predominantly from accident years 2004 through 2007, for which reported indemnity claims and average cost per claim (severity) developed better than expected

We have had unfavorable loss reserve development this year and favorable development over the previous two years. The magnitude of this development illustrates the inherent uncertainty in our liability for losses and loss adjustment expenses, and we believe that favorable or unfavorable development of similar magnitude, or greater, could occur in the future. For more information regarding our development, see ‘‘Item 7—Management’s Discussion Analysis of Financial Condition and Results of Operations” and Note 11 of the Notes to our Consolidated Financial Statements.

Loss Reserve Development. The table below shows the development of our consolidated reserves for losses and loss adjustment expenses, net of reinsurance, for years ended December 31, 2000 through 2010. The accompanying data is not accident year data, but rather a display of 2000 to 2010 year-end reserves and the subsequent changes in those reserves. The accompanying data does not include the GAAP fair value purchase accounting adjustments that reduced loss reserves and reinsurance recoverables by $3.3 million and $5.6 million, respectively, for the year ended December 31, 2010. The accompanying data does not include the GAAP fair value purchase accounting adjustments that reduced loss reserves and reinsurance recoverables by $3.8 million and $5.7 million, respectively, for the year ended December 31, 2009. The accompanying data does not include the GAAP fair value purchase accounting adjustments that reduced loss reserves and reinsurance recoverables by $4.4 million and $6.5 million, respectively, for the year ended December 31, 2008. The accompanying data does not include the elimination of affiliate reinsurance recoverables of $18.2 million or the GAAP fair value purchase accounting adjustments that reduced loss reserves and reinsurance recoverables by $4.9 million and $7.2 million, respectively, for the year ended December 31, 2007. The accompanying data does not include the GAAP fair value purchase accounting adjustments that reduced loss reserve and reinsurance recoverables by $6.2 million and 6.9 million, respectively for the year ended December 31, 2006.

Section A of the table shows the estimated liability for losses and loss adjustment expenses, net of reinsurance, recorded at the balance sheet date for each of the indicated years for all current and prior accident years. This liability represents the estimated amount of losses and loss adjustment expenses for claims arising for all years that are unpaid at the balance sheet date, including losses that have been incurred but not yet reported and reduced by estimates of amounts recoverable under reinsurance contracts. Section B of the table shows the re-estimated amount of the previously recorded liability, based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims.

Sections C and G of the table show the aggregate change in the net and gross liability, respectively, from original balance sheet dates and the re-estimated liability through December 31, 2010. Thus, changes in ultimate development estimates are included in operations over a number of years, minimizing the significance of such changes in any one year.

Section D of the table shows the cumulative amount of net losses and loss adjustment expenses paid relating to recorded liabilities as of the end of each succeeding year. Section E of the table shows the re-estimated liability reduced by estimated reinsurance receivables and Section F of the table shows the re-estimated gross liability before the reduction of reinsurance receivables through December 31, 2010.

	Years ended December 31,
	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010

Section A. Reserve for unpaid loss and loss adjustment expenses, net of reinsurance recoveries	$ 63,745	$ 66,999	$ 76,389	$ 87,781	$ 101,015	$ 111,275	$ 124,004	$ 151,375	$ 188,058	$ 204,007	$ 187,553
Novation reserves assumed in 2007 on prior years				106	2,148	4,651	6,944
Re-stated liability after Novation	$ 63,745	$ 66,999	$ 76,389	$ 87,887	$ 103,163	$ 115,926	$ 130,948	$ 151,375	$ 188,058	$ 204,007	$ 187,553


Section B. Reserve, net of reinsurance recoveries, re- estimated as of:
One year later	68,509	73,153	90,093	95,411	104,060	107,487	121,724	145,959	194,034	206,418
Two years later	70,883	83,038	95,533	102,910	105,177	105,421	112,871	144,569	196,453
Three years later	74,250	87,246	101,133	106,125	105,350	99,081	112,935	144,046
Four years later	77,158	89,875	103,584	106,715	101,622	100,478	110,347
Five years later	78,575	92,448	104,993	105,167	101,078	97,646
Six years later	80,355	94,663	104,325	104,160	100,544
Seven years later	82,905	94,221	103,355	103,556
Eight years later	82,396	93,446	103,208
Nine years later	82,070	93,825
Ten years later	82,559


Section C. Net Cumulative Redundancy (Deficiency)	(18,813)	(26,826)	(26,819)	(15,669)	2,619	18,280	20,601	7,329	(8,395)	(2,411)


Section D. Paid, net (cumulative) as of:
as of:
One year later	27,322	31,844	33,768	31,878	30,729	25,569	23,974	31,542	53,281	65,836
Two years later	46,570	52,008	55,410	53,239	49,322	40,204	40,760	54,968	89,694
Three years later	57,249	63,543	68,588	66,039	59,274	51,156	52,265	72,332
Four years later	63,228	70,490	76,609	72,646	66,904	57,700	61,124
Five years later	66,383	74,635	80,937	78,240	71,314	63,202
Six years later	68,602	77,536	84,453	81,208	74,943
Seven years later	70,136	79,593	86,350	84,053
Eight years later	71,470	80,955	88,469
Nine years later	72,397	82,673
Ten years later	73,779

Net Liability--
December 31,	63,745	66,999	76,389	87,887	103,163	115,926	130,948	151,375	188,058	204,007	187,553
Receivable from
reinsurers for
unpaid losses	27,827	31,384	33,037	40,651	41,783	30,937	28,830	42,437	61,954	117,267	130,235

Gross Liability--
December 31,	91,572	98,383	109,426	128,538	144,946	146,863	159,778	193,812	250,012	321,274	317,788
Novation reserves assumed in 2007 on prior years				216	3,085	8,132	15,987
Re-stated gross liability after Novation	91,572	98,383	109,426	128,754	148,031	154,995	175,765	193,812	250,012	321,274	317,788

Section E. Re-estimated liability, net	82,559	93,825	103,208	103,556	100,544	97,646	110,347	144,046	196,453	206,418
Re-estimated receivable
from reinsurers for
unpaid losses	31,317	47,165	51,166	53,477	50,046	42,113	41,502	42,758	73,930	120,453


Section F. Re-estimated liability, gross	113,876	140,990	154,374	157,032	150,590	139,759	151,849	186,804	270,383	326,871


Section G. Gross Cumulative Redundancy (Deficiency)	(22,304)	(42,607)	(44,948)	(28,278)	(2,559)	15,236	23,916	7,007	(20,371)	(5,597)

Investments

We invest the funds made available by our insurance subsidiaries’ capital and net cash flows from operations with the objective to provide income and realized gains on investments. We manage our investment portfolio by considering duration, asset/liability matching, sector allocation, execution expense, credit quality and concentration and various regulatory requirements in formulating investment strategy and selecting securities.

Our investment objective is to maximize current yield while maintaining safety of capital together with sufficient liquidity for ongoing insurance operations. Since May 2008, our investment portfolio is composed of fixed-income securities. We structure our investment portfolio giving consideration to the expected timing of the payout of our insurance liabilities. If our payout estimates are inaccurate, we may be forced to liquidate investments prior to maturity at a significant loss to cover such liabilities. Investment losses could significantly decrease our asset base, which will adversely affect our ability to conduct business and could have a material adverse effect on our financial condition and results of operations.

As of December 31, 2010, our available-for-sale portfolios totaled $259.5 million, of which $234.5 million were on deposit with various regulatory agencies as required by law. A one percent increase in the current market interest rates would cause the fair value of our investment portfolio as of December 31, 2010 to decrease by approximately $10.1 million.

The following table shows the fair market values of various categories of our investment portfolio, the percentage of the total market value of our invested assets represented by each category and the tax equivalent yield to maturity based on the fair market value of each category of invested assets as of the dates indicated:

	As of December 31, 2010
	(Dollars in thousands)
Description of Securities	Fair Value		Percent of Total			Yield
U.S. Treasury and government sponsored agency securities	$	42,594		16	%		2.4	%
Obligations of states and political subdivisions		82,405		32	%		4.2	%
Corporate and other obligations		134,547		52	%		3.4	%
Total investment securities, available for sale	$	259,546		100	%		3.5	%

The following table shows the ratings distribution of our fixed-income portfolio by Standard and Poor’s rating as a percentage of total market value as of the dates indicated:

Rating	As of December 31, 2010
	(Dollars in thousands)
“AAA”	$	91,984	35	%
“AA”		85,459	33	%
“A”		80,043	31	%
“BBB”		2,060	1	%
Total investment securities, available for sale	$	259,546	100	%

The following table shows the composition of our investment portfolio by remaining time to maturity as of the dates indicated. For securities that are redeemable at the option of the issuer and have a market price that is greater than par value, the maturity used for the table below is the earliest redemption date. For securities that are redeemable at the option of the issuer and have a market price that is less than par value, the maturity used for the table below is the final maturity date.

	December 31, 2010
	(Dollars in thousands)
	Amortized Cost		Fair Value
Due in one year or less	$	19,557	$	19,881
Due after one year through five years		116,604		118,959
Due after five years through ten years		45,333		46,247
Due after ten years		74,057		74,459
Total investment securities, available for sale	$	255,551	$	259,546

Reinsurance

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. Reinsurance does not legally discharge us from primary liability for the full amount due under our policies. However, our reinsurers are obligated to indemnify us to the extent of the coverage provided in our reinsurance agreements. The cost and limits of reinsurance we purchase can vary from year to year based upon the availability of quality reinsurance at an acceptable price and our desired level of retention. Retention refers to the amount of risk that we retain for our own account.

Excess of Loss Ceded Reinsurance. Under excess of loss ceded reinsurance, covered losses in excess of the retention level up to the limit of the program are paid by the reinsurer. Our excess of loss ceded reinsurance is written in layers, in which our reinsurers accept a band of coverage up to a specified amount. Any liability exceeding the limit of the program reverts to us as the ceding company.

For losses incurred between July 1, 2010 and June 30, 2011, Majestic Insurance entered into a new excess of loss reinsurance treaty program that provides $49.4 million of reinsurance protection, per occurrence, for workers’ compensation losses in excess of a $600 thousand retention limit. Majestic Insurance retains liability for any amounts of losses and loss adjustment expenses that exceed $50 million up to the applicable statutory limit. We have 11 reinsurers providing coverage, including: Axis Specialty Limited, Catlin Insurance Company, Dorinco Reinsurance Company, Hannover Rueckversicherung AG, Transatlantic, Endurance Specialty Insurance Ltd., Flagstone Re. Ltd., Munich Re, Tokio Millennium Re Ltd., Odyssey Re, Aspen Re and various Lloyd’s syndicates.

For losses incurred between July 1, 2009 and June 30, 2010, Majestic Insurance has an excess of loss reinsurance treaty program that provides $69.5 million of reinsurance protection, per occurrence, for workers’ compensation losses in excess of a $500 thousand retention limit. Majestic Insurance retains liability for any amounts of losses and loss adjustment expenses that exceed $70 million up to the applicable statutory limit. We have 11 reinsurers providing coverage, including: Axis Specialty Limited, Catlin Insurance Company, Dorinco Reinsurance Company, Endurance Specialty Insurance LTD., Hannover Rueckversicherung AG, Flagstone Re. Ltd., Munich Re America Corporation, Tokio Millennium Re Ltd., Validus Reinsurance, Ltd., various Lloyd’s syndicates, and Twin Bridges, our Bermuda-based reinsurance subsidiary. Under the treaty, Twin Bridges has a 2.75% participation level in the excess of loss treaty for the loss and loss adjustment expenses in excess of $2.0 million per occurrence up to $5.0 million.

For losses incurred between July 1, 2008 and June 30, 2009, Majestic Insurance has an excess of loss reinsurance treaty that provides $99.5 million of reinsurance protection, per occurrence, for workers’ compensation losses in excess of a $500 thousand retention limit. Majestic Insurance retains liability for any amounts of losses and loss adjustment expenses that exceed $100 million up to the applicable statutory limit. There are 18 reinsurers providing coverage, including: Axis Specialty Limited, Catlin Insurance Company, Dorinco Reinsurance Company, Endurance Specialty Insurance Ltd., Hannover Re (Bermuda) Ltd., Hannover Rueckversicherung AG, Flagstone Re. Ltd., Max Re, Ltd., Munich Re America Corporation, Partner Reinsurance Company of the U.S., Tokio Millennium Re Ltd., Validus Reinsurance, Ltd., various Lloyd’s syndicates, and Twin Bridges. Under the treaty, Twin Bridges has a 4% participation level in the excess of loss treaty for the loss and loss adjustment expenses in excess of $500 thousand per occurrence up to $2.0 million.

For losses incurred between August 1, 2007 and June 30, 2008, Majestic Insurance has an excess of loss reinsurance treaty that is substantially similar to the treaty effective July 1, 2008 to June 30, 2009. The treaty provides $99.5 million of reinsurance protection, per occurrence, for workers’ compensation losses in excess of a $500 thousand retention limit. Twin Bridges has a 50% participation in the excess of loss treaty for the loss and loss adjustment expenses in excess of $500 thousand per occurrence up to $750 thousand, exclusive of primary workers’ compensation business written in New York and Florida. For losses incurred between October 1, 2007 and June 30, 2008, Twin Bridges has a 100% participation in the treaty for loss and loss adjustment expenses in excess of $500 thousand per occurrence up to $2.0 million for primary workers’ compensation business written exclusively in New York and Florida.

Prior to August 1, 2007, Majestic Insurance participated in an excess of loss reinsurance treaty, under which the reinsurers reimburse Majestic Insurance for losses and loss adjustment expenses over $600 thousand up to $50 million on a per occurrence basis. Majestic Insurance is liable for losses and loss adjustment expenses that exceed $50 million up to statutory limits. Twin Bridges does not participate in this excess of loss reinsurance treaty.

Quota Share Reinsurance. 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.

External Assumed Quota Share Reinsurance. Majestic Insurance, and certain insurance subsidiaries of AmTrust Financial Services, Inc. (AmTrust), entered into a 90% assumed quota share agreement, effective April 1, 2010, covering underwriting, claims management and administration of workers’ compensation insurance in the western states of California, Arizona, Nevada and Oregon (covered business). Under the assumed quota share agreement, Majestic Insurance assumes 90% of the first $500 thousand of losses and loss adjustment expenses from any single occurrence under the covered business and AmTrust cedes 90% of the applicable premiums to Majestic Insurance. Majestic Insurance provides to AmTrust security for its obligations in the form of a trust account, which may be funded with cash advances, funds withheld, letters of credit or a combination thereof. The assumed quota share agreement limits the amount of covered business to $40 million in any calendar year. Majestic Insurance performs various management services for the covered business, including marketing, underwriting, issuance of polices, loss control and claims handling. Majestic Insurance reimburses AmTrust for costs associated with the covered business, including commissions, taxes, assessments and all other expenses other than allocated loss adjustment expenses. In addition, for each calendar year, AmTrust receives a ceding commission equal to the greater of $630 thousand or 7.0% of annual gross net premiums written.

The assumed quota share agreement has an initial term from April 1, 2010 to December 31, 2011, with successive calendar year renewals thereafter. AmTrust has the right to terminate the agreement (1) on 120 days prior written notice, (2) on 30 days prior written notice if Majestic Insurance experiences a loss of 20% or more of its policyholders’ surplus or shareholder funds during any twelve month period and upon other contractually defined circumstances, or (3) immediately if Majestic Insurance becomes insolvent, is unable to pay its debts, is placed in conservation, rehabilitation or liquidation or has a receiver appointed. The assumed quota share agreement renewed January 1, 2011 and was not terminated by AmTrust when Majestic Insurance was placed under statutory conservation by the CA DOI on April 21, 2011. Majestic Insurance will continue to participate in the assumed quota share agreement whereby workers’ compensation insurance policies will continue to be underwritten by the AmTrust group of companies and reinsured by Majestic Insurance until the rehabilitation plan is approved by the CA DOI and the AmTrust Transactions described in “Item 1 – Business – Significant Developments – California Department of Insurance – Conservation and Rehabilitation of Majestic Insurance” are executed.

External Ceded Quota Share Reinsurance. Majestic Insurance entered into a 43% ceded quota share agreement (43% Quota Share) effective July 1, 2009, of which 80% was placed with participating reinsurers. The 43% Quota Share was effective for new and renewal primary insurance policies issued by Majestic Insurance on or after July 1, 2009 through June 30, 2010. Under the 43% Quota Share, the participating reinsurers assume their pro-rata share of the first $500 thousand of losses and loss adjustment expenses from any single occurrence under Majestic Insurance’s primary insurance policies and Majestic Insurance, in turn, cedes the applicable percentage of premiums to the participating reinsurers. The 43% Quota Share limits the ceded premiums on primary workers’ compensation business written in New York to $10.0 million and allows Majestic Insurance the option to decrease the percentage ceded to the participating reinsurers on the first day of each calendar quarter, although the percentage cannot be reduced below 21.5%. The participating reinsurers’ losses are capped at 130% of the premiums ceded by Majestic Insurance.

Majestic Insurance receives a 25% provisional ceding commission on all ceded premiums under the 43% Quota Share to cover its costs associated with the policies, including dividends, commissions, taxes, assessments and all other expenses other than allocated loss adjustment expenses. If Majestic Insurance’s loss ratio is greater than 72.5%, its ceding commission decreases by 0.75% for each 1% increase in its loss ratio, with a minimum 22.0% ceding commission received at a 76.5% loss ratio. If Majestic Insurance’s loss ratio is less than 72.5%, its ceding commission increases by 0.75% for each 1% decrease in its loss ratio, with a maximum 27.25% ceding commission received at a 69.5% loss ratio.

The 43% Quota Share was 80% placed with two participating reinsurers, Aspen Re and Axis Specialty, Ltd. Aspen Re and Axis Specialty, Ltd. each agreed to assume a 40% pro-rata share of the 43% Quota Share. The remaining 20% was not placed with any participating reinsurers and Majestic Insurance remains responsible for those losses.

The 43% Quota Share was not renewed and terminated on a “run off” basis on June 30, 2010 (the expiration date). Therefore, we remain liable for losses under the policies in force on the expiration date, as a result of occurrences taking place after the expiration date, until the policies naturally expire.

In addition to the 43% Quota Share, Majestic Insurance entered into a 15% ceded quota share agreement (15% Quota Share) with Max Re, Ltd. (Max Re) effective July 1, 2009. Under the 15% Quota Share, Max Re assumes 15% of the first $500 thousand of losses and loss adjustment expenses from any single occurrence under Majestic Insurance’s primary insurance policies and Majestic Insurance cedes 15% of the applicable premiums to Max Re. The 15% Quota Share excludes coverage for workers’ compensation business written by Majestic Insurance in New York and allows Majestic Insurance the option to decrease the percentage ceded to Max Re on the first day of each calendar quarter, although the percentage cannot be reduced below 5%. Max Re’s losses are capped at 150% of the premiums ceded by Majestic Insurance. Majestic Insurance receives a 25.75% ceding commission on all ceded premiums to cover its costs associated with the policies, including dividends, commissions, taxes, assessments and all other expenses other than allocated loss adjustment expenses. The 15% Quota Share is effective for losses incurred and premiums earned by Majestic Insurance for new and renewal primary insurance policies issued by Majestic Insurance on or after July 1, 2009 through June 30, 2010.

The 15% Quota Share was not renewed and terminated on a “run off” basis on June 30, 2010 (the expiration date). Therefore, we remain liable for losses under the policies in force on the expiration date, as a result of occurrences taking place after the expiration date, until the policies naturally expire.

For losses incurred between July 1, 2008 and June 30, 2009, Majestic Insurance entered into a 40% ceded quota share agreement (40% Quota Share) with Max Re. Under the 40% Quota Share, Max Re assumes 40% of the first $500 thousand of losses and loss adjustment expenses from any single occurrence under Majestic Insurance’s primary insurance policies and Majestic Insurance cedes 40% of the applicable premiums to Max Re. Max Re’s losses are capped at 150% of the premiums ceded by Majestic Insurance. Majestic Insurance receives a 30% ceding commission on all ceded premiums to cover Majestic Insurance’s costs associated with the policies, including dividends, commissions, taxes, assessments and all other expenses other than allocated loss adjustment expenses

Affiliate Ceded Quota Share Reinsurance. Effective January 1, 2008, Majestic Insurance entered into a 40% ceded quota share agreement (the Affiliate Primary Quota Share) with Twin Bridges, under which Twin Bridges assumed 40% of the first $500 thousand of premiums and losses and loss adjustment expenses of Majestic Insurance’s primary insurance policies in force. Twin Bridges allows Majestic Insurance (a) a ceding commission of 32% on all ceded premiums to cover Majestic Insurance’s costs associated with the policies, including dividends, commissions, taxes, assessments and other expenses and (b) 6% of ceded premiums to cover Majestic Insurance’s loss adjustment expenses. The Affiliate Primary Quota Share was amended effective April 1, 2008, to decrease Twin Bridges assumption of the first $500 thousand of premiums and losses and loss adjustment expenses of Majestic Insurance’s primary insurance policies in force from 40% to 5%. The Affiliate Primary Quota Share was terminated effective September 30, 2010.

Majestic Insurance and Twin Bridges entered into a 90% quota share ceded reinsurance agreement (the Affiliate Excess Quota Share) effective January 1, 2007 with respect to all new and renewal excess workers’ compensation insurance coverage issued to the self-insured groups managed by CRM CA. In addition, the consummation of the Novation Agreement transferred and assigned to Majestic Insurance two quota share reinsurance agreements previously in effect between NY Marine & General and Twin Bridges. These policies included a 50% ceded quota share arrangement for excess policies issued between December 2003 and November 2005 and a 70% ceded quota share arrangement for policies issued from December 2005 through December 2006. For the layers of coverage outside of the Twin Bridges quota share reinsurance agreements, NY Marine & General obtained consent agreements from each of its other reinsurers naming Majestic Insurance as an insured party on the reinsurance agreements.

Recoverability of Ceded Reinsurance. Reinsurance makes the assuming reinsurer liable to the ceding company to the extent of the reinsurance. It does not, however, discharge the ceding company from its primary liability to its policyholders in the event the reinsurer is unable to meet its obligations under the reinsurance treaty. To reduce our risk of the possibility of a reinsurer becoming unable to fulfill its obligations under the reinsurance contracts, we attempt to select financially strong reinsurers with an A.M. Best rating of “A-” (Excellent) or better and continue to evaluate their financial condition and monitor various credit risks to minimize our exposure to losses from reinsurer insolvencies. We have made an exception to this policy for Twin Bridges, our Bermuda-based reinsurance company, which is currently rated “B” (Fair) by A.M. Best, given our knowledge of Twin Bridges’ operations.

The following table is a summary of our ten largest reinsurance recoverable balances, net of prepaid reinsurance premiums, by reinsurer at December 31, 2010:

Reinsurer	Net Amount Recoverable at December 31, 2010		AM Best Rating of Reinsurer
	(Dollars In thousands)
Max Re Ltd – Bermuda	$	39,485		A
Hannover RK – NS		33,154		A
Aspen - Bermuda		14,935		A
Axis Specialty Ltd. - Bermuda		14,914		A
Lloyd’s Syndicate #2003 Through Catlin		9,693		A
Dorinco Reinsurance Company		4,823		A	-
Axis US		3,126		A
Lloyd’s Syndicate #0435 DP Mann Ltd.		1,726		(1	)
Lloyd’s Syndicate #4472 Liberty Syndicate_UK		1,566		(1	)
Lloyd’s Syndicate #2020 Wellington/Catlin		1,486		(1	)

(1)	Includes multiple reinsurers whose ratings are A- or better.

Corporate Overhead - General and Administrative Expenses

Our holding companies include Majestic Capital, Majestic Capital USA and Embarcadero. These companies own, directly or indirectly, all of the capital shares and stock of our insurance and other subsidiaries. The general and administrative expenses incurred by the holding company include stock exchange listing and other licensing fees, directors’ fees, and legal, auditing, general corporate overhead and other administrative fees.

Discontinued Operations — Fee-Based Management Services

We began our business in 1999 by forming, managing, and operating workers’ compensation self-insured groups in California and New York. We ceased our self-insured group operations in California as of December 31, 2010 and in New York as of September 8, 2008. Accordingly, the results of our fee-based management services are reported within discontinued operations for all periods presented. Financial information concerning our discontinued operations is presented in Note 3 in our consolidated financial statements.

California Self-Insured Groups

We began our California operations in 2003. We originally formed and managed six worker’s compensation self-insured groups in the California market. During 2006, our California group which provided workers’ compensation insurance to plastics manufacturers ceased operations and disbanded. The plastics’ group disbanded due in large part to its conclusion that declines in the California plastics industry made prospects for future growth of the group less certain. During 2008 and 2009, three of our self-insured groups under management (auto dealers in 2008 and wineries and contractors in 2009) decided to cease active business operations and enter run-off as the groups were unable to obtain adequate bonding coverage to meet the surety requirements of the California Department of Industrial Relations. Further, in the soft market conditions experienced in California, primary insurance carriers offering guaranteed cost products presented a competitive alternative to the risk product offered by our self-insurance groups. During 2009 and 2010 the remaining two groups under management, bankers and healthcare, respectively, elected to move to new group administrators.

New York Self-Insured Groups

We believe that the self-insured group product which we offered in New York was not as attractive during periods of low premium rates and excess underwriting capacity because of the risks associated with the joint and several liability of the members. Increased market competition and pricing pressure combined with the underfunded status of the self-insured groups 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 were caused by several factors that, when combined, would have made 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 ceased to manage any self-insured groups in New York. We transferred administration of the claims for all of the self-insured groups 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 us and the New York Workers’ Compensation Board, we surrendered our third-party administrator’s license in New York on September 8, 2008. In conjunction with the voluntary termination of the New York self-insured groups, we have ceased the operations of our Eimar division which provided medical bill review and case management services, as historically, the majority of Eimar’s business was derived from the New York self-insured groups we managed.

Settlement of Contingencies

Our discontinued fee-based management services business has subjected us to regulatory investigations and lawsuits. While we do not expect to derive revenues or incur operating expenses from fee-based management services going forward, we may continue to incur legal defense costs related to pending litigation and regulatory proceedings.

In addition to legal defense costs, ongoing cash outflows of our discontinued operations include:

·	a $4.6 million charge related to the proposed settlement of litigation involving the New York self-insured groups; and

the remaining three annual installments of $0.4 million due on the June 2008 settlement agreement for litigation commenced by Cornerstone Program Management & Insurance Services (“Cornerstone”), the former general agent for Contractors Access Program (CAP), a self-insured group administered by CRM CA.

For a further discussion of the investigations and lawsuits pending against us, see “Item 3 — Legal Proceedings” below, and for a discussion of risks associated therewith, see “Item 1A — Risk Factors — Risks Related to Litigation” below.

Competition

The insurance industry, in general, is highly competitive and there is significant competition in the workers’ compensation insurance industry. Competition in the insurance business is based on many factors, including premium rates, policy terms, coverage availability, claims management, safety services, payment terms, types of insurance offered, overall financial strength, financial ratings assigned by independent rating organizations, such as A.M. Best, and reputation. Our competitors include other insurance companies, mutual insurance companies, individual self-insured employers, state insurance pools including the State Compensation Insurance Fund in California and the New York State Insurance Fund, safety groups and other self-insured and captive products. Many of the insurance companies we compete with have a higher A.M. Best rating, more capital, name and brand recognition and marketing and management resources than we have. Many of our competitors have offered, and may continue to offer, workers’ compensation insurance combined with other insurance coverage. Some of our competitors offer workers’ compensation insurance on a multi-state basis greater than ours. We may also compete with new market entrants in the future.

Ratings

Ratings by independent agencies are an important factor in establishing the competitive position of commercial insurance companies. Rating organizations continually review the financial positions of insurers. Standard & Poor’s maintains a letter scale rating system ranging from “AAA” (Extremely Strong) to “R” (under regulatory supervision). A.M. Best maintains a letter scale rating system ranging from “A++” (Superior) to “F” (in liquidation). In evaluating a company’s financial and operating performance, A.M. Best reviews the company’s profitability, indebtedness and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence. This rating is intended to provide an independent opinion of an insurer’s ability to meet its obligations to policyholders and is not an evaluation directed at investors. The objective of S&P and A.M. Best’s ratings systems is to provide an opinion of an insurer’s financial strength and ability to meet ongoing obligations to its policyholders.

2011 A.M. Best Downgrade. On March 25, 2011, A.M. Best downgraded the financial strength ratings of Majestic Insurance and Twin Bridges to “B” (Fair) from “B+” (Good), downgraded Majestic Insurance’s issuer credit rating to “bb+” from “bbb,” downgraded Twin Bridges’ issuer credit rating to “bb+” from “bbb-“; and downgraded the issuer credit ratings of Majestic Capital, Embarcadero and Majestic USA to “b” from “bb”. In addition, A.M. best downgraded the debt ratings on the debt obligations of both Majestic USA and Embarcadero to “ccc+” from “b+” on March 25, 2011. The status for all ratings has been revised to under review with negative implications from under review with developing implications.

A.M. Best’s 2011 downgrade of Majestic Insurance’s financial strength rating to “B” (Fair) places the rating in the “non-secure” category within A.M. Best’s letter scale rating system and will cause significant negative effects to our business. The ratings actions reflect A.M. Best’s concern over the termination of the Bayside amalgamation described in “Item 7 – Liquidity and Capital Resources – Capital Resources – Previously Announced and Subsequently Terminated Bayside Amalgamation Agreement” and the continued deterioration in our overall earnings and material deterioration of our surplus. In addition, A.M. Best’s concerns were further compounded by the anticipated conservation and rehabilitation of Majestic Insurance by the CA DOI. The above ratings will remain under review with negative implications concerning the conservation of Majestic Insurance, the approval of the related rehabilitation plan and the determination of bankruptcy proceedings of Majestic Capital and its non-insurance subsidiaries, all of which are described in “Item 1 – Business – Significant Developments.”

2009 A.M. Best Downgrade. In December 2009, A.M. Best downgraded the financial strength rating of Majestic Insurance to “B++” (Good) from “A-” (Excellent) and Majestic’s issuer credit rating to “bbb” from “a-”. A.M. Best also downgraded the financial strength rating of Twin Bridges to “B+” (Good) from “B++” (Good) and Twin Bridges’ issuer credit rating to “bbb-” from “bbb”. These rating actions reflected A.M. Best’s concern over the potential impact on Majestic Insurance and Twin Bridges of the regulatory and litigation issues faced by their affiliates, CRM and Majestic Capital. The issues stem from a “Notice of Imminent Enforcement Action” filed by the New York State Office of the Attorney General, and a lawsuit commenced by the New York State Workers’ Compensation Board. For a further discussion of these actions, see “Item 3 — Legal Proceedings” below. In addition, A.M. Best’s concerns were further compounded by the sizeable deterioration in our overall earnings and the increased level of dependence on Majestic Insurance to support our holding company operations. A.M. Best also downgraded the issuer credit ratings to “bb” from “bbb-” of Majestic Capital, Embarcadero and Majestic USA, and downgraded the debt ratings to “b+” from “bb” for the trust preferred securities of Majestic USA and the surplus notes of Embarcadero. All ratings were placed under review with negative implications.

In April 2008, A.M. Best placed the financial strength ratings of Majestic Insurance and Twin Bridges under review with negative implications. At the time, Majestic Insurance was rated “A-” and Twin Bridges was rated “B++”. 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 Insurance falling 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 Insurance. In addition to this, Majestic Insurance executed certain transactions relating to its reinsurance coverage, including securing a 40% quota share agreement with a third party reinsurer, reducing the amount of premiums ceded to Twin Bridges, and renewing its excess of loss treaty program, which are more fully described above in “Item 1 – Business – Reinsurance – Quota Share Reinsurance.”

Following this, A.M. Best announced in July 2008, that it had removed from under review with negative implications and affirmed the financial strength rating of “A-” (Excellent) of Majestic Insurance. 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 reflected Majestic Insurance’s improved risk-adjusted capitalization following the implementation of our capital reallocation from Twin Bridges to Majestic Insurance and the execution of a 40% quota share reinsurance arrangement with Max Re. In addition, CRM had settled the third party administrator’s license issues with the New York Workers’ Compensation Board during 2008 with no admission of wrong doing, fines or penalties, although CRM agreed to surrender its license. Despite the settlement, A.M Best remained 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 recognized 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 reallocate capital to Majestic Insurance.

Change in NASDAQ Exchange and Reverse Share Split

On May 12, 2010, we received a letter from The Nasdaq Stock Market stating that our common shares had failed to comply with the $1.00 minimum bid price required for continued listing on the NASDAQ Global Select Market. In response, we obtained approval from The Nasdaq Stock Market to transfer our stock listing from the NASDAQ Global Select Market to the NASDAQ Capital Market, effective at the opening of the market on May 21, 2010. In connection with the transfer and in accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), we were granted an additional 180 days from May 10, or until November 8, 2010, to demonstrate compliance with the $1.00 bid price requirement of the NASDAQ Capital Market. Failure to comply with the $1.00 bid price requirement by November 8, 2010 would have resulted in notification from Nasdaq of their determination to delist our common shares.

At the 2010 Annual General Meeting of Shareholders, our shareholders voted on and approved to authorize the Board of Directors, in their discretion, to effect a reverse share split of our common and Class B shares within a range of 1-for-5 shares to 1-for-10 shares, at any time prior to November 5, 2010. On November 2, 2010, our Board of Directors implemented a 1-for-10 reverse share split, effective at the close of business on November 4, 2010. Our common shares initiated trading on the NASDAQ Capital Market on a reverse split basis effective with the opening of the market on November 5, 2010 under the symbol “MAJCD” and continued to trade under that symbol for a period of 20 days. Thereafter, trading resumed under the symbol “MAJC.” The primary purpose of the reverse share split was to increase the per share price of our shares, such that we will be in compliance with the $1.00 bid price requirement of the NASDAQ Capital Market.

In connection with the November 4, 2010 reverse share split, the number of outstanding common shares was reduced from 16,655,928 shares to 1,666,019 shares and the number of outstanding Class B shares from 395,000 shares to 39,500 shares. No fractional shares were issued in connection with the reverse stock split. Instead, fractional shares were rounded up to the nearest whole share. The number of common shares outstanding and granted under our long-term incentive plans were proportionately adjusted to reflect the reverse share split.

Employees

As of December 31, 2010, we had 150 full-time employees and 3 part-time employees. We believe that our relations with our employees are good. None of our employees is subject to a collective bargaining agreement.

Regulation

The insurance business is regulated in most states of the United States and in other countries, including Bermuda, although the degree and type of regulation vary significantly from one jurisdiction to another. We are also subject to regulation in California and each state in which we issue insurance policies.

State Insurance Regulation in the United States

Insurance companies are subject to extensive regulation and supervision by the department of insurance in the state in which they are domiciled and, to a lesser extent, other states in which they conduct business. These state agencies have broad regulatory, supervisory and administrative powers, including, among other things, the power to grant and revoke licenses to transact business; license agents; set the standards of solvency to be met and maintained; determine the nature of, and limitations on, investments and dividends; approve policy forms and rates in some states; periodically examine an insurance company’s financial condition; determine the form and content of required financial statements including by prescribing statutory accounting standards; and periodically examine market conduct.

Holding Company Regulation. As a group member of an insurance holding company (Embarcadero), Majestic Insurance is subject to regulation by California, its domiciliary state, and the other states in which it transacts business. Pursuant to the insurance holding company system regulatory act of California, Majestic Capital is required to register with the CA DOI. In addition, Majestic Insurance is required to periodically report certain financial, operational and management data to the CA DOI. All transactions between a holding company and an affiliated company that affect an insurer must have fair and reasonable terms, charges or fees for services performed must be fair and reasonable to the insurer, and the insurer’s policyholder surplus following any transaction must be both reasonable in relation to its outstanding liabilities and adequate for its needs. Notice to, and in some cases approval from, the CA DOI is required prior to the consummation of certain affiliated and other transactions involving Majestic Insurance.

State Insurance Department Examinations. Detailed annual and quarterly financial statements prepared in accordance with statutory accounting standards and other reports are required to be filed with the departments of insurance of the states in which we are licensed to transact business. Majestic Insurance’s financial statements and financial condition are subject to periodic examination by these departments of insurance. As with all domestic insurers, Majestic Insurance is subject to periodic examinations by the CA DOI. The CA DOI generally examines each of its domiciliary insurance companies on a triennial basis, and Majestic Insurance is currently undergoing an examination for calendar years 2005 through 2010. For a discussion on the findings of the CA DOI with respect to the adequacy of Majestic Insurance’s reserves for loss and loss adjustment expenses see “Item 7 – Critical Accounting Policies and Estimates – Reserve for Losses and Loss Adjustment Expenses – Loss Reserve Adequacy – California Department of Insurance Examination.”

In addition, the CA DOI has appointed a “Special Examiner” who is responsible for providing special examination services. During the Special Examiner’s appointment, Majestic Insurance has agreed that it will not, without the prior approval of the Special Examiner or the CA DOI: (a) make any payment to, or engage in any transaction or enter into any agreement with, an affiliated or related person or entity if the cost exceeds $10,000 except for certain payments that have previously been reported to or approved by the Department which may continue until further notice; (b) make any payment to, or engage in any transaction or enter into any agreement with any non-affiliated or unrelated person or entity outside of the ordinary course of business that exceeds $10,000 individually or $100,000 in the aggregate; or (c) pay bonuses or make other distributions (including dividends). In connection with the findings of the Special Examiner, the CA DOI applied for an order to place Majestic Insurance into a statutory conservation on April 21, 2011, as further described in “Item 1 – Business – Significant Transactions – California Department of Insurance – Conservation and Rehabilitation of Majestic Insurance.”

Dividend Limitations. Majestic’s ability to pay dividends is subject to restrictions. The insurance holding company act in California requires that ordinary dividends be reported to the CA DOI at least 10 business days prior to payment of the dividend to shareholders. Extraordinary dividends may not be paid until 30 days after the Commissioner has received notice of the declaration of such extraordinary dividend and has either approved the payment of such extraordinary dividend or has not, within such 30-day period, disapproved of the payment. An extraordinary dividend is generally defined as a dividend that, together with all other dividends made within the past 12 months, exceeds the greater of 10% of the company’s statutory policyholders’ surplus as of the preceding December 31st or the net income from operations of the company for the 12-month period ending the previous December 31st. Statutory policyholders’ surplus, as determined under statutory accounting principles, is the amount remaining after all liabilities, including loss and loss adjustment expenses, are subtracted from all admitted assets. Admitted assets are assets of an insurer prescribed or permitted by a state insurance regulator to be recognized on the statutory balance sheet. California law also provides that a domestic insurer can make dividends only from the insurer’s earned surplus (other than earned surplus derived from the net appreciation in the value of assets not yet realized or earned surplus derived from an exchange of assets not yet realized or realizable in cash), unless the Insurance Commissioner has given prior approval for the dividend. In addition to these statutory and regulatory restrictions, Majestic, has agreed not to pay any dividends (including ordinary dividends) without the prior approval of the Special Examiner or the CA DOI. Given the conservation of Majestic Insurance in April 2011, Majestic Insurance most likely will not pay dividends for the foreseeable future.

Guaranty Fund Assessments. In California, New York and most of the states where Majestic Insurance was licensed to transact business, there is a requirement that property and casualty insurers doing business within each such state participate in a guaranty association, which is organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premium written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets.

Property and casualty insurance company insolvencies or failures may result in additional security fund assessments to us at some future date. At this time, we are unable to determine the impact, if any, such assessments may have on our financial position or results of operations. We have established liabilities for guaranty fund assessments with respect to insurers that are currently subject to insolvency proceedings.

Change of Control. In addition, the insurance holding company laws of California require advance approval by the CA DOI of any change in control of Majestic Insurance. “Control” is generally presumed to exist through the direct or indirect ownership of 10% or more of the voting securities of a domestic insurance company or of any entity that controls a domestic insurance company. In addition, insurance laws in many states contain provisions that require pre-acquisition notification to the insurance commissioners of a change in control of a non-domestic insurance company licensed in those states. Any future transactions that would constitute a change in control of Majestic Insurance, including a change of control of us, would generally require the party acquiring control to obtain the prior approval by the CA DOI and may require pre-acquisition notification in applicable states that have adopted pre-acquisition notification provisions. Obtaining these approvals may result in a material delay of, or deter, any such transaction. These laws may also discourage potential acquisition proposals and may delay, deter or prevent a change of control of Majestic Capital, including through transactions, and in particular unsolicited transactions, that some or all of our shareholders might consider to be desirable.

Federal Insurance Laws and Regulations

Maritime Coverage. Since Majestic Insurance is authorized to provide maritime workers’ compensation insurance, we are subject to the USL&H Act, which generally covers exposures on the navigable waters of the United States and in adjoining waterfront areas, including exposures resulting from loading and unloading vessels. We are also subject to regulations related to the USL&H Act and the Merchant Marine Act of 1920, or the Jones Act. The USL&H Act, which is administered by the U.S. Department of Labor, provides medical benefits, compensation for lost wages and rehabilitation services to longshoremen, harbor workers and other maritime workers who are injured during the course of employment or suffer from diseases caused or worsened by conditions of employment. The Department of Labor has the authority to require us to make deposits to serve as collateral for losses incurred under the USL&H Act. The Jones Act is a federal law, the maritime employer provisions of which provide injured offshore workers, or seamen, with a remedy against their employers for injuries arising from negligent acts of the employer or co-workers during the course of employment on a ship or vessel.

As a condition of authorization effective August 25, 2005, the U.S. Department of Labor implemented new regulations requiring insurance carriers authorized to write insurance under the USL&H Act or any of its extensions to deposit security to secure compensation payment obligations. The Department of Labor determines the amount of this deposit annually by calculating the carrier’s obligations under the USL&H Act and its extensions by state and by the percentage of those obligations deemed unsecured by those states’ guaranty funds.

Terrorism Risk Insurance. On November 26, 2002, in response to the tightening of supply in certain insurance and reinsurance markets resulting from, among other things, the September 11, 2001 terrorist attacks, the Terrorism Risk Insurance Act of 2002 (Terrorism Risk Act) was enacted. In 2007, the Terrorism Risk Insurance Program Reauthorization Act of 2007 was enacted and extended the Terrorism Risk Act through December 31, 2014. The Terrorism Risk Act is designed to ensure the availability of insurance coverage for losses resulting from certain acts of terror in the United States. As extended, the law establishes a federal assistance program through the end of 2014 to help the property and casualty insurance industry cover claims related to future terrorism-related losses and requires such companies to offer coverage for certain acts of terrorism. By law, Majestic Insurance may not exclude coverage for terrorism losses from its workers’ compensation policies. Although Majestic Insurance is protected by federally funded terrorism reinsurance to the extent provided for in the Terrorism Risk Act, there are limitations and restrictions on this protection, including a substantial deductible and loss limitation that must be met, which could have an adverse effect on our financial condition or results of operations. Potential future changes to the Terrorism Risk Act could also adversely affect us by causing our reinsurers to increase prices or withdraw from certain markets where terrorism coverage is required.

Federal and State Legislative and Regulatory Changes

From time to time, various regulatory and legislative changes have been proposed in the insurance industry at both the federal and state levels. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the National Association of Insurance Commissioners. We are unable to predict whether any of these laws and regulations will be adopted, the form in which any such laws and regulations would be adopted or the effect, if any, these developments would have on our operations and financial condition.

The National Association of Insurance Commissioners

The National Association of Insurance Commissioners, or NAIC, is a group formed by state insurance commissioners to discuss issues and formulate policy with respect to regulation, reporting and accounting of insurance companies. Although the NAIC has no legislative authority and insurance companies are at all times subject to the laws of their respective domiciliary states and, to a lesser extent, other states in which they conduct business, the NAIC is influential in determining the form in which such laws are enacted. The NAIC provides authoritative guidance to insurance regulators on current statutory accounting issues by promulgating and updating a codified set of statutory accounting practices in its Accounting Practices and Procedures Manual. The CA DOI has adopted these codified statutory accounting practices.

California has also adopted laws substantially similar to the NAIC’s risk-based capital laws, which require insurers to maintain minimum levels of capital based on their investments and operations. These risk-based capital requirements provide a standard by which regulators can assess the adequacy of an insurance company’s capital and surplus relative to its operations. Among other requirements, an insurance company must maintain capital and surplus of at least 200% of the risk-based capital computed by the NAIC’s risk-based capital model (known as the “Authorized Control Level” of risk-based capital). At December 31, 2010, the capital and surplus of Majestic Insurance did not meet the Authorized Control Level of risk-based capital.

The NAIC’s insurance regulatory information system, or IRIS, key financial ratios, developed to assist insurance departments in overseeing the financial condition of insurance companies, are reviewed by experienced financial examiners of the NAIC and state insurance departments to select those companies that merit highest priority in the allocation of the regulators’ resources. IRIS identifies twelve industry ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer’s business.

Statutory Accounting Practices

Statutory accounting practices, or SAP, are a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s surplus. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state. GAAP is concerned with a company’s solvency, but such principles are also concerned with other financial measurements, such as income and cash flows. Accordingly, GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP rather than SAP.

Statutory accounting practices established by the NAIC and adopted, in part, by the California regulators, determine, among other things, the amount of statutory surplus and statutory net income of Majestic Insurance and thus determine, in part, the amount of funds it has available to pay dividends to us.

Bermuda Regulation

The Insurance Act 1978 of Bermuda and related regulations, as amended (the Insurance Act), regulates the insurance and reinsurance business of Twin Bridges. The Insurance Act provides that no person may carry on any insurance business in or from within Bermuda unless registered as an insurer by the Bermuda Monetary Authority (BMA), which is the regulatory body responsible for the day-to-day supervision of insurers. Twin Bridges has been registered as a Class 3A insurer by the BMA and approved to carry on general insurance and reinsurance business. Majestic Capital is a holding company that does not carry on any insurance or reinsurance business and as such is not subject to Bermuda insurance regulations; however, like all Bermuda companies, it is subject to the provisions and regulations of the Companies Act 1981 of Bermuda, as amended (the Companies Act).

The Insurance Act imposes solvency and liquidity standards and auditing and reporting requirements on Bermuda insurance companies and grants powers to the BMA to supervise, investigate and intervene in the affairs of insurance companies.

The BMA continues to make amendments to the Insurance Act with a view to enhancing Bermuda’s insurance regime and ensuring that Bermuda remains at the vanguard of international standards of insurance. Of particular importance and significance to Twin Bridges are the following recent amendments promulgated in 2010:

·	The scope of the BMA’s powers was extended allowing the BMA to make rules in relation to prudential standards to include insurance reserves and eligible capital requirements; and

·	New notification requirements were introduced in respect of a change of shareholder controller, changed to controllers and officers and provision for insurers to notify the BMA of any proposed material change in their business.

Additionally, the Insurance Code of Conduct (the Code) became operative on July 1, 2010 and insurers have until July 1, 2011 to comply with the Code.

Certain significant aspects of the Bermuda insurance regulatory framework are set forth below.

Classification of Insurers. The Insurance Act distinguishes between insurers carrying on long-term business and insurers carrying on general business. There are six classifications of insurers carrying on general business. Twin Bridges is registered as a Class 3A insurer and is licensed to carry on general business and reinsurance business. Twin Bridges is not licensed to carry on long-term business. We do not intend, at this time, to obtain a license for Twin Bridges to carry on long-term business. Long-term business includes life insurance and disability insurance with terms in excess of five years. General business broadly includes all types of insurance that is not long-term business.

Cancellation or Modification of Insurer’s Registration. An insurer’s registration may be cancelled or modified by the Supervisor of Insurance of the BMA on certain grounds specified in the Bermuda Insurance Act, including failure of the insurer to comply with its obligations under the Bermuda Insurance Act or if, in the opinion of the BMA after consultation with the Insurance Advisory Committee, the insurer has not been carrying on business in accordance with sound insurance principles. The BMA has pursuant to the powers granted to it under the Insurance Act, modified Twin Bridges’ Certificate of Registration (Certificate). In its letter dated April 8, 2011, the BMA has by formal amendment to Twin Bridges’ Certificate, restricted Twin Bridges from writing any new insurance business (the Restriction) without the prior written consent of the BMA.

Principal Representative. An insurer is required to maintain a principal office in Bermuda and to appoint and maintain a principal representative in Bermuda. Twin Bridges’ principal office is located at our principal executive offices in Bermuda, and Quest Management Services Limited has been appointed as Twin Bridges’ principal representative. Without a reason acceptable to the BMA, an insurer may not terminate the appointment of its principal representative, and the principal representative may not cease to act as such, unless 30 days’ notice in writing is given of the intention to do so. It is the duty of the principal representative, upon reaching the view that there is a likelihood of the insurer for which the principal representative acts becoming insolvent or that a reportable “event” has, to the principal representative’s knowledge, occurred or is believed to have occurred, to immediately notify the BMA and to make a report in writing within 14 days setting out all the particulars of the case that are available to the principal representative. Examples of such a reportable “event” include failure by the insurer to comply substantially with a condition imposed upon the insurer by the BMA relating to a solvency margin or liquidity or other ratio.

Independent Approved Auditor. Every registered insurer must appoint an independent auditor approved by the BMA who will annually audit and report on the statutory financial statements, solvency certificate and declaration of statutory ratios. Twin Bridges annually files statutory financial statements and a statutory financial return with the BMA. The approved auditor of Twin Bridges may be the same person or firm which audits Twin Bridges’ statutory financial statements and statutory financial returns and Twin Bridges’ financial statements prepared in accordance with GAAP.

Loss Reserve Specialist. As a registered Class 3A insurer, Twin Bridges must submit annually an opinion of a loss reserve specialist with its statutory financial return and statutory financial statement in respect of its loss and loss adjustment expense provisions. The loss reserve specialist, who will normally be a qualified property and casualty actuary, must be approved by the BMA.

Annual Statutory Financial Return and Financial Statement. Twin Bridges must prepare annual statutory financial statements which must be submitted as part of its statutory financial return no later than four months after its financial year end (unless specifically extended). The annual statutory financial statements give detailed information and analyses regarding premiums, claims, reinsurance, reserves and investments. The statutory financial return includes, among other items, a report of the approved independent auditor on the statutory financial statements; a declaration of statutory ratios; a solvency certificate; the statutory financial statements themselves; and the opinion of the approved loss reserve specialist. The statutory financial statements and the statutory financial return do not form part of the public records maintained by the BMA. The principal representative and a minimal of two directors of Twin Bridges will be required to sign the solvency certificates certifying that Twin Bridges has complied with the conditions set out in its certificate of registration and that the minimum solvency margin has been met. The independent approved auditor will be required to confirm that it was reasonable for the directors to make this certification. Additionally, under the Insurance Act, all Class 3A insurers are required to submit a Schedule of Ceded Reinsurance.

Minimum Solvency Margin, Enhanced Capital Requirement and Restriction on Dividends and Distributions. An insurer’s statutory assets must exceed its statutory liabilities by an amount greater than the prescribed minimum solvency margin which varies with the category of its registration and net premiums written and loss reserves posted (Minimum Solvency Margin). The Minimum Solvency Margin that must be maintained by Twin Bridges as a Class 3A insurer is the greater of (1) $1,000,000; (2) 20% of the first $6,000,000 of net premiums written and 15% of the remainder; and (3) 15% of net loss and loss expense provisions and other general business insurance reserves. As of December 31, 2010, Twin Bridges exceeded the BMA’s capital requirements.

After the year ended December 31, 2011, Twin Bridges as a Class 3A insurer will be required to maintain available statutory capital and surplus in an amount that is equal to or exceeds the target capital levels based on Enhanced Capital Requirements (ECR). This is calculated using the Bermuda Solvency Capital Requirement (BSCR) model. The BSCR model provides a risk-based capital model as a tool to assist the BMA both in measuring risk and in determining appropriate levels of capitalization. In order to minimize the risk of shortfall in capital arising from an unexpected adverse deviation, the BMA seeks that insurers operate at or above a threshold capital level being the target capital level (defined as 120% of the enhanced capital requirement) based on the subsidiary’s statutory financial statements.

Twin Bridges is prohibited from declaring or paying any dividends if in breach of the required Minimum Solvency Margin or Minimum Liquidity Ratio (the Relevant Margins) or if the declaration or payment of such dividend would cause the insurer to fail to meet the Relevant Margins. Where an insurer fails to meet its Relevant Margins on the last day of any financial year, it is prohibited from declaring or paying any dividends during the next financial year without the prior approval of the BMA. Further, Twin Bridges must obtain the BMA’s prior approval for a reduction by 15% or more of the total statutory capital as set forth in its previous year’s financial statements. These restrictions on declaring or paying dividends and distributions under the Insurance Act are in addition to the solvency requirements under the Companies Act which apply to all Bermuda companies. In its letter dated April 8, 2011, the BMA has by formal amendment to Twin Bridges’ Certificate, restricted Twin Bridges from declaring and/or paying any dividends and/or distributing any Capital to its parent or affiliates, without the prior written consent of the BMA.

In addition, once a Class 3A insurer is required to meet the ECR, if it is in breach of its ECR, it will be prohibited from declaring or paying dividends until it rectifies that breach. The Restriction further prohibits Twin Bridges from declaring any dividends or making any capital contributions without the prior written consent of the BMA.

Minimum Liquidity Ratio. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities (Minimum Liquidity Ratio). As of December 31, 2010, Twin Bridges exceeded the minimum liquidity ration requirements of the BMA.

Supervision, Investigation and Intervention. If the BMA believes that an investigation is required in the interests of an insurer’s policyholders or persons who may become policyholders, it may appoint an inspector who has extensive powers of investigation. If it appears to the BMA to be desirable in the interests of policyholders, the BMA may also exercise these powers in relation to holding companies, subsidiaries and other affiliates of insurers. If it appears to the BMA that there is a risk of an insurer becoming insolvent, or that the insurer is in breach of the Insurance Act or any conditions of its registration, the BMA may exercise extensive powers of intervention including directing the insurer not to take on any new insurance business; not to vary any insurance contract if the effect would be to increase the insurer’s liabilities; not to make certain investments; to realize or not to realize certain investments; to maintain in, or transfer to the custody of, a specified bank, certain assets; not to declare or pay any dividends or other distributions or to restrict the making of such payments and/or to limit its premium income and to remove a controller or officer.

The BMA has implemented a new insurance code, the Code which came into effect on 1 July 2010. The BMA established 1 July 2011 as the date of compliance for all insurers. The Code is divided into six categories, including;

·	Proportionality Principle

·	Corporate Governance

·	Risk Management

·	Governance Mechanism

·	Outsourcing

·	Market Discipline and Disclosure

These categories contain the duties, requirements and compliance standards to be adhered to by all insures. It stipulates that in order to achieve compliance with the Code, insurers are to develop and apply policies and procedures capable of assessment by the BMA. The Board of Directors has confirmed that to the best of its knowledge and belief that Twin Bridges will be fully complaint with the Code before 1 July 2011.

Disclosure of Information. In addition to powers under the Bermuda Insurance Act to investigate the affairs of an insurer, the BMA may require the insurer (or certain other persons) to produce certain information to it. Further, the BMA has been given powers to assist other regulatory authorities, including foreign insurance regulatory authorities, with their investigations involving insurance and reinsurance companies in Bermuda but subject to restrictions. For example, the BMA must be satisfied that the assistance being requested is in connection with the discharge of regulatory responsibilities of the foreign regulatory authority. The BMA must also consider whether cooperation is in the public interest. The grounds for disclosure are limited and the Bermuda Insurance Act provides sanctions for breach of the statutory duty of confidentiality.

Notifications to the Bermuda Monetary Authority. The amendments to the Insurance Act in 2010 saw the modification of notification requirements for change of shareholder controllers. Where an insurer’s shares or its parent company’s shares are traded on any stock exchange recognized by the BMA, then the BMA requires written notification from any person who, directly or indirectly, becomes a holder of at least 10%, 20%, 33% or 50% of the voting shares of Majestic Capital (and ultimately Twin Bridges) by the later of 45 days of becoming such a holder or 30 days from the date they have knowledge of having such a holding. The BMA may object to such a person if it appears to the BMA that the person is not fit and proper to be such a holder and/or require the shareholder to reduce its holdings or voting rights. Also an insurer must give notice to the BMA of any person ceasing to be a controller of that insurer, a controller being a managing director, chief executive or other person in accordance with whose directions or instructions the directors of Twin Bridges are accustomed to act, including any person who holds, or is entitled to exercise, 10% or more of the voting shares or voting power or is able to exercise significant influence over the management of Twin Bridges. A person that does not comply with such a notice or direction from the BMA will be guilty of an offense.

An insurer, or designated insurer, in respect of the group of which it is a member, must notify the BMA in writing that it proposes to take measures that are likely to be of material significance for the discharge, in relation to the insurer or the insurance group, of the BMA’s functions under the Insurance Act. Measures that are likely to be of material significance include:

·	transfer or acquisition of insurance business being part of a scheme falling within section 25 of Insurance Act or section 99 of the Companies Act;

·	amalgamation with or acquisition of another firm;

·	a material change in the insurer’s business plan not otherwise reported to the BMA.

In respect of the forgoing, the BMA is obliged to serve a notice of objection to the material change unless it is satisfied that:

·	the interest of policyholders and potential policyholders of the insurer or the insurance group would not in any manner be threatened by the material change; and

·	without prejudice to the foregoing, that, having regard to the material change the requirements of Insurance Act would continue to complied with, or, if any of those requirements are not complied with, that the insurer concerned is likely to undertake adequate remedial action.

Failure to give such notice constitutes an offence under the Insurance Act. It is possible to appeal a notice of objection served by the BMA.

Currency Transactions. Although Majestic Capital is incorporated in Bermuda, we are classified by the BMA as a non-resident of Bermuda for exchange control purposes. As a result, we may engage in transactions in currencies other than Bermuda dollars and there are no restrictions on our ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to U.S. residents who are holders of its common shares.

Exempted Company Status. Under Bermuda law, exempted companies are companies formed with the ability to conduct business outside Bermuda from a principal place of business in Bermuda. As “exempted” companies, neither we nor Twin Bridges may, without the express authorization of the Bermuda legislature or under a license or consent granted by the Minister of Finance, participate in certain business transactions, including the acquisition or holding of land in Bermuda (except through lease); the taking of mortgages on land in Bermuda to secure an amount in excess of $50,000; to acquire any bonds, or debentures secured on any land in Bermuda, except bonds or debentures issued by the Government of Bermuda or a public authority of Bermuda; or the carrying on of business of any kind or type for which it is not licensed in Bermuda, except in certain limited circumstances such as doing business with another exempted undertaking in furtherance of Majestic Capital’ or Twin Bridges’ business carried on outside Bermuda.

Securities. Transfers and issuances of our common shares may be subject to restrictions under Bermuda law. Securities may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act of 2003, and the Exchange Control Act 1972, and related regulations. In addition, specific permission is required from the BMA, pursuant to the provisions of the Exchange Control Act 1972 and related regulations, for all issuances and transfers of securities of Bermuda companies, other than in cases where the BMA has granted a general permission. The BMA has advised that where any equity securities, which would include our common shares, of a Bermuda company are listed on an appointed stock exchange, general permission is given for the issue and subsequent transfer of any securities of a company from and/or to a non-resident, for as long as any equities securities of such company remain so listed. The Nasdaq Global Select Market is deemed to be an Appointed Stock Exchange under Bermuda law. Notwithstanding the above general permission, the BMA has granted Majestic Capital permission to, subject to the common shares in Majestic Capital being listed on an appointed stock exchange, issue, grant, create, sale and transfer any of Majestic Capital’ shares (other than our common shares), stock, bonds, notes (other than promissory notes), debentures, debenture stock, units under a unit trust scheme, shares in an oil royalty, options, warrants, coupons, rights and depository receipts, or collectively the Securities, to and among persons who are either resident or non-resident of Bermuda for exchange control purposes, whether or not the Securities are listed on an appointed stock exchange.

Taxes. Under Bermuda law, there are no restrictions on the degree of foreign ownership, and neither we nor Twin Bridges is currently subject to taxes 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 or to any foreign exchange controls in Bermuda.

Employment Restrictions. Under Bermuda law, non-Bermudians (other than spouses of Bermudians and permanent residents) may not engage in any gainful occupation in Bermuda without a work permit issued by the Bermuda Department of Immigration. Such work permits may be granted or extended upon showing that, after proper public advertisement, no Bermudian, or spouse of a Bermudian or individual holding a permanent resident certificate is available who meets the minimum standards for the advertised position. None of our executive officers is a Bermudian. Our officers work in Bermuda under work permits. In April 2001, the Bermuda government announced a policy that places a six-year term limit on individuals with work permits, subject to certain exceptions for key employees.

Available Information

We maintain a website at www.crmholdingsltd.bm. We are not including the information on our website as a part of, or incorporating such information by reference into this Annual Report on Form 10-K. We make available all of our SEC filings, including this Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K, through our website, free of charge, as soon as is reasonable practicable after these materials have been filed with the SEC. In addition, our Code of Business Conduct and Ethics is available on our web site.

ITEM 1A.

RISK FACTORS

An investment in our common shares involves a high degree of risk. Before making an investment decision, you should carefully consider the risks described below and all of the information contained in this Annual Report on Form 10-K. If any of the risks discussed in this annual report actually occur, our business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the price of our common shares could decline significantly and you may lose all or a part of your investment.

Risks Related to Our Ability to Continue as a Going Concern

There is substantial doubt about our ability to continue as a going concern.

Our consolidated financial statements included in this Annual Report on Form 10-K are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The historical consolidated financial statements included in this Annual Report on Form 10-K do not include any adjustments that might be necessary if we are unable to continue as a going concern.

The assessment of our ability to continue as a going concern was made by management considering, among other factors: the financial strength ratings of our insurance company subsidiaries, the litigation facing Majestic Capital and its subsidiaries, regulatory filings and actions being taken by the CA DOI, and our budgets and financial projections of future operations, including the likelihood of achieving operating profitability without the need for additional financing.

We have incurred significant losses and negative cash flows from operations in the past. For the fiscal year ended December 31, 2010, we experienced a net loss of $48.6 million and negative cash flows from operations of $47.5 million. These results have had a negative impact on our financial condition. There can be no assurance that our business will become profitable in the future and that additional losses and negative cash flows from operations will not be incurred. If these trends continue in the future, it could have a material adverse effect on our business, financial condition and results of operations.

For periods subsequent to December 31, 2010, we expect losses to continue while Majestic Insurance is in conservation under the CA DOI, if we are unable to write new business or renew existing business as a B rated insurance company, if our loss ratios do not improve and we are not able to reduce other operating expenses and overhead sufficiently to a level in line with our level of revenues. If we are unable to increase revenues sufficiently or decrease our expenditures to a sustainable level, our financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected. These conditions raise substantial doubt about our ability to continue as a going concern.

We continue to evaluate the sale of certain of our assets and businesses. We cannot provide any assurance that we will be successful in finding suitable purchasers for the sale of such assets or that the proceeds of any such sale will provide a return for our shareholders. An inability to consummate asset sales could adversely affect our business, financial condition, results of operations and cash flows. Even if we are able to find purchasers, we could be required to file for protection under the U.S. Bankruptcy Code or Bermuda Companies Act if the proceeds of the sales of assets or businesses are insufficient to meet creditor demands.

We could potentially be required to seek relief through a filing under the U.S. Bankruptcy Code, either through a prepackaged plan of reorganization or under an alternative plan, which could include liquidation.

Due to the termination of the Bayside Amalgamation Agreement and our lack of success in securing an alternative transaction, we may seek relief through a filing under the U.S. Bankruptcy Code or Bermuda Companies Act, either through a prepackaged plan of reorganization or under an alternative plan, which could include liquidation. Substantial risks would result from any such bankruptcy filing, including the risk that the equity interests of our current shareholders would be completely eliminated.

Our auditors have issued a disclaimer of opinion with respect to our financial statements for the year ended December 31, 2010 which could lead investors to lose confidence in the reliability of our financial statements.

Our auditors have issued a disclaimer of opinion with respect to our financial statements for the year ended December 31, 2010. This disclaimer of opinion may cause our investors to lose confidence in the reliability of our financial statements, which could have a negative effect on the trading price of our common stock.

Risks Related to Our Insurance Business

The following risk factors are applicable if Majestic Insurance reemerges from the conservation and rehabilitation actions initiated by the CA DOI and we recommence our insurance operations.

Our loss reserves are based on estimates and may be inadequate to cover our losses.

If we fail to accurately assess the risks associated with the businesses we insure, our loss reserves may be inadequate to cover our actual losses and we may fail to establish appropriate premium rates. We establish loss reserves in our financial statements that represent an estimate of amounts needed to pay and administer claims with respect to insured and reinsured events that have occurred, including events that have not yet been reported to us. Loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of liability.

Our loss reserve estimates are based on estimates of the ultimate cost of individual claims and on actuarial estimation techniques. Several factors contribute to the uncertainty in establishing these estimates. Judgment is required in actuarial estimation to ascertain the relevance of historical payment and claim settlement patterns under current facts and circumstances. Key assumptions in the estimation process are the average cost of claims over time (which are referred to as severity trends and include the increasing level of medical, legal and rehabilitation costs); frequency risks; fluctuations in inflation; prevailing economic, social and judicial trends; legislative changes; third party claims handling procedures; costs associated with fraud or other abuses of the medical claim process; and other third party factors beyond our control. If there are unfavorable changes in our key assumptions, our reserves for losses and loss adjustment expenses might need to be increased.

In addition, loss reserves associated workers’ compensation claims carry additional uncertainty as compared to loss reserves associated with other types of insurance. Workers’ compensation claims are “long-tail” in nature such that claims are often paid over a long period of time. Further, there are no policy limits on liability for workers’ compensation claims. Accordingly, estimating reserves for insurance of workers’ compensation claims can be more uncertain than estimating reserves for other lines of insurance with shorter or more definite periods between the occurrence of the claim and the final determination of the ultimate loss and with policy limits for claim amounts. As a result, there is a greater risk that we may fail to accurately estimate the risks associated with the businesses that we insure and that our reserves may prove to be inadequate to cover our actual losses.

Further, we have limited operating histories in certain areas of our business that can lead to additional uncertainty with our loss reserves. We rely on a combination of industry data and benchmarks and limited operating history for policies written in states other than California. Consequently, operational changes in claims handling practices over the years may impact the interpretation of this historical data, which can also be impacted by external forces such as legislative changes, economic fluctuations and legal trends. Additionally, our actual loss experience in this line of business could be materially higher than industry loss experience, and therefore we are exposed to an increased likelihood that our actual results may not conform to our estimates.

Additionally, Twin Bridges reinsures insurance policies written by Majestic Insurance and we are exposed to a greater share of these losses, since, on a consolidated basis, we remain responsible for 100% of any losses under the insurance policies issued by Majestic. Any underestimate of our loss reserves for this risk would have a greater impact on our consolidated results of operations and financial position than if Majestic Insurance reinsured with an unaffiliated third party. The increased overall exposure to losses from large and/or frequent loss occurrences could have a material adverse effect on our business, financial condition and results of operations.

To the extent our loss reserves for Majestic Insurance or Twin Bridges are insufficient to cover actual losses and loss adjustment expenses, we will have to increase our loss reserves which would result in a charge to our earnings, and could have a material adverse effect on our business, financial condition and results of operations. Due to the inherent uncertainty of estimating reserves, it has been, and will continue to be, necessary to revise estimated future liabilities as reflected in our reserves for claims and related expenses.

If we do not effectively price our insurance policies, our financial results will be adversely affected.

Our insurance policy prices are established when coverage is initiated. Adequate rates are necessary to generate premiums sufficient to pay losses, loss adjustment expenses and underwriting expenses, and to earn a profit. Our prices for insurance coverage are based on estimates of expected losses generated from the policies which we underwrite. We analyze many factors when pricing a policy, including the policyholder’s prior loss history, and the loss prevention orientation of the policyholder’s management. Inaccurate information regarding a policyholder’s past claims experience puts us at risk of mispricing our policies. When initiating coverage on a policyholder, we rely on the claims information provided by the policyholder or previous carriers to estimate future claims expense. If the claims information is not accurately stated, we may under price our policy by using claims estimates that are too low. As a result, our actual costs for providing insurance coverage to our policyholders may be significantly higher than our premiums, which would have a material adverse effect on our business, financial condition and results of operations. Besides the risks associated with under-pricing risks, we could overprice risks, which could reduce our sales volume and competitiveness. In addition, our competitors may adopt premium rate reductions that are greater than ours. In any of these scenarios, our business, financial condition, and results of operations could be materially affected. Finally, the rating actions of state regulatory authorities have a material impact on the pricing of our policies. See “Workers’ Compensation Market Conditions” contained in “Item 7. Management’s Discussion and Analysis” for a discussion of rating actions.

Our insurance operations and premiums could be significantly affected by the ongoing weakness in business and economic conditions in the U.S.

Our insurance operations and financial performance may be impacted by changes in the U.S. economy. Although there have been some indicators of stabilization, the U.S. continues to experience significant recessionary conditions and we believe meaningful risk remains of potential further deterioration in economic conditions. The significant downturn in the U.S. economy during the end of 2008 through 2010 led to lower reported payrolls, which has had a negative impact on our net earned premiums that continued through 2010. If our customers reduce their workforce levels, the level of workers’ compensation insurance coverage they require and, as a result the premiums that we charge, would be reduced, and if our customers cease operations, they will not renew their policies. It is uncertain if economic conditions will deteriorate further, or when economic conditions will improve. A prolonged recession could further reduce payrolls, which could have a significant negative impact on our business, financial condition and results of operations.

The downgrade in the A.M. Best ratings of our insurance and reinsurance subsidiaries could further reduce the amount of business we are able to write.

Rating agencies assess and rate the claims-paying ability of insurers based upon criteria established by the agencies. These financial strength ratings are used by policyholders, insurers, reinsurers and insurance and reinsurance intermediaries as an important means of assessing the financial strength and quality of our insurance subsidiaries. These ratings are not evaluations directed to potential purchasers of our common shares and are not recommendations to buy, sell or hold our common shares.

Our insurance companies’ financial strength ratings were downgraded by A.M. Best in March 2011. A.M. Best downgraded the financial strength rating of Majestic Insurance to “B” (Fair) from “B++” (Good) and the financial strength rating of Twin Bridges to “B” (Fair) from “B+” (Good). Both ratings were placed under review with negative implications. The rating actions reflected A.M. Best’s concern over the potential impact on Majestic Insurance and Twin Bridges due to the failure to close the Bayside transaction, the poor operating results of our insurance subsidiaries and regulatory and litigation issues faced by their affiliates, CRM, CRM CA and Majestic Capital. For a further discussion of A.M. Best’s rating actions, see “Item 1. Business – Ratings” above.

The ratings assigned by A.M. Best can be an important factor in marketing our products. The reduction of Majestic Insurance’s A.M. Best rating below “B++” constitutes a “non-secure” rating in A.M. Best’s system. In this category, we will not be able to compete for many policies that were available to us when our rating was “B++” or better. Accordingly, we could experience a significant decline in our net earned premiums.

Furthermore, our ratings remain subject to further change at any time. Majestic’s and Twin Bridges’ rating are currently assigned an “under review with negative implications” rating modifier. Our ratings could be further revised downward or revoked at the sole discretion of the rating agencies. Our ability to retain our existing business and to attract new business in our insurance operations depends largely on these ratings. Our failure to maintain our ratings, or any other adverse development with respect to our ratings, including a further downgrade, could cause our current and future independent agents and brokers and insureds to choose to transact their business with competitors of ours that have higher A.M. Best ratings. If A.M. Best further downgrades our ratings, our competitive viability would be further damaged and our ability to sell our products would decline. If that happens, our revenues would decrease substantially and our operating losses would increase.

In addition, because lenders and reinsurers will also use our A.M. Best ratings as a factor in deciding whether to transact business with us, the failure of Majestic Insurance or Twin Bridges to maintain their current ratings could dissuade a lender or reinsurance company from conducting business with us or might increase our interest or reinsurance costs.

As a result of any of the foregoing, our business revenues, results of operations and financial condition could be materially and adversely affected.

If we are unable to obtain or collect on our reinsurance protection, our business, financial condition and results of operations could be materially and adversely affected.

We purchase reinsurance coverage to help manage the risk assumed under our workers’ insurance compensation policies issued by Majestic Insurance. Reinsurance coverage helps to protect us from the impact of large losses. It involves an arrangement in which an insurance company, called the ceding company, transfers insurance risk by sharing premiums with another insurance company, called the reinsurer. Conversely, the reinsurer receives or assumes reinsurance from the ceding company.

Majestic Insurance currently purchases excess of loss reinsurance and historically participated in ceded quota share agreements. Under excess of loss reinsurance, the reinsurer reimburses the ceding company for losses and loss expenses over a specified dollar amount up to an agreed limit per occurrence. 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. For a discussion of Majestic’s reinsurance coverage, see “Item 1. Business – Primary Insurance Segment – Reinsurance” above.

The availability, amount and cost of reinsurance depend on market conditions and our experience with insured losses and may vary significantly. As a result of catastrophic events, such as the events of September 11, 2001, we may incur significantly higher reinsurance costs, more restrictive terms and conditions and decreased availability.

We review and renegotiate our reinsurance protection each year. We cannot be certain, however, that our reinsurance agreements will be renewed or replaced prior to their expiration upon terms satisfactory to us. If we are unable to renew or replace our reinsurance agreements upon terms satisfactory to us, our net liability on individual risks would increase and we would have greater exposure to catastrophic losses. If this were to occur, our underwriting results would be subject to greater variability and our underwriting capacity could be reduced. These consequences could adversely affect our business, financial condition and results of operations.

The decrease in Majestic Insurance’s A.M. Best rating to “B” could cause the terms of the contracts to be more restrictive and the price for coverage to be higher. These conditions could materially adversely affect our business, financial condition and results of operations.

We are also subject to credit risk with respect to Majestic Insurance’s reinsurers. Reinsurance protection that Majestic Insurance receives does not discharge its direct obligations under its insurance policies, as Majestic Insurance remains liable to its policyholders even if we are unable to recover under Majestic Insurance’s reinsurance contracts. Losses may not be recovered from the reinsurers until claims are paid, and, in the case of long-term workers’ compensation cases, the creditworthiness of the reinsurers may change and we may not recover amounts to which we are entitled. As of December 31, 2010, Majestic Insurance had $130.4 million recoverable from its unaffiliated reinsurers that we would be obligated to pay if the reinsurers failed to pay Majestic. If we experience these problems in the future, our charges to income would increase and our net income would decline. These consequences would adversely affect our business, financial condition and results of operations.

If we are unable to realize our investment objectives, our financial condition and results of operations may be adversely affected.

Investment income is an important component of our net income. As of December 31, 2010, our investment portfolio, including cash and cash equivalents, had a carrying value of $287.8 million. For the year ended December 31, 2010, we had $10.6 million of net investment income from continuing operations.

Our investment portfolios funds are invested by a professional investment management firm under the direction of our management team in accordance with investment guidelines approved by the Finance and Investment Committee of the Board of Directors. Although these guidelines stress diversification and capital preservation, our investments are subject to a variety of risks, including risks related to general economic conditions, interest rate fluctuations and market volatility.

Beginning in 2008, the capital markets in the United States and elsewhere experienced extreme volatility and disruption. We are exposed to significant capital markets risk, including changes in interest rates, credit spreads and equity prices. Our investment portfolio is affected by the changes in the capital markets. In addition, benchmark interest rates, such as the Federal Fund Rate, are currently at historic lows, which is likely to significantly impact our investment income. Changes in interest rates and credit quality may result in fluctuations in the income derived from, or the valuation of, our fixed income securities. Our investment portfolios include a significant amount of interest rate-sensitive instruments, such as bonds, which may be adversely affected by changes in interest rates. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Increases in interest rates will decrease the value of our investments in fixed-income securities. If increases in interest rates occur during periods when we sell investments to satisfy liquidity needs, we may experience investment losses. Conversely, if interest rates decline, reinvested funds will earn less than expected.

Any significant decline in our investment income as a result of falling interest rates, decreased dividend payment rates or general market conditions could have an adverse effect on our net income and, as a result, on our shareholders’ equity and our policyholders’ surplus. Further adverse changes in the capital markets could result in additional other-than-temporary impairments in the future, or could reduce our investment income, which would adversely affect our results of operations, and financial condition.

Our profitability may be adversely impacted by inflation.

The effects of inflation could cause the amount of each claim to rise in the future. Our reserves for losses and loss adjustment expenses include assumptions about future payments for settlement of claims and claims handling costs, such as medical treatments and litigation costs. To the extent inflation causes these costs to increase above reserves established for these costs, we would be required to increase our loss reserves with a corresponding reduction in our net income in the period in which the deficiency is identified, which could have a material adverse effect on our business, financial condition and results of operations.

Assessments and premium surcharges for state guaranty funds, second injury funds and other mandatory pooling arrangements may reduce our profitability.

Most states require insurance companies licensed to do business in their state to participate in guaranty funds, which require the insurance companies to bear a portion of the unfunded obligations of impaired, insolvent or failed insurance companies. These obligations are funded by assessments, which are expected to continue in the future. State guaranty associations levy assessments, up to prescribed limits, on all member insurance companies in the state based on their proportionate share of premiums written in the lines of business in which the impaired, insolvent or failed insurance companies are engaged. Accordingly, the assessments levied on us will fluctuate as our premium levels change. Some states also have laws that establish second injury funds to reimburse insurers and employers for claims paid to injured employees for aggravation of prior conditions or injuries. These funds are supported by either assessments or premium surcharges based on case incurred losses.

In addition, as a condition to conducting business in some states, insurance companies are required to participate in residual market programs to provide insurance to those employers who cannot procure coverage from an insurance carrier on a negotiated basis. Insurance companies generally can fulfill their residual market obligations by, among other things, participating in a reinsurance pool where the results of all policies provided through the pool are shared by the participating insurance companies. Although we price our insurance to account for obligations we may have under these pooling arrangements, we may not be successful in estimating our liability for these obligations. Accordingly, mandatory pooling arrangements may cause a decrease in our profits. As we write policies in new states that have mandatory pooling arrangements, we will be required to participate in pooling arrangements. Further, the impairment, insolvency or failure of other insurance companies in these pooling arrangements would likely increase the liability for other members in the pool. The effect of assessments and premium surcharges or increases in them could reduce our profitability in any given period or limit our ability to grow our business and have a material adverse effect on our business, financial condition and results of operations.

We may have exposure to losses from terrorism for which we are required by law to provide coverage.

When writing workers’ compensation insurance policies, we are required by law to provide workers’ compensation benefits for losses arising from acts of terrorism. The impact of any terrorist act is unpredictable, and the ultimate impact on us would depend upon the nature, extent, location and timing of such an act. Majestic Insurance’s current excess of loss reinsurance treaty program excludes coverage for acts of terrorism. Notwithstanding the protection provided by reinsurance and the Terrorism Risk Act, the risk of severe losses to us from acts of terrorism has not been eliminated. Accordingly, events constituting acts of terrorism may not be covered by, or may exceed the capacity of the Terrorism Risk Act and could adversely affect our business, financial condition and results of operations.

Risks Related to Litigation

We are involved in several potential and pending litigation matters as described more fully in Item 3 - Legal Proceedings. As each of these matters is in a preliminary stage, the outcomes are difficult to predict and quantify, and the defense against such claims can be costly. In addition to decreasing profitability, diverting financial and management resources and general business disruption, we may suffer from adverse publicity that could harm our reputation, regardless of whether the allegations are valid or whether we are ultimately successful in our defense of the action. We cannot estimate what impact, if any, the litigation may have on our business reputation, results of operations, financial condition or cash flows. These matters, or other claims or lawsuits that may arise later, if decided adversely to or settled by us, individually or in the aggregate, could require us to pay significant damage amounts and could result in a material adverse effect on our business, results of operations, financial condition and cash flows. These liabilities may exceed our insurance coverage and financial resources. We cannot assure you that our insurance will be sufficient to cover the liabilities we may incur.

Our discontinued California and New York fee-based management services business has resulted in several lawsuits and exposes us to potential liability.

CRM and its affiliates have been named in several lawsuits following the closure of the California and New York self-insured groups, which, individually or in the aggregate, could have a material adverse effect on our business. Information regarding these lawsuits is presented in “Item 3 - Legal Proceedings.”

We are currently subject to securities class action litigation, the unfavorable outcome of which may have a material adverse effect on our financial condition, results of operations and cash flows.

In February 2010, a purported class action lawsuit was filed against us and certain of our directors and executive officers alleging violations of federal securities laws. For further discussion of this lawsuit, see “Item 3. Legal Proceedings” below.

If the loss reserves for the self-insured groups we managed in the past are underestimated, our business could be adversely affected.

The self-insured groups we managed in the past established loss reserves as they recognized liabilities for unpaid losses, which represented estimates of amounts needed to pay and administer claims with respect to insured events that have occurred, including events that have occurred but have not been reported. Loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of liability.

The self-insured groups’ loss reserve estimates are based on estimates of the ultimate cost of individual claims and on actuarial estimation techniques. Several factors contribute to the uncertainty in establishing these estimates. Judgment is required in actuarial estimation to ascertain the relevance of historical payment and claim settlement patterns under current facts and circumstances. Key assumptions in the estimation process including average cost of claims over time, include the increasing level of medical, legal and rehabilitation costs; frequency risks; fluctuations in inflation; prevailing economic, social and judicial trends; legislative changes; third party claims handling procedures; costs associated with fraud or other abuses of the medical claim process; and other third party factors beyond the groups’ control.

To the extent the loss reserves for the self-insured groups we managed in the past are insufficient to cover the group’s actual losses and loss adjustment expenses, the groups will have to adjust their loss reserves which could have a material adverse effect on the groups’ financial condition and cash flows and could require the group to assess its members. This could expose us to liability for our management of a group.

Risks Generally Applicable to our Business and Industry

The following risk factors are applicable if Majestic Insurance reemerges from the conservation and rehabilitation actions initiated by the CA DOI and we recommence our insurance operations.

Our revenues and results of operation may fluctuate as a result of many factors, including the cyclical changes in the insurance industry, which may cause the price of our common shares to be volatile.

The results of operations of companies in the insurance industry historically have been subject to significant fluctuations and uncertainties. Our profitability can be affected significantly by:

·	competition;

·	rate increases and decreases;

·	volatile and unpredictable developments, including frequency of occurrence or severity of catastrophic and other loss events;

·	changes in the availability of reinsurance capacity and capital capacity;

·	rising loss costs that we cannot anticipate at the time our insurance products are priced; and

·	other general economic and social conditions.

The supply of insurance is related to prevailing prices, the level of insured losses and the level of industry surplus, which, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance and reinsurance industry. As a result, the insurance and reinsurance business historically has been a cyclical industry, characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity permitted favorable premium levels. The supply of insurance and reinsurance may increase, either due to capital provided by new entrants or by the commitment of additional capital by existing insurers or reinsurers, which may cause prices to decrease. Any of these factors could lead to a significant reduction in premium rates and additional competition for business. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and insurers may affect the cycles of the insurance and reinsurance business significantly. If rates continue to decrease and competition continues to increase, this could have a material adverse effect on our business, financial condition, and results of operations.

The current recession and other adverse consequences of the recent U.S. and global economic and financial industry downturns could harm our business, our liquidity and financial condition.

Although there have been some indicators of stabilization, the U.S. economy continues to experience significant recessionary conditions, and we believe meaningful risk remains of potential further deterioration in economic conditions, including substantial and continuing financial market disruptions. The current U.S. recession has resulted in unprecedented levels of market volatility, credit illiquidity and declining interest rates which may significantly affect our business, results of operations, ability to meet liquidity needs, access to capital and cost of capital. Global market and economic conditions have been severely disrupted since the fall of 2008 due in part to financial stresses affecting the liquidity of the banking system and the financial markets. These circumstances have also exerted downward pressure on stock prices and reduced access to the equity and debt markets for many issuers, including us.

These conditions are likely to affect (among other aspects of our business) the demand for and claims made under our insurance policies, the ability of customers, reinsurers and other counterparties and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources, the risks we assume under insurance and reinsurance policies, and our investment performance.

We operate in a highly competitive industry and may lack the financial resources to compete effectively.

The workers’ compensation insurance market is highly competitive and, except for regulatory considerations, has very few barriers to entry. We compete with many companies and other underwriting organizations in the workers’ compensation insurance business. Many of the insurance companies we compete against have significantly more capital, name and brand recognition and marketing and management resources than we have. Many of our competitors have offered, and may continue to offer, workers’ compensation insurance combined with other insurance coverage. Some of our competitors offer workers’ compensation insurance on a multi-state basis greater than ours. In addition, most of our competitors have financial strength ratings from A.M. Best higher than ours. Our ability to implement a business strategy in a manner that will allow us to be competitive is doubtful. If any of our competitors offer premium rates, policy terms or types of insurance that are more competitive than ours, we could lose market share and our business, financial condition and results of operations could be materially and adversely affected as a result.

Negative developments in the workers’ compensation insurance industry could adversely affect our financial condition and results of operations.

We offer only workers’ compensation insurance products. As a result of this concentration, negative developments in the economic, competitive or regulatory conditions affecting the workers’ compensation insurance industry could have a material adverse effect on our financial condition and results of operations. Negative developments in the workers’ compensation insurance industry could have a greater effect on us than on more diversified insurance companies that also sell other types of insurance. If continued rate declines impair profitability, in any of the states in which we operate, we may elect to reduce the amount of premiums written in such states. If our competitors offer products at prices lower than we believe would be profitable, we may decline to compete at those lower prices and our premium levels could be reduced. Many of our competitors are multi-line carriers that can price the workers’ compensation insurance that they offer at a loss in order to obtain other lines of business at a profit. As we offer only workers’ compensation insurance products, we must make a profit on this business and will not lower our price to obtain business below a price that we believe will be profitable for us.

The insurance business is subject to extensive regulation that limits the way we can operate our business.

We are subject to extensive regulation by the CA DOI and the BMA and other insurance regulatory agencies in each state in which we are licensed. These regulatory agencies have broad regulatory powers designed primarily to protect policyholders, claimants and employees of insured businesses, but not our shareholders.

Regulations vary from jurisdiction, but typically address or include:

·	approval of premium, contribution and funding rates;

·	ratios of assets to liabilities, credit and risk reserves, net worth levels and standards of solvency;

·	limits on the size and nature of risks assumed and retained;

·	reserves for unearned premium, losses and other purposes;

·	periodic audits and other regulatory reviews of financial statements;

·	annual reporting and disclosure agreements;

·	limitations on our ability to transact business with our affiliates;

·	regulation of mergers, acquisitions and divestitures;

·	compliance with various licensing requirements and approvals that affect our ability to do business;

·	approval or rejection of policy coverage and endorsements;

·	limitations on our investments and dividends;

·	assessment requirements for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies; and

·	compliance with medical privacy laws.

Insurance departments and state workers’ compensation or similar boards also conduct periodic examinations of the affairs of the insurance companies and groups they regulate and require the filing of periodic, annual and other reports relating to financial condition, approval of new members, groups and other matters. The actuarial findings of the CA DOI examination states that Majestic Insurance’s statutory reserves for losses and loss adjustment expenses may be understated by $41 million.

Our ability to transact business with our affiliates and to enter into mergers, acquisitions and divestitures involving Majestic Insurance is limited by the requirements of the insurance holding company laws in California. To comply with these laws, we are required to file notices with the CA DOI to seek its approval at least thirty days before engaging in any inter-company transactions, such as sales, purchases, exchanges of assets, loans, extensions of credit, cost sharing arrangements and extraordinary dividends or other distributions to shareholders. Under these holding company laws, any change of control transaction also requires prior notification and approval.

In addition, during the pendency of the Special Examiner’s appointment, Majestic Insurance has agreed that it will not, without the prior approval of a Special Examiner or the CA DOI: (a) make any payment to, or engage in any transaction or enter into any agreement with, an affiliated or related person or entity if the cost exceeds $10,000 except for certain payments that have previously been reported to or approved by the Department which may continue until further notice; (b) make any payment to, or engage in any transaction or enter into any agreement with any non-affiliated or unrelated person or entity outside of the ordinary course of business that exceeds $10,000 individually or $100,000 in the aggregate; or (c) pay bonuses or make other distributions (including dividends).

Because governmental agencies, including the CA DOI, may not take action or give approval within the specified period of time, these notifications and approval requirements may subject us to business delays and additional business expense. If we fail to give these notifications, we may be subject to significant fines and penalties and damaged working relations with these governmental agencies.

Twin Bridges is subject to regulation and supervision in Bermuda. Among other matters, Bermuda statutes, regulations and policies of the BMA require Twin Bridges to maintain minimum levels of statutory capital, statutory capital and surplus, and liquidity, to meet solvency standards, to obtain prior approval of certain issuances and transfers of shares as well as to submit to certain periodic examinations of its financial condition. In an order dated April 8, 2011, the BMA restricted Twin Bridges’ operating authority by prohibiting Twin Bridges from writing new business and requiring the prior approval of the BMA before paying dividends/distributing capital to its parent or any affiliate.

Moreover, the offshore insurance and reinsurance regulatory markets have long been the subject of scrutiny by federal and state legislative and regulatory bodies. This scrutiny has led to a number of legislative and regulatory initiatives designed to make it more difficult for offshore companies to transact business with U.S. persons. If Twin Bridges were to become subject to any U.S. federal or state law or regulation, Twin Bridges may be required to post deposits or maintain minimum surplus and may be prohibited from engaging in lines of business or from writing specified types of policies or contracts. Compliance with these laws and regulations could have a material adverse effect on our business, financial condition and results of operations.

The effects of emerging claim and coverage issues on our business are uncertain.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until after we have issued insurance policies that are affected by the changes. As a result, the full extent of liability under our insurance products may not be known until many years after the coverage is initiated. For example, medical costs associated with permanent and partial disabilities may increase more rapidly or be higher than we currently expect. Changes of this nature may expose us to higher claims than we anticipated when we underwrote underlying coverage.

We could be adversely affected if our controls to ensure compliance with guidelines, policies and legal and regulatory standards are not effective.

Our business is highly dependent on our ability to engage on a daily basis in a large number of insurance underwriting, claim processing and investment activities, many of which are highly complex. These activities often are subject to internal guidelines and policies, as well as legal and regulatory standards. A control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives will be met. If our controls are not effective, it could lead to financial loss, unanticipated risk exposure (including underwriting, credit and investment risk) or damage to our reputation. Our business success and profitability depend, in part, on effective information.

Our geographic concentration ties our performance to the business, economic and regulatory conditions in California.

Our insurance business is concentrated in California which represented 73% of our net earned premiums for the year ended December 31, 2010. Unfavorable business, economic or regulatory conditions in California could negatively impact our business, and, consequently, we are exposed to economic and regulatory risks that are greater than the risks faced by insurance companies that conduct business over a greater geographic area. Because our business is concentrated in California, the occurrence of one or more catastrophic events or other conditions affecting losses in these states could have a material adverse effect on our results of operation and financial condition. We may be exposed to economic and regulatory risks or risk from natural perils that are greater than the risks associated with greater geographic diversification.

If we cannot sustain our relationships with our independent agents and brokers, we may be unable to operate profitably.

We market and sell our workers’ compensation insurance products solely through independent agents and brokers. We do not have an exclusive relationship with these independent agents and brokers. They are not obligated to promote our insurance products and may sell insurance products offered by our competitors. Some of our independent agents and brokers may cease to offer our products because Majestic’s A.M. Best rating has been reduced to “B”. Many of our competitors have longer relationships with the independent agents and brokers that we use or intend to use. Further, we must offer workers’ compensation insurance products that meet the requirements of these agents and brokers and their customers and provide competitive compensation to these agents and brokers. There is no assurance that we will successfully maintain these relationships, cultivate new ones or be able to meet the future requirements of these independent agents and brokers. In addition, consolidation in the insurance agency and brokerage industry may lead to the loss of one or more of these relationships. The failure to maintain satisfactory relationships with the independent agents and brokers from whom we obtain or expect to obtain our business or to develop new relationships would have a material adverse effect on our business, financial condition and results of operations.

We have virtually no access to additional capital.

Given the litigation surrounding the company, our ratings from A.M. Best, our operating results over the past two years, the conservation of Majestic Insurance by the CA DOI and the pending delisting of our common shares by the NASDAQ Capital Market, we have very limited access to new sources of capital. Additional capital could help support our insurance company operations and stabilize our A.M. Best rating. However, it is unlikely that additional capital will be available to us. Furthermore, we believe that our ability to raise additional capital will be adversely affected until there is greater clarity with respect to the pending regulatory matters and lawsuits described in “Item 3. Legal Proceedings” and if Majestic Insurance emerges from the conservation and rehabilitation actions initiated by the CA DOI and we recommence our insurance operations.

Any additional equity or debt financing, if available at all, may be available only on terms that are not favorable to us. If we are able to raise capital through equity financings, your interest in us would be diluted, and the securities we issue may have rights, preferences and privileges that are senior to our common shares. If we raise capital through the issuance of debt, the incurrence and repayment of any debt could have a material adverse effect on our business, financial condition and results of operations. If we cannot obtain adequate capital or sources of credit on favorable terms, or at all, our business, operating results, and financial condition could be adversely affected. It is possible that, in the future, one or more of the rating agencies could further reduce our existing ratings. If one or more of our ratings were further downgraded, we could incur higher borrowing costs and our ability to access the capital markets could be impacted.

The inability of our insurance and other operating subsidiaries to pay dividends to our holding companies in sufficient amounts could adversely affect our ability to meet our debt obligations, pay dividends, make other payments and redeploy capital among our subsidiaries.

Majestic Capital is a holding company that transacts business through its operating subsidiaries, including Majestic Insurance and Twin Bridges. Dividends and other permitted distributions from our operating subsidiaries are expected to be our primary source of funds to meet our ongoing cash requirements and other expenses, and to pay dividends, if any, to our shareholders. Insurance regulations in California restrict the payment of dividends and other distributions by Majestic Insurance. In addition, in connection with its triennial examination, Majestic Insurance has agreed that it will not pay dividends without the prior approval of a Special Examiner or the CA DOI. The BMA has also imposed restrictions on the payment of dividends/distribution of capital from Twin Bridges. In addition to the regulatory restrictions, U.S. withholding tax payable on dividends paid to Majestic Capital by our U.S. subsidiaries affects our ability to pay dividends and redeploy capital from our U.S. subsidiaries to our Bermuda operations. Any dividends paid from our U.S. subsidiaries to us would be subject to a U.S. federal withholding tax of 30%. The inability of our operating subsidiaries to pay dividends in an amount sufficient to enable us to meet our cash requirements could have a material adverse effect on our business and financial condition.

Our business could be adversely affected by Bermuda employment restrictions.

Under Bermuda law, non-Bermudians (other than spouses of Bermudians and holders of a Permanent Resident’s Certificate) may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Work permits may be granted or extended by the Bermuda government upon showing that, after proper public advertisement in most cases, no Bermudian (or spouse of a Bermudian) is available who meets the minimum standard requirements for the advertised position. In 2001, the Bermuda government announced a new policy limiting the duration of work permits to six years, with certain exemptions for key employees. We may not be able to use the services of one or more of our key employees in Bermuda if we are not able to obtain work permits for them, which could have a material adverse effect on our business. We have obtained non-resident work permits for our key employees. If we are unable to renew the work permits for these employees or to obtain work permits for any new employees, we may not be able to conduct our business operations fully or efficiently and our business, financial condition and results of operations would be adversely affected.

Risks Related to Our Common Shares

We have received a delisting notice from The Nasdaq Stock Market and our common stock may be involuntarily delisted from trading on the NASDAQ Capital Market. A delisting of our common stock is likely to adversely affect the price and liquidity of our common stock, and our ability to obtain financing or raise capital.

The listing standards of The Nasdaq Stock Market require, among other things, that listed companies timely file all required periodic financial reports with the SEC through the EDGAR system. We failed to timely file this Annual Report on Form 10-K and on April 15, 2011, we received a letter from The Nasdaq Stock Market indicating that we were not in compliance with the rules for continued listing under Nasdaq Listing Rule 5250(c)(1). We were provided an initial period of 60 calendar days, or until June 14, 2011, during which to submit a plan to regain compliance, and if The Nasdaq Stock Market accepts our plan, they may grant an extension of 180 calendar days, or until October 12, 2011, during which we can regain compliance. If we do not regain compliance, the Nasdaq staff will provide written notice that our common stock is subject to delisting. A delisting could adversely affect the market price of, and liquidity of the trading market for, our common shares, our ability to obtain financing or raise capital, and could result in the loss of confidence by investors, market makers, reinsurers, rating agencies and employees. There can be no assurance that we will be successful in maintaining the listing of our common stock on the NASDAQ Capital Market.

A delisting from NASDAQ could significantly impact the transferability and issuance of our common shares under Bermuda law.

Specific permission is required from the BMA, pursuant to the provisions of the Exchange Control Act 1972 and related regulations, for all issuances and transfers of securities of Bermuda companies, other than in cases where the BMA has granted a general permission. The BMA has advised that general permission is given for the issue and subsequent transfer of any securities of a company that is listed on an appointed exchange from and/or to a non-resident, for as long as any equities securities of such company remain so listed. If our common stock is delisted from the NASDAQ Capital Market, and our common stock is not eligible for quotation on another market or exchange, trading of our common stock could be conducted in the over-the-counter market, or the “pink sheets.” In such event, it could become more difficult to dispose of or obtain accurate price quotations for our common stock, and there would likely be a reduction in coverage by security analysts and the news media, all of which could cause the price of our common stock to decline further. If an active trading market for our common stock is not sustained, it will be difficult for our shareholders to sell their shares without further depressing the market price of our common stock.

Further, the NASDAQ Capital Market is deemed to be an appointed stock exchange under Bermuda law and such general permission applies to our common shares. However, the OTC Bulletin Board and the “pink sheets” are not considered to be appointed stock exchanges. Consequently, if our common shares are delisted from The Nasdaq Capital Market and are traded on the OTC Bulletin Board or in the “pink sheets,” we would no longer qualify for the BMA’s grant of general permission. As an alternative, we could seek to apply for listing on the Bermuda Stock Exchange, which is considered an appointed stock exchange, although we cannot assure you that such a listing can be obtained. If we are delisted from the NASDAQ Capital Market and are not able to obtain listing on the Bermuda Stock Exchange, the transfer and issuance of our common shares would be subject to specific permission of the BMA under the Exchange Control Act 1972. This would adversely affect the market price of, and liquidity of the trading market for, our common shares, our ability to obtain financing or raise capital, and could result in the loss of confidence by investors, market makers, reinsurers, rating agencies and employees.

If our common stock is delisted from the NASDAQ Capital Market, we may seek to voluntarily deregister as a reporting company.

If our common stock is delisted from the NASDAQ Capital Market, we may seek to voluntarily deregister its common stock and suspend its reporting obligations under the Securities Exchange Act of 1934. In such event, there will be no established market or mechanism through which our common stock will be traded. Therefore it will be difficult for investors to engage in any buy or sell transactions in our shares.

In the event of delisting of our shares from the NASDAQ Capital Market, our common stock will be subject to the “penny stock” rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.

Rule 15g-9 of the Securities and Exchange Act of 1934 establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:

·	that a broker or dealer approve a person’s account for transactions in penny stocks; and

·	the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:

·	obtain financial information and investment experience objectives of the person; and

·	make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:

·	sets forth the basis on which the broker or dealer made the suitability determination; and

·	that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. Compliance with these requirements may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

Future sales of common shares by our directors, officers, affiliates and other shareholders may adversely affect the price.

We cannot predict what effect, if any, future sales of our common shares, or the availability of shares for future sale, will have on the trading price of our common shares. Future sales of common shares by our directors, officers, affiliates and other shareholders, or the perception that such sales may occur, could adversely affect the market price of our common shares and may make it more difficult for you to sell your common shares at a time and price that you determine appropriate.

Provisions in our charter documents may reduce or increase the voting power associated with our common shares and thereby affect your voting rights.

Our by-laws generally provide that shareholders have one vote for each share held by them and are entitled to vote, on a non-cumulative basis, at all meetings of shareholders. However, pursuant to a mechanism specified in our by-laws, the voting rights exercisable by a shareholder will be limited so that certain persons or groups are not deemed to hold more than 9.9% of the total voting power conferred by our shares. In addition, our board of directors retains certain discretion to make adjustments to the aggregate number of votes attaching to the shares of any shareholder that they consider fair and reasonable in all the circumstances to ensure that no person will hold more than 9.9% of the total voting power represented by our then outstanding shares. Our by-laws provide, generally, that any shareholder owning, directly, indirectly or, in the case of any U.S. person, by attribution, more than 9.9% of our common shares will have the voting rights attached to such common shares reduced so that it may not exercise more than 9.9% of the total voting rights. The reduction in votes is generally to be applied proportionately among all shareholders who are members of the first shareholder’s control group. A control group means, with respect to any person, all shares directly owned by such person and all shares directly owned by each other shareholder any of whose shares are included in the controlled shares of such person. Controlled shares means all common shares that a person is deemed to own directly, indirectly (within the meaning of Section 958(a) of the U.S. Internal Revenue Code, or the Code) or, in the case of a U.S. person, constructively (within the meaning of Section 958(b) of the Code). A similar limitation is to be applied to shares held directly by members of a related group. A related group means a group of shareholders that are investment vehicles and are under common control and management. Any reduction in votes will generally be applied proportionately among members of the shareholder’s control group or related group, as the case may be. The amount of any reduction of votes that occurs by operation of the above limitations will generally be reallocated proportionately among all of our other shareholders who were not members of these groups so long as such reallocation does not cause any person to hold more than 9.9% of the total voting power of our shares.

The attribution rules with respect to a control group will not apply to Daniel G. Hickey, Sr. and Daniel G. Hickey, Jr. Accordingly, the voting rights of each of Mr. Hickey, Sr. and Mr. Hickey, Jr. will be limited to 9.9% on an individual basis and not on a joint and aggregate basis.

Under these provisions, some shareholders may have the right to exercise their voting rights limited to less than one vote per share. Moreover, these provisions could have the effect of reducing the voting power of certain shareholders who would not otherwise be subject to the limitation by virtue of their direct share ownership.

As a result of any reduction in the votes of other shareholders, your voting power might increase above 5% of the aggregate voting power of the outstanding shares, which may result in your becoming a reporting person subject to Schedule 13D or 13G filing requirements under the Exchange Act.

We also have the authority to request information from any shareholder for the purpose of determining whether a shareholder’s voting rights are to be reallocated pursuant to the by-laws. If a shareholder fails to respond to a request for information from us or submits incomplete or inaccurate information (after a reasonable cure period) in response to a request, we, in our reasonable discretion, may reduce or eliminate the shareholder’s voting rights.

Anti-takeover provisions in our by-laws could impede an attempt to replace or remove our directors, which could diminish the value of our common shares.

Our by-laws contain provisions that may entrench directors and make it more difficult for shareholders to replace directors even if the shareholders consider it beneficial to do so. In addition, these provisions could delay or prevent a change of control that a shareholder might consider favorable. For example, these provisions may prevent a shareholder from receiving the benefit from any premium over the market price of our common shares offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our common shares if they are viewed as discouraging changes in management and takeover attempts in the future.

Examples of provisions in our by-laws that could have such an effect include the following:

·	election of our directors is staggered, meaning that the members of only one of three classes of our directors are elected each year;

·	the total voting power of any shareholder owning more than 9.9% of our common shares will be reduced to 9.9% of the total voting power of our common shares; and

our directors may, in their discretion, decline to record the transfer of any common shares on our share register if the shares have not been fully paid for, if the directors are not satisfied that all required regulatory approvals for such transfer have been obtained, if as a result of the transfer a shareholder would own more than 9.9% of our common shares, or if the instrument of transfer is in favor of more than five persons jointly.

U.S. persons who own our common shares may have more difficulty protecting their interests than U.S. persons who are shareholders of a U.S. corporation.

The Companies Act, which applies to us, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. In order to highlight those differences, we have set forth below a summary of certain significant provisions of the Companies Act, including, where relevant, information on our by-laws, which differ in certain respects from the provisions of Delaware corporate law. Further, under certain circumstances, our by-laws impose greater restrictions on us than required by the Companies Act. Because the following statements are summaries, they do not discuss all aspects of Bermuda law that may be relevant to us and our shareholders.

Shareholders’ Suits. The rights of shareholders under Bermuda law are not as extensive as the rights of shareholders in many United States jurisdictions. Class actions and derivative actions are generally not available to shareholders under Bermuda law. However, the Bermuda courts ordinarily would be expected to follow English case law precedent, which would permit a shareholder to commence a derivative action in the name of a company where the act complained of is alleged to be beyond the corporate power of the company, is illegal or would result in the violation of such company’s memorandum of association or by-laws. Furthermore, consideration would be given by the court to acts that are alleged to constitute a fraud against the minority shareholders or where an act requires the approval of a greater percentage of our shareholders than actually approved it. The successful party in such an action generally would be able to recover a portion of the attorney’s fees incurred in connection with such action. Our by-laws provide that shareholders waive all claims or rights of action that they might have, individually or in our right, against any director or officer or any person appointed to any committee by the board of directors or resident representative for any action or failure to act in the performance of his duties, except such waiver shall not extend to any claims or rights of action that would render the waiver void pursuant to the Companies Act and arise out of fraud or dishonesty on the part of such person or with respect to the recovery of any gain, personal profit or advantage to which such person is not legally entitled. Conversely, class actions and derivative actions generally are available to shareholders under Delaware corporate law, for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. In such actions under Delaware corporate law, the court has discretion to permit the winning party to recover attorney’s fees in connection with such action.

Indemnification of Directors and Officers. Under Bermuda law and our by-laws, we will indemnify our directors or officers or any person appointed to any committee by the board of directors and any resident representative (and their respective heirs, executors or administrators) against all actions, costs, charges, liabilities, loss, damage or expense, to the fullest extent permitted by law, incurred or suffered by such officer, director or other person by reason of any act done, conceived in or omitted in the conduct of our business or in the discharge of his duties; provided that such indemnification shall not extend to any matter involving any fraud or dishonesty on the part of such director, officer or other person. Under Bermuda law, a company pursuant to the terms of its by-laws, or a contract or arrangement between the company and any director or officer, may advance moneys to any director or officer for the costs, charges and expenses incurred by the director or officer in defending any civil or criminal proceedings against them, on condition that the director or officer shall repay the advance if any allegation of fraud or dishonesty is proved against them. In general, under Delaware corporate law, U.S. companies may limit the personal liability of their directors as long as they acted in good faith and reasonably believed their actions were not opposed to the best interests of the company and, with regard to criminal actions or proceedings, without knowing violation of law.

We are a Bermuda company and it may be difficult for you to enforce judgments against us.

We are a Bermuda company and a significant portion of our assets are or may be located in jurisdictions outside the United States. It may therefore be difficult for shareholders to affect service of process against us or to enforce against us judgments of U.S. courts predicated upon civil liability provisions of the U.S. federal securities laws.

There is no treaty in force between the United States and Bermuda providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. As a result, whether a United States judgment would be enforceable in Bermuda against us or our directors and officers depends on whether the U.S. court that entered the judgment is recognized by the Bermuda court as having jurisdiction over us or our directors and officers, as determined by reference to Bermuda conflict of law rules. A judgment debt from a U.S. court that is final and for a sum certain based on U.S. federal securities laws will not be enforceable in Bermuda unless the judgment debtor had submitted to the jurisdiction of the U.S. court, and the issue of submission and jurisdiction is a matter of Bermuda (not United States) law.

In addition to and irrespective of jurisdictional issues, the Bermuda courts will not enforce a United States federal securities law that is either penal or contrary to the public policy of Bermuda. An action brought pursuant to a public or penal law, the purpose of which is the enforcement of a sanction, power or right at the instance of the state in its sovereign capacity, may not be entertained by a Bermuda court. Certain remedies available under the laws of U.S. jurisdictions, including certain remedies under U.S. federal securities laws, will not be available under Bermuda law or enforceable in a Bermuda court, as they may be contrary to Bermuda public policy. Further, no claim may be brought in Bermuda against us or our directors and officers in the first instance for violations of U.S. federal securities laws because these laws have no extraterritorial jurisdiction under Bermuda law and do not have force of law in Bermuda. A Bermuda court may, however, impose civil liability on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law.

Risks Related to Taxation

Majestic Capital and its non-U.S. subsidiaries may be subject to U.S. federal income taxation.

If Majestic Capital or any of our non-U.S. subsidiaries, including Twin Bridges, were treated as engaged in a trade or business in the United States, that entity could be subject to U.S. income and branch profits tax on all or a portion of the income that is effectively connected with such trade or business. We intend to operate in a manner such that neither Majestic Capital nor any of our non-U.S. subsidiaries will be treated as being engaged in a trade or business in the United States. Accordingly, we do not believe that Majestic Capital or any of our non-U.S. subsidiaries are or will be subject to U.S. federal income taxation on net income. However, this determination is essentially factual in nature, and there are no definitive standards as to what activities constitute being engaged in a trade or business within the United States. Accordingly, there can be no assurance that the U.S. Internal Revenue Service, or IRS, would not find that Majestic Capital or any of our non-U.S. subsidiaries is engaged in a trade or business in the United States. Any liability for income or branch profits tax resulting from such finding could materially adversely affect our financial condition, results of operations and cash flows.

Even if Majestic Capital and our non-U.S. subsidiaries are not treated as being engaged in a trade or business in the United States, we may be subject to U.S. federal income tax on certain fixed or determinable annual or periodical gains, profits, and income (such as dividends and certain interest on investments) derived from sources within the United States.

Majestic Capital could be considered a U.S. corporation for U.S. federal income tax purposes, and thus subject to U.S. tax on its worldwide income (including current income of Twin Bridges), if the value of Twin Bridges at the time of our restructuring did not exceed 20% of the total value of CRM, CRM CA, Eimar and Twin Bridges at that time.

If a foreign corporation acquires substantially all of the assets of a U.S. corporation, and 80% or more of the stock of the foreign corporation (excluding new stock issued in a public offering related to the acquisition) is owned by former shareholders of the U.S. corporation by reason of their ownership of the U.S. corporation, the foreign corporation will be considered a U.S. corporation for U.S. federal income tax purposes. In our restructuring, the former owners of CRM, CRM CA and Eimar contributed all of their interests in CRM, CRM CA and Eimar to Majestic USA in return for all of the common stock of Majestic USA. The former owners of CRM, CRM CA and Eimar then contributed all of their Majestic USA shares to us in exchange for 6,372,425 of our pre-reverse split common shares. In addition, in our restructuring, the former owners of Twin Bridges contributed all of their shares in Twin Bridges to us in exchange for 3,874,690 of our pre-reverse split common shares. As a result of these exchanges, the former owners of CRM, CRM CA Eimar and Twin Bridges acquired 9,457,115 of our pre-reverse split common shares in our restructuring.

Based on discussions with our professional advisors at the time of our restructuring, we believe that the former owners of CRM, CRM CA and Eimar did not obtain 80% or more of the stock of Majestic Capital (excluding the stock sold in our initial public offering) by reason of their ownership of CRM, CRM CA and Eimar (i.e., we believe that Twin Bridges was worth more than 20% of the combined value of CRM, CRM CA, Eimar and Twin Bridges). We cannot assure you that the IRS will agree with our conclusions. If the IRS successfully challenges our conclusions, Majestic Capital would be subject to United States federal income tax on its worldwide income at the rate applicable to U.S. corporations, which is currently 35%, rather than being subject to tax on only certain U.S. source income and income effectively connected with a U.S. trade or business. However, in that case, dividends paid to Majestic Capital by its U.S. subsidiaries would not be subject to any U.S. federal income tax, nor would they be subject to the 30% U.S. federal withholding tax. The tax liability that would result if Majestic Capital is treated as a U.S. corporation for U.S. federal income tax purposes could have a material adverse effect on our business, financial condition and results of operations.

Any of our U.S. subsidiaries may be deemed a “personal holding company” and subject to additional U.S. federal income tax.

Any of Majestic Capital’ U.S. subsidiaries might be subject to additional U.S. federal income tax on a portion of its income if it is considered a personal holding company for U.S. federal income tax purposes. This status will depend on whether more than 50% of our shares by value could be deemed to be owned (taking into account indirect and constructive ownership) by five or fewer individuals and whether 60% or more of such subsidiary’s adjusted ordinary gross income consists of “personal holding company income,” which is, in general, certain forms of passive and investment income. We believe based upon information made available to us regarding our existing shareholder base that none of Majestic Capital’ U.S. subsidiaries should be considered a personal holdings company for U.S. federal income tax purposes. In addition, we intend to manage our business to minimize the possibility that we will meet the 60% income threshold. However, because of the lack of complete information regarding our ultimate common share ownership (i.e., as determined by the constructive ownership rules for personal holdings companies), we cannot be certain that none of Majestic Capital’ subsidiaries will be considered a personal holding company or that the amount of U.S. tax that would be imposed in that case would be immaterial

Shareholders who are U.S. persons may be subject to U.S. federal income tax on their pro rata share of our undistributed earnings.

Shareholders who are U.S. persons may be subject to U.S. federal income tax on our undistributed earnings if we are treated as a controlled foreign corporation or a passive foreign investment company or if we have generated more than a permissible amount of related person insurance income. In addition, gain on the disposition of our common shares may be treated as dividend income.

Controlled Foreign Corporation. Each “10% U.S. Shareholder” of a foreign corporation that is a controlled foreign corporation for an uninterrupted period of thirty days or more during a taxable year, and that owns shares in the controlled foreign corporation directly or indirectly through foreign entities on the last day of the corporation’s taxable year on which such corporation was a controlled foreign corporation, must include in its gross income for U.S. federal income tax purposes its pro rata share of the controlled foreign corporation’s “subpart F income,” even if the subpart F income is not distributed. Subpart F income generally includes, among other things, investment income such as dividends, interest and capital gains, and income from insuring risks located outside the insurer’s country of incorporation. A foreign corporation is considered a controlled foreign corporation if “10% U.S. Shareholders” own more than 50% of the total combined voting power of all classes of voting stock of the foreign corporation, or the total value of all stock of the corporation. A 10% U.S. Shareholder is a U.S. person, as defined in the Code, that owns at least 10% of the total combined voting power of all classes of stock of the foreign corporation entitled to vote. For purposes of taking into account subpart F income consisting of insurance income, a controlled foreign corporation also includes a foreign corporation of which more than 25% of the total combined voting power of all classes of stock (or more than 25% of the total value of the stock) is owned by 10% U.S. Shareholders on any day during the taxable year of such corporation, if the gross amount of premiums or other consideration for the reinsurance or the issuing of insurance or annuity contracts generating subpart F income exceeds 75% of the gross amount of premiums or other consideration in respect of all risks. It is expected that all of Twin Bridges’ income will be considered subpart F insurance income. For purposes of determining whether the more-than-50% (or more-than-25%, in the case of insurance income) and 10% ownership tests have been satisfied, and therefore whether a corporation is a controlled foreign corporation, shares owned includes shares owned directly or indirectly through foreign entities and shares considered owned under applicable constructive ownership rules. The attribution rules are complicated and depend on the particular facts relating to each investor.

Majestic Capital’s By-Laws contain provisions that impose limitations on the concentration of voting power of its shares. Accordingly, based upon these provisions and the dispersion of our share ownership, we do not believe that we have any 10% U.S. Shareholders. It is possible, however that the IRS could challenge the effectiveness of these provisions and that a court could sustain such a challenge.

Related Person Insurance Income. If Twin Bridges’ gross related person insurance income equals or exceeds 20% of its gross insurance income in any taxable year, direct or indirect insureds (and persons related to such insureds) own (or are treated as owning directly or indirectly) 20% or more of the voting power or value of the shares of Twin Bridges and U.S. persons are considered to own in the aggregate 25% or more of the stock of Twin Bridges by vote or value, then a U.S. person who owns any of our shares directly or indirectly through foreign entities on the last day of Twin Bridges’ taxable year on which it is a controlled foreign corporation would be required to include in its income for U.S. federal income tax purposes its pro rata share of Twin Bridges’ related person insurance income for the U.S. person’s taxable year that includes the end of Twin Bridges’ taxable year, determined as if such related person insurance income were distributed proportionately to such U.S. shareholders at that date regardless of whether such income is distributed. In addition any related person insurance income that is includible in the income of a U.S. tax-exempt organization will be treated as unrelated business taxable income. The amount of related person insurance income earned by Twin Bridges (generally, premium and related investment income from the direct or indirect insurance or reinsurance of any direct or indirect U.S. shareholder of Twin Bridges or any person related to such shareholder) will depend on a number of factors, including the identity of persons directly or indirectly insured or reinsured by Twin Bridges.

Although we do not expect our gross related person insurance income to equal or exceed 20% of our gross insurance income in the foreseeable future, some of the factors which determine the extent of related person insurance income in any period may be beyond Twin Bridges’ control. Consequently, Twin Bridges’ gross related person insurance income could equal or exceed 20% of its gross insurance income in any taxable year and ownership of its shares by direct or indirect insureds and related persons could equal or exceed the 20% threshold described above.

The related person insurance income rules provide that if a shareholder that is a U.S. person disposes of shares in a foreign insurance corporation that has related person insurance income (even if the amount of related person insurance income is less than 20% of the corporation’s gross insurance income or the ownership of its shares by direct or indirect insureds and related persons is less than the 20% threshold) and in which U.S. persons own 25% or more of the shares, any gain from the disposition will generally be treated as ordinary income to the extent of the shareholder’s share of the corporation’s undistributed earnings and profits that were accumulated during the period that the shareholder owned the shares (whether or not such earnings and profits are attributable to related person insurance income). In addition, such a shareholder will be required to comply with reporting requirements, regardless of the amount of shares owned by the shareholder. We believe that these rules should not apply to dispositions of our shares because Majestic Capital will not itself be directly engaged in the insurance business and because proposed U.S. Treasury regulations appear to apply only in the case of shares of corporations that are directly engaged in the insurance business. However, the IRS might interpret the proposed regulations in a different manner and the applicable proposed regulations may be promulgated in final form in a manner that would cause these rules to apply to dispositions of our shares.

Passive Foreign Investment Company. We do not intend to conduct our activities in a manner that would cause us to become a passive foreign investment company. However, it is possible that we could be deemed a passive foreign investment company by the IRS. Our being considered a passive foreign investment company could have material adverse tax consequences for an investor that is subject to U.S. federal income taxation, including subjecting the investor to a greater tax liability than might otherwise apply or subjecting the investor to tax on amounts in advance of when tax would otherwise be imposed. There are currently no regulations regarding the application of the passive foreign investment company provisions to an insurance company. New regulations or pronouncements interpreting or clarifying these rules may be issued in the future. We cannot predict what impact, if any, this guidance would have on a shareholder that is subject to U.S. federal income taxation. We have not sought and do not intend to seek an opinion of legal counsel as to whether or not we were a passive foreign investment company for any year.

We may become subject to taxes in Bermuda after March 31, 2035.

The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966, as amended, of Bermuda has given each of Majestic Capital and Twin Bridges an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to Majestic Capital or Twin Bridges or any of their operations, shares, debentures or other obligations until March 31, 2035. Given the limited duration of the Minister of Finance’s assurance, we cannot be certain that we will not be subject to any Bermuda tax after March 31, 2035. In the event that we become subject to any Bermuda tax after such date, it would have a material adverse effect on our financial condition and results of operations.

Changes in U.S. tax law or regulations could materially adversely affect our business.

Legislation is periodically introduced in the U.S. Congress intended to eliminate some perceived tax advantages of companies (including insurance and reinsurance companies) that have legal domiciles outside the United State but have certain U.S. connections. It is possible that legislative proposals could emerge in the future that could have a material adverse impact on us or our shareholders.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.

PROPERTIES

We lease our principal executive offices in Hamilton Bermuda, which also houses our reinsurance operations. Our U.S. executive offices are located in leased premises of approximately 34 thousand square feet in Poughkeepsie, New York. We operate our primary insurance east coast operations from these offices. Our west coast insurance operations are located in leased premises of approximately 26 thousand square feet in San Francisco, California. We also rent additional office for our insurance operations in 2 other locations. We believe that such leased properties are suitable and adequate for our current business operations.

ITEM 3.

LEGAL PROCEEDINGS

Pending Litigation

Litigation Involving New York Self-Insured Groups

Proposed Settlement of Litigation Involving New York Self-Insured Groups. On September 30, 2010, the Company and the New York State Office of Attorney General and the New York State Workers’ Compensation Board (collectively referred to as the “State of New York”) entered into a memorandum of understanding outlining a proposed settlement with the State of New York described below on the following terms and conditions:

·	the Company will pay $4.6 million in cash to the State of New York;

·	the Company’s errors and omissions insurance carrier will pay $2.5 million to the State of New York;

·	the Company will turn over to the State of New York $4.1 million the Company has not yet paid under severance agreements with its former co-chief executive officers;

·	certain of the Company’s current directors and current and formers officers will assign to the State of New York the proceeds received on the sale of an aggregate of 1.2 million pre-reverse split common shares of the Company owned by such persons;

·	the Company will commute, on an undiscounted basis, its loss reserves currently held on excess insurance policies it issued to four of the self-insured groups previously managed by CRM;

·	the Company will forego its rights to disclaim coverage and/or impose penalties for late notice for certain claims arising under certain excess insurance policies it issued to the self-insured groups previously managed by CRM; and

·	the Company will adjust the attachment points and increase policy limits on certain aggregate insurance policies it issued to certain self-insured groups previously managed by CRM.

The completion of the settlement is subject to the following conditions:

·	approval of the CA DOI and the BMA;

·	negotiation and execution of an assurance of discontinuation and a definitive settlement agreement;

·	releases granted in favor of the Company and its subsidiaries and affiliates by the State of New York, the self-insured groups previously managed by CRM, all members of the self-insured groups previously managed by CRM and any party related to any of foregoing; and

·	other customary conditions.

If completed, the proposed settlement would resolve the claims by the State of New York and certain lawsuits that are described below.

The Company recorded a reserve of $4.6 million during the quarter ended September 30, 2010 for the amount to be paid by the Company to the State of New York, and except for legal fees to complete the settlement, the Company does not expect to incur further charges as a result of the proposed settlement.

There can be no assurance that the Company will ultimately enter into any definitive settlement agreement with the State of New York, or that the other conditions described above will be satisfied. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated. The Company denies all liability with respect to the facts and claims alleged in the investigation and lawsuits. However, because it will eliminate the uncertainty and expense of further litigation, the Company has agreed to the terms of the proposed settlement described above.

If the proposed settlement is not completed, the Company intends to defend the investigation and lawsuits vigorously. If this were to occur, these matters, or other claims or lawsuits that may arise later, if decided adversely to or settled by the Company, individually or in the aggregate, could require the Company to pay significant damage amounts and could result in a material adverse effect on its business, results of operations, financial condition and cash flows. Defending such actions would divert financial and management resources and result in a general business disruption, and the Company could continue to suffer from adverse publicity and harm to its reputation, regardless of whether the allegations are valid or whether the Company is ultimately successful in its defense of the action. The Company cannot estimate what impact, if any, the litigation may have on its business reputation, results of operations, financial condition or cash flows.

New York State Office of the Attorney General Investigation. In March 2008, CRM was advised that the New York State Office of the Attorney General (NY Attorney General) had commenced an investigation of CRM and had issued a subpoena for documents related to CRM’s administration of the Healthcare Industry Trust of New York (HITNY). Subsequent NY Attorney General inquiries and requests for documents indicated a focus on the Company’s initial public offering in December 2005, and in August 2009, the Company was advised that the NY Attorney General would seek testimony of six current or former directors and officers of the Company and CRM. Thereafter, in December 2009, the Company received a “Notice of Imminent Enforcement Action” from the NY Attorney General, in which the NY Attorney General informed the Company that the NY Attorney General was intending to file civil claims against the Company, certain of its subsidiaries and certain directors and officers to seek redress of allegedly unlawful practices unless an acceptable settlement could be reached. The NY Attorney General alleged that the Company and the other named parties engaged in fraudulent practices in connection with CRM’s administration and marketing of workers’ compensation group self-insurance trusts in New York and in connection with the Company’s initial public offering completed in December 2005. These practices are alleged to have violated New York’s Executive Law and Martin Act, and the NY Attorney General informed the Company that it would seek injunctive relief, restitution, damages, penalties and costs with respect thereto. During recent settlement negotiations, the NY Attorney General advised the Company that any such action commenced may allege criminal actions or inaction. For information regarding the proposed settlement of this matter, please see above under the heading “― Proposed Settlement of Litigation Involving New York Self-Insured Groups.”

New York State Workers Compensation Board v. Compensation Risk Managers, LLC et al. In December 2009, the New York State Workers’ Compensation Board (NY Workers’ Compensation Board) commenced a lawsuit on its own behalf and in its capacity as successor in interest to seven of the eight workers’ compensation self-insured groups in New York previously managed by CRM. The NY Workers’ Compensation Board’s lawsuit, brought in Supreme Court of the State of New York, Albany County, alleges that CRM, Majestic Capital, its subsidiaries and certain directors and officers breached fiduciary duties owed to the self-insured groups, breached contracts between CRM and the self-insured groups, breached duties of good faith and fair dealing owed to the self-insured groups, engaged in fraudulent activities in administering the self-insured groups, engaged in deceptive business practices and advertising, and were unjustly enriched. In March 2010, the NY Workers’ Compensation Board amended its complaint to include the Elite Contractors Trust of New York, the eighth workers’ compensation self-insured group previously administered by CRM, as a plaintiff. The amended complaint alleges that the NY Workers’ Compensation Board and the self-insured groups have suffered damages in an amount that is not currently ascertainable, but which the NY Workers’ Compensation Board believes exceeds $472 million. In April 2010, CRM submitted an application to the State of New York Litigation Coordination Panel (Panel) seeking to coordinate pretrial proceedings in the following lawsuits before a single justice of the New York State Supreme Court, Albany County: (1) FS Kids LLC, et al. v. Compensation Risk Managers, LLC; (2) Armstrong Brands, Inc., et al. v. Compensation Risk Managers, LLC; (3) Arlen Senior Contracting of Central Islip, LLC, et al. v. Compensation Risk Managers, LLC; (4) 70 Sheldon Inc., et al. v. Compensation Risk Managers, LLC; (5) Healthcare Industry Trust of New York, et al. v. Compensation Risk Managers, LLC, et al.; (6) New York State Workers Compensation Board v. Compensation Risk Managers, LLC et al.; and (7) any future lawsuits which relate to CRM’s administration of group self-insured trusts in the State of New York (Coordinated Lawsuits). In connection with CRM’s application, the Panel issued an order staying each of the Coordinated Lawsuits pending the Panel’s decision. On February 23, 2011, the Panel issued an order that any actions seeking damages alleged to have arisen from CRM’s administration of self-insured groups that provided workers’ compensation coverage to its members that were filed in the Supreme Court of the State of New York and which remain active and any such actions that are filed hereafter be coordinated unless the Panel rules otherwise. An initial conference was held on April 18, 2011. Pursuant to that conference, an order will be circulated whereby within thirty days of the order, HITNY plaintiffs will circulate its proposed third amended complaint and the parties will then either consent to the service of same or require motion practice which will be scheduled at a later date. In the interim, all discovery proceedings and pending motions are presently stayed. For information regarding the proposed settlement of this lawsuit, please see above under the heading “― Proposed Settlement of Litigation Involving New York Self-Insured Groups.”

FS Kids LLC, et al. v. Compensation Risk Managers, LLC. On November 24, 2008, FS Kids, LLC, Mask Foods, Inc., Valu Home Centers, Inc., KBLM Foods, Inc., KDJB Foods, Inc., Gaige & Son Grocery, Inc., TJ’s Market, Inc., BB&T Supermarkets Inc., BNR-Larson, LLC, and Gift Express of New York, Inc., all of which were former members of the Wholesale Retail Workers’ Compensation Trust of New York (WRWCTNY), on their own behalf and on behalf of all others similarly situated, sued CRM in New York Supreme Court, Erie County. On August 26, 2009, the plaintiffs filed an amended complaint seeking class action certification and alleging that CRM: (1) breached its contract with WRWCTNY; (2) breached its duty of good faith and fair dealing owed to WRWCTNY; (3) breached its fiduciary duties owed to WRWCTNY; (4) was negligent in administering WRWCTNY; (5) engaged in deceptive business practices; (6) was unjustly enriched; and (7) should indemnify the plaintiffs for any assessments that they may incur. The plaintiffs are seeking damages arising from (a) the plaintiffs’ joint and several liability for the deficit of WRWCTNY and (b) any unpaid claims of the plaintiffs’ injured employees.

In September 2009, CRM filed a motion to dismiss the plaintiffs’ amended complaint. CRM’s motion to dismiss was denied by the court on March 11, 2010. Following the court’s decision, in April 2010, CRM submitted an application to the Panel seeking to coordinate pretrial proceedings and on February 23, 2011, the Panel issued an order that this action would be one of the Coordinated Lawsuits. An initial conference was held on April 18, 2011. Pursuant to that conference, an order will be circulated whereby within thirty days of the order, HITNY plaintiff will circulate its proposed third amended complaint and the parties will then either consent to the service of same or require motion practice which will be scheduled at a later date. In the interim, all discovery proceedings and pending motions are presently stayed. For information regarding the proposed settlement of this lawsuit, please see above under the heading “― Proposed Settlement of Litigation Involving New York Self-Insured Groups.”

Armstrong Brands, Inc., et al. v. Compensation Risk Managers, LLC. On March 6, 2009, Armstrong Brands, Inc., Metal Cladding, Inc., TREK, Inc., Petri Baking Products, Inc., Time Cap Laboratories, Inc., Custom Coatings, Inc., GPM Associates, LLC, d/b/a Forbes Products, PJR Industries, Inc., d/b/a Southside Precast Products, Lakeshore Metals, Inc. Duro-Shed, Inc., Tooling Enterprises, Inc. Northeast Concrete Products, Inc., d/b/a Concrete Building Supply and Superior Steel Studs, Inc., all of which were former members of Trade Industry Trust Workers’ Compensation Trust for Manufacturers (the Trade Trust), on their own behalf and on behalf of all others similarly situated, sued CRM in New York State Supreme Court, Erie County. The lawsuit seeks class action certification and alleges that CRM: (1) breached its contract with the Trade Trust; (2) breached its duty of good faith and fair dealing owed to the Trade Trust; (3) breached its fiduciary duties owed to Trade Trust; (4) was negligent in administering the Trade Trust; (5) engaged in deceptive business practices; (6) was unjustly enriched; and (7) should indemnify the plaintiffs for any assessments that they may incur. The plaintiffs are seeking damages (a) arising from the plaintiffs’ joint and several liability for the deficit of the Trade Trust, (b) from any unpaid claims of the plaintiffs’ injured employees, (c) from potentially being liable for the costs of liquidation charged or to be charged by the WCB, and (d) from fees paid by the plaintiffs and the Trade Trust to CRM pursuant the service agreement between CRM and the Trade Trust. On August 17, 2009, CRM filed a motion to dismiss the plaintiffs’ complaint, and in response to CRM’s motion, on November 10, 2009, the plaintiffs filed an amended complaint alleging substantially the same claims and damages as contained in their original complaint. In April 2010, CRM submitted an application to the Panel seeking to coordinate pretrial proceedings and on February 23, 2011, the Panel issued an order that this action would be one of the Coordinated Lawsuits. An initial conference was held on April 18, 2011. Pursuant to that conference, an order will be circulated whereby within thirty days of the order, HITNY plaintiff will circulate its proposed third amended complaint and the parties will then either consent to the service of same or require motion practice which will be scheduled at a later date. In the interim, all discovery proceedings and pending motions are presently stayed. For information regarding the proposed settlement of this lawsuit, please see above under the heading “― Proposed Settlement of Litigation Involving New York Self-Insured Groups.”

Arlen Senior Contracting of Central Islip, LLC, et al. v. Compensation Risk Managers, LLC. On August 18, 2009, Arlen Senior Contracting of Central Islip LLC, Anchor Building Maintenance Corp., Conifer Realty, LLC, Constanza Enterprises, Inc., Court Plaza Senior Apartments, L.P., John Wesley Village II, Midland Management, LLC, Niagara River World, Inc., Plattsburgh Airbase Redevelopment Corp., and Wen Management Corp., all of which were former members of the Real Estate Management Trust of New York (the Real Estate Trust), on their own behalf and on behalf of all others similarly situated, sued CRM in New York State Supreme Court, Erie County. The lawsuit seeks class action certification and alleges that CRM: (1) breached its contract with the Real Estate Trust; (2) breached its duty of good faith and fair dealing owed to the Real Estate Trust; (3) breached its fiduciary duties owed to the Real Estate Trust; (4) was negligent in administering the Real Estate Trust; (5) engaged in deceptive business practices; (6) was unjustly enriched; and (7) should indemnify the plaintiffs for any assessments that they may incur. The plaintiffs are seeking damages (a) arising from the plaintiffs’ joint and several liability for the deficit of the Real Estate Trust, (b) from any unpaid claims of the plaintiffs’ injured employees, (c) from potentially being liable for the costs of liquidation charged or to be charged by the WCB, and (d) from fees paid by the plaintiffs and the Real Estate Trust to CRM pursuant the service agreement between CRM and the Real Estate Trust. On October 20, 2009, CRM filed a motion to dismiss the plaintiffs’ complaint. In April 2010, CRM submitted an application to the Panel seeking to coordinate pretrial proceedings and on February 23, 2011, the Panel issued an order that this action would be one of the Coordinated Lawsuits. An initial conference was held on April 18, 2011. Pursuant to that conference, an order will be circulated whereby within thirty days of the order, HITNY plaintiff will circulate its proposed third amended complaint and the parties will then either consent to the service of same or require motion practice which will be scheduled at a later date. In the interim, all discovery proceedings and pending motions are presently stayed. For information regarding the proposed settlement of this lawsuit, please see above under the heading “― Proposed Settlement of Litigation Involving New York Self-Insured Groups.”

70 Sheldon Inc., et al. v. Compensation Risk Managers, LLC. On August 20, 2009, 70 Sheldon, Inc., Advance Relocation Storage, Inc., All County Bus, LLC, Alpha Services of Westchester, Inc., A. T. & A. Trucking Corp., B. Pariso Transport, Inc., Carmen M. Pariso, Inc., Covered Wagon Train, Inc., Exclusive Ambulette Service, Inc. Ficel Transport, Inc., North Shore Ambulance and Oxygen Service, Inc., Rivlab Transportation Corp., Woodland Leasing Co., Inc., all of which were former members of the Transportation Industry Workers’ Compensation Trust (the Transportation Trust), on their own behalf and on behalf of all others similarly situated, sued CRM in New York State Supreme Court, Erie County. The lawsuit seeks class action certification and alleges that CRM: (1) breached its contract with the Transportation Trust; (2) breached its duty of good faith and fair dealing owed to the Transportation Trust; (3) breached its fiduciary duties owed to the Transportation Trust; (4) was negligent in administering the Transportation Trust; (5) engaged in deceptive business practices; (6) was unjustly enriched; and (7) should indemnify the plaintiffs for any assessments that they may incur. The plaintiffs are seeking damages (a) arising from the plaintiffs’ joint and several liability for the deficit of the Transportation Trust, (b) from any unpaid claims of the plaintiffs’ injured employees, (c) from potentially being liable for the costs of liquidation charged or to be charged by the WCB, and (d) from fees paid by the plaintiffs and the Transportation Trust to CRM pursuant the service agreement between CRM and the Transportation Trust. On October 20, 2009, CRM filed a motion to dismiss the plaintiffs’ complaint. In April 2010, CRM submitted an application to the Panel seeking to coordinate pretrial proceedings and on February 23, 2011, the Panel issued an order that this action would be one of the Coordinated Lawsuits. An initial conference was held on April 18, 2011. Pursuant to that conference, an order will be circulated whereby within thirty days of the order, HITNY plaintiff will circulate its proposed third amended complaint and the parties will then either consent to the service of same or require motion practice which will be scheduled at a later date. In the interim, all discovery proceedings and pending motions are presently stayed. For information regarding the proposed settlement of this lawsuit, please see above under the heading “― Proposed Settlement of Litigation Involving New York Self-Insured Groups.”

Healthcare Industry Trust of New York, et al. v. Compensation Risk Managers, LLC, et al. On November 2, 2009, HITNY and 89 of its former members filed a lawsuit in New York State Supreme Court, Albany County against CRM, CRM USA Holdings, CRM Holdings, Majestic Insurance Company, Embarcadero, Twin Bridges, Eimar, and certain current and former directors and officers of CRM Holdings. The plaintiffs also named HITNY’s former actuaries, auditors, trustees and brokers as defendants in the lawsuit.

Plaintiffs are seeking damages from the defendants’ alleged failure to carry out their respective contractual, common law and statutory obligations to the plaintiffs to provide third-party administration and insurance services to HITNY. As against CRM, its affiliated entities and directors and officers, the lawsuit alleges that: (1) CRM breached its contract with HITNY; (2) CRM breached its duty of good faith and fair dealing owed to HITNY; (3) CRM breached its fiduciary duties owed to HITNY; (4) CRM engaged in common law fraud during its administration of HITNY; (5) CRM, its affiliated entities and directors and officers converted the assets of HITNY’s members for personal use; (6) CRM, its affiliated entities and directors and officers were unjustly enriched; (7) CRM negligently misrepresented information relative to HITNY; (8) CRM committed fraud in the inducement with respect to plaintiffs’ decision to join HITNY; (9) CRM and its directors and officers engaged in deceptive business practices; (10) CRM, its affiliated entities and directors and officers are alter egos of each other and should be liable for the debts, judgments and liabilities of each other; and (11) CRM, certain of its affiliated entities, a current director and a former officer committed a civil conspiracy in violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §1962(c) (RICO).

The plaintiffs are seeking damages (a) arising from the plaintiffs’ joint and several liability for the deficit of HITNY, (b) from any unpaid claims of the plaintiffs’ injured employees, (c) from potentially being liable for other costs to be charged by the WCB, and (d) from fees paid by HITNY to CRM and its affiliated entities. In addition, the plaintiffs are seeking treble damages for the allegedly deceptive business practices and RICO claims.

On March 12, 2010, the plaintiffs filed an amended complaint which contains substantially the same allegations as the original complaint, but seeks to add additional claims, including: (i) the imposition of a constructive trust upon certain assets of CRM, its affiliated entities and two former director and officers; (ii) an accounting to determine the amount and location of any assets improperly obtained by CRM, its affiliated entities and two former directors and officers; (iii) indemnification from CRM for amounts paid by plaintiffs; and (iv) an injunction pursuant to New York’s Debtor and Creditor Law restraining the disposition and appointing a receiver to take charge of the property of CRM Holdings and two former directors and officers and the setting aside of certain payments. The plaintiffs have granted CRM and its affiliates an unlimited extension of time to respond to the complaint, which may be revoked on 20 days notice. In April 2010, CRM submitted an application to the Panel seeking to coordinate pretrial proceedings and on February 23, 2011, the Panel issued an order that this action would be one of the Coordinated Lawsuits. An initial conference was held on April 18, 2011. Pursuant to that conference, an order will be circulated whereby within thirty days of the order, HITNY plaintiffs will circulate its proposed third amended complaint and the parties will then either consent to the service of same or require motion practice which will be scheduled at a later date. In the interim, all discovery proceedings and pending motions are presently stayed. For information regarding the proposed settlement of this lawsuit, please see above under the heading “― Proposed Settlement of Litigation Involving New York Self-Insured Groups.”

Three Brothers Electric, Inc., et. al. v. Compensation Risk Managers, LLC. On February 23, 2011, Three Brothers Electric, Inc., Action Residential Insulation, Inc., Brothers & Company, Inc., Calvin Maintenance, Inc., Carrea & Sons, Inc., Conroy & Conroy Contractors, Inc., Delia Heating Ventilating & Air Conditioning, Inc., JPR Plumbing & Heating Co., Inc., Linaire Sheet Metal Corp., Mandon Building Systems, Inc., MLP Plumbing & Mechanical, Inc., Northern Mechanicals, Inc., OMC, Inc., Precision Carpentry of Westchester, Inc., Rochester Custom Exteriors Inc., Sid Beebe & Sons Builders, In., Tim Gray Masonery Construction, Inc., Torino Industrial, Inc., Village Dock, Inc. and Wilkstone, LLC, all of which were former members of Elite Contractors Trust of New York, on their own behalf and on behalf of all others similarly situated, sued Compensation Risk Managers, LLC in New York Supreme Court, Erie County.

The complaint seeks class action certification and alleges that CRM: (1) breached its contract with the Elite Contractors Trust; (2) breached its duty of good faith and fair dealing owed to the Elite Contractors Trust; (3) breached its fiduciary duties owed to Elite Contractors Trust; (4) was negligent in administering the Elite Contractors Trust; (5) engaged in deceptive business practices; (6) was unjustly enriched; and (7) should indemnify the plaintiffs for any assessments that they may incur. The plaintiffs are seeking damages (a) arising from the plaintiffs' joint and several liability for the deficit of the Elite Contractors Trust which, as of December 15, 2010, was estimated by the New York State Workers' Compensation Board to be in excess of $82 million, (b) from any unpaid claims of the plaintiffs' injured employees in an amount presently undetermined, (c) from potentially being liable for the costs of liquidation charged or to be charged by the WCB, and (d) from fees paid by the plaintiffs and the Elite Contractors Trust to CRM pursuant to the service agreement between CRM and the Elite Contractors Trust.

This subsequently filed related action will also be coordinated with the other pending actions against CRM. Accordingly, CRM has not yet responded to the complaint pursuant to the Litigation Coordination Panel's February 23, 2011 Order, as discussed above. For information regarding the proposed settlement of this lawsuit, please see above under the heading “ Proposed Settlement of Litigation Involving New York Self-Insured Groups.”

Other Litigation

Binghamton Giant Market v. Compensation Risk Managers, LLC, et al. On or about February 13, 2007, CRM and The Wholesale & Retail Workers' Compensation Trust of New York (collectively, the “Binghamton Giant Defendants”) were named as defendants in a lawsuit brought by Binghamton Giant Market, Inc. (Binghamton Giant). Binghamton Giant’s complaint alleges, in essence, that from October 1, 2001 until September 30, 2005, when Binghamton Giant was a member of Wholesale-Retail, it was charged contribution dollars for remuneration that included full overtime pay for Binghamton Giant’s employees and that this resulted in Binghamton Giant being overcharged in contributions. Binghamton Giant contends that the contributions for overtime are to be calculated using straight time for the overtime, not the overtime rate. Binghamton Giant's Complaint does not distinguish between Wholesale-Retail and CRM and alleges three causes of action: (1) the Binghamton Giant Defendants have breached their contractual obligations to Binghamton Giant; (2) the Binghamton Giant Defendants have been unjustly enriched at Binghamton Giant’s expense; and (3) the Binghamton Giant Defendants have breached a fiduciary duty owed to Binghamton Giant. Binghamton Giant is seeking damages against the Binghamton Giant Defendants, jointly and severally, in the amount of $100,000 on each of the causes of action.

CRM was served on or about February 23, 2007 and an answer was interposed along with discovery demands. CRM received Binghamton Giant’s initial responses to its discovery demands on or about October 17, 2007. On or about March 17, 2008, the Binghamton Giant Defendants served a motion to amend its answer and asserted a counterclaim requesting judgment in the amount of $336,892.00, together with interest. The counterclaim is based upon Binghamton-Giant’s breach of the Joinder and Trust Agreements in that it failed to pay assessments totaling said amount. The court granted Wholesale-Retail's motion and the Binghamton Giant Defendants thereafter amended its answer to include the counterclaim. On or about March 19, 2008, Binghamton Giant served a Reply to Defendants’ Amended Complaint as well as a Demand for a Verified Bill of Particulars and Demand for Discovery and Inspection. On or about March 26, 2008, the Binghamton Giant Defendants served Binghamton Giant with their Second Set of Interrogatories seeking particulars of the affirmative defenses to the counterclaims. Plaintiff has served a reply to the counterclaims. Discovery regarding the counterclaims is still pending. The Company intends to vigorously defend this litigation, which is in a preliminary stage, and it cannot estimate what impact, if any, the litigation may have on our business reputation, results of operations, financial condition or cash flows. If, however, this matter is decided adversely to the Company, it may result in a material adverse effect on its business, results of operations, financial conditions and cash flows.

H.C.F.A. Associates Corp. v. Compensation Risk Managers, LLC. On April 9, 2007, H.C.F.A. Associates Corp. and 17 related companies, all of which were members or former members of HITNY, sued HITNY and CRM in New York State Supreme Court, Ulster County, alleging, among other things, that HITNY and CRM failed to fulfill their obligations in connection with providing workers’ compensation claims services. CRM answered the complaint, denying the plaintiffs’ material allegations. On or about December 12, 2008, HCFA served burdensome and over broad discovery demands which CRM objected to. As a result, CRM has requested a conference with the court to discuss the discovery demands. A status conference was held on October 5, 2009 and a discovery schedule for the completion of discovery was set down as follows: all paper discovery was to be completed on or before December 31, 2009, depositions of the parties were to be completed on or before March 31, 2010, and a compliance conference was to be held on May 10, 2010. The dates on the proposed discovery schedule have been adjourned and discovery remains on-going. We intend to vigorously defend this litigation, which is in a preliminary stage, and we cannot estimate what impact, if any, the litigation may have on our business reputation, results of operations, financial condition or cash flows. If, however, this matter is decided adversely to us, it may result in a material adverse effect on its business, results of operations, financial conditions and cash flows.

In re: CRM Holdings, Ltd. Securities Litigation. On February 5, 2010, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York on behalf of a class consisting of all persons or entities who purchased the securities of CRM Holdings between December 21, 2005 and November 5, 2008. The complaint was filed by Beverly L. Munter, individually and on behalf of all others similarly situated, and charges CRM Holdings and certain of its executive officers and directors with violations of federal securities laws.

The complaint alleges that throughout the class period the defendants knew or recklessly disregarded that their public statements concerning CRM Holdings’ financial performance and prospects were materially false and misleading. Specifically, the defendants are alleged to have made false and/or misleading statements and/or failed to disclose: (1) that the defendants and their affiliates engaged in a fraudulent scheme and course of business to grow membership in eight group self-insured trusts previously administered by CRM, by charging premiums below commercial rates; (2) that the membership growth inflated gross trust revenues while reducing net paid premium income to the level that the assets of the group self-insured trusts would become insufficient to cover liabilities; (3) that, accordingly, the group self-insured trusts would fall below “fully funded” status; (4) that, as part of their fraudulent scheme and course of business to cover up the difference between assets and liabilities, the defendants and their affiliates disguised the true financial conditions of the group self-insured trusts by engaging in certain improprieties designed to result in minimal projected claims liability, including under-reserving individual claims and utilizing improper actuarial/accounting methods; (5) that the defendants and their affiliates provided the New York State Workers’ Compensation Board with materially false and/or misleading financial and actuarial reports for the group self-insured trusts which reflected artificially reduced liabilities; (6) that, as a result of the above, the Company was exposed to hundreds of millions of dollars in liabilities relating to the under-funding of the group self-insured trusts; (7) that the Company lacked adequate internal and financial controls; and (8) that, as a result of the above, the Company’s financial statements were materially false and misleading. The plaintiff seeks to recover damages on behalf of class members.

On May 21, 2010, the court granted plaintiffs’ motion appointing Brett Brandes and Beverly L. Munter as lead plaintiffs in the action, Glancy Binkow & Goldberg LLP as lead counsel for the class, and consolidation of any subsequently filed lawsuits with the action under the caption In re: CRM Holdings, Ltd. Securities Litigation.

On September 10, 2010, the plaintiffs’ filed and served an amended complaint. The amended complaint’s allegations and claims are substantially the same as those in the original complaint, except that the plaintiffs have added claims against certain of the Company’s current and former executive officers and directors for insider trading violations under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. Those directors named in the suit have entered into a Stipulation and Tolling Agreement, dated September 10, 2010, which provides that the applicable statute of limitations will be tolled for a period of two years and that such directors shall participate in discovery as if they were named defendants. On January 7, 2011, the Company filed a motion to dismiss which is currently pending before the court.

The Company intends to vigorously defend this litigation, which is in a preliminary stage, and the Company cannot estimate what impact, if any, the litigation may have on its business reputation, results of operations, financial condition or cash flows. If, however, this matter is decided adversely to the Company, it may result in a material adverse effect on its business, results of operations, financial conditions and cash flows.

New York State Workers' Compensation Board v. Classic Insurance Agency et al. v. Compensation Risk Managers, LLC. On January 3, 2003, a lawsuit was filed naming The Kids Waterfront Corp., a former member of the Transportation Industry Worker's Compensation Trust (Transportation Trust) as a defendant. In the action, the plaintiff had suffered a double leg amputation and had alleged various claims of negligence and statutory liability in connection with unsafe machinery. The matter was ultimately settled, with respect to The Kids Waterfront, Corp., CRM, and the Transportation Trust, on July 21, 2006, in consideration of $500,000.

Because of the amount involved, Clarendon National Insurance Company (Clarendon), the excess carrier for the Transportation Trust, was notified of the claim. In response, Clarendon issued a reservation of rights letter to disclaim liability based upon various theories relating to the plaintiff's employment status. In light of these coverage issues, the Transportation Trust instituted a declaratory judgment action in May 2006, seeking a judicial declaration that Clarendon should provide excess coverage in the amount of $200,000 to the Transportation Trust for damages arising out of the Underlying Action. On December 19, 2006, the Declaratory Judgment Action was settled, wherein the Transportation Trust agreed to release Clarendon in consideration of $200,000. On June 4, 2008, a lawsuit was brought by the Transportation Trust and Clarendon against Classic Insurance Agency, the insurance brokers for The Kids Waterfront, Corp. The complaint asserts claims for negligent misrepresentation and fraud in connection with the defendants' submission of the application for membership in the Transportation Trust on behalf of The Kids Waterfront, Corp. The complaint sought recovery of defense fees and/or settlement proceeds paid in the Underlying Action including the $500,000 settlement. Following the assumption of the Transportation Trust, a motion was filed and granted substituting the WCB, as successor in interest to the Transportation Trust, as the plaintiff in place of CRM.

On April 20, 2010, a third party action was brought against CRM by the Classic Insurance Agency and Lifetime Insurance Brokerage, the insurance brokers for The Kids Waterfront Corp., and Andrea Meister, the individual broker (collectively, the Brokers). The Third Party Action asserts two causes of action: (1) equitable subrogation (Classic stands in the shoes of Clarendon and the Transportation Trust) and seeks recovery from CRM for any amounts paid by the Brokers to Clarendon and/or the Transportation Trust due to CRM's negligent and/or failure to adequately investigate and/or underwrite The Kids Watefront Corp. application as well as a lack of a loss control inspection; and (2) contribution such that if the plaintiffs are able to prove any causes of action against the Brokers, then CRM will be liable for the proportionate share of any damages suffered by Clarendon and/or the Transportation Trust and/or proximately caused by the acts or omissions of CRM. The Complaint was served on CRM on April 30, 2010. On May 19, 2010, CRM filed a motion to dismiss and/or sever the third-party plaintiffs’ complaint on the grounds that the plaintiffs’ failed to properly commence the third-party action and the equitable subrogation and contribution claims fail as a matter of law. On June 11, 2010, third-party plaintiffs filed an Opposition to CRM's motion to dismiss and/or sever the third-party action. CRM filed a reply on June 22, 2010. On October 26, 2010, CRM appeared for a conference which was adjourned to January 25, 2011 as CRM's motion to dismiss and/or sever the third-party plaintiffs complaint was still pending. The Court gave the plaintiff a new Note of Issue date of January 31, 2011. The Court recently rendered a decision on the motion, granting it to the extent CRM sought to dismiss the claim for equitable subrogation. On or about March 30, 2011, CRM served its answer and served discovery demands on plaintiffs and third party plaintiffs. A status conference was held on April 12, 2011 wherein a discovery order was entered into. The order requires that plaintiffs and third-party defendants produce documents within thirty days of the date of the order, depositions are to commence on June 1, 2011 and the deadline for filing the Note of Issue is now August 30, 2011. The next status conference has been scheduled for July 26, 2011. The Company intends to vigorously defend this litigation, which is in a preliminary stage, and it cannot estimate what impact, if any, the litigation may have on our business reputation, results of operations, financial condition or cash flows. If, however, this matter is decided adversely to the Company, it may result in a material adverse effect on its business, results of operations, financial conditions and cash flows.

California Plastering, Inc., et al. v. Pridemark-Everest Insurance Services, Inc., et al. On November 1, 2010, California Plastering, Inc., Collins Builders, Inc., Evans & Son, Inc., Pacific Wall Systems, Inc., Quality Production Services, Inc., Rutherford Co., Inc., Sound Control Company, Southern California Boiler, Inc., Summer Systems, Inc., Versatile Coatings, Inc. and Vision Builders Group, all of which were former members of the Contractors Access Program of California (CAP), sued CRM, CRM CA, Majestic USA and Majestic Insurance Company in California Superior Court, County of Orange. The plaintiffs also named their former insurance broker and two former trustees of CAP. Plaintiffs are seeking damages from the defendants’ alleged mismanagement and wrongful conduct with respect to CAP. As against CRM CA and its affiliated entities, the lawsuit alleges that CRM CA and its affiliated entities: (1) engaged in common law fraud during the administration of CAP; (2) negligently misrepresented information relative to CAP; (3) breached fiduciary duties and aided and abetted in breached of fiduciary duties owed to CAP; (4) violated California state securities laws by (a) selling membership interests in CAP which were unregistered securities and (b) making such sales by means of untrue statements of fact and material omissions; and (5) engaged in deceptive business practices. The plaintiffs are seeking damages (a) for the amount of CAP’s underfunding, which the plaintiffs have currently estimated to be in excess of $30 million, or as established at trial, (b) punitive damages, (c) rescission of plaintiffs’ purchase of membership interests in CAP and the return of their contributions paid into the program, or damages according to proof at trial, and (d) costs and attorney fees. On or about February 10, 2011, CRM CA filed a demurrer. On March 10, 2011, the Court rendered a decision sustaining with leave to amend as to the cause of action regarding breach of fiduciary duty and overruled the demurrer as to the remaining causes of action. On or about February 10, 2011, CRM filed a motion to quash service for lack of personal jurisdiction. On March 10, 2011, the Court rendered a decision denying CRM’s motion to quash service of the summons for lack of personal jurisdiction. The Company intends to vigorously defend this litigation and the Company cannot estimate what impact, if any, the litigation may have on its business reputation, results of operations, financial condition or cash flows. If, however, this matter is decided adversely to the Company, it may result in a material adverse effect on its business, results of operations, financial conditions and cash flows.

Contractors Access Program of California v. Majestic Capital, Ltd., et al. On December 20, 2010 Contractors Access Program of California (CAP), by Bickmore Risk Services, as Conservator, sued CRM, CRM CA, Majestic USA, Majestic Capital, Ltd., Twin Bridges (Bermuda) Ltd., Majestic Insurance Company, Daniel G. Hickey, Jr., and Chester Walczyk in California Superior Court, County of San Francisco. The plaintiffs also named two former trustees along with their respective employers. Plaintiffs are seeking damages from the defendants’ alleged mismanagement and wrongful conduct with respect to CAP. As against CRM CA and its affiliated entities, the lawsuit alleges that CRM CA and its affiliated entities: (1) breached fiduciary duties and aided and abetted in breaches of fiduciary duties owed to CAP; (2) breach of the Service Agreement and Field Consulting Agreement; (3) unjust enrichment; (4) rescission and restitution against Majestic Insurance Company; and (5) fraudulent conduct within the meaning of Business & Professions Code§17200. The plaintiffs are seeking damages (a) for the amount of CAP’s underfunding, which the plaintiffs have currently estimated to be in excess of $34 million, or as established at trial, (b) exemplary and punitive damages, (c) rescission of plaintiffs’ purchase of membership interests in CAP and the return of their contributions paid into the program, or damages according to proof at trial, and (d) costs and attorney fees. On or about February 28, 2011, Plaintiff filed an amended complaint making similar allegations to the original complaint and deleting the rescission cause of action. CRM CA and its affiliated entities’ responsive pleadings are due on April 12, 2011. The Company intends to vigorously defend this litigation, which is in a preliminary stage, and the Company cannot estimate what impact, if any, the litigation may have on its business reputation, results of operations, financial condition or cash flows. If, however, this matter is decided adversely to the Company, it may result in a material adverse effect on its business, results of operations, financial conditions and cash flows.

Mark Tanner Construction, Inc., et al. v. Majestic Capital, Ltd., et al. On January 27, 2011, Mark Tanner Construction, Inc., Doe Gelso Construction, Inc., Mt. Lincoln Construction, Inc., and Sierra Paint & Chemical, Inc., all of which were former members of the Contractors Access Program of California (CAP), sued CRM, CRM CA, Majestic USA, Majestic Capital, Ltd., Twin Bridges (Bermuda) Ltd., Embarcadero Insurance Holdings, Inc., Majestic Insurance Company, Louis J. Viglotti, Chester Walczyk, James J. Scardino, and Bayside Capital Partners, LLC (“Bayside”) in California Superior Court, County of San Francisco. The plaintiffs also named three former trustees of CAP. Plaintiffs are seeking damages from the defendants’ alleged mismanagement and wrongful conduct with respect to CAP. As against CRM CA and its affiliated entities, the lawsuit alleges that CRM CA and its affiliated entities: (1) engaged in common law fraud during the administration of CAP; (2) negligently misrepresented information relative to CAP; (3) violated the Uniform Fraudulent Transfer Act California Civil Code; (4) violated Title 18 U.S.C. Section 1961, et seq., Racketeer Influenced and Corrupt Organizations Act; and (5) breached reinsurance contracts. The plaintiffs are seeking special and general damages including but not limited to (a) return of premiums and other monies paid as part of the enrollment and participation in the program; (b) punitive damages, (c) rescission of contracts between plaintiffs and defendants; (d) an order stopping the transfer to Bayside until the obligation of the defendants to plaintiffs is determined and satisfied in full; (e) an attachment or other provisional remedy against the assets of defendant sought to be or actually transferred to Bayside; (f) an injunction stopping the merger and/or transfer to Bayside or any other entity; (g) appointment of a receiver to recapture the assets transferred in violation of the Uniform Fraudulent Transfer Act; (h) an order against defendants that they divest themselves of all interest in the enterprises of the defendants; (i) an order of dissolution of all of the enterprises of all the defendants; (j) a restraining order prohibiting any action of defendants pending the outcome of this litigation; and (k) costs and attorney fees with interest at the legal rate. The Company intends to vigorously defend this litigation, which is in a preliminary stage, and the Company cannot estimate what impact, if any, the litigation may have on its business reputation, results of operations, financial condition or cash flows. If, however, this matter is decided adversely to the Company, it may result in a material adverse effect on its business, results of operations, financial conditions and cash flows.

Potential Litigation Involving the Plastic Manufacturers Self Insurance Program. In January 2010, CRM CA was contacted by an attorney representing the Plastic Manufacturers Self Insurance Program of California (PMSIP) threatening litigation against CRM CA should members of PMSIP commence an action against PMSIP or its Board of Trustees. PMSIP’s attorney advised CRM CA that certain members of PMSIP were questioning PMSIP’s administration as a result of a deficit and corresponding assessment and that PMSIP’s members were alleging “gross negligence” and negligent administration by CRM CA in the administration of PMSIP. Accordingly, to the extent any litigation or formal legal claim was commenced, PMSIP threatened to tender the defense and indemnification of any claim or action filed by any past or current PMSIP member arising out of CRM CA’s administration of PMSIP. PMSIP alleges that the service agreement between PMSIP and CRM CA contained a contractual indemnity clause; however, CRM CA disagrees and intends to contest vigorously PMSIP’s claim and any subsequent litigation that may be brought by PMSIP or any of its members.

Doria Enterprises Inc., et al. v. RMI Consulting, Inc., et al. v. Compensation Risk Managers, LLC. In November 2010, RMI Consulting, Inc. and James W. Barber sued CRM as a third-party defendant in a lawsuit commenced by Doria Enterprises, Inc. and Grace’s Marketplace, Inc. against RMI Consulting, Inc. and Mr. Barber in New York State Supreme Court, New York County. RMI Consulting, Inc. and Mr. Barber allege that CRM should be held liable for common law indemnification and contribution in the event that RMI Consulting, Inc. and Mr. Barber are held liable to plaintiffs in the underlying action, in which the plaintiffs have alleged misrepresentations, omissions, and professional negligence against RMI Consulting, Inc. and Mr. Barber while acting as plaintiffs’ brokers and allegedly wrongfully inducing the plaintiffs to become members of the Wholesale-Retail Workers’ Compensation Trust. The Company filed a motion to dismiss which is currently pending before the Court. The Company intends to vigorously defend this litigation, which is in a preliminary stage, and the Company cannot estimate what impact, if any, the litigation may have on its business reputation, results of operations, financial condition or cash flows. If, however, this matter is decided adversely to the Company, it may result in a material adverse effect on its business, results of operations, financial conditions and cash flows.

Regulatory Proceedings

New York State Insurance Department Inquiry

In June 2008, Majestic Insurance received a “Call for Special Report and Documents Pursuant to Section 308 of the Insurance Law” from the New York State Insurance Department. Among other items, the New York State Insurance Department requested information related to Majestic Insurance’s loss reserving practices and Majestic Insurance’s providing insurance to former members of the group self-insured trusts previously managed by CRM as insureds of Majestic Insurance. In September 2009, Majestic Insurance received a further request from the New York State Insurance Department requesting information related to CRM’s acquisition of Majestic Insurance and additional information related to Majestic Insurance’s issuance of workers’ compensation policies in New York, including policies issued to previous members of the group self-insured trusts managed by CRM. Majestic Insurance is cooperating fully with the New York State Insurance Department. To the Company’s knowledge, the New York State Insurance Department has not initiated any proceedings against Majestic Insurance. The Company cannot currently predict when the New York State Insurance Department will conclude its review, what, if any, actions may be taken by the New York State Insurance Department, or the effect any such action may have on the Company’s results of operations, reputation, financial condition, or cash flows.

New York State Workers’ Compensation Board Inspector General Investigation

On or about January 9, 2009, Majestic Insurance’s underwriting department received a subpoena from the New York State Workers Compensation Board Office of the Fraud Inspector General. The subpoena requested production of various documents related to the issuance of excess workers’ compensation and employers’ liability policies by Majestic Insurance to the Elite Contractors Trust of New York. On May 8, 2009, CRM Holdings and Twin Bridges received a subpoena from the New York State Workers’ Compensation Board Office of Fraud Inspector General. The subpoena requested documents related to quota share agreements and a novation agreement among Twin Bridges, NY Marine and General and Majestic Insurance. The subpoenas were captioned In the Matter of Compensation Risk Managers, LLC and were assigned Inspector General Case No. 38839. To the Company’s knowledge, the Inspector General has not commenced any action against CRM or any of its affiliates. The Company cannot currently predict when the New York State Workers’ Compensation Board Office of Fraud Inspector General will conclude its review, what, if any, action may be taken by the Office of Fraud Inspector General, or the effect any such action may have on the Company’s business reputation, results of operations, financial condition or cash flows.

ITEM 4.

RESERVED

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common shares began trading on December 21, 2005 on the NASDAQ Global Select Market under the symbol CRMH. In May 2010, our shareholders approved changing the name of CRM Holdings Ltd. to Majestic Capital Ltd. In conjunction with this change, our NASDAQ stock symbol changed to MAJC. Effective May 21, 2010, we transferred our stock listing from the NASDAQ Global Select Market to the NASDAQ Capital Market as further discussed in Item 1 “Change in NASDAQ Exchange and Reverse Share Split.”

As of December 31, 2010, there were approximately 8 holders of record of our common shares and 1 holder of record of our Class B shares. Prior to December 21, 2005, there was no public market for our common shares.

The following table sets forth, for the periods indicated, the high and low closing sales share prices of our post reverse share split common shares as reported on the NASDAQ Global Select Market (prior to May 21, 2010) and the NASDAQ Capital Market (May 21, 2010 and forward):

	2011				2010				2009
Period	High		Low		High		Low		High		Low
First Quarter	$	4.44	$	0.54	$	8.00	$	2.90	$	18.00	$	4.40
Second Quarter		—		—	$	6.30	$	2.60	$	14.00	$	6.20
Third Quarter		—		—	$	3.90	$	1.90	$	12.00	$	9.10
Fourth Quarter		—		—	$	4.49	$	3.80	$	10.60	$	3.00

On April 18, 2011, the closing sale price per share of our common shares was $0.38. Please see Risks Related to Our Common Shares in Item 1A above.

Dividend Policy

We have never paid cash dividends on our common shares. We currently intend to retain any future earnings to finance our operations and growth. As a result, we do not expect to pay any cash dividends on our common shares for the foreseeable future. Any future determination to pay cash dividends on our common shares will be at the discretion of our board of directors and will be dependent on our earnings, financial condition, operating results, capital requirements, any contractual, regulatory or other restrictions on the payment of dividends by our subsidiaries to Majestic Capital, and other factors that our board of directors deems relevant.

Majestic Capital is a holding company and has no direct operations. Our ability to pay dividends in the future depends on the ability of our operating subsidiaries to pay dividends to us. Our insurance and reinsurance subsidiaries are regulated insurance companies and therefore are subject to significant regulatory restrictions limiting their ability to declare and pay dividends as discussed in greater detail in Item 1. under the heading “Regulation.”

During 2010 and 2009, Majestic Insurance paid $0.2 million and $3.0 million in dividends to Embarcadero. Majestic Insurance did not pay any dividends to Embarcadero during 2008. Currently, Majestic Insurance is not able to pay any dividends without prior approval of the CA DOI as discussed in greater detail in Item 1 under the heading “Item 1. Business –Regulation – State Insurance Regulation in the United States.” For the years ended December 31, 2010, 2009 and 2008, Twin Bridges paid dividends and distributed capital in an aggregate amount of $9.0 million, $6.0 million and $40.7 million. In 2011, Twin Bridges is not able to pay any dividends without prior approval of the BMA as discussed in greater detail in Item 1 under the heading “Item 1. Business – Regulation – Bermuda Regulation - Restrictions on Dividends and Distributions.”

In addition to these regulatory restrictions, U.S. withholding tax payable on dividends paid to Majestic Capital by our U.S. subsidiaries affects our ability to pay dividends. Any dividends paid from our U.S. subsidiaries to us would be subject to a U.S. federal withholding tax of 30%.

Majestic Capital’s ability to pay dividends is subject to restrictions contained in the Companies Act. Under the Companies Act, we may declare or pay a dividend out of Majestic Capital’s retained earnings, or make a distribution out of contributed surplus, only if we have reasonable grounds for believing that Majestic Capital is and, after the payment of such dividends, will be able to pay its liabilities as they become due and if the realizable value of its assets would thereby not be less than the aggregate of its liabilities and issued share capital and share premium accounts.

Securities Authorized for Issuance Under Equity Compensation Plans

The information required by this item concerning securities authorized for issuance under equity compensation plans is set forth in Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

ITEM 6.

SELECTED FINANCIAL DATA

The following table sets forth our selected historical consolidated financial information for the periods ended and as of the dates indicated. The selected consolidated statement of operations information for the years ended December 31, 2010, 2009 and 2008 and the selected consolidated balance sheet information as of December 31, 2010 and 2009 are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations information for the years ended December 31, 2007 and 2006 and the selected consolidated balance sheet information as of December 31, 2008, 2007 and 2006 are derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K.

We have ceased operations of our fee-based subsidiaries – CRM CA, CRM and Eimar. Accordingly, the results of operations of CRM CA, CRM and Eimar are reported as discontinued operations for all periods presented.

The historical results are not necessarily indicative of results to be expected in any future period. You should read the following selected consolidated financial information in conjunction with the information contained in this Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Many factors may cause our actual results to differ materially from the financial information and results presented below including, but not limited to, those factors discussed in “Risk Factors.”

Selected Consolidated	Years Ended December 31,
Statement of Operations Information
	2010			2009			2008			2007		2006
	(in thousands except for per share data)
Revenues
Net premiums earned	$	51,194		$	80,524		$	121,942		$	116,843	$	30,702
Investment income		10,604			16,303			13,906			11,261		4,176
Total revenues		61,798			96,827			135,848			128,104		34,878
Expenses
Losses and loss adjustment expenses		51,188			81,654			85,506			64,075		10,490
Policy acquisition costs and other expenses		12,605			15,716			20,040			19,806		8,249
General, administrative and interest expenses		29,768			35,637			30,525			27,043		10,984
Severance and other expenses		13,113			5,477			825			—		—
Total expenses		106,674			138,484			136,896			110,924		29,723

(Loss) income from continuing operations before income taxes		(44,876	)		(41,657	)		(1,048	)		17,180		5,155
Tax (benefit) provision from continuing operations		(972	)		3,515			(2,385	)		165		(1,929	)
(Loss) income from continuing operations		(43,904	)		(45,172	)		1,337			17,015	$	7,084

(Loss) income from discontinued operations before income taxes		(4,703	)		(948	)		(4,226	)		4,574		10,677
Tax provision (benefit) from discontinued operations		10			714			(1,393	)		1,447		3,505
(Loss) income on discontinued operations		(4,713	)		(1,662	)		(2,833	)		3,127		7,172

Net (Loss) Income	$	(48,617	)	$	(46,834	)	$	(1,496	)	$	20,142	$	14,256

Basic and fully diluted (loss) earnings per share from continuing operations	$	(25.81	)	$	(26.92	)	$	0.81		$	10.44	$	4.36
Basic and fully diluted (loss) earnings per share from discontinued operations	$	(2.77	)	$	(0.99	)	$	(1.72	)	$	1.92	$	4.41
Basic and fully diluted (loss) earnings per share	$	(28.58	)	$	(27.91	)	$	(0.91	)	$	12.36	$	8.77

Weighted average common shares outstanding		1,701			1,678			1,644			1,629		1,625
Weighted average fully diluted shares outstanding(1)		1,701			1,678			1,644			1,631		1,625

	December 31,
Selected Consolidated
Balance Sheet Information	2010			2009			2008		2007			2006
	(in thousands, except share data)
Assets
Cash and cash equivalents	$	22,118		$	44,087		$	29,234	$	34,286		$	22,328
Cash and cash equivalents, restricted		2,374			5,922			810		—			5,763
Investments		263,327			282,569			314,818		267,212			206,768
Premiums receivable, net		6,073			6,246			11,935		13,891			17,589
Reinsurance recoverable and prepaid reinsurance		132,623			123,767			63,801		38,584			30,749
Other receivables		4,445			5,720			6,283		7,766			7,897
Deferred policy acquisition costs		1,573			758			1,084		623			1,143
Current income taxes, net		—			6,979			3,208		(275	)		(298	)
Deferred income taxes, net		—			—			7,809		7,473			6,803
Goodwill and other intangible assets, net		276			436			3,252		3,521			2,695
Other assets		3,382			6,463			5,166		6,779			4,400
Total assets	$	436,191		$	482,947		$	447,400	$	379,860		$	305,838


Liabilities and shareholders’ equity
Reserves for losses and loss adjustment expenses	$	314,537		$	317,497		$	245,618	$	188,848		$	153,622
Reinsurance payable		29,985			20,357			9,424		5,741			1,321
Unearned premiums		9,622			10,599			13,090		8,853			8,080
Long-term debt		44,083			44,083			44,083		44,084			44,115
Other liabilities		22,530			29,677			26,325		24,796			15,056
Total liabilities		421,757			422,213			338,540		272,322			222,194

Common shares, $1.00 par value per share, 5 billion shares authorized (1)		167			165			162		160			155
Class B shares (2)		4			4			4		4			8
Additional paid-in capital		71,499			71,057			69,743		68,192			66,566
Retained (deficit) earnings		(59,832	)		(11,215	)		35,619		37,115			16,973
Accumulated other comprehensive income (loss)		2,596			723			3,332		2,067			(58	)
Total shareholders’ equity		14,434			60,734			108,860		107,538			83,644

Total liabilities and shareholders’ equity	$	436,191		$	482,947		$	447,400	$	379,860		$	305,838

(1)	1.7 million common shares issued and outstanding at both December 31, 2010 and 2009, and 1.6 million common shares issued and outstanding at December 31, 2008, 2007 and 2006.

(2)	0.04 million Class B shares issued and outstanding at December 31, 2010, 2009,2008, and 2007 and 0.08 million Class B shares issued and outstanding at December 31, 2006.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. We caution you that our results of operations for prior periods are not indicative of the actual results that may be achieved in future periods. In addition, some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. Many factors may cause our actual results to differ materially from those anticipated or implied by these forward-looking statements including, but not limited to, those discussed in “Risk Factors.” You should read the information under “Risk Factors” as presented in Item 1A. for information about material risks and uncertainties that affect us, our business and our common shares and the cautionary note regarding “Forward-Looking Statements” which precedes Item 1 in this Annual Report on Form 10-K.

Overview

We are a specialty provider of workers’ compensation insurance products and services. Through our subsidiaries, we seek to provide quality products and services that fit the needs of our insureds and clients and are dedicated to developing and maintaining a mutually beneficial long-term relationship with them. Historically, our workers’ compensation insurance coverage was offered to employers in California, New York, New Jersey, Arizona, Nevada and other states.

Executive Summary

We did not achieve our overall business, financial and shareholder performance expectations for fiscal year 2010. Our net loss from continuing operations in 2010 was $43.9 million compared to $45.2 million in 2009. The major factors contributing to our net losses include:

·	a significant decrease in our net written and net earned premiums due to the A.M. Best downgrade and ongoing recession;

·	unacceptable loss and loss adjustment and underwriting expenses given the lower in-force premium levels; and

·	severance and other charges taken in 2010 due to the substantial doubt concerning our ability to continue as a going concern and resulting violation of contractual covenants.

Factors Influencing our Future Performance. Our future operating results and financial conditions will be affected by many factors including the following, all of which are discussed in “Item 1 – Business – Significant Developments:”

·	the 2010 Announcement and 2011 termination of the Bayside Amalgamation;

·	the 2011 decision to withdraw from the New York/New Jersey market’

·	the 2011 A.M. Best downgrade of Majestic Insurance;

·	the CA DOI conservation and rehabilitation of Majestic Insurance; and

·	the possible bankruptcy, insolvency, or liquidation of our non-insurance companies.

Workers’ Compensation Insurance Market Conditions

Our business is 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.

Our Insureds’ Payroll Levels. Our insurance premiums are ultimately determined by the policyholder’s aggregate payroll. Based on the ongoing recession in the U.S., we have seen a rise in unemployment, and as a result, we continue to experience a downward trend in the payroll levels of our insureds. Consequently, this downward trend in payrolls has resulted in a downward trend of our net earned premiums. Until unemployment declines, we may continue to experience a downward trend in our insureds’ payrolls and our net earned premiums. To the extent that payroll levels on insureds’ policies continue to decline as a result of the recession, our actual premiums earned may be less than expected.

California’s Premium Rates. In California, the state in which the largest amount of our workers’ compensation premiums are earned, the Workers’ Compensation Insurance Rating Bureau of California (WCIRB), an industry-backed private organization that provides statistical analysis, recommends claims cost benchmarks to be used by companies in determining their premium rates. The WCIRB’s recommendations are reviewed by the CA DOI, which also adopts and publishes its own claims cost benchmark. The benchmark rates cover expected loss costs, but do not contain an element to cover operating expenses or profit.

Between 2004 and 2007, California benchmark rates experienced a significant downward trend, which resulted in soft market conditions. The reduction in rates was based on legislative reforms adopted by California in 2003 and 2004, which had the goal of reducing over time the medical and indemnity expenses incurred by insurance companies under workers’ compensation policies. The benchmark rates in California fell 63% percent from their high in 2003.

Beginning in 2008, market conditions indicated a stabilizing to California’s benchmark rates. However, the pricing in the California market has remained soft. The benchmark rating actions in California since 2008 have included:

·	In January 2008, the Commissioner recommended no change in workers’ compensation insurance benchmark rates based upon his review of the data provided by the WCIRB at that time.

·	In May 2008, the Commissioner, citing forecasted marketplace stability, did not issue an interim pure premium rate advisory - the first time in six years an interim pure premium rate advisory was not issued by a California insurance commissioner.

·	In October 2008, the Commissioner rejected WCIRB’s recommendation of a 16% increase to the workers’ compensation benchmark rates and instead granted a 5% increase. The WCIRB’s recommended increase was based primarily on rising medical costs and loss adjustment expenses.

In July 2009, the Commissioner declined WCIRB’s application to increase the workers’ compensation benchmark rates by 23.7%. The Commissioner recommended no change, citing evidence that self-insured employers were able to reduce overall workers’ compensation costs. The WCIRB’s recommendation was based on an evaluation of the industry loss and loss adjustment expense experience as of December 31, 2008 and on expected cost increases arising from two significant Workers’ Compensation Board of Appeals decisions that affected the 2004 legislative reforms.

In November 2009, the Commissioner declined WCIRB’s recommendation of a 22.8% increase to the workers’ compensation benchmark rates. The Commissioner recommended no change, citing evidence that insurers were not realizing efficiencies to bring down the costs in the system, including failing to achieve a balance between cost and benefit with medical provider networks and utilization review, and are not communicating effectively with medical providers. The WCIRB’s recommendation was based on an analysis of insurer experience as of June 30, 2009, and an analysis of anticipated cost increases stemming from two significant Workers’ Compensation Board of Appeals decisions affecting the 2004 legislation.

The California Insurance Commissioner’s decisions are advisory only and insurance companies may choose whether or not to adopt the new rates. We set our own California premium rates based upon actuarial analysis of current and anticipated cost trends including any modifications to the workers’ compensation system, while maintaining our goal of achieving underwriting profits.

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 addition, in February 2008, New York State enacted related legislation that requires workers’ compensation insurers to establish premiums based on loss cost multipliers instead of a mandated rate. In August 2008, it was announced that workers’ compensation rates in New York would be reduced by an additional 5% percent for 2009, bringing the total reduction to about 25% from the 2007 pre-reform rates.

Effective October 1, 2009, the loss cost multiplier in New York State realized an increase of 4.5% and the New York State assessment increased from 13.4% to 14.2% of standard premium. Commencing October 1, 2010, New York State approved a 7.7% increase in the loss cost multiplier coupled with an upward adjustment of the State assessment from 14.2% to 18.1%.

Principal Revenue and Expense Items

Our revenues consist primarily of the following:

Net Premiums Earned. Direct premiums written include all direct premiums billed during a specified policy period. Assumed premiums written are premiums from third party companies or authorized state mandated pools. Net premiums written is the difference between direct and assumed premiums written and premiums ceded or paid to affiliate or third party reinsurers.

Net premiums earned are the elapsed portion of our net premiums written. At the end of each accounting period, (a) the portion of direct and assumed premiums that are not yet earned is included in unearned premiums and is realized in subsequent periods over the remaining terms of the policies; and (b) the portion of ceded premiums that are not earned is included in prepaid reinsurance premiums and is realized in subsequent periods over the remaining terms of the policies.

Ceded premiums earned also include reinstatement premiums. Reinstatement premiums represent additional premiums payable to reinsurers to maintain coverage purchased under excess of loss reinsurance contracts. These contracts generally contain provisions requiring payment of additional premiums based on a percentage of ceded losses in the event that losses of a defined magnitude are ceded under such contracts. Reserves are established for potential reinstatement premiums and are recorded once estimated actuarial loss reserves exceed the defined limits.

A portion of our premiums are written on an adjustable basis, and premiums from those policies can be adjusted retrospectively in accordance with the actual loss experience of the policyholders’ claims arising during the policy term. These retrospective premium adjustments are periodically made to the net premiums earned to reflect the changes in the estimation of the policyholders’ ultimate losses as more information becomes available over time.

Earned but unbilled premiums include estimated future audit premiums and are subject to changes in payrolls due to growth, economic conditions and seasonality. The estimates are continually reviewed and adjusted as experience develops or new information becomes known. Any such adjustments are included in current operations. At the end of the policy terms, payroll-based premium audits are performed to determine earned premiums for that policy year and the premiums are adjusted and billed accordingly.

Investment Income. Our investment income is dependent upon the 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 and realize losses on impairment of investments as a result of (1) the inability and intent to hold investments to maturity; and (2) changing market conditions, including changes in market interest rates and changes in the credit quality of our invested assets. Investment income is recorded net of investment 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, we expect to incur on each insurance and reinsurance contract written. Actual losses and loss adjustment expenses will depend on actual costs to settle our claims and the actual expenses incurred in settling the claims. Our loss adjustment expenses include allocated loss adjustment expenses (ALAE) or amounts that can be attributed to specific claims and unallocated loss adjustment expenses (ULAE) or claims expenses, including costs of maintaining a claims department that are not directly attributable to specific claims.

Underwriting and Acquisition Expenses. Underwriting and acquisition expenses consist of certain personnel expenses of our insurance operations, impairment of goodwill, other operational expenses and commissions, premium taxes, other policy issuance costs of our insurance subsidiaries relating to the underwriting and issuance of workers’ compensation insurance policies.

General and Administrative Expenses. General and administrative expenses consist primarily of personnel expenses, professional fees and other public company general and administrative expenses.

Severance and Other Charges. Severance and other charges represent infrequent expenses incurred that are not directly related to (1) our workers’ compensation business; or (2) the cost of being a public company. The expenses include the acceleration of future payments due under our operating leases, termination fees and other costs related to the restructuring of our facilities lease in Poughkeepsie, New York, the acceleration of the amortization of the debt issuance costs on our long-term debt obligations, and employee and former Co-Chief Executive Officer severance.

Discontinued Operations

The results of CRM CA, CRM and Eimar are included in discontinued operations for all periods presented. CRM CA ceased providing administrative services to self-insured groups on December 31, 2010. As of September 8, 2008, we ceased to manage self-insured groups in New York or provide bill review and case management services for self-insured groups or third party clients.

Change in Reportable Segments

The changes in segment reporting include aggregating our primary insurance and reinsurance segments, Majestic Insurance and Twin Bridges, into a single “risk-bearing” segment in accordance with the framework established by segment reporting guidance. Twin Bridges only reinsures risk underwritten at Majestic Insurance, both use independent agents/brokers to produce business, and both Majestic Insurance and Twin Bridges, as insurance companies, are subject to insurance regulatory environments. Further, the operations of CRM CA have been reclassified as discontinued operations as described above in Discontinued Operations. Lastly, Majestic Capital, Majestic USA and Embarcadero have no revenues and are not viewed as a discrete operation for decision-making purposes and therefore are not a reportable segment.

Critical Accounting Policies and Estimates

It is important to understand our accounting policies in order to understand our financial statements. Management considers some of these policies to be critical to the presentation of our financial results, since they require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the financial reporting date and throughout the period being reported upon. Some of the estimates result from judgments that can be subjective and complex, consequently, actual results reflected in future periods might differ from these estimates and could differ by material amounts. In addition, if factors such as those described in Item 1A. under the heading “Risk Factors” cause actual events to differ materially from management’s assumptions used in applying the relevant accounting policy, there could be a material adverse effect on our financial condition and results of operations.

We believe the most critical accounting policies relate to the reporting of reserves for losses and loss adjustment expenses, amounts recoverable from third party reinsurers, fixed-maturity securities, impairment of fixed-maturity securities, premiums receivable, deferred policy acquisition costs, goodwill, deferred income taxes, going concern, and contingencies relating to corporate litigation and regulatory matters. The following description of our critical accounting policies should be read in conjunction with the notes to our consolidated financial statements.

Reserve for Losses and Loss Adjustment Expenses

We record reserves for estimated losses under insurance policies that we write and for loss adjustment expenses related to the investigation and settlement of policy claims. Our reserves for losses and loss adjustment expenses represent the estimated cost of all reported and unreported losses and loss adjustment expenses incurred and unpaid at any given point in time based on known facts and circumstances. In establishing our reserves, we do not use loss discounting, which would involve recognizing the time value of money and offsetting estimates of future payments by future expected investment income. Our reserves for loss and loss adjustment expenses are estimated using case-by-case valuations and various actuarial analyses. Additional information regarding our reserves for losses and loss adjustment expenses and our processes for establishing the reserves can be found in Item 1 under the headings “Business – Reserves for Losses and Loss Adjustment Expenses.”

Variation in Ultimate Loss Estimates. The actuarial techniques that we use to establish our loss reserves are based upon a combination of our historical experience as well as industry information. These techniques recognize, among other factors:

·	our claims experience;

·	the industry’s claim experience;

·	historical trends in reserving patterns and loss payments;

·	the impact of claim inflation and/or deflation;

·	the pending level of unpaid claims;

·	the cost of claim settlements;

·	legislative reforms affecting workers’ compensation;

·	the overall environment in which insurance companies operate; and

·	trends in claim frequency and severity.

In addition, there are losses and loss adjustment expense risk factors that affect workers’ compensation claims that can change over time and also cause our loss reserves to fluctuate. Some examples of these risk factors include, but are not limited to, the following:

·	recovery time from the injury;

·	degree of patient responsiveness to treatment;

·	use of pharmaceutical drugs;

·	type and effectiveness of medical treatments;

·	frequency of visits to healthcare providers;

·	changes in costs of medical treatments;

·	availability of new medical treatments and equipment;

·	types of healthcare providers used;

·	availability of light duty for early return to work;

·	attorney involvement;

·	legislative reform;

·	wage inflation in states that index benefits; and

·	changes in administrative policies of second injury funds.

Our loss reserves can also vary due to factors that include, but are not limited to, the following:

·	mix of injury type;

·	change in mix of business by state;

·	change in mix of business by employer type;

·	small volume of internal data; and

·	significant exposure growth over recent data periods.

Impact of Changes in Key Assumptions on Reserve Volatility. The most significant factor currently impacting our loss reserve estimates is the reliance on our and industry historical reserving patterns and loss payments, also referred to as loss development patterns. The actuarial methods that we use depend at varying levels on loss development patterns based on past information. Development is defined as the difference, on successive valuation dates, between observed values of certain fundamental metrics that may be used in the loss reserve estimation process. For example, the data may be paid losses, case incurred losses and the change in case reserves or claim counts, including reported claims, closed claims or reopened claims. Development can be expected, meaning it is consistent with prior results; favorable (better than expected); or unfavorable (worse than expected). In all cases, we are comparing the actual development of the data in the current valuation with what was expected based on the historical patterns in the underlying data. Favorable development indicates a basis for reducing the estimated ultimate loss amounts, thereby increasing our operating results, while unfavorable development indicates a basis for increasing the estimated ultimate loss amounts, thereby decreasing our operating results. We reflect the favorable or unfavorable development in loss reserves in the results of operations in the period in which the ultimate loss estimates are changed.

The predictive ability of loss development factors is dependent on consistent underwriting, claims handling, and inflation, among other factors, and predictable legislatively and judicially imposed legal requirements. If all things remain equal, losses incurred in 2010 should develop similarly to losses incurred in 2009 and prior years. Thus, if the net loss ratio, which is calculated by dividing the loss and loss adjustment expense by net premiums earned, for premiums written in year one is 94% we expect that the net loss ratio for premiums written in year 2 also would be 94%. However, due to the inherent uncertainty in the loss development factors, our actual liabilities may differ significantly from our original estimates.

Our estimated ultimate losses for accident year 2010 are based on a combination of the three primary methods described in Item 1 above under the heading “Business – Reserves for Losses and Loss Adjustment Expenses,” plus consideration of trended pure premiums. This is consistent with our reserving approach for the current accident year at prior year-end valuations. During the year ended December 31, 2010, we adjusted our current year estimated loss and ALAE ratio to 79% from 86%. We adjusted the estimated loss ratio for 2010 due to the increase in the average premium rate level in California and a reduction in our exposure in the higher loss ratio states of New York and New Jersey.

For all other accident years, the estimated ultimate losses are developed using a variety of actuarial techniques. In reviewing this information, we consider certain factors to be especially important because they increase the variability risk factors in our loss reserve estimates. Majestic’s written premiums grew consistently since our acquisition in November 2006 through 2008. Part of this growth results from our geographic diversification of Majestic’s product offerings to new states (New Jersey and New York) that were not included in Majestic’s historical data. In addition, a significant portion of Majestic’s loss reserves are related to business written in California, which is based largely on Majestic’s book of business prior to our acquisition. Over the last several years, three significant comprehensive legislative reforms were enacted in California which resulted in uncertainty regarding the impact of the reforms on loss payments, loss development and, ultimately, loss reserves. Therefore, Majestic’s historical data is less reliable as an indicator of future loss. In response to the reform legislation and a continuing drop in the frequency of workers’ compensation claims, the pure premium rates approved by the California Insurance Commissioner effective January 1, 2008 were 65.1% lower than the pure premium rates in effect as of July 1, 2003. We consider all of these factors to be important in our review of the data because they increase the variability risk factors in our loss reserve estimates.

In our primary insurance policy business, our paid loss data for state act indemnity for California displayed increasing, or inflationary, trends over the most recent valuations at December 31, 2010. The increasing trends are exhibited in the paid loss development data for the 2007 and 2008 accident years. The decision to increase the estimated ultimate losses for accident years 2007 and 2008 was appropriately made, as the underlying loss data showed deterioration over the prior twelve months. We did not see similar increase in paid loss development for the 2004 through 2006 accident years. Accordingly, we have not increased the estimated ultimate losses for those accident years. We believe that our loss development factor selections are appropriate given the relative immaturity of our data. Over time, as the data for these accident years mature and uncertainty surrounding the ultimate outcome of the claim costs and associated loss adjustment expenses diminishes, the full impact of the actual loss development will be factored into our assumptions and selections.

We have limited historical experience in our excess insurance policy business and therefore we perform a ground-up analysis of loss emergence patterns of the insured. The expected ultimate impact of these excess policies is based upon actual experience of the insureds’ and industry excess of loss factors which vary by state and hazard group. Gross losses were developed to ultimate and the portion of the losses expected to exceed our retention with respect to each insured was calculated. We reevaluated the loss ratios at December 31, 2010 and recognized favorable development for that year ended. The favorable development relates primarily to California accident years 2004 and 2006 for which actual results have been better than industry excess of loss factors.

Reserve Sensitivities. Although many factors influence the actual cost of claims and the corresponding unpaid loss and loss adjustment expense estimates, we do not measure and estimate values for all of these variables individually because many of the factors that are known to impact the cost of claims cannot be measured directly. This is the case for the impact of economic inflation on claim costs and coverage interpretations. In most instances, we rely on historical experience or industry information to estimate values for the variables that are explicitly used in the unpaid loss and loss adjustment expense analysis. We assume that the historical effect of these unmeasured factors, which is embedded in our experience or industry experience, is representative of future effects of these factors. It is important to note that actual claims costs will vary from our estimate of ultimate claim costs, perhaps by substantial amounts, due to the inherent variability of the business written, the potentially significant time lags associated with the settlement of claims and the fact that not all events affecting future claim costs can be estimated.

As discussed above, there are a number of variables that can impact, individually or in combination, the adequacy of our loss and loss adjustment expense liabilities. While the actuarial methods employed factor in amounts for these circumstances, the loss reserves may prove to be inadequate despite the actuarial methods used. An example is provided below to highlight the potential variability present in our loss reserves

Claim cost inflation can result from medical cost inflation, wage inflation and severity of injury. As discussed above, the actuarial methods employed include an amount for claim cost inflation based on historical experience with some adjustment in cases of legislative reforms. We assume that the historical effect of this factor, which is embedded in our experience and industry experience, is representative of future effects for claim inflation. To the extent that the historical factors and the actuarial methods utilized, are inadequate to recognize future inflationary trends, our unpaid loss and loss adjustment expense liabilities may be inadequate. The more recent accident years are subject to greater variability. If our estimate of future loss cost trends is three percentage points inadequate (e.g., if we estimate a 6% annual trend and the actual trend is 9%), our unpaid loss and loss adjustment expense liability would be inadequate by approximately $10.2 million on a pre-tax basis, or 3%, as of December 31, 2010. Under these assumptions, the inadequacy of approximately $10.2 million represents approximately 70% of total shareholders’ equity at December 31, 2010. The impact of any reserve deficiencies, or redundancies, on our reported results and future earnings is discussed below.

We review our reserves on a quarterly basis to determine whether they are consistent with our actual results. In the event of a discrepancy, we would seek to determine the causes (underwriting, claims, inflation, regulatory) and would adjust our reserves accordingly. In the event that our estimates of ultimate unpaid loss and loss adjustment expense liabilities prove to be greater or less than the ultimate liability, our earnings and financial position could be positively or negatively impacted. Earnings would be reduced by the amount of any deficiencies in the year(s) in which the claims are paid or the unpaid loss and loss adjustment expense liabilities are increased. For example, if we determined our unpaid loss and loss adjustment expense liability of $314.5 million as of December 31, 2010 to be 5% inadequate, we would experience a pre-tax reduction in earnings of approximately $15.7 million. The reduction could be realized in the year when the deficiency is identified. The deficiency would also impact our financial position because our statutory surplus would be reduced by an amount equivalent to the reduction in net income. Any deficiency is typically recognized in the unpaid loss and loss adjustment expense liability and, accordingly, it typically does not have a material effect on our liquidity because the claims have not been paid. Since the claims will typically be paid out over a multi-year period, we have generally been able to adjust our investments to match the anticipated future claim payments. Conversely, if our estimates of ultimate unpaid loss and loss adjustment expense liabilities prove to be redundant, our future earnings and financial position would be improved.

Loss Reserve Adequacy – California Department of Insurance Examination of Majestic Insurance. We are currently undergoing an examination by the CA DOI for calendar years 2005 through 2010. As part of its examination, the CA DOI conducts a review of the adequacy of our statutory carried reserves for losses and loss adjustment expenses, net of reinsurance (statutory loss reserves). In its examination report, the statutory loss reserves estimated by the CA DOI are approximately $41.0 million higher than the statutory loss reserves carried by us at December 31, 2010.

Approximately 60% of the discrepancy between the estimated statutory loss reserves of the CA DOI and our carried statutory loss reserves at December 31, 2010 is attributable to statutory loss reserves for business underwritten in California, where certain assumptions made by CA DOI resulted in higher estimated statutory loss reserves. These assumptions include: (1) a greater projected amount of development expected after eight years (the tail); and (2) a difference in the loss ratio used to approximate our statutory loss reserves - the CA DOI maintains that given the significant growth of premiums for the years 2007-2009, the loss ratio experienced will not be better than the industry loss ratio (as determined by the Workers; Compensation Insurance Rating Bureau of California – or WCIRB) for those accident years.

The remainder of the difference between the estimated statutory loss reserves of the CA DOI and our carried reserves at December 31, 2010 is attributable to statutory loss reserves for business underwritten in New York and New Jersey. The methodology used by the CA DOI is based largely on the application of industry loss development factors in each state, with no weight given to our consistent nationwide case reserving philosophy.

We have evaluated the analyses of the CA DOI concerning the loss reserve adequacy of Majestic Insurance. We continue to believe that the statutory loss reserves carried by Majestic Insurance at December 31, 2010 are adequate and therefore we have not increased our carried statutory loss reserves. The decision to maintain the statutory loss reserves at their current level is based on the following factors:

An expectation of less tail development in California – this expectation is based on (1)years of historical experience (dating back to 1986) which is a good baseline for estimating the tail development for business underwritten in California; and (2) a prudent selection of loss development factors whereby we have made adjustments for extraordinarily large claims that tend to distort the average loss development factors relative to the size of the company;

The use of traditional actuarial methods to determine the loss ratios for business underwritten in California as compared to the industry factors exclusively used by the CA DOI – the traditional actuarial methods we used have historically resulted in better-than-WCIRB industry loss ratios in California; and

The inclusion of reported loss development of our California business in the establishment of statutory loss reserves for business underwritten in New York and New Jersey. The same case reserving philosophy is maintained nationwide under the direction of a claims executive with over twenty-five years of industry experience.

Reinsurance Recoverable

Amounts recoverable from reinsurers are estimated on an individual contract basis, in a manner consistent with the associated reserve for losses and loss adjustment expenses. Included in reinsurance recoverables are paid losses recoverable from reinsurers and prepaid reinsurance premiums to reinsurers. Such recoverables are reported net of any allowance for estimated uncollectible reinsurance recoverables. We evaluate and monitor the financial condition of our reinsurers to minimize our exposure to significant losses from reinsurer insolvencies. We calculate amounts recoverable from reinsurers based on our estimates of the underlying loss and loss adjustment expenses, which themselves are subject to significant judgments and uncertainties described above under the heading “Reserve for Losses and Loss Adjustment Expenses.” Changes in the estimates and assumptions underlying the calculation of our loss reserves may have an impact on the balance of our reinsurance recoverables. In general, an increase in our underlying loss reserves on claims subject to reinsurance should increase our reinsurance recoverables. The amount of the increase would depend on a number of considerations including, but not limited to, the terms and attachment points of our reinsurance contracts and the incurred amount on various claims subject to reinsurance. Changes in reinsurance recoverables are recorded in the period in which the estimate is revised. We assessed the collectability of our year-end receivables and believe all amounts are collectible based on currently available information. Therefore, at December 31, 2010 and 2009, we had no reserve for uncollectible reinsurance recoverables.

Fixed-Maturity Securities

Our fixed-maturity securities are classified as available-for-sale and are reported at their estimated fair value based on quoted market prices or dealer quotes. Unrealized investment gains and losses on securities are recorded as a separate component of other comprehensive income or loss, net of deferred income taxes to the extent that the underlying investment is held by a taxable entity. Realized gains and losses are determined on the basis of specific identification.

We outsource investment accounting services for our available-for-sale investment portfolio to a third party. Through this third party, we use nationally recognized pricing services to estimate fair value measurements for our investments. 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, the pricing services use significant other observable inputs that are more subjective, such as pricing models or other financial analytical methods. To validate the techniques or models used by the pricing services, we compare the fair value estimates to our perception of the current market and will challenge any prices deemed not to be representative of fair value

Impairment of Investments

We adjust the cost of our invested assets for impairments in value deemed to be other-than-temporary in the period in which the determination is made. These other-than-temporary impairment (OTTI) adjustments are recorded in our results of operations as a realized loss on investments. The assessment of whether such impairment has occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value.

We regularly evaluate our available-for-sale fixed-maturity investment portfolio to identify other-than-temporary impairments in the fair values of the securities we hold. When, in the opinion of management, a decline in the fair value of an available-for-sale investment below its cost or amortized cost is considered to be other-than-temporary, such investment is written-down to its fair value. We consider various factors in determining whether a decline in the fair value of an available-for-sale security is other-than-temporary, including:

·	how long and by how much the fair value of the security has been below its cost;

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

·	our intent and ability not to sell the security for a sufficient time period for it to recover its value;

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

·	any reduction or elimination of dividends, or nonpayment of scheduled interest payments.

Premiums Receivable

Premiums receivable include premium amounts due from policyholders. Premiums receivable are recorded net of any allowance for estimated uncollectible premiums. The allowance for doubtful accounts represents management’s best estimate of uncollectible premiums included in premiums receivable.

Deferred Policy Acquisition Costs

Policy acquisition costs are comprised of ceding commissions, broker commissions, premium taxes and certain underwriting and other policy issuance costs and are primarily related to the production of new and renewal business. These costs are deferred and amortized as the related insurance and reinsurance premiums are earned. We evaluate deferred policy acquisition costs to determine if recorded amounts exceed estimated recoverable amounts after allowing for anticipated investment income. Premium deficiency, if any, is recorded as amortization of deferred policy acquisition costs.

Goodwill

Goodwill represents the excess of the cost of acquiring a business enterprise over the fair value of the net assets acquired. Goodwill is not amortized but is tested for impairment at least annually, or more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for conducting an interim test. We perform our annual goodwill impairment testing in the fourth quarter of each year.

Impairment testing is performed using the fair value approach, which requires the use of estimates and judgment, at the “reporting unit” level. A reporting unit is the operating segment or a business one level below the operating segment, if discrete financial information is prepared and regularly reviewed by management at that level.

For purposes of goodwill impairment testing, if the carrying value of a reporting unit’s goodwill exceeds its estimated fair value, there is an indication of impairment and the implied fair value of the goodwill is determined in the same manner as the amount of goodwill would be determined in a business acquisition. The excess of the carrying value of goodwill over the implied fair value of goodwill is recognized as impairment and recorded as a charge against net income.

The estimate of a reporting unit’s fair value may be based on one or a combination of approaches including (1) the ratio of market value to book value for the unit’s peer companies, and (2) the sales prices of acquired peer companies relative to their trading stock market values. Other key inputs, judgments and assumptions relevant to the determination of the estimated fair value of the reporting unit include projected earnings, current book value, regulatory rating of the reporting unit, the level of economic capital required to support the mix of business, long-term growth rates, and projections of new and renewal business.

The valuation methodologies utilized are subject to key judgments and assumptions that are sensitive to change. Estimates of fair value are inherently uncertain and represent only management’s reasonable expectation regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ from actual future results and the difference could be material.

As a result of our 2009 annual impairment testing, we determined that the goodwill recorded in the primary insurance segment was fully impaired. Consequently, we recorded goodwill impairment charges of $2.7 million in the year ended December 31, 2009. Factors that occurred in the fourth quarter of 2009 that resulted in the full impairment of our goodwill include: (1) the downgrade of Majestic’s AM Best rating from “A-“ to “B++” with negative implications, (2) a reduction in Majestic’s projected premiums written due to the AM Best downgrade, (3) an increase in Majestic’s losses and loss adjustment expenses, and (4) the unexpected net operating loss in the fourth quarter of 2009 – which resulted from adverse development of Majestic Insurance’s current and prior year losses and loss adjustment expenses.

Deferred Income Taxes

Deferred tax assets and liabilities resulting from temporary differences between the financial reporting and tax bases of assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse.

The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or carryforward periods. A valuation allowance is established when management determines, based on available information, that it is more likely than not that deferred income tax assets will not be realized. Significant judgment is required in determining whether valuation allowances should be established as well as the amount of such allowances. When making such determination, consideration is given to future taxable income, future reversals of existing taxable temporary differences, taxable income in prior carryback years and tax planning strategies.

We evaluated our net deferred tax asset for recoverability and considered the relative impact of negative and positive evidence, including historical profitability and projections of future taxable income within the foreseeable future. In evaluating the need for a valuation allowance, we estimated future taxable income based on business plans and ongoing tax planning strategies. This process involved significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or about assumptions relating to our projected operating performance, actual results and other factors.

Based on the accounting guidance, our assumptions are limited to business strategies which we can control. Given these limitations, we concluded that estimated future taxable income and certain tax planning strategies no longer constituted sufficient positive evidence to assert that it is more likely than not that the net deferred tax assets would be realizable in the foreseeable future. Consequently, we carried a net deferred tax valuation allowance of $28.0 million and $17.1 million at December 31, 2010 and 2009.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At and for the year ended December 31, 2010, we had a consolidated retained deficit of $59.8 million and a loss from continuing operations before taxes of $44.9 million. We have generated net losses for the last three years and expect to continue to generate net losses for the foreseeable future. In addition, based on the following, management has determined that there is substantial doubt surrounding our ability to meet our obligations as they become due in the foreseeable future and continue as a going concern:

The termination of the proposed merger with Bayside as discussed in “Item 7 – Liquidity and Capital Resources – Capital Resources – Previously Announced and Subsequent Termination of Bayside Amalgamation Agreement.” We will not be able to benefit from the financial condition, reputation and regulatory and rating agency standing of Lancer, an affiliated insurance company of Bayside;

·	The conservation and rehabilitation of Majestic Insurance by the California Department of Insurance as discussed in “Item 1 – Business – Significant Developments – California Department of Insurance – Conservation and Rehabilitation of Majestic Insurance.”

·	The restrictions of the BMA on Twin Bridges’ ability to write new business or pay dividends/distribute surplus to its parent Majestic Capital described in “Item 1 – Business – Regulation – Minimum Solvency Margin, Enhanced Capital Requirement and Restriction on Dividends and Distributions.”

The inability to fund the ongoing expenses of Majestic Capital, Majestic USA and Embarcadero (the Holding Companies) and discontinued operations for the foreseeable future. The Holding Companies and discontinued operations generate no revenue but are obligated to pay the following expenses: debt service, public company costs, other general corporate overhead and costs to defend and settle pending litigation and regulatory actions, including the proposed settlement involving the New York self-insured groups discussed in “Item 3 – Legal Proceedings - Pending Litigation – Litigation Involving the New York Self-Insured Groups>” Historically, these expenses were funded by (1) the operations of our fee-based subsidiaries when they were continuing operations; (2) BMA approved dividends/return of capital from Twin Bridges.; (3) the CA DOI approved Form D filing by which certain of Majestic USA’s other general corporate overhead was allocated to/funded by Majestic Insurance; and (4) dividends from Majestic Insurance. Given the termination of our fee-based business and the regulatory aforementioned restrictions placed on Majestic Insurance and Twin Bridges, there may be limited/ no funds available to cover the ongoing expenses of the Holding Companies and discontinued operations.

Based on the above factors, we may be forced to seek relief through a filing under the U.S. Bankruptcy Code or Bermuda Companies Act (bankruptcy filing). A bankruptcy filing would result in the violation of one or more legal and financial covenants of our debt and other contractual obligations as described in “Item 7 - Liquidity and Capital Resources – Capital Resource - Event of Default Under Bankruptcy, Insolvency or Liquidation.” Our auditors have issued a disclaimer of opinion with respect to our financial statements of and for the year ended December 31, 2010.

Contingencies Relating to Corporate Litigation and Regulatory Matters

We evaluate each contingent liability separately to determine if a loss contingency should be recorded. A loss contingency is only recorded if it is both (1) probable and (2) reasonably estimable. Loss contingencies are established at our “best estimate,” or, if no one number within the range of possible losses is more probable than any other, we record an estimated reserve at the low end of the range of losses. Costs of legal defense of litigation and regulatory matters are expensed as incurred.

Recent Accounting Pronouncements Not Yet Adopted

In October 2010, the Financial Accounting Standards Board (FASB) issued updated guidance to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance, which is now part of ASC 944, Financial Services – Insurance, modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs. The updated guidance is effective for periods ending after December 15, 2011. The Company is currently evaluating the potential impact, if any, of the adoption of this guidance on its financial condition and results of operations.

In January 2010, the FASB issued new guidance for fair value measurements and disclosures. The new guidance, which is now part of ASC 820, Fair Value Measurements and Disclosures, clarifies existing disclosure requirements regarding the level of disaggregation and inputs and valuation techniques and provides new disclosure requirements regarding disclosures about, among other things, transfers in and out of levels 1 and 2 of the fair value hierarchy and details of the activity in level 3 of the fair value hierarchy. The new guidance is effective for fiscal years beginning after December 15, 2009 for the levels 1 and 2 disclosures and for fiscal years beginning after December 15, 2010 for level 3 disclosures. The levels 1 and 2 disclosure requirements were applied prospectively to the Company’s fair value disclosure effective with the first quarter of 2010 and the level 3 disclosure will be applied prospectively to the Company’s fair value disclosure subsequent to the effective date.

Results of Operations

	Years ended December 31,
	2010			2009			2008
	(Dollars in thousands)
Written Premiums
Direct premiums written	$	91,509		$	153,471		$	171,586
Assumed premiums written		6,602			2,186			279
Ceded premiums written		(44,182	)		(72,360	)		(46,992	)
Net premiums written		53,929			83,297			124,873

Revenues
Net premiums earned	$	51,194		$	80,524		$	121,942
Investment income		10,604			16,303			13,906
Total revenues		61,798			96,827			135,848

Expenses
Losses and loss adjustment expenses		51,188			81,654			85,506
Underwriting and acquisition expenses (1)		31,455			36,424			40,136
General and administrative expenses		6,284			11,131			6,711
Severance and other charges		13,113			5,477			825
Interest expense		4,634			3,798			3,718
Total expenses		106,674			138,484			136,896

Loss from continuing operations before income taxes		(44,876	)		(41,657	)		(1,048	)
Tax (benefit) provision from continuing operations		(972	)		3,515			(2,385	)
(Loss) income from continuing operations		(43,904	)		(45,172	)		1,337

Loss from discontinued operations		(4,713	)		(1,662	)		(2,833	)

Net Loss	$	(48,617	)	$	(46,834	)	$	(1,496	)

GAAP Combined Ratio
Loss and loss adjustment expense ratio (2)		100	%		101	%		70	%
Underwriting expense ratio (3)		61	%		45	%		33	%
GAAP combined ratio (4)		161	%		146	%		103	%

(1)

Underwriting and acquisition expenses includes: (a) $12.6 million, $15.7 million and $20.0 million of policy acquisition costs for the years ended December 31, 2010, 2009 and 2008, respectively, and (b) $18.9 million, $20.7million and $20.1 million of general and administrative expenses for the years ended December 31, 2010, 2009 and 2008, respectively, of our insurance subsidiaries relating to the underwriting and issuance of workers’ compensation insurance policies.

(2)

The loss and loss adjustment expense ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. When the calendar year loss and loss adjustment ratio is adjusted to exclude prior period items, such as loss reserve development, it becomes the “accident year loss ratio,” a non-GAAP financial measure.

(3)	The underwriting expense ratio is calculated by dividing underwriting and acquisition expenses by net premiums earned.

(4)	The GAAP combined ratio is the sum of the loss and loss adjustment expense ratio and the underwriting expense ratio. The GAAP combined ratio is a key measurement of profitability traditionally used in the property-casualty insurance business.

Direct Premiums Written.

Geographically, our direct premiums written were:

	Year Ended December 31,
	2010				2009				2008
	(Dollars in thousands)
California	$	69,060	75	%	$	105,112	68	%	$	103,896	61	%
New York/New Jersey		18,991	21	%		41,557	27	%		60,010	35	%
Others		3,458	4	%		6,802	5	%		7,680	4	%
Total	$	91,509	100	%	$	153,471	100	%	$	171,586	100	%

Despite a 12% annual increase in average premium rate per policy and a 23% annual increase in average premium size per policy, our direct written premiums decreased $62.0 million or 40% to $91.5 million in 2010, compared to $153.5 million in 2009. Of this decrease, $57.2 million was attributable to primary insurance policy business and $4.7 million was attributable to excess insurance policy business.

The decrease in our direct written premiums in 2010 compared to 2009 was primarily attributable to the following factors:

In December 2009, A.M. Best downgraded Majestic Insurance’s financial strength rating to “B++” from “A-“, which impeded its ability to renew existing insured that require an A- rating and to attract new business in an already highly competitive market. Our total in-force premiums were 45% lower and our in-force policy count was 53% lower in 2010 as compared to 2009.

Lower than anticipated B++ premiums underwritten in California attributable to intense competition in the California market where we adhered to strict pricing and prudent underwriting disciplines throughout the year. This contributed to the 45% decrease in in-force premiums and the 57% decrease in in-force policy count year over year in the California market.

A reduction in B++ premiums underwritten in New York and New Jersey resulting from the continuing effects of underwriting actions taken on our business underwritten in these states, and difficulties we continue to face in this marketplace, as a result of regulatory restrictions with regard to pricing. This contributed to the 48% decrease in in-force premiums and a 47% decrease of in-force policy count year over year for the New York/New Jersey markets.

·	The ongoing recession continued to negatively impact the payroll levels of our insureds. Our current total year payroll exposure is 40% lower in 2010 compared to 2009.

Our excess insurance policy count and reported payrolls declined year-over-year based on (1) the closure of the self-insured groups we previously managed in California which resulted in the cancellation/non-renewal of the related excess insurance policies underwritten by Majestic Insurance; and (2) our decision to exit the excess insurance policy business at the end of 2010.

Our direct premiums written decreased $18.1 million, or 11%, to $153.5 million in 2009, compared to $171.6 million in 2008. Of this decrease, $14.0 million was attributable to excess insurance policy business and $4.1 million was attributable to primary insurance policy business.

The decrease in our excess insurance policy business direct written premiums was primarily attributable to a decrease in the policy count and reported payrolls in both California and New York in 2009 as compared to 2008. Contributing factors to this decrease include: (1) the closure of the self-insured groups we previously managed in California and New York which resulted in the non-renewal of the related excess insurance policies underwritten by Majestic Insurance; and (2) the economic downturn negatively impacted the payroll levels of our insureds.

Factors contributing to the decrease in our primary insurance policy business include: (1) our average premium rate per policy decreased in 2009 compare to 2008; and (2) the aforementioned effects of the economic downturn which resulted in lower payroll levels of our insureds. While the effects of underwriting actions taken on primary insurance business underwritten in New York and New Jersey reduced our direct written premiums by $15.5 million, or 44%, in 2009 compared to 2008, an increase in our primary insurance business underwritten in California resulted in a $10.4 million, or 12% increase year over year.

Assumed Premiums Written. Assumed premiums written increased $4.4 million, or 202%, to $6.6 million in 2010, from $2.2 million in 2009. This increase resulted primarily from premiums assumed under the April 1, 2010 assumed share agreement more fully discussed in “Item 1. Business – Assumed Quota Share Reinsurance.”

Assumed premiums written increased $1.9 million, or $684%, to $2.2 million in 2009, from $0.3 million in 2008. This increase was attributable to premiums assumed from state mandated pools, primarily in New Jersey, in 2009 compared to 2008.

Ceded Premiums Written. Ceded premiums written decreased $28.2 million, or 39% to $44.2 million in 2010 from $72.4 million in 2009. The decrease in premiums written in 2010 as compared to 2009 is attributable to:

·	The decrease in direct premiums written in 2010 as compared to 2009 as discussed above; and

·	Effective July 1, 2010, we did not renew our ceded quota share agreements as more fully discussed in “Item 1 – Business – Ceded Quota Share Reinsurance.” This resulted in lower ceded premiums written during the third and fourth quarters of 2010 as compared to the same period last year.

Ceded premiums written increased $25.4 million, or 54%, to $72.4 million in 2009 from $47.0 million in 2008. This increase was attributable to the full year effects of our ceded quota share agreements in 2009 as compared to 2008.

Premiums ceded to reinsurers under quota share agreements were in the following proportions in 2010, 2009 and 2008:

	2010			2009			2008

Quarter ended March 31,
Max Re(1)		13	%		40	%		0	%
Aspen/Axis(2)		34	%		0	%		0	%
Total External Quota Share %		47	%		40	%		0	%
Quarter ended June 30,
Max Re(1)		13	%		40	%		0	%
Aspen/Axis(2)		34	%		0	%		0	%
Total External Quota Share %		47	%		40	%		0	%
Quarter ended September 30,
Max Re(1)		9	%		13	%		40	%
Aspen/Axis(2)		23	%		34	%		0	%
Total External Quota Share %		32	%		47	%		40	%
Quarter ended December 31,
Max Re(1)		5	%		13	%		40	%
Aspen/Axis(2)		15	%		34	%		0	%
Total External Quota Share %		20	%		47	%		40	%
Average Annual Quota Share %		37	%		44	%		20	%

(1)

The cession percentages shown do not reflect the effects of amounts ceded under our excess of loss reinsurance treaty. For losses incurred between July 1, 2008 and June 30, 2009, Majestic Insurance entered into a 40% ceded quota share agreement with Max Re. For losses incurred between July 1, 2009 and June 30, 2010, Majestic Insurance entered into a 15% ceded quota share agreement with Max Re, excluding coverage for workers’ compensation business written by Majestic Insurance in New York. The cession percentage shown in the table for this agreement reflects an approximation of the exclusion of New York business.

(2)

The cession percentages shown do not reflect the effects of amounts ceded under our excess of loss reinsurance treaty. For losses incurred between July 1, 2009 and June 30, 2010, Majestic Insurance entered into a 43% ceded quota share agreement with Aspen Re and Axis. The cession percentage reflects the 80% placement with Aspen Re and Axis under the 43% quota share agreement.

Net Premiums Earned. Net premiums earned decreased $29.3 million, or 36%, to $51.2 million in 2010 from $80.5 million in 2009. Of this decrease, $26.4 million was attributable to primary insurance policy business and $2.9 million was attributable to excess policy business. In addition to the items that reduced our direct premiums written, our net premiums earned were lower in 2010 due to the continuing impact of premium refunds on expiring policies following the completion of payroll audits. These decreases were offset by lower ceded earned premiums due to the non-renewal of our ceded quota share agreements in the second half of 2010.

Net premiums earned decreased $41.4 million, or 34% to $80.5 million in 2009 from $121.9 million in 2008. Of this decrease, $33.7 million was attributable to primary insurance policy business and $7.7 million was attributable to excess insurance policy business. Our net earned premiums were lower in 2009 compared to 2008 primarily due to (1) higher ceded earned premiums due to the full year effect of ceded quota share agreements year over year; (2) lower direct premiums written in 2009 compared to 2008; and (3) estimated reinstatement premiums of $3.1 million on Majestic’s excess of loss treaty that expired June 30, 2009.

Geographically, our net premiums earned were:

	Year Ended December 31,
	2010				2009				2008
	(Dollars in thousands)
California	$	37,276	73	%	$	53,259	66	%	$	74,780	61	%
New York/New Jersey		11,491	22	%		23,715	29	%		42,504	35	%
Others		2,427	5	%		3,550	5	%		4,658	4	%
Total	$	51,194	100	%	$	80,524	100	%	$	121,942	100	%

Investment Income. Investment income decreased $5.7 million, or 35%, to $10.6 million in 2010 from $16.3 million in 2009. Of this decrease, aggregate charges of $3.3 million was attributable to OTTI on our total investments, $1.2 million was attributable to lower year over year net realized gains of our available-for-sale investment portfolio and $1.2 million was attributable to lower investment income earned in 2010 as compared to 2009.

As a result of (1) the uncertainty surrounding our ability to continue as a going concern; (2) the conservation of Majestic Insurance and rehabilitation plan initiated by the CA DOI; and (3) the termination of our secured policy administration operating lease, we may be required to sell certain of our available-for-sale securities to meet our future obligations. Therefore, we no longer have the intent or ability not to sell our available-for-sale securities that are in a gross unrealized loss position. In addition, if we default on our junior subordinated debt obligations (Junior Debt) due to possible future bankruptcy proceedings, we may not receive interest and principal payments on the related common securities we hold as an investment in unconsolidated subsidiary. Accordingly, we incurred aggregate OTTI charges on our invested assets of $3.3 million for the year ended December 31, 2010 as compared to immaterial OTTI charges for the year ended December 31, 2009.

The remaining decrease in our investment income in 2010 compared to 2009 is attributable to lower net realized gains on our available-for-sale investment portfolio and lower net investment income in 2010 compared to 2009. In 2009, in order to maximize the after-tax yield of our investment portfolio, we restructured our investment portfolio. We realized net gains on the liquidation of our tax-exempt municipal bonds and reinvested the proceeds in taxable fixed-maturity securities. Lower investment yields on our new taxable securities and a decrease in the average amount of invested assets held resulted in lower investment income in 2010 compared to 2009. The investment yield on our available-for-sale portfolio was 3.5% in 2010 compared to 3.6% in 2009.

Investment income increased $2.4 million, or 17%, to $16.3 million in 2009 from $13.9 million in 2008. Of this increase, $3.3 million was attributable to an increase in net realized gains on the restructuring of our available-for-sale investment portfolio in 2009. While the average amount of invested assets increased year over year, a significant decrease in the investments yield on new investments resulted in lower investment income in 2009 compared to 2008. The investment yield on our available-for-sale portfolio was 3.6% in 2009 compared to 4.5% in 2008

The components of our investment income in 2010, 2009 and 2008 are as follows:

	Years Ended December 31,
	2010			2009			2008
	(Dollars in thousands)
Net investment income	$	8,885		$	10,079		$	10,981
Net realized gains		5,014			6,254			3,783
OTTI losses on available-for-sale investments (1)		(2,212	)		(30	)		(858	)
OTTI losses on investment in unconsolidated subsidiary		(1,083	)		—			—
Total investment income	$	10,604		$	16,303		$	13,906

(1) In 2008, we recorded an impairment charge of $0.9 million on one fixed-maturity security (Lehman Brothers Holdings Inc filed for bankruptcy in 2008). In 2010, the Lehman security matured and we recovered 100% of the impairment charge. The $0.9 million recovery is included in our 2010 net realized gains.

Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses decreased $30.5 million, or 37%, to $51.2 million in 2010 from $81.7 million in 2009. Loss and loss adjustment expenses decreased $3.9 million, or 5%, to $81.7 million in 2009 compared to $85.5 million in 2008.

The components of our 2010, 2009 and 2008 loss and loss adjustment expense ratio (LAE) are as follows:

	Years Ended December 31,
	2010			2009			2008

Current accident year loss and ALAE ratio		79	%		86	%		71	%
Current accident year ULAE ratio (1)		15	%		8	%		4	%
Current accident year loss and LAE ratio		94	%		94	%		75	%
Prior accident year loss and LAE ratio		6	%		7	%		(5	%)
Loss and LAE ratio		100	%		101	%		70	%

(1) The current year ULAE ratio is impacted by ceded quota share agreements and the related ceding commission income as follows: (a) the ceded quota share agreement in place between July 1, 2008 and June 30, 2009 included 6% ceding commission income to cover ULAE, resulting in a lower current year ULAE ratio; and (b) the ceded quota share agreements in place between July 1, 2009 and June 30, 2010 had no ceding commission income to cover ULAE, resulting in a higher current year ULAE ratio.

Our overall loss and loss adjustment expense ratio in 2010 was 100% compared to 101% in 2009. While the current year loss and loss adjustment expense ratio was adversely impacted by the decrease in our net earned premiums year over year, the current accident year loss and loss adjustment expense ratio in 2010 of 79% is 7 percentage points better than the same period last year. The improvement is primarily due to (1) a 10% increase in the average premium rate level in California; and (2) a reduction in our exposure in the higher loss ratio states of New York and New Jersey.

Our overall loss and loss adjustment expense ratio in 2009 was 101% compared to 70% in 2008. The 2009 accident year loss and loss adjustment expense ratio was adversely affected by lower net earned premiums year over year and increased to 94% in 2009 from 75% in 2008. The increase of our 2009 accident year loss and ALAE ratio to 86% from 71% was primarily attributable to (1) an increase in our claims’ severity trend in California primary insurance policy business; (2) a 7% decrease in the average premium rate level in California; and (3) greater than expected loss emergence in New York and New Jersey.

Prior Year Development

As a result of changes in estimates of insured events in prior years, we experienced unfavorable development of $2.8 million in 2010, where $3.4 million of unfavorable development in our primary insurance business was offset by $0.6 million of favorable development in our excess insurance business. Our primary insurance business experienced unfavorable development in California accident years 2007 and 2008 where incurred and paid losses developed above actuarial projections. Our excess insurance business had favorable development on policies underwritten in California, where losses have not emerged above the self-insured retention, which was offset by unfavorable development of policies underwritten in New York.

As a result of changes in estimates of insured events of prior years, we experienced unfavorable development of $5.8 million for the year ended December 31, 2009 where $7.9 million of unfavorable development it our primary insurance business was offset by $2.1 million of favorable development in our excess insurance business. Our primary insurance business experienced unfavorable development as a result of loss cost trends in California and New Jersey, predominantly in accident year 2008. Our excess insurance business had favorable development where accident years 2008 and 2006 continue to develop better than industry excess of loss factors initially projected.

As a result of changes in estimates of insured events of prior years, we experienced favorable development of $5.6 million for the year ended December 31, 2008 of which $3.6 million was attributable to our primary insurance business and $2.0 million was attributable to our excess insurance business. Both our primary insurance and excess insurance businesses experienced favorable development as a result of favorable loss cost trends in California, predominantly in accident years 2006 and 2007.

We have established loss reserves at December 31, 2010 that are based upon our current best estimate of loss and loss adjustment expenses. Loss reserves do not represent an exact calculation of liability, but instead represent management’s best estimates, generally utilizing actuarial expertise and projection techniques, at a given accounting date. Reserves for losses and loss adjustment expenses are estimates and are inherently uncertain; they do not and cannot represent an exact measure of liability. The methods for making such estimates and for establishing the resulting reserves are continually reviewed and updated, and any adjustments are reflected in current operations. For additional information regarding our reserves for losses and loss adjustment expenses, our processes for establishing the reserves and the risks associated therewith, see “Item 1. Business — Reserves for Losses and Loss Adjustment Expenses,” “Item 1A. Risk Factors — Our loss reserves are based on estimates and may be inadequate to cover our losses,” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Reserve for Losses and Loss Adjustment Expenses.”

Underwriting and Acquisition Expenses. Underwriting and acquisition expenses decreased by $5.0 million, or 14%, to $31.4 million in 2010 from $36.4 million in 2009. The factors contributing to this decrease were:

·	Lower broker commissions, premium taxes and other policy issuance costs related to the year-over-year reduction in our direct premiums written;

·	No goodwill impairment charges in 2010 as compared to a $2.7 million charge in 2009;

·	A $1.6 million decrease in uncollectible premiums primarily resulting from underwriting actions taken in New York and New Jersey beginning in 2009; and

·	A decrease in other operational expenses that resulted from various cost cutting measures instituted in 2010.

These decreases were offset by lower ceding commission income due to the 2010 mid-year non-renewal of our ceded quota share agreements, expense increases related to the development of our integrated policy administration system, the reallocation of personnel and other resources from Majestic USA to our insurance company operations, and an increase in the expense of the regulatory review and oversight of Majestic Insurance.

Our underwriting expense ratio in 2010 was 61% compared to 45% in 2009. The increase in our expense ratio is primarily attributable to the year-over-year reduction in our net earned premiums.

Underwriting and acquisition expenses decreased by $3.7 million, or 9%, to $36.4 million in 2009 from $40.1 million in 2008. The factors contributing to this decrease were:

·	A $3.6 million increase in our ceding commission income due to the full year effect of our ceded quota share agreements;

·	Lower broker commissions, premium taxes and other policy issuance costs related to the year over year reduction in our direct premiums written; and

A decrease in allocated general corporate overhead expenses in 2009 compared to 2008. In 2009, allocated general corporate overhead expenses were reduced as a result of a $3.0 million dividend paid from Majestic Insurance to its parent company Majestic USA. In 2008, no parent company dividends were paid; therefore, there was no reduction to allocated general corporate overhead expenses for that year ended.

These decreases were offset by a $2.7 million goodwill impairment charge, an increase of $1.0 million in uncollectible premiums, an increase in regulatory expenses on policies underwritten in New York and New Jersey and increases in expenses related to the development of our integrated policy administration system.

Our underwriting expense ratio in 2009 was 45% compared to 33% in 2008. The increase in our expense ratio is primarily attributable to the year-over-year reduction in our net earned premiums.

General and Administrative Expenses. General and administrative expenses decreased $4.8 million, or 44%, to $6.3 million in 2010 from $11.1 million in 2009. The factors contributing to this decrease were:

·	The reallocation of personnel and other resources from Majestic USA to our insurance company operations in 2010;

·	The effects of January 1, 2010 pay cuts for executive management and the Board of Directors as well as other reductions in general and administrative expenses resulting from cost cutting measures instituted in 2010; and

·	A $0.4 million benefit recognized in 2010 related to the early termination of an escrow agreement to cover indemnification claims with respect to Majestic Insurance’s pre-acquisition reserves for losses and loss adjustment expenses.

These decreases were offset by higher insurance premiums for our directors’ and officers’ insurance coverage in 2010 compared to 2009.

General and administrative expenses increased $4.4 million, or 66%, to $11.1 million in 2009 from $6.7 million in 2008. The factors contributing to this increase were:

·	An increase in professional fees related to the regulatory proceedings and pending litigation described in “Part I. Item 3 – Legal Proceedings” and “Part II. Item 8 – Financial Statements – Note 21. Contingencies” ;and

·	An increase in the general corporate overhead expenses retained by Majestic USA in 2009 compared to 2008 as described above in Underwriting and Acquisition Expenses.

Severance and Other Charges. Severance and other charges increased $7.6 million, or 139% to $13.1 million in 2010 from $5.5 million in 2009. The increase was attributable the following charges incurred in 2010 compared the recognition of severance expense related to our former Co-Chief Executive Officer during 2009:

An $9.1 million charge which represents the remaining future obligations due under operating leases for (1) our integrated policy administration system, and (2) furniture and fixtures in our Poughkeepsie, New York office space. Our 2010 operating results triggered a violation of the lease covenant whereby a material adverse change in our financial condition would cause the remaining payments due under both leases to become immediately due;

·	A $1.5 million charge related to the lease amendment and license agreement to eliminate certain office space in Poughkeepsie, New York. ;

A $1.1 million acceleration of the amortization of our prepaid debt issuance costs associated with our Junior Debt. As a result of the uncertainty surrounding our ability to continue as a going concern and possible default on the Junior Debt due to possible future bankruptcy proceedings, we determined there is no future value to this asset at December 31, 2010;

A $0.9 million charge related to security deposits on our integrated policy administration system and our Poughkeepsie, New York office space and prepaid expenses related to our integrated policy administration system. As a result of the uncertainty surrounding our ability to continue as a going concern and the termination of the PAS lease, we determined that there is no future value to these assets at December 31, 2010; and

·	A $0.5 million severance charge related to the work force reductions in 2010. This reduction reflects the decrease in premium levels experienced by Majestic Insurance and is designed to better align our workforce to current premium levels and properly manage enterprise wide expenses.

Severance and other charges increased $4.7 million, or 564%, to $5.5 million in 2009 from $0.8 million in 2008. The increase was attributable to the recognition of additional severance expense for our former Co-Chief Executive Officers in 2009 compared to 2008.

Our Chief Executive Officer and Chairman of the Board resigned in March 2009. In conjunction with his resignation, we entered into a separation agreement, the terms of which include $3.3 million of cash payments, immediate vesting of restricted stock awards and payment of health and welfare benefits for up to three years. Accordingly, we recorded $3.8 million of severance expense in the first quarter of 2009.

In addition, we accelerated the recognition of the severance expense of our Former Co-Chief Executive Officer who resigned in December 2006. Historically commencing in 2007, we recognized $0.8 million of severance expense per year, which represented the total severance expense earned ratably over the term of the non-compete/non-solicitation covenants contained in his separation agreement. In 2009, we determined that there was not a significant ongoing economic benefit related to those covenants due to our decreased presence in the self-insured group market and the current economic and regulatory environment. Accordingly, we accelerated the recognition of severance expense and recorded the remaining $1.5 million of severance expense in the first quarter of 2009.

Interest Expense. Interest expense increased $0.9 million, or 24%, to $4.7 million in 2010 from $3.8 million in 2009. Interest expense increased $0.1 million, or 2%, to $3.8 million in 2009 from $3.7 million in 2008. The increases for both periods were primarily attributable to higher amounts paid to reinsurers on balances required as collateral for unpaid ceded liabilities under our reinsurance agreements year over year.

Loss from Continuing Operations before Income Taxes. Loss from continuing operations was $44.9 million in 2010 compared to $41.7 million in 2009. The $3.2 million, or 8% increase in our loss from continuing operations is primarily attributable severance and other charges and lower investment income, offset by the reduction in general and administrative expenses and the net effect of lower premium volume in our insurance operations.

Loss from continuing operations was $41.7 million in 2009 compared to $1.0 million in 2008. The $40.6 million increase in our loss from continuing operations is attributable to lower premium volume in our insurance operations, severance expense related to our former co-chief executive officers and the impairment of goodwill in 2009 compared to 2008.

Tax (Benefit) Provision from Continuing Operations. We recorded an income tax benefit of $1.0 million in 2010, a $3.5 million tax provision in 2009, and an income tax benefit of $2.4 million in 2008. We carried a full valuation allowance on our net deferred tax assets at both December 31, 2010 and 2009.

The 2010 income tax benefit included a deferred tax benefit of $14.5 million and a $13.5 million non-cash valuation allowance with respect to our net deferred tax asset. In 2010, we reduced our valuation allowance to offset the tax effect of increases in net unrealized gains of our investment portfolio, which resulted in our recognition of an income tax benefit for that year ended.

The 2009 income tax provision included a current tax benefit of $5.3 million; a $7.5 million deferred tax benefit, and a $16.3 million non-cash valuation allowance with respect to our net deferred tax asset. Our 2009 income tax provision includes the establishment of our non-cash full valuation allowance with respect to our net deferred tax asset, somewhat offset by net income tax benefits on taxable losses of our U.S. domiciled subsidiaries that are included in continuing operations.

The 2008 income tax benefit included a $1.6 million income tax benefit and a $0.8 million deferred tax benefit. Our 2008 income tax benefit included the tax benefit associated with our net operating losses from continuing operations.

Our deferred tax benefit in 2010 and 2009 included tax benefits related to our net operating loss carryforwards, the deferred tax benefit for all years presented included the impact of temporary differences from net loss reserves, unearned premiums and deferred policy acquisition costs being reported differently for financial statement purposes and for federal income tax purposes.

Discontinued Operations. The results of CRM CA, CRM and Eimar are included in discontinued operations for all periods presented. We recorded losses from discontinued operations of $4.7 million in 2010, $1.7 million in 2009 and $2.8 million in 2008.

CRM CA

CRM CA has ceased providing administrative services to its last self-insured group under management on December 31, 2010. Consequently, we closed down our California fee-based operations and CRM CA is reported as a discontinued operation in the consolidated statements of operations for all periods presented. Income from discontinued operations related to CRM CA was $0.0 million, $0.2 million and $0.7 million in 2010, 2009 and 2008, respectively.

CRM and Eimar

As of September 8, 2008, we ceased to manage self-insured groups in New York or provide bill review and case management services for self-insured groups or third party clients. Accordingly, CRM and Eimar are reported in discontinued operations for all periods presented. Losses from discontinued operations related to CRM and Eimar were $4.7 million, $1.9 million and $3.5 million for 2010, 2009 and 2008, respectively.

Included in our 2010 loss from discontinued operations related to CRM and Eimar is $4.6 million related to the proposed settlement of litigation involving the New York self-insured groups. All years presented include legal defense costs related to our proposed settlement and other regulatory proceedings and pending litigation. The proposed settlement involving the New York self-insured groups and our other regulatory proceedings and pending litigation are described in “Part I. Item 3 – Legal Proceedings” and “Part II. Item 8 – Financial Statements – Note 21. Contingencies.”

Net Loss. Consolidated net loss was $48.6 million in 2010 compared to $46.8 million in 2009. The $1.8 million, or 4% increase in our consolidated net loss is attributable to an increase in severance and other charges and the proposed settlement costs of the New York self-insured group litigation recorded in discontinued operations offset by an increase in our operating results and a decrease in our non-cash full valuation allowance on our deferred tax asset due to appreciation of our available-for-sale investment portfolio.

Consolidated net loss was $46.8 million in 2009 compared to $1.5 million in 2008. The $45.3 million increase in our consolidated net loss is attributable to decreases in the results of our insurance operations in 2009 compared to 2008, the establishment of a non-cash full valuation allowance on our net deferred tax asset in 2009, and severance expense for our former co-chief executive officers and the impairment of goodwill in 2009 compared to 2008.

Investment Portfolio

We invest the funds made available by our insurance subsidiaries’ capital and the net cash flows from operations, with the objective to earn income and realize gains on investments. As of December 31, 2010, our investment portfolio, which includes available-for-sale investments, short-term investments, investment in unconsolidated subsidiary, cash and cash equivalents, receivables for investments sold and payables for investments purchased totaled $287.8 million, compared to $332.7 million at December 31, 2009.

The following table shows the fair market values of various categories of our available-for-sale investment portfolio, the percentage of the total market value of our invested assets represented by each category and the tax equivalent yield to maturity based on the fair market value of each category of invested assets as of the dates indicated:

December 31, 2010

December 31, 2009

(Dollars in thousands)

Description of Securities

Fair Value

Percent of Total

Yield

Fair Value

Percent of Total

Majestic Capital, Ltd. 10-K