|  |
|--|

| **UNITED                STATES SECURITIES AND**** EXCHANGE                COMMISSION****Washington, D.C. 20549** |
|-----------------------------------------------------------------------------------------------------------------------|
|                                                                                                                  |
|                                                                                                                       |
|                                                                                                                  |
| **FORM                10-Q**                                                                                          |
|                                                                                                                  |
| (Mark                One)                                                                                             |

| **x**  | **Quarterly Report                Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934                For the quarterly period ended September 30, 2007**    |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                           |
| **or** |
|   |                                                                                                                                                                           |
| **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                    000-51124**

**SeaBright Insurance                    Holdings, Inc.**(Exact name of                    registrant as specified in its charter) |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                        |

| **Delaware**                                                                                 |   | **56-2393241**                                   |
|----------------------------------------------------------------------------------------------|--------|--------------------------------------------------|
| (State or other                jurisdiction of incorporation                or organization) |   | (IRS Employer                Identification No.) |
|                                                                                         |   |                                             |

| **2101                    4th Avenue, Suite 1600****Seattle, Washington 98121**(Address of principal executive offices, including zip code)

**(206)                    269-8500**(Registrant’s telephone number, including area code)

        Indicate by check mark                    whether the registrant (1) has filed all reports required to be filed by                    Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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.                    Yesx                         Noo

      Indicate by check mark                    whether the registrant is a large accelerated filer, an accelerated filer, or a                    non-accelerated filer. See definition of “accelerated filer and large                    accelerated filer” in Rule 12b-2 of the Exchange Act. (Check                    one):

      Large accelerated                    filero                        Accelerated filerx                          Non-accelerated filero

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

Indicate the number of                    shares outstanding of each of the issuer’s classes of common equity, as                    of the latest practicable date: |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

| **Class**                                    |   | **Shares outstanding as of                November 8, 2007** |
|----------------------------------------------|--------|--------------------------------------------------------------|
| Common Stock, $0.01 Par                Value |   | 20,831,102                                                   |

|    |
|--------------|

| **SeaBright Insurance                    Holdings, Inc.**

**Index                    to Form 10-Q** |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |

|                        |   |                                                                                                                                                                                                       |   | **Page** |   |
|-----------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|
|                        |   |                                                                                                                                                                                                       |   |          |   |
| **Part                I.**  |   | **Financial                Information**                                                                                                                                                                   |   |          |   |
|                             |        |                                                                                                                                                                                                            |
|                        |   |                                                                                                                                                                                                       |   |     |   |
| Item                1.      |   | Financial                Statements (unaudited)                                                                                                                                                            |   | 2        |   |
|                             |        |                                                                                                                                                                                                            |
|                        |   |                                                                                                                                                                                                       |   |     |   |
|                        |   | Condensed                Consolidated Balance Sheets as of September 30, 2007 and                        December 31, 2006                                         |   | 2        |   |
|                             |        |                                                                                                                                                                                                            |
|                        |   |
|                        |   |  Condensed                Consolidated Statements of Operations for the Three Months                        and Nine Months Ended September 30, 2007 and 2006 |   | 3        |   |
|                             |        |                                                                                                                                                                                                            |
|                        |   |
|                        |   |  Condensed                Consolidated Statements of Cash Flows for the Nine Months                         Ended September 30, 2007 and 2006            |   | 4        |   |
|                             |        |                                                                                                                                                                                                            |
|                        |   |                                                                                                                                                                                                       |   |     |   |
|                        |   | Notes to                Unaudited Condensed Consolidated Financial Statements                                                                                                                              |   | 5        |   |
|                             |        |                                                                                                                                                                                                            |
|                        |   |                                                                                                                                                                                                       |   |     |   |
| Item                2.      |   | Management’s                Discussion and Analysis of Financial Condition and Results of                Operations                                                                                  |   | 16       |   |
|                             |        |                                                                                                                                                                                                            |
|                        |   |                                                                                                                                                                                                       |   |     |   |
| Item                3.      |   | Quantitative and                Qualitative Disclosures About Market Risk                                                                                                                                  |   | 34       |   |
|                             |        |                                                                                                                                                                                                            |
|                        |   |                                                                                                                                                                                                       |   |     |   |
| Item                4.      |   | Controls and                Procedures                                                                                                                                                                     |   | 34       |   |
|                             |        |                                                                                                                                                                                                            |
|                        |   |                                                                                                                                                                                                       |
| **Part                II.** |   | **Other                Information**                                                                                                                                                                       |
|                             |        |                                                                                                                                                                                                            |
|                        |   |                                                                                                                                                                                                       |   |     |   |
| Item                1A.     |   | Risk                Factors                                                                                                                                                                                |   | 35       |   |
|                             |        |                                                                                                                                                                                                            |
|                        |   |                                                                                                                                                                                                       |   |     |   |
| Item                2.      |   | Unregistered                Sales of Equity Securities and Use of Proceeds                                                                                                                                 |   | 35       |   |
|                             |        |                                                                                                                                                                                                            |
|                        |   |                                                                                                                                                                                                       |   |     |   |
| Item                6.      |   | Exhibits                                                                                                                                                                                                   |   | 35       |   |
|                             |        |                                                                                                                                                                                                            |
|                        |   |                                                                                                                                                                                                       |   |     |   |
| Signatures                  |   |                                                                                                                                                                                                       |   | 36       |   |
|                             |        |                                                                                                                                                                                                            |

| - 1                    - |
|--------------------------|

| **PART I                    — FINANCIAL INFORMATION**

**Item                    1. Financial Statements**

**SEABRIGHT INSURANCE                    HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED                    CONSOLIDATED BALANCE SHEETS** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                       |

|                                                                                                                                                                                                                                                                                                                              | **September 30,                2007** |    | **December 31,                2006** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------|---------|--------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                              |                                       |    |                                      |   |
|                                                                                                                                                                                                                                                                                                                              | **(Unaudited)**                       |    |                                 |   |   |
|                                                                                                                                                                                                                                                                                                                              | **(in                thousands)**     |    |
| **ASSETS**                                                                                                                                                                                                                                                                                                                        |                                  |    |                                 |   |   |   |
| Fixed income                securities available for sale, at fair value (amortized cost                  $430,301 in 2007 and $399,433 in 2006)                                                                                                                                                                        | $                                     | 429,315 |                                 | $      | 399,119 |   |
| Equity                securities available for sale, at fair value (cost $8,873 in 2007 and                  $802 in 2006)                                                                                                                                                                                              |                                  | 9,268   |                                 |   | 813 |   |
| Preferred                stock available for sale, at fair value (cost $5,431)                                                                                                                                                                                                                                                    |                                  | 5,358   |                                 |   | – |   |
| Cash and cash                equivalents                                                                                                                                                                                                                                                                                          |                                  | 41,508  |                                 |   | 20,412 |   |
| Accrued                investment income                                                                                                                                                                                                                                                                                          |                                  | 4,725   |                                 |   | 4,208 |   |
| Premiums                receivable, net of allowance                                                                                                                                                                                                                                                                              |                                  | 11,922  |                                 |   | 8,877 |   |
| Deferred                premiums                                                                                                                                                                                                                                                                                                  |                                  | 131,834 |                                 |   | 118,788 |   |
| Federal income                tax recoverable                                                                                                                                                                                                                                                                                     |                                  | 954     |                                 |   | 1,263 |   |
| Service income                receivable                                                                                                                                                                                                                                                                                          |                                  | 428     |                                 |   | 792 |   |
| Reinsurance                recoverables                                                                                                                                                                                                                                                                                           |                                  | 12,969  |                                 |   | 13,675 |   |
| Receivable                under adverse development cover                                                                                                                                                                                                                                                                         |                                  | 2,781   |                                 |   | 2,781 |   |
| Prepaid                reinsurance                                                                                                                                                                                                                                                                                                |                                  | 1,794   |                                 |   | 1,917 |   |
| Property and                equipment, net                                                                                                                                                                                                                                                                                        |                                  | 2,098   |                                 |   | 1,241 |   |
| Deferred                income taxes, net                                                                                                                                                                                                                                                                                         |                                  | 14,014  |                                 |   | 12,198 |   |
| Deferred                policy acquisition costs, net                                                                                                                                                                                                                                                                             |                                  | 18,059  |                                 |   | 15,433 |   |
| Intangible                assets, net                                                                                                                                                                                                                                                                                             |                                  | 1,210   |                                 |   | 1,217 |   |
| Goodwill                                                                                                                                                                                                                                                                                                                          |                                  | 1,527   |                                 |   | 1,527 |   |
| Other                assets                                                                                                                                                                                                                                                                                                       |                                  | 12,022  |                                 |   | 10,014 |   |
|                                                                                                                                                                                                                                                                                                                              |                                       |    |                                      |   |
|     Total                assets                                                                                                                                                                                                                                                                               | $                                     | 701,786 |                                 | $      | 614,275 |   |
|                                                                                                                                                                                                                                                                                                                              |                                       |    |                                      |   |
|                                                                                                                                                                                                                                                                                                                         |
|                 **      LIABILITIES AND STOCKHOLDERS’                EQUITY**                                                                                                                                 |                                  |    |                                 |   |   |   |
| Liabilities:                                                                                                                                                                                                                                                                                                                      |                                  |    |                                 |   |   |   |
|   Unpaid loss and                loss adjustment expense                                                                                                                                                                                                                                                                | $                                     | 233,717 |                                 | $      | 198,356 |   |
|   Unearned                premiums                                                                                                                                                                                                                                                                                      |                                  | 131,739 |                                 |   | 114,312 |   |
|   Reinsurance funds                withheld and balances payable                                                                                                                                                                                                                                                        |                                  | 681     |                                 |   | 309 |   |
|   Premiums                payable                                                                                                                                                                                                                                                                                       |                                  | 2,859   |                                 |   | 3,047 |   |
|   Accrued expenses                and other liabilities                                                                                                                                                                                                                                                                 |                                  | 39,429  |                                 |   | 37,125 |   |
|   Surplus                notes                                                                                                                                                                                                                                                                                          |                                  | 12,000  |                                 |   | 12,000 |   |
|                                                                                                                                                                                                                                                                                                                              |                                       |    |                                      |   |
|     Total                liabilities                                                                                                                                                                                                                                                                          |                                  | 420,425 |                                 |   | 365,149 |   |
|                                                                                                                                                                                                                                                                                                                              |                                       |    |                                      |   |
|                                                                                                                                                                                                                                                                                                                         |
| Commitments                and contingencies                                                                                                                                                                                                                                                                                      |                                  |    |                                 |   |   |   |
|                                                                                                                                                                                                                                                                                                                         |
| Stockholders’                equity:                                                                                                                                                                                                                                                                                        |                                  |    |                                 |   |   |   |
|   Series A preferred                stock, $0.01 par value; 750,000 shares authorized;                     no shares issued and outstanding                                                                                                                                                    |                                  | — |                                 |   | — |   |
|   Undesignated                preferred stock, $0.01 par value; 10,000,000 shares                     authorized; no shares issued and                outstanding                                                                                                                              |                                  | — |                                 |   | — |   |
|   Common stock, $0.01                par value; 75,000,000 shares authorized;                     issued and outstanding – 20,823,602 shares at                September 30, 2007                     and 20,553,400 shares at December 31,                2006 |                                  | 208     |                                 |   | 205 |   |
|   Paid-in                capital                                                                                                                                                                                                                                                                                        |                                  | 193,134 |                                 |   | 190,593 |   |
|   Accumulated other                comprehensive loss                                                                                                                                                                                                                                                                   |                                  | (432    | )                                    |   | (197 | ) |
|   Retained                earnings                                                                                                                                                                                                                                                                                      |                                  | 88,451  |                                 |   | 58,525 |   |
|                                                                                                                                                                                                                                                                                                                              |                                       |    |                                      |   |
|      Total                stockholders’ equity                                                                                                                                                                                                                                                     |                                  | 281,361 |                                 |   | 249,126 |   |
|                                                                                                                                                                                                                                                                                                                              |                                       |    |                                      |   |
|      Total                liabilities and stockholders’ equity                                                                                                                                                                                                                                     | $                                     | 701,786 |                                 | $      | 614,275 |   |
|                                                                                                                                                                                                                                                                                                                              |                                       |    |                                      |   |

|                                                                                                                     |
|--------------------------------------------------------------------------------------------------------------------------|
| *See                    accompanying notes to unaudited condensed consolidated financial                    statements.* |

| - 2                    - |
|--------------------------|

| **SEABRIGHT INSURANCE                    HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED                    CONSOLIDATED STATEMENTS OF OPERATIONS****(Unaudited)** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                              |

|                                                                                                                           | **Three Months Ended                September 30,**                |       | **Nine Months Ended                September 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------|------------|----------------------------------------------------|--------|
|                                                                                                                           |                                                                    |       |                                                    |   |
|                                                                                                                           | **2007**                                                           |       | **2006**                                           |   | **2007** |   | **2006** |   |
|                                                                                                                           |                                                                    |       |                                                    |   |  |   |  |   |
|                                                                                                                           | **(in thousands, except                income per share amounts)** |       |
|  Revenue:                                                                                                                 |                                                               |            |                                               |   |  |   |   |  |   |   |  |   |
|    Premiums                earned                                                                               | $                                                                  | 59,721     |                                               | $      | 47,819 |   | $ | 163,109 |   | $ | 133,576 |   |
|    Claims                service income                                                                         |                                                               | 432        |                                               |   | 497 |   |   | 1,331 |   |   | 1,553 |   |
|    Other service                income                                                                          |                                                               | 55         |                                               |   | 31 |   |   | 104 |   |   | 78 |   |
|    Net                investment income                                                                         |                                                               | 5,174      |                                               |   | 3,970 |   |   | 14,786 |   |   | 10,836 |   |
|    Net realized                loss                                                                             |                                                               | (25        | )                                                  |   | (74 | ) |   | (85 | ) |   | (389 | ) |
|    Other                income                                                                                  |                                                               | 1,376      |                                               |   | 508 |   |   | 3,018 |   |   | 2,133 |   |
|                                                                                                                           |                                                                    |       |                                                    |   |  |   |  |   |
|                                                                                                                           |                                                               | 66,733     |                                               |   | 52,751 |   |   | 182,263 |   |   | 147,787 |   |
|                                                                                                                           |                                                                    |       |                                                    |   |  |   |  |   |
|  Losses                and expenses:                                                                                      |                                                               |       |                                               |   |   |   |   |   |   |   |   |   |
|    Loss and loss                adjustment expenses                                                             |                                                               | 34,921     |                                               |   | 27,879 |   |   | 89,851 |   |   | 78,407 |   |
|    Underwriting,                acquisition and insurance                     expenses |                                                               | 15,172     |                                               |   | 10,099 |   |   | 42,495 |   |   | 29,581 |   |
|    Interest                expense                                                                              |                                                               | 289        |                                               |   | 285 |   |   | 854 |   |   | 813 |   |
|    Other                expenses                                                                                |                                                               | 2,020      |                                               |   | 1,449 |   |   | 5,223 |   |   | 3,859 |   |
|                                                                                                                           |                                                                    |       |                                                    |   |  |   |  |   |
|                                                                                                                           |                                                               | 52,402     |                                               |   | 39,712 |   |   | 138,423 |   |   | 112,660 |   |
|                                                                                                                           |                                                                    |       |                                                    |   |  |   |  |   |
|    Income before                taxes                                                                           |                                                               | 14,331     |                                               |   | 13,039 |   |   | 43,840 |   |   | 35,127 |   |
|                                                                                                                           |                                                                    |       |                                                    |   |  |   |  |   |
|                                                                                                                      |
| Income tax                expense (benefit):                                                                                   |                                                               |       |                                               |   |   |   |   |   |   |   |   |   |
|   Current                                                                                                            |                                                               | 5,438      |                                               |   | 4,521 |   |   | 15,604 |   |   | 13,755 |   |
|   Deferred                                                                                                           |                                                               | (757       | )                                                  |   | (579 | ) |   | (1,690 | ) |   | (3,076 | ) |
|                                                                                                                           |                                                                    |       |                                                    |   |  |   |  |   |
|                                                                                                                           |                                                               | 4,681      |                                               |   | 3,942 |   |   | 13,914 |   |   | 10,679 |   |
|                                                                                                                           |                                                                    |       |                                                    |   |  |   |  |   |
|    Net                income                                                                                    | $                                                                  | 9,650      |                                               | $      | 9,097 |   | $ | 29,926 |   | $ | 24,448 |   |
|                                                                                                                           |                                                                    |       |                                                    |   |  |   |  |   |
|                                                                                                                      |
| Basic earnings                per share                                                                                        | $                                                                  | 0.47       |                                               | $      | 0.45 |   | $ | 1.47 |   | $ | 1.23 |   |
| Diluted                earnings per share                                                                                      | $                                                                  | 0.46       |                                               | $      | 0.44 |   | $ | 1.43 |   | $ | 1.21 |   |
|                                                                                                                      |
| Weighted                average basic shares outstanding                                                                       |                                                               | 20,350,778 |                                               |   | 20,319,525 |   |   | 20,336,778 |   |   | 19,873,930 |   |
| Weighted                average diluted shares outstanding                                                                     |                                                               | 20,989,481 |                                               |   | 20,686,161 |   |   | 20,950,968 |   |   | 20,269,730 |   |

|                                                                                                                     |
|--------------------------------------------------------------------------------------------------------------------------|
| *See                    accompanying notes to unaudited condensed consolidated financial                    statements.* |

| - 3                    - |
|--------------------------|

| **SEABRIGHT INSURANCE                    HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED                    CONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                              |

|                                                                                                                                                                                                 | **Nine Months Ended                September 30,** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------|---------|
|                                                                                                                                                                                                 |                                                    |    |
|                                                                                                                                                                                                 | **2007**                                           |    | **2006** |   |
|                                                                                                                                                                                                 |                                                    |    |  |   |
|                                                                                                                                                                                                 | **(in                thousands)**                  |    |
| Cash flows                from operating activities:                                                                                                                                                 |                                               |         |   |   |  |   |
|   Net                income                                                                                                                                                                | $                                                  | 29,926  |   | $ | 24,448 |   |
|   Adjustments to                reconcile net income to cash provided by operating activities:                                                                                             |                                               |    |   |   |   |   |
|      Amortization                of deferred policy acquisition costs                                                                                                       |                                               | 26,564  |   |   | 21,079 |   |
|      Policy                acquisition costs deferred                                                                                                                       |                                               | (29,190 | ) |   | (22,840 | ) |
|      Provision                for depreciation and amortization                                                                                                             |                                               | 2,058   |   |   | 2,087 |   |
|      Compensation                cost on restricted stock                                                                                                                   |                                               | 1,617   |   |   | 720 |   |
|      Compensation                cost on stock options                                                                                                                      |                                               | 530     |   |   | 363 |   |
|      Net                realized loss on investments                                                                                                                        |                                               | 85      |   |   | 389 |   |
|      Gain                on sale of fixed assets                                                                                                                            |                                               | (1      | ) |   | — |   |
|      Benefit                for deferred federal income taxes                                                                                                               |                                               | (1,690  | ) |   | (3,076 | ) |
|   Changes in certain                assets and liabilities:                                                                                                                                |                                               |    |   |   |   |   |
|      Unpaid                loss and loss adjustment expense                                                                                                                 |                                               | 35,360  |   |   | 42,434 |   |
|      Unearned                premiums, net of deferred premiums                         and premiums                receivable |                                               | 1,453   |   |   | (3,512 | ) |
|      Reinsurance                recoverables, net of reinsurance withheld                                                                                                   |                                               | 167     |   |   | (206 | ) |
|      Accrued                investment income                                                                                                                               |                                               | (517    | ) |   | (1,018 | ) |
|      Federal                income tax recoverable                                                                                                                          |                                               | 309     |   |   | (1,052 | ) |
|      Other                assets and other liabilities                                                                                                                      |                                               | 1,297   |   |   | 55 |   |
|                                                                                                                                                                                                 |                                                    |    |  |   |
|        Net                cash provided by operating activities                                                                                                   |                                               | 67,968  |   |   | 59,871 |   |
|                                                                                                                                                                                                 |                                                    |    |  |   |
|                                                                                                                                                                                            |
| Cash flows                from investing activities:                                                                                                                                                 |                                               |    |   |   |   |   |
|   Purchases of                investments                                                                                                                                                  |                                               | (95,333 | ) |   | (254,420 | ) |
|   Sales of                investments                                                                                                                                                      |                                               | 17,758  |   |   | 140,438 |   |
|   Maturities and                other                                                                                                                                                      |                                               | 31,710  |   |   | 10,989 |   |
|   Purchases of                property and equipment                                                                                                                                       |                                               | (1,405  | ) |   | (585 | ) |
|                                                                                                                                                                                                 |                                                    |    |  |   |
|        Net                cash used in investing activities                                                                                                       |                                               | (47,270 | ) |   | (103,578 | ) |
|                                                                                                                                                                                                 |                                                    |    |  |   |
|                                                                                                                                                                                            |
| Cash flows                from financing activities:                                                                                                                                                 |                                               |    |   |   |   |   |
|   Proceeds from                exercise of stock options                                                                                                                                   |                                               | 310     |   |   | 32 |   |
|   Deferred tax                benefit from disqualifying dispositions                                                                                                                      |                                               | 83      |   |   | — |   |
|   Grant of restricted                shares of common stock                                                                                                                                |                                               | 5       |   |   | — |   |
|   Net proceeds from                follow-on public offering of common stock                                                                                                               |                                               | — |   |   | 57,562 |   |
|                                                                                                                                                                                                 |                                                    |    |  |   |
|        Net                cash provided by financing activities                                                                                                   |                                               | 398     |   |   | 57,594 |   |
|                                                                                                                                                                                                 |                                                    |    |  |   |
|                                                                                                                                                                                            |
|        Net                increase in cash and cash equivalents                                                                                                   |                                               | 21,096  |   |   | 13,887 |   |
| Cash and cash                equivalents at beginning of period                                                                                                                                      |                                               | 20,412  |   |   | 12,135 |   |
|                                                                                                                                                                                                 |                                                    |    |  |   |
| Cash and cash                equivalents at end of period                                                                                                                                            | $                                                  | 41,508  |   | $ | 26,022 |   |
|                                                                                                                                                                                                 |                                                    |    |  |   |
|                                                                                                                                                                                            |
| Supplemental                disclosures:                                                                                                                                                             |                                               |    |   |   |   |   |
|   Federal income                taxes paid                                                                                                                                                 | $                                                  | 14,850  |   | $ | 14,500 |   |
|   Interest paid on                surplus notes                                                                                                                                            |                                               | 852     |   |   | 800 |   |
|   Accrued expenses                for purchases of investments                                                                                                                             |                                               | — |   |   | 8,413 |   |

|                                                                                                             |
|------------------------------------------------------------------------------------------------------------------|
| *See                accompanying notes to unaudited condensed consolidated financial                statements.* |

| - 4                    - |
|--------------------------|

| **SEABRIGHT INSURANCE                    HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES                    TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**1.                      Organization**

        SeaBright Insurance                    Holdings, Inc. (“SIH” or the Company), a Delaware corporation, was                    formed in June 2003. On July 14, 2003, SIH entered into a purchase                    agreement, effective September 30, 2003, with Kemper Employers Group, Inc.                    (“KEG”), Eagle Pacific Insurance Company, Inc. and Pacific Eagle                    Insurance Company, Inc. (referred to collectively as “Eagle”), and                    Lumbermens Mutual Casualty Company (“LMC”), the ultimate owner of                    KEG and Eagle (the “Acquisition”). Under this agreement, SIH                    acquired Kemper Employers Insurance Company (“KEIC”), PointSure                    Insurance Services, Inc. (“PointSure”), and certain assets of                    Eagle, primarily renewal rights.

        Prior to the Acquisition,                    beginning in 2000, KEIC wrote business only in California. In May 2002, KEIC                    ceased writing business and by December 31, 2003, all premiums related to                    business prior to the Acquisition were 100% earned. KEIC resumed writing                    business effective October 1, 2003, primarily targeting policy renewals                    for former Eagle business in the states of California, Hawaii and Alaska. In                    November 2003, permission was granted by the Illinois Department of Financial                    and Professional Regulation, Division of Insurance (the “Illinois                    Division of Insurance”) for KEIC to change its name to SeaBright                    Insurance Company (“SBIC”). As of September 30, 2007, SBIC is                    licensed to write workers’ compensation insurance in 45 states and the                    District of Columbia. PointSure is engaged primarily in administrative and                    wholesale insurance brokerage activities.

**2. Summary of                    Significant Accounting Policies**

        ***a. Basis of Presentation***

        The accompanying unaudited                    condensed consolidated financial statements include the accounts of SIH and its                    wholly owned subsidiaries, SBIC and PointSure (collectively,                    the “Company,” “we” or “us”). All                    significant intercompany transactions and amounts among these affiliated                    entities have been eliminated in consolidation.

        The accompanying unaudited                    condensed consolidated financial statements have been prepared in accordance                    with U.S. generally accepted accounting principles (“GAAP”) for                    interim financial information and pursuant to the instructions to Form 10-Q and                    Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended                    (the “Exchange Act”). Accordingly, they do not include all of the                    information and notes required by GAAP for complete financial statements. The                    condensed consolidated balance sheet at December 31, 2006 has been derived from                    the audited financial statements at that date but does not include all of the                    information and notes required by GAAP for complete financial statements. These                    unaudited condensed consolidated financial statements and notes should be read                    in conjunction with the audited financial statements and accompanying notes as                    of and for the year ended December 31, 2006 included in the Company’s                    Annual Report on Form 10-K, which was filed with the U.S. Securities and                    Exchange Commission (the “SEC”) on March 16, 2007.

        In the opinion of                    management, the unaudited condensed consolidated financial statements include                    all adjustments, consisting only of normal recurring adjustments, necessary to                    state fairly the financial information set forth therein. Results of operations                    for the three month and nine month periods ended September 30, 2007 are not                    necessarily indicative of the results expected for the full fiscal year or for                    any future period.

        ***b. Use of Estimates***

        The preparation of the                    unaudited condensed consolidated financial statements in conformity with GAAP                    requires management of the Company to make a number of estimates and                    assumptions relating to the reported amount of assets and liabilities and the                    disclosure of contingent assets and liabilities at the date of the unaudited                    condensed consolidated financial statements and the reported amounts of                    revenues and expenses during the period. Actual results could differ from those                    estimates. The Company has used significant estimates in determining fair value                    and impairment of investment securities, unpaid loss and loss adjustment                    expenses, goodwill and other intangibles, earned premiums on retrospectively                    rated policies, earned but unbilled premiums, deferred acquisition costs,                    federal income taxes and certain amounts related to reinsurance.

        ***c. Revenue Recognition***

        Premiums for primary and                    reinsured risks are included in revenue over the lives of the contracts in                    proportion to the amount of insurance protection provided (i.e., ratably over                    the policy periods). The portions of premiums that are applicable to the                    unexpired periods of the policies in-force are not included in revenue but are                    deferred and recorded |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - 5                    - |
|--------------------------|

| **SEABRIGHT INSURANCE                    HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES                    TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                    (Continued)**

as unearned premium in                    the liability section of the balance sheet. Deferred premiums represent the                    unbilled portion of annual premiums.

        Earned premiums on                    retrospectively rated policies are based on the Company’s estimate of                    loss experience as of the measurement date. Loss experience includes known                    losses specifically identifiable to a retrospective policy as well as                    provisions for future development on known losses and for losses incurred but                    not yet reported, which are developed using actuarial loss development factors                    that are consistent with how the Company projects losses in general. For                    retrospectively rated policies, the governing contractual minimum and maximum                    rates are established at policy inception and are made a part of the insurance                    contract. While the typical retrospectively rated policy has five annual                    adjustment or measurement periods, premium adjustments continue until mutual                    agreement to cease future adjustments is reached with the policyholder. For the                    three months ended September 30, 2007 and 2006, approximately 23.2% and 29.6%,                    respectively, of direct premiums written related to retrospectively rated                    policies. For the nine months ended September 30, 2007 and 2006, approximately                    19.2% and 25.7%, respectively, of direct premiums written related to                    retrospectively rated policies.

        The Company estimates the                    amount of premiums that have been earned but unbilled at the end of the period                    by analyzing historical earned premium adjustments made and applying an                    adjustment percentage against in-force earned premiums. Included in deferred                    premiums is an accrual for earned but unbilled premiums of $0 at September 30,                    2007 and $1.5 million at December 31, 2006.

        Service income generated                    from various underwriting and claims service agreements with third parties is                    recognized as income in the period in which services are performed.

        ***d. Unpaid Loss and Loss Adjustment Expense***

        Unpaid loss and loss                    adjustment expense represents an estimate of the ultimate net cost of all                    unpaid losses incurred through the specified period. Loss adjustment expenses                    are estimates of unpaid expenses to be incurred in settlement of the claims                    included in the liability for unpaid losses. These liabilities, which                    anticipate salvage and subrogation recoveries and are presented gross of                    amounts recoverable from reinsurers, include estimates of future trends in                    claim severity and frequency and other factors that could vary as the losses                    are ultimately settled. Liabilities for unpaid loss and loss adjustment                    expenses are not discounted to account for the time value of money.

        In light of the                    Company’s short operating history and uncertainties concerning the                    effects of legislative reform specifically as it relates to the Company’s                    California workers’ compensation class of business, actuarial techniques                    are applied that use the historical experience of the Company and the                    Company’s predecessor as well as industry information in the analysis of                    unpaid loss and loss adjustment expense. These techniques recognize, among                    other factors: |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

|  | • | the                Company’s claims experience and that of its predecessor; |
|--|--------|-----------------------------------------------------------------------------------|
|  |   |                                                                              |
|  | • | the                industry’s claims experience;                            |
|  |   |                                                                              |
|  | • | historical                trends in reserving patterns and loss payments;         |
|  |   |                                                                              |
|  | • | the impact                of claim inflation;                                     |
|  |   |                                                                              |
|  | • | the pending                level of unpaid claims;                                |
|  |   |                                                                              |
|  | • | the cost of                claim settlements;                                     |
|  |   |                                                                              |
|  | • | legislative                reforms affecting workers’ compensation; and     |
|  |   |                                                                              |
|  | • | the                environment in which insurance companies operate.              |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         Although it is not possible                    to measure the degree of variability inherent in such estimates, management                    believes that the liability for unpaid loss and loss adjustment expense is                    reasonable. The estimates are reviewed quarterly and any necessary adjustment                    is included in the results of operations of the period in which the adjustment                    is determined. |

| - 6                    - |
|--------------------------|

| **SEABRIGHT INSURANCE                    HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES                    TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                    (Continued)** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                             |

|         ***e. Reinsurance*** |
|----------------------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         The Company protects itself                    from excessive losses by reinsuring certain levels of risk in various areas of                    exposure with nonaffiliated reinsurers. Reinsurance premiums, commissions,                    expense reimbursements and reserves related to ceded business are accounted for                    on a basis consistent with that used in accounting for original policies issued                    and the terms of the reinsurance contracts. The unpaid loss and loss adjustment                    expense subject to the adverse development cover with LMC is calculated                    periodically using generally accepted actuarial methodologies for estimating                    unpaid loss and loss adjustment expense liabilities, including incurred loss                    and paid loss development methods. Amounts recoverable in excess of acquired                    reserves at September 30, 2003 are recorded gross in unpaid loss and loss                    adjustment expense in accordance with Statement of Financial Accounting                    Standards (“SFAS”) No. 141, *Business Combinations*, with a                    corresponding amount receivable from the seller. Amounts are shown net in the                    unaudited condensed consolidated statements of operations. Premiums ceded to                    other companies are reported as a reduction of premiums written and earned.                    Reinsurance recoverables are determined based on the terms and conditions of                    the reinsurance contracts.

        Balances due from                    reinsurers on unpaid loss and loss adjustment expenses, including an estimate                    of such recoverables related to reserves for IBNR losses, are reported as                    assets and are included in reinsurance recoverables even though amounts due on                    unpaid loss and loss adjustment expenses are not recoverable from the reinsurer                    until such losses are paid. Should a reinsurer be unable or unwilling to pay                    such amounts to the Company when due, the Company would be liable for such                    obligations. The Company periodically evaluates its reinsurance recoverables,                    including the financial ratings of its reinsurers, and revises its estimates of                    such amounts as conditions and circumstances change. The Company does not                    believe that it is currently exposed to any material credit risk through its                    reinsurance agreements because most of its reinsurance is recoverable from                    large, well-capitalized reinsurance companies. Historically, no amounts from                    reinsurers have been written-off as uncollectible. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

|         ***f. Income Taxes*** |
|-----------------------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         The asset and liability                    method is used in accounting for income taxes. Under this method, deferred tax                    assets and liabilities are determined based on differences between the                    financial reporting and tax bases of assets and liabilities and are measured                    using the enacted tax rates and laws that are expected to be in effect when the                    differences are expected to reverse, net of any applicable valuation                    allowances. The Company evaluates the necessity of a deferred tax asset                    valuation allowance by determining, based on the weight of available evidence,                    whether it is more likely than not that some portion or all of the deferred tax                    asset will not be realized. When necessary, a valuation allowance is recorded                    to reduce the deferred tax asset to the amount that is more likely than not to                    be realized.

        The Company adopted the                    provisions of Financial Accounting Standards Board (“FASB”)                    Interpretation No. 48, *Accounting for Uncertainty in Income Taxes – an                    Interpretation of FASB Statement No. 109* (“FIN 48”) on January                    1, 2007. At the date of adoption and as of September 30, 2007, the Company had                    no unrecognized tax benefits and no adjustments to liabilities or operations                    were required.

        The Company recognizes                    interest on tax related matters as interest expense and penalties as income tax                    expense. As of September 30, 2007, the Company had no accrued interest or                    penalties related to uncertain tax positions.

        The tax years 2003 through                    2006 remain open to examination by the major taxing jurisdictions to which we                    are subject. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

|         ***g. Earnings Per Share*** |
|-----------------------------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         The following table                    provides the reconciliation of basic and diluted weighted average shares                    outstanding used in calculating earnings per share for the three month and nine                    month periods ended September 30, 2007 and 2006: |

| - 7                    - |
|--------------------------|

| **SEABRIGHT INSURANCE                    HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES                    TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                    (Continued)** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                             |

|                                                                                                                                                                                                                 | **Three Months Ended                September 30,** |       | **Nine Months Ended                September 30,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------|------------|----------------------------------------------------|--------|
|                                                                                                                                                                                                                 |                                                     |       |                                                    |   |
|                                                                                                                                                                                                                 | **2007**                                            |       | **2006**                                           |   | **2007** |   | **2006** |   |
|                                                                                                                                                                                                                 |                                                     |       |                                                    |   |  |   |  |   |
| Basic weighted                average shares outstanding                                                                                                                                                             |                                                | 20,350,778 |                                               |   | 20,319,525 |   |   | 20,336,778 |   |   | 19,873,930 |   |
|   Weighted average                shares issuable upon                    exercise of outstanding stock options                    and vesting of restricted stock |                                                | 638,703    |                                               |   | 366,636 |   |   | 614,190 |   |   | 395,800 |   |
|                                                                                                                                                                                                                 |                                                     |       |                                                    |   |  |   |  |   |
| Diluted                weighted average shares                   outstanding                                                                                                                               |                                                | 20,989,481 |                                               |   | 20,686,161 |   |   | 20,950,968 |   |   | 20,269,730 |   |
|                                                                                                                                                                                                                 |                                                     |       |                                                    |   |  |   |  |   |

|                                                                                    |
|-----------------------------------------------------------------------------------------|
|          ***h. Stock-Based Compensation*** |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         The Company accounts for                    awards of stock options and restricted stock according to the provisions of                    SFAS No. 123R, *Share-Based Payment*. The following table summarizes total                    stock-based compensation expense recognized in the unaudited condensed                    consolidated statements of operations for the three month and nine month                    periods ended September 30, 2007 and 2006: |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

|                                                                                    | **Three Months Ended                September 30,** |   | **Nine Months Ended                September 30,** |   |
|-----------------------------------------------------------------------------------------|-----------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                                    |                                                     |   |                                                    |   |
|                                                                                    | **2007**                                            |   | **2006**                                           |   | **2007** |   | **2006** |   |
|                                                                                    |                                                     |   |                                                    |   |  |   |  |   |
|                                                                                    | **(in                thousands)**                   |   |
| Stock option                compensation expense                  related to: |                                                |        |                                               |   |  |   |   |  |   |   |  |   |
|   Restricted                stock                                             | $                                                   | 681    |                                               | $      | 134 |   | $ | 1,616 |   | $ | 362 |   |
|   Stock                options                                                |                                                | 207    |                                               |   | 334 |   |   | 531 |   |   | 721 |   |
|                                                                                    |                                                     |   |                                                    |   |  |   |  |   |
| Total                                                                                   | $                                                   | 888    |                                               | $      | 468 |   | $ | 2,147 |   | $ | 1,083 |   |
|                                                                                    |                                                     |   |                                                    |   |  |   |  |   |
|                                                                               |
| Total related                tax benefit                                                | $                                                   | 247    |                                               | $      | 120 |   | $ | 587 |   | $ | 260 |   |

|                                                                                |
|-------------------------------------------------------------------------------------|
|          ***i. Comprehensive Income*** |

|                                                                                                                                                                                                                                        |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         The following table                    summarizes the Company’s comprehensive income for the three month and                    nine month periods ended September 30, 2007 and 2006: |
|                                                                                                                                                                                                                                        |

|                                                                                                                                       | **Three Months Ended                September 30,** |   | **Nine Months Ended                September 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                                                                                       |                                                     |   |                                                    |   |
|                                                                                                                                       | **2007**                                            |   | **2006**                                           |   | **2007** |   | **2006** |   |
|                                                                                                                                       |                                                     |   |                                                    |   |  |   |  |   |
|                                                                                                                                       | **(in                thousands)**                   |   |
| Net                income                                                                                                                  | $                                                   | 9,650  |                                               | $      | 9,097 |   | $ | 29,926 |   | $ | 24,448 |   |
|  Reclassification                adjustment for net                   realized losses recorded into income             |                                                | (25    | )                                                  |   | (74 | ) |   | (85 | ) |   | (389 | ) |
|  Tax                benefit related to reclassification                   adjustment                                   |                                                | 9      |                                               |   | 26 |   |   | 30 |   |   | 136 |   |
|  Decrease                (increase) in unrealized losses on                   investment securities available for sale |                                                | 6,117  |                                               |   | 9,135 |   |   | (276 | ) |   | 2,015 |   |
|  Tax                benefit (expense) related to change in                   unrealized losses                         |                                                | (2,142 | )                                                  |   | (3,197 | ) |   | 96 |   |   | (705 | ) |
|                                                                                                                                       |                                                     |   |                                                    |   |  |   |  |   |
|   Total comprehensive                income                                                                                      | $                                                   | 13,609 |                                               | $      | 14,987 |   | $ | 29,691 |   | $ | 25,505 |   |
|                                                                                                                                       |                                                     |   |                                                    |   |  |   |  |   |

|                                                                                                     |
|----------------------------------------------------------------------------------------------------------|
|          ***j. Recently Issued Accounting Pronouncements*** |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         In September 2005, the                    American Institute of Certified Public Accountants (“AICPA”)                    released Statement of Position 05-1, *Accounting by Insurance Enterprises for                    Deferred Acquisition Costs in Connection with Modifications or Exchanges of                    Insurance Contracts* (“SOP 05-1”). SOP 05-1 requires                    identification of transactions that result in a substantial change in an                    insurance contract. If it is determined that a substantial change to an                    insurance contract has occurred, the related unamortized deferred policy                    acquisition costs, unearned premiums and other related balances must be written                    off. SOP 05-1 is effective for fiscal years beginning after December 15, 2006.                    The Company adopted the provisions of SOP 05-1 as of January 1, 2007, which did                    not have a material effect on its consolidated financial condition or results                    of operations.

        In July 2006, the FASB                    issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income                    Taxes – an Interpretation of FASB Statement No. 109* (“FIN                    48”), which provides for the recognition, measurement, presentation and                    disclosure of uncertain tax positions. A tax benefit from an uncertain position                    may be recognized |

| - 8                    - |
|--------------------------|

| **SEABRIGHT INSURANCE                    HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES                    TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                    (Continued)**

only if it is more                    likely than not that the position is sustainable based on its technical merits.                    The provisions of FIN 48 are effective for fiscal years beginning after                    December 15, 2006. The Company adopted the provisions of FIN 48 as of January                    1, 2007, which did not have a material effect on its consolidated financial                    condition or results of operations.

        In September 2006, the FASB                    issued SFAS No. 157, *Fair Value Measurements*, which defines fair value                    and establishes a framework for measuring fair value in GAAP and expands                    disclosures about fair value measurements. The provisions for SFAS No. 157 are                    effective for fiscal years beginning after November 15, 2007, and interim                    periods within those fiscal years. Early adoption is permitted. The Company                    must adopt these new requirements no later than its first fiscal quarter of                    2008. The Company expects that SFAS No. 157 will not have a material effect on                    its consolidated financial condition or results of operations.

        In February 2007, the FASB                    issued SFAS No. 159, *The Fair Value Option for Financial Assets and                    Financial Liabilities – Including an Amendment of FASB Statement No.                    115*, which permits entities to choose to measure many financial instruments                    and certain other items at fair value in order to mitigate volatility in                    reported earnings caused by measuring related assets and liabilities                    differently and without having to apply complex hedge accounting provisions.                    The provisions for SFAS No. 157 are effective for fiscal years beginning after                    November 15, 2007, and interim periods within those fiscal years. Early                    adoption is permitted. The Company must adopt these new requirements no later                    than its first fiscal quarter of 2008. The Company is currently evaluating the                    impact that adoption of SFAS No. 159 will have on its consolidated financial                    condition and results of operations. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

|         ***k. Reclassifications*** |
|----------------------------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         Certain reclassifications                    have been made to the prior years’ financial statements to conform to                    classifications used in the current year.

**3.                      Investments**

        The consolidated cost or                    amortized cost, gross unrealized gains and losses, and estimated fair value of                    investment securities available for sale at September 30, 2007 are as                    follows: |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

|                                                                           | **Cost or                Amortized                Cost** |    | **Gross                Unrealized                Gains** |   | **Gross                Unrealized                Losses** |   | **Estimated                Fair Value** |   |
|--------------------------------------------------------------------------------|----------------------------------------------------------|---------|----------------------------------------------------------|--------|-----------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                           |                                                          |    |                                                          |   |                                                           |   |                                         |   |
| Fixed income                securities:                                        | **(in                thousands)**                        |    |
|   U.S. Treasury                securities                            | $                                                        | 9,931   |                                                     | $      | 36                                                        |   | $                                       | (57    | ) | $ | 9,910 |   |
|   Government                sponsored agency securities              |                                                     | 38,899  |                                                     |   | 122                                                       |   |                                    | (80    | ) |   | 38,941 |   |
|   Corporate                securities                                |                                                     | 42,669  |                                                     |   | 38                                                        |   |                                    | (737   | ) |   | 41,970 |   |
|   Tax-exempt                municipal securities                     |                                                     | 221,895 |                                                     |   | 1,268                                                     |   |                                    | (953   | ) |   | 222,210 |   |
|   Mortgage                pass-through securities                    |                                                     | 67,908  |                                                     |   | 188                                                       |   |                                    | (655   | ) |   | 67,440 |   |
|   Collateralized                mortgage obligations                 |                                                     | 2,066   |                                                     |   | —                                                   |   |                                    | (27    | ) |   | 2,039 |   |
|   Asset-backed                securities                             |                                                     | 46,933  |                                                     |   | 53                                                        |   |                                    | (182   | ) |   | 46,805 |   |
|                                                                           |                                                          |    |                                                          |   |                                                           |   |                                         |   |
|     Total                fixed income securities           |                                                     | 430,301 |                                                     |   | 1,705                                                     |   |                                    | (2,691 | ) |   | 429,315 |   |
| Equity                securities                                               |                                                     | 8,873   |                                                     |   | 399                                                       |   |                                    | (4     | ) |   | 9,268 |   |
| Preferred                stock                                                 |                                                     | 5,431   |                                                     |   | —                                                   |   |                                    | (73    | ) |   | 5,358 |   |
|                                                                           |                                                          |    |                                                          |   |                                                           |   |                                         |   |
|       Total                investment securities | $                                                        | 444,605 |                                                     | $      | 2,104                                                     |   | $                                       | (2,768 | ) | $ | 443,941 |   |
|                                                                           |                                                          |    |                                                          |   |                                                           |   |                                         |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         Equity securities consist                    of investments in exchange traded funds designed to correspond to the                    performance of certain indexes based on domestic or international stocks. The                    unrealized loss on temporarily impaired investments totaled $2.8 million at                    September 30, 2007 for investment securities available-for-sale with a fair                    value of $218.1 million. Approximately $1.4 million of total unrealized losses                    at September 30, 2007 were from securities that had been impaired for more than                    one year. At September 30, 2007, no unrealized loss exceeded 20% of the related                    security’s book value at that date. The following table summarizes the                    fair value and gross unrealized losses, aggregated by investment category and                    length of time that individual securities have been in a continuous unrealized                    loss at September 30, 2007: |

| - 9                    - |
|--------------------------|

| **SEABRIGHT INSURANCE                    HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES                    TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                    (Continued)** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                             |

|                                                                                                      | **Less Than 12                Months**  |    | **12 Months or More**                                       |   | **Total**                               |   |
|-----------------------------------------------------------------------------------------------------------|-----------------------------------------|---------|-------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                      |                                         |    |                                                             |   |                                         |   |
| **Investment Category**                                                                                   | **Aggregate                Fair Value** |    | **Aggregate                Unrealized                Loss** |   | **Aggregate                Fair Value** |   | **Aggregate                Unrealized                Loss** |   | **Aggregate                Fair Value** |   | **Aggregate                Unrealized                Loss** |   |
|                                                                                                           |                                         |    |                                                             |   |                                         |   |  |   |  |   |  |   |
|                                                                                                      | **(in                thousands)**       |    |
| Fixed income                securities:                                                                   |                                    |         |                                                        |   |                                         |   |   |  |   |   |  |   |   |  |   |   |  |   |
|   U.S. Treasury                securities                                                       | $                                       | 312     |                                                        | $      | —                                 |   | $ | 4,177 |   | $ | (57 | ) | $ | 4,489 |   | $ | (57 | ) |
|   Government                sponsored agency                     securities |                                    | 3,692   |                                                        |   | (35                                     | )      |   | 5,572 |   |   | (45 | ) |   | 9,264 |   |   | (80 | ) |
|   Corporate                securities                                                           |                                    | 11,536  |                                                        |   | (246                                    | )      |   | 22,207 |   |   | (491 | ) |   | 33,743 |   |   | (737 | ) |
|   Tax-exempt                municipal securities                                                |                                    | 63,467  |                                                        |   | (719                                    | )      |   | 31,060 |   |   | (234 | ) |   | 94,527 |   |   | (953 | ) |
|   Mortgage                pass-through securities                                               |                                    | 28,701  |                                                        |   | (227                                    | )      |   | 16,095 |   |   | (428 | ) |   | 44,796 |   |   | (655 | ) |
|   Collateralized                mortgage                     obligations    |                                    | 321     |                                                        |   | (9                                      | )      |   | 1,718 |   |   | (18 | ) |   | 2,039 |   |   | (27 | ) |
|   Asset-backed                securities                                                        |                                    | 17,165  |                                                        |   | (82                                     | )      |   | 7,023 |   |   | (100 | ) |   | 24,188 |   |   | (182 | ) |
|                                                                                                      |                                         |    |                                                             |   |                                         |   |  |   |  |   |  |   |
|      Total                fixed income securities                                |                                    | 125,194 |                                                        |   | (1,318                                  | )      |   | 87,852 |   |   | (1,373 | ) |   | 213,046 |   |   | (2,691 | ) |
| Equity                securities                                                                          |                                    | 641     |                                                        |   | (4                                      | )      |   | — |   |   | — |   |   | 641 |   |   | (4 | ) |
| Preferred                stock                                                                            |                                    | 4,374   |                                                        |   | (73                                     | )      |   | — |   |   | — |   |   | 4,374 |   |   | (73 | ) |
|                                                                                                      |                                         |    |                                                             |   |                                         |   |  |   |  |   |  |   |
|     Total                                                                             | $                                       | 130,209 |                                                        | $      | (1,395                                  | )      | $ | 87,852 |   | $ | (1,373 | ) | $ | 218,061 |   | $ | (2,768 | ) |
|                                                                                                      |                                         |    |                                                             |   |                                         |   |  |   |  |   |  |   |
|                                                                                                           |                                         |         |                                                             |        |                                         |        |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         The Company regularly                    reviews its investment portfolio to evaluate the necessity of recording                    impairment losses for other-than-temporary declines in the fair value of                    investments. A number of criteria are considered during this process,                    including, but not limited to, the following: the current fair value as                    compared to amortized cost or cost, as appropriate, of the security; the length                    of time the security’s fair value has been below amortized cost; the                    Company’s intent and ability to retain the investment for a period of                    time sufficient to allow for an anticipated recovery in value; specific credit                    issues related to the issuer; and current economic conditions. In general, the                    Company focuses on those securities whose fair values were less than 80% of                    their amortized cost or cost, as appropriate, for six or more consecutive                    months. Other-than-temporary impairment losses result in a permanent reduction                    of the carrying amount of the underlying investment. Significant changes in the                    factors considered when evaluating investments for impairment losses could                    result in a significant change in impairment losses reported in the financial                    statements. The Company evaluated investment securities with September 30, 2007                    fair values less than amortized cost and has determined that the decline in                    value is temporary and is related primarily to the change in market interest                    rates since purchase. Furthermore, the Company has the ability to hold the                    impaired investments to maturity and the intent to hold them for a period of                    time sufficient for recovery of their carrying amount. No other-than-temporary                    impairment losses were recorded in the three month or nine month periods ended                    September 30, 2007 and 2006.

        The amortized cost and                    estimated fair value of fixed income securities available for sale at September                    30, 2007, by contractual maturity, are set forth below. Actual maturities may                    differ from contractual maturities because certain borrowers have the right to                    call or prepay obligations with or without call or prepayment                    penalties. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

|                                                                      | **Maturity** |                              | **Cost or                Amortized                Cost** |   | **Estimated                Fair Value** |    |
|---------------------------------------------------------------------------|--------------|-----------------------------------|----------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                                      |              |                              |                                                          |   |                                         |    |
|                                                                      |         | **(in                thousands)** |                                                     |
| Due in one year or                less                                    |         | $                                 | 37,901                                                   |   | $                                       | 37,976  |   |
| Due after one year through five                years                      |         |                              | 80,655                                                   |   |                                    | 80,197  |   |
| Due after five years through                ten years                     |         |                              | 172,804                                                  |   |                                    | 172,834 |   |
| Due after ten years                                                       |         |                              | 22,035                                                   |   |                                    | 22,024  |   |
| Securities not due at a single                maturity date               |         |                              | 116,906                                                  |   |                                    | 116,284 |   |
|                                                                      |         |                                   |                                                     |        |                                    |
|   Total investment                securities available for sale |         | $                                 | 430,301                                                  |   | $                                       | 429,315 |   |
|                                                                      |         |                                   |                                                     |        |                                    |

|                                                                                                                                                                                                                                         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         The amortized cost of                    investment securities available for sale deposited with various regulatory                    authorities at September 30, 2007 was $179.9 million. |

| - 10                    - |
|---------------------------|

| **SEABRIGHT INSURANCE                    HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES                    TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                    (Continued)**

**4.                      Premiums**

        Direct premiums written                    totaled $65.6 million and $44.6 million for the three month periods ended                    September 30, 2007 and 2006, respectively, and $188.7 million and $144.4                    million for the nine month periods then ended, respectively.

        Premiums receivable                    consisted of the following at September 30, 2007 and December 31,                    2006: |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

|                                           |   | **September 30,                2007** |   | **December 31,                2006** |   |
|------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                           |   |                                       |   |                                      |   |
|                                           |   | **(in thousands)**                    |   |
| Premiums                receivable             |   | $                                     | 13,214 |                                 | $      | 9,986 |   |
| Allowance for                doubtful accounts |   |                                  | (1,292 | )                                    |   | (1,109 | ) |
|                                           |   |                                       |   |                                      |   |
|                                           |   | $                                     | 11,922 |                                 | $      | 8,877 |   |
|                                           |   |                                       |   |                                      |   |

|                                  |
|---------------------------------------|
| **5.                    Reinsurance** |
|                                  |

|         ***a. Reinsurance Ceded*** |
|----------------------------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         Under reinsurance                    agreements, the Company cedes various amounts of risk to nonaffiliated                    insurance companies for the purpose of limiting the maximum potential loss                    arising from the underlying insurance risks. For the period from October 1,                    2006 through October 1, 2007 and for the period from October 1, 2007 through                    October 1, 2008, the Company entered into reinsurance agreements with                    nonaffiliated reinsurers wherein it retains the first $1.0 million of each loss                    occurrence. Losses in excess of $1.0 million up to $75.0 million are reinsured                    as follows: |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

| **Layer**                                                                 |   | **General                Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|---------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                           |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| $1.0 million excess of $1.0                million each loss occurrence   |   | Fully                reinsured, subject to an aggregate annual limit of $8.0 million                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| $3.0 million                excess of $2.0 million each loss occurrence   |   | Fully                reinsured, subject to an aggregate annual limit of $12.0 million                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| $5.0 million                excess of $5.0 million each loss occurrence   |   | Fully                reinsured, subject to an aggregate annual limit of $15.0 million                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| $10.0 million                excess of $10.0 million each loss occurrence |   | Fully                reinsured, subject to a limit of $7.5 million maximum for any one life and an                aggregate limit of $20.0 million.                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| $55.0 million                excess of $20.0 million each loss occurrence |   | Fully                reinsured in two sub-layers. The first sub-layer affords coverage of up to $30.0                million for each loss occurrence in excess of $20.0 million, subject to an                aggregate annual limit of $60.0 million, and the second sub-layer affords coverage                up to $25.0 million for each loss occurrence in excess of $50.0 million, subject to                an annual aggregate limit of $50.0 million. Both sub-layers are subject to a limit                of $5.0 million maximum for any one life. |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         The above coverages are                    subject to various additional limitations and exclusions as more fully                    described in the reinsurance agreements.

        As part of the purchase of                    SBIC, SIH and LMC entered into an adverse development excess of loss                    reinsurance agreement (the “Agreement”). The Agreement, after                    taking into account any recoveries from third party reinsurers, requires LMC to                    reimburse SBIC 100% of the excess of the actual loss at December 31, 2011                    over the initial insurance liabilities at September 30, 2003. The                    Agreement also requires SBIC to reimburse LMC 100% of the excess of the initial                    insurance liabilities at September 30, 2003 over the actual loss results                    at December 31, 2011. The amount of adverse loss development under the                    Agreement recorded in the accompanying unaudited consolidated balance sheets                    was $2.8 million at September 30, 2007. Any increase or decrease in the amount                    due from LMC is included in loss and loss adjustment expenses in the unaudited                    consolidated statements of operations. |

| - 11                    - |
|---------------------------|

| **SEABRIGHT INSURANCE                    HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES                    TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                    (Continued)**

        As part of the Agreement,                    LMC placed into trust (the “Trust”) $1.6 million, equal to 10% of                    the balance sheet reserves of SBIC on the date of sale. Thereafter, the Trust                    shall be adjusted each quarter, if warranted, to an amount equal to the greater                    of (a) $1.6 million or (b) 102% of LMC’s obligations under the Agreement.                    The balance of the Trust, including accumulated interest, was $3.5 million at                    September 30, 2007 and $5.2 million at December 31, 2006. In February 2007, LMC                    submitted a request to withdraw approximately $1.8 million of excess funds on                    deposit in the trust account. After due evaluation, the Company complied with                    LMC’s request, resulting in a balance in the trust account of                    approximately $3.4 million immediately following the withdrawal. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

|         ***b. Reinsurance Assumed*** |
|------------------------------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         The Company involuntarily                    assumes residual market business either directly from various states that                    operate their own residual market programs or indirectly from the National                    Council for Compensation Insurance (the “NCCI”), which operates                    residual market programs on behalf of some states. The states in which we                    assumed residual market business at September 30, 2007 include the following:                    Alabama, Alaska, Arizona, Arkansas, Connecticut, Delaware, the District of                    Columbia, Georgia, Idaho, Illinois, Iowa, Kansas, Massachusetts, Michigan,                    Nevada, New Jersey, New Mexico, Oregon, South Carolina, and                    Virginia. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

|         ***c.  Reinsurance Recoverables and Income Statement                Effects*** |
|-------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         Balances affected by                    reinsurance transactions are reported gross of reinsurance in the accompanying                    unaudited condensed consolidated balance sheets. Reinsurance recoverables are                    comprised of the following amounts at September 30, 2007 and December 31,                    2006: |
|                                                                                                                                                                                                                                                                                                                                                                                          |

|                                                                                | **September 30,                2007** |   | **December 31,                2006** |   |
|-------------------------------------------------------------------------------------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                                |                                       |   |                                      |   |
|                                                                                | **(in thousands)**                    |   |
| Reinsurance                recoverables on unpaid loss and loss adjustment expenses | $                                     | 12,780 |                                 | $      | 13,504 |   |
| Reinsurance                recoverables on paid losses                              |                                  | 189    |                                 |   | 171 |   |
|                                                                                |                                       |   |                                      |   |
|   Total reinsurance                recoverables                           | $                                     | 12,969 |                                 | $      | 13,675 |   |
|                                                                                |                                       |   |                                      |   |

|                                                                                                                                                                                                          |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         The effects of reinsurance                    are as follows for the three month and nine month periods ended September 30,                    2007 and 2006: |
|                                                                                                                                                                                                          |

|                                                                                                            | **Three Months Ended                September 30,** |   | **Nine Months Ended                September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------|-----------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                                                            |                                                     |   |                                                    |   |
|                                                                                                            | **2007**                                            |   | **2006**                                           |   | **2007** |   | **2006** |   |
|                                                                                                            |                                                     |   |                                                    |   |  |   |  |   |
|                                                                                                            | **(in                thousands)**                   |   |
| Reinsurance                assumed:                                                                             |                                                |        |                                               |   |  |   |   |  |   |   |  |   |
|   Written                premiums                                                                     | $                                                   | 2,357  |                                               | $      | (1,786 | ) | $ | 6,809 |   | $ | 5,460 |   |
|   Earned                premiums                                                                      |                                                | 2,199  |                                               |   | (1,127 | ) |   | 6,389 |   |   | 4,272 |   |
|   Losses and loss                adjustment expenses                     incurred |                                                | 1,462  |                                               |   | (1,218 | ) |   | 4,106 |   |   | 2,033 |   |
|   Related                commissions                                                                  |                                                | 821    |                                               |   | (460 | ) |   | 2,360 |   |   | 1,498 |   |
|                                                                                                                 |                                                     |        |                                                    |        |
|                                                                                                            |                                                |   |                                               |   |   |   |   |   |   |   |   |   |
| Reinsurance                ceded:                                                                               |                                                |   |                                               |   |   |   |   |   |   |   |   |   |
|   Written                premiums                                                                     | $                                                   | 4,200  |                                               | $      | 3,798 |   | $ | 11,781 |   | $ | 11,897 |   |
|   Earned                premiums                                                                      |                                                | 4,286  |                                               |   | 4,126 |   |   | 11,754 |   |   | 12,088 |   |
|   Losses and loss                adjustment expenses                     incurred |                                                | 530    |                                               |   | 405 |   |   | 391 |   |   | 1,238 |   |
|   Related                commissions                                                                  |                                                | 313    |                                               |   | 255 |   |   | 878 |   |   | 1,165 |   |

|                                                                                                                                                                                                                                                                                                                                                     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **6.   Unpaid Loss                    and Loss Adjustment Expenses**

        The following table                    summarizes the activity in unpaid loss and loss adjustment expense for the                    three month and nine month periods ended September 30, 2007 and                    2006: |

| - 12                    - |
|---------------------------|

| **SEABRIGHT INSURANCE                    HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES                    TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                    (Continued)** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                             |

|                                                                                                                                       | **Three Months Ended                September 30,** |    | **Nine Months Ended                September 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------|---------|----------------------------------------------------|--------|
|                                                                                                                                       |                                                     |    |                                                    |   |
|                                                                                                                                       | **2007**                                            |    | **2006**                                           |   | **2007** |   | **2006** |   |
|                                                                                                                                       |                                                     |    |                                                    |   |  |   |  |   |
|                                                                                                                                       | **(in                thousands)**                   |    |
| Beginning                balance:                                                                                                          |                                                |         |                                               |   |  |   |   |  |   |   |  |   |
|   Unpaid loss and                loss adjustment expense                                                                         | $                                                   | 218,679 |                                               | $      | 169,336 |   | $ | 198,356 |   | $ | 142,211 |   |
|   Reinsurance                recoverables                                                                                        |                                                | (12,648 | )                                                  |   | (13,620 | ) |   | (13,504 | ) |   | (13,745 | ) |
|                                                                                                                                       |                                                     |    |                                                    |   |  |   |  |   |
|     Net                                                                                                                |                                                | 206,031 |                                               |   | 155,716 |   |   | 184,852 |   |   | 128,466 |   |
|                                                                                                                                       |                                                     |    |                                                    |   |  |   |  |   |
| Incurred                related to:                                                                                                        |                                                |    |                                               |   |   |   |   |   |   |   |   |   |
|   Current                period                                                                                                  |                                                | 40,389  |                                               |   | 31,356 |   |   | 110,302 |   |   | 92,284 |   |
|   Prior                periods                                                                                                   |                                                | (5,468  | )                                                  |   | (3,477 | ) |   | (20,451 | ) |   | (13,877 | ) |
|                                                                                                                                       |                                                     |    |                                                    |   |  |   |  |   |
|     Total                incurred                                                                                      |                                                | 34,921  |                                               |   | 27,879 |   |   | 89,851 |   |   | 78,407 |   |
|                                                                                                                                       |                                                     |    |                                                    |   |  |   |  |   |
| Paid related                to:                                                                                                            |                                                |    |                                               |   |   |   |   |   |   |   |   |   |
|   Current                period                                                                                                  |                                                | (11,749 | )                                                  |   | (7,927 | ) |   | (24,390 | ) |   | (17,168 | ) |
|   Prior                periods                                                                                                   |                                                | (8,266  | )                                                  |   | (4,630 | ) |   | (29,376 | ) |   | (18,667 | ) |
|                                                                                                                                       |                                                     |    |                                                    |   |  |   |  |   |
|     Total                paid                                                                                          |                                                | (20,015 | )                                                  |   | (12,557 | ) |   | (53,766 | ) |   | (35,835 | ) |
|                                                                                                                                       |                                                     |    |                                                    |   |  |   |  |   |
|   Unpaid loss and                loss adjustment                    expense, net of reinsurance recoverables |                                                | 220,937 |                                               |   | 171,038 |   |   | 220,937 |   |   | 171,038 |   |
| Reinsurance                recoverables                                                                                                    |                                                | 12,780  |                                               |   | 13,607 |   |   | 12,780 |   |   | 13,607 |   |
|                                                                                                                                       |                                                     |    |                                                    |   |  |   |  |   |
|   Unpaid loss and                loss adjustment                    expense                                  | $                                                   | 233,717 |                                               | $      | 184,645 |   | $ | 233,717 |   | $ | 184,645 |   |
|                                                                                                                                       |                                                     |    |                                                    |   |  |   |  |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         Loss and loss adjustment                    expenses are net of the release of loss reserves totaling approximately $5.5                    million and $20.5 million in the three month and nine month periods ended                    September 30, 2007, respectively, compared to $3.5 million and $13.9 million                    for the same periods in 2006. The majority of these reserve releases relate to                    the Company’s California book of business and reflect a continuation of                    lower than anticipated patterns of loss payments in recent accident years as a                    result of reform legislation enacted there primarily in 2003 and                    2004.

**7. Surplus                    Notes**

        In a private placement on                    May 26, 2004, SBIC issued $12.0 million in subordinated floating rate                    surplus notes due in 2034. Interest, paid quarterly in arrears, is calculated                    at the beginning of the interest payment period using the 3-month LIBOR rate                    plus 400 basis points, subject to certain limitations. Interest expense totaled                    $289,000 and $854,000 for the three month and nine month periods ended                    September 30, 2007, respectively, and $285,000 and $813,000 for the three month                    and nine month periods ended September 30, 2006, respectively.

        The notes are redeemable                    prior to 2034 by the Company, in whole or in part, from time to time, on or                    after May 24, 2009 on an interest payment date or at any time prior to                    May 24, 2009, in whole but not in part, upon the occurrence and                    continuation of a tax event as defined in the agreement. The Company may not                    exercise its option to redeem with respect to a tax event unless it pays a                    premium in addition to the redemption price.

**8.                    Contingencies**

         **a.**                      SBIC is subject to guaranty fund and other assessments by the                    states in which it writes business. Guaranty fund assessments are accrued                    at the time premiums are written. Other assessments are accrued either at the                    time of assessment or in the case of premium-based assessments, at the time the                    premiums are written, or in the case of loss-based assessments, at the time the                    losses are incurred. As of September 30, 2007, SBIC had a liability for                    guaranty fund and other assessments of $2.6 million and a guaranty fund                    receivable of $4.0 million. These amounts represent management’s best                    estimate based on information received from the states in which it writes                    business and may change due to many factors, including the Company’s                    share of the ultimate cost of current and future insolvencies. The majority of                    assessments are paid out in the year following the year in which the premium is                    written or the losses are paid. Guaranty fund receivables and other surcharge                    items are generally realized by a charge to new and renewing policyholders in                    the year following the year in which the related assessments were                    paid.

        ** b**.  The                    Company is involved in various claims and lawsuits arising in the ordinary                    course of business. Management believes the outcome of these matters will not                    have a material adverse effect on the Company’s consolidated financial                    position or results of operations. |

| - 13                    - |
|---------------------------|

| **SEABRIGHT INSURANCE                    HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES                    TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                    (Continued)**

**9. Share-Based                    Payment Arrangements**

      At September 30, 2007, the                    Company had outstanding stock options and restricted stock granted according to                    the terms of two equity incentive plans. The stockholders and Board of                    Directors approved the 2003 Stock Option Plan (the “2003 Plan”) in                    September 2003, and amended and restated the 2003 Plan in February 2004, and                    approved the 2005 Long-Term Equity Incentive Plan (the “2005 Plan”                    and, together with the 2003 Plan, the “Stock Option Plans”) in                    December 2004. The Stock Option Plans were further amended and restated in                    April 2007.

      As of September 30, 2007,                    options to purchase 451,778 shares of common stock were outstanding under the                    2003 Plan, and no additional shares were reserved for issuance under the 2003                    Plan. As of September 30, 2007, 466,380 shares of restricted stock were issued                    under the 2005 Plan, options to purchase 558,543 shares of common stock were                    outstanding under the 2005 Plan and 747,877 shares were reserved for issuance                    under the 2005 Plan.

      ***a. Stock                    Options***

      The fair values of stock                    options granted during the three month and nine month periods ended September                    30, 2007 and 2006 were determined on the dates of grant using the                    Black-Scholes-Merton option valuation model with the following weighted average                    assumptions: |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

|                                           | **Three Months Ended                September 30,** |    | **Nine Months Ended                September 30,** |   |
|------------------------------------------------|-----------------------------------------------------|---------|----------------------------------------------------|--------|
|                                           |                                                     |    |                                                    |   |
|                                           | **2007**                                            |    | **2006**                                           |   | **2007** |   | **2006** |   |
|                                           |                                                     |    |                                                    |   |  |   |  |   |
| Expected term                (years)           |                                                | 6.3     |                                               |   | 6.3 |   |   | 6.3 |   |   | 6.2 |   |
| Expected stock                price volatility |                                                | 26.0    | %                                                  |   | 26.0 | % |   | 26.2 | % |   | 26.1 | % |
| Risk-free                interest rate         |                                                | 4.94    | %                                                  |   | 5.02 | % |   | 4.59 | % |   | 4.75 | % |
| Expected                dividend yield         |                                                | — |                                               |   | — |   |   | — |   |   | — |   |
|                                           |                                                |    |                                               |   |   |   |   |   |   |   |   |   |
| Estimated fair                value per option | $                                                   | 6.52    |                                               | $      | 5.86 |   | $ | 6.75 |   | $ | 6.37 |   |

|                                                                                                                                                                                     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         The following table                    summarizes stock option activity for the nine months ended September 30,                    2007: |
|                                                                                                                                                                                     |

|                                             | **Shares                Subject to                Options** |   | **Weighted                Average                Exercise Price                per Share** |   | **Weighted                Average Re-                maining                Contractual Life                (years)** |    | **Aggregate                Intrinsic                Value                (in thousands)** |   |
|--------------------------------------------------|-------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------|---------|-------------------------------------------------------------------------------------------|--------|
|                                             |                                                             |   |                                                                                            |   |                                                                                                                       |    |                                                                                           |   |
| Outstanding at                December 31, 2006  | 918,154                                                     |   | $                                                                                          | 9.39   |                                                                                                                  | 7.6     |                                                                                      | $      | 7,916 |   |
|   Granted                              | 143,700                                                     |   |                                                                                       | 18.29  |                                                                                                                  | — |                                                                                      |   | — |   |
|   Forfeited                            | (13,710                                                     | )      |                                                                                       | 12.22  |                                                                                                                  | — |                                                                                      |   | — |   |
|   Exercised                            | (37,697                                                     | )      |                                                                                       | 8.22   |                                                                                                                  | — |                                                                                      |   | — |   |
|   Cancelled                            | (126                                                        | )      |                                                                                       | 18.40  |                                                                                                                  | — |                                                                                      |   | — |   |
|                                             |                                                             |   |                                                                                       |   |                                                                                                                  |    |                                                                                      |   |   |   |
| Outstanding at                September 30, 2007 | 1,010,321                                                   |   |                                                                                       | 10.66  |                                                                                                                  | 7.2     |                                                                                      |   | 6,478 |   |
|                                             |                                                             |   |                                                                                       |   |                                                                                                                  |    |                                                                                      |   |   |   |
|                                        |
| Exercisable at                September 30, 2007 | 614,645                                                     |   |                                                                                       | 8.13   |                                                                                                                  | 6.8     |                                                                                      |   | 5,497 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         The aggregate intrinsic                    values in the table above are before applicable income taxes and are based on                    the Company’s closing stock price of $17.07 on September 30, 2007. As of                    September 30, 2007, total unrecognized stock-based compensation cost related to                    nonvested stock options was approximately $1.5 million, which is expected to be                    recognized over a weighted average period of approximately 32.5 months.                    Proceeds from the exercise of stock options totaled approximately $70,900 and                    $0 for the three months ended September 30, 2007 and 2006, respectively, and                    $310,000 and $32,400 for the nine months ended September 30, 2007 and 2006,                    respectively. The intrinsic value of stock options exercised during the three                    months ended September 30, 2007 and 2006 totaled approximately $86,000 and $0,                    respectively, and $373,500 and $42,300 for the nine months ended September 30,                    2007 and 2006, respectively. |

| - 14                    - |
|---------------------------|

| **SEABRIGHT INSURANCE                    HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES                    TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                    (Continued)**

        The following table                    presents additional information regarding options outstanding as of September                    30, 2007: |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                |

|                                        |   | **Options                Outstanding** |   | **Options Exercisable**                                                                                              |   |
|---------------------------------------------|--------|----------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------|--------|
|                                        |   |                                        |   |                                                                                                                      |   |
| **Range of                Exercise Prices** |   | **Number                Outstanding**  |   | **Weighted-                Average                Remaining                Contractual                Life (years)** |   | **Weighted-                Average                Exercise Price** |   | **Number                Outstanding** |   | **Weighted-                Average                Exercise Price** |   |
|                                             |   |                                        |   |                                                                                                                      |   |  |   |  |   |  |   |
| $                6.54                       |   | 451,778                                |   | 6.08                                                                                                                 |   | $ | 6.54 |   | 433,135 |   | $ | 6.54 |   |
|    10.50-12.54               |   | 299,093                                |   | 7.33                                                                                                                 |   |   | 10.61 |   | 148,293 |   |   | 10.66 |   |
|    15.44-18.68               |   | 259,450                                |   | 9.06                                                                                                                 |   |   | 17.89 |   | 33,217 |   |   | 17.48 |   |
|                                        |   |                                        |   |                                                                                                                 |   |   |   |   |  |   |   |   |   |
|                                        |   | 1,010,321                              |   | 7.22                                                                                                                 |   |   | 10.66 |   | 614,645 |   |   | 8.13 |   |
|                                        |   |                                        |   |                                                                                                                 |   |   |   |   |  |   |   |   |   |

|                                                                                                                                                                                                                                                                                       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         ***b. Restricted                    Stock***

        The following table                    summarizes restricted stock activity for the nine months ended September 30,                    2007: |
|                                                                                                                                                                                                                                                                                       |

|                                             |   | **Number of                Shares** |   | **Weighted                Average                Grant Date                Fair Value** |    |
|--------------------------------------------------|--------|-------------------------------------|--------|-----------------------------------------------------------------------------------------|---------|
|                                             |        |                                |        |                                                                                    |
| Outstanding at                December 31, 2006  |   | 233,875                             |   | $                                                                                       | 17.39   |   |
|   Granted                              |   | 248,255                             |   |                                                                                    | 18.17   |   |
|   Vested                               |   | —                             |   |                                                                                    | — |   |
|   Forfeited                            |   | (15,750                             | )      |                                                                                    | 17.97   |   |
|                                             |        |                                |   |                                                                                    |    |
| Outstanding at                September 30, 2007 |   | 466,380                             |   |                                                                                    | 17.79   |   |
|                                             |        |                                |   |                                                                                    |    |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         As of September 30, 2007,                    there was $5.5 million of total unrecognized compensation cost related to                    restricted stock granted under the 2005 Plan. That cost is expected to be                    recognized over a weighted-average period of 25.9 months. No shares vested                    during the nine month periods ended September 30, 2007 and 2006. |

| - 15                    - |
|---------------------------|

| **Item                    2.    Management’s Discussion and Analysis of Financial                    Condition and Results of Operations**

**Cautionary                    Statement**  

           You should read the                    following discussion and analysis in conjunction with our unaudited condensed                    consolidated financial statements and the related notes thereto included in                    Item 1 of this Part I. The information contained in this quarterly                    report is not a complete description of our business or the risks associated                    with an investment in our common stock. We urge you to carefully review and                    consider the various disclosures made by us in this quarterly report and in our                    other reports filed with the U.S. Securities and Exchange Commission                    (“SEC”), including our Annual Report on Form 10-K for the year                    ended December 31, 2006 filed with the SEC on March 16, 2007.

           The discussion under the                    heading “Risk Factors” in our Annual Report on Form 10-K for the                    year ended December 31, 2006, as updated by the discussion in Part II, Item 1A                    of this quarterly report, and similar discussions in our other SEC filings,                    describe some of the important risk factors that may affect our business,                    results of operations and financial condition. You should carefully consider                    those risks, in addition to the other information in this report and in our                    other filings with the SEC, before deciding to purchase, hold or sell our                    common stock.

        Some of the statements in                    this Item 2 and elsewhere in this quarterly report may include forward-looking                    statements that reflect our current views with respect to future events and                    financial performance. These statements include forward-looking statements both                    with respect to us specifically and the insurance sector in general. Statements                    that include the words “expect,” “intend,”                    “plan,” “believe,” “project,”                    “estimate,” “may,” “should,”                    “anticipate,” “will” and similar statements of a future                    or forward-looking nature identify forward-looking statements for purposes of                    the federal securities laws or otherwise.

        All forward-looking                    statements address matters that involve risks and uncertainties. Accordingly,                    there are or will be important factors that could cause our actual results to                    differ materially from those indicated in these statements. We believe that                    these factors include but are not limited to the following: |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

|  | • | ineffectiveness or obsolescence                of our business strategy due to changes in current or future market                conditions;                                                                                                                                                  |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |        |                                                                                                                                                                                                                                                                                           |
|  | • | increased                competition on the basis of pricing, capacity, coverage terms or other                factors;                                                                                                                                                                        |
|  |        |                                                                                                                                                                                                                                                                                           |
|  | • | greater                frequency or severity of claims and loss activity, including as a result of natural                or man-made catastrophic events, than our underwriting, reserving or investment                practices anticipate based on historical experience or industry data; |
|  |        |                                                                                                                                                                                                                                                                                           |
|  | • | the effects of                acts of terrorism or war;                                                                                                                                                                                                                                        |
|  |        |                                                                                                                                                                                                                                                                                           |
|  | • | developments                in financial and capital markets that adversely affect the performance of our                investments;                                                                                                                                                          |
|  |        |                                                                                                                                                                                                                                                                                           |
|  | • | changes in                regulations or laws applicable to us, our subsidiaries, brokers or                customers;                                                                                                                                                                         |
|  |        |                                                                                                                                                                                                                                                                                           |
|  | • | our dependency                on a concentrated geographic market;                                                                                                                                                                                                                             |
|  |        |                                                                                                                                                                                                                                                                                           |
|  | • | changes in the                availability, cost or quality of reinsurance and failure of our reinsurers to pay                claims timely or at all;                                                                                                                                        |
|  |        |                                                                                                                                                                                                                                                                                           |
|  | • | decreased                demand for our insurance products;                                                                                                                                                                                                                                    |
|  |        |                                                                                                                                                                                                                                                                                           |
|  | • | loss of the                services of any of our executive officers or other key personnel;                                                                                                                                                                                                   |
|  |        |                                                                                                                                                                                                                                                                                           |
|  | • | the effects of                mergers, acquisitions and divestitures that we may undertake;                                                                                                                                                                                                    |
|  |        |                                                                                                                                                                                                                                                                                           |
|  | • | changes in                rating agency policies or practices;                                                                                                                                                                                                                                 |
|  |        |                                                                                                                                                                                                                                                                                           |
|  | • | changes in                legal theories of liability under our insurance policies;                                                                                                                                                                                                            |
|  |        |                                                                                                                                                                                                                                                                                           |
|  | • | changes in                accounting policies or practices; and                                                                                                                                                                                                                                |
|  |        |                                                                                                                                                                                                                                                                                           |
|  | • | changes in                general economic conditions, including inflation and other factors.                                                                                                                                                                                                  |

| - 16                    - |
|---------------------------|

|         The foregoing factors                    should not be construed as exhaustive and should be read in conjunction with                    the other cautionary statements that are included in this quarterly report. We                    undertake no obligation to publicly update or review any forward-looking                    statement, whether as a result of new information, future developments or                    otherwise.

        If one or more of these or                    other risks or uncertainties materialize, or if our underlying assumptions                    prove to be incorrect, actual results may vary materially from what we project.                    Any forward-looking statements you read in this quarterly report reflect our                    views as of the date of this quarterly report with respect to future events and                    are subject to these and other risks, uncertainties and assumptions relating to                    our operations, results of operations, growth strategy and liquidity. Before                    making an investment decision, you should carefully consider all of the factors                    identified in this quarterly report that could cause actual results to                    differ.

        Additional information                    concerning these and other factors is contained in our SEC filings, including,                    but not limited to, our 2006 Annual Report on Form 10-K.

**Overview**

        We are a specialty provider                    of multi-jurisdictional workers’ compensation insurance. We are domiciled                    in Illinois, commercially domiciled in California and headquartered in Seattle,                    Washington. We are licensed in 45 states and the District of Columbia to write                    workers’ compensation insurance. Traditional providers of workers’                    compensation insurance provide coverage to employers under one or more state                    workers’ compensation laws, which prescribe benefits that employers are                    obligated to provide to their employees who are injured arising out of or in                    the course of employment. We focus on employers with complex workers’                    compensation exposures and provide coverage under multiple state and federal                    acts, applicable common law or negotiated agreements. We also provide                    traditional state act coverage in markets we believe are underserved. Our                    workers’ compensation policies are issued to employers who also pay the                    premiums. The policies provide payments to covered, injured employees of the                    policyholder for, among other things, temporary or permanent disability                    benefits, death benefits and medical and hospital expenses. The benefits                    payable and the duration of such benefits are set by statute and vary by                    jurisdiction and with the nature and severity of the injury or disease and the                    wages, occupation and age of the employee.

      SIH was formed in 2003 by                    members of our current management and entities affiliated with Summit Partners,                    a leading private equity and venture capital firm, for the purpose of the                    Acquisition. In the Acquisition, we acquired from LMC and certain of its                    affiliates the renewal rights and substantially all of the operating assets and                    employees of Eagle. Eagle began writing specialty workers’ compensation                    insurance policies in the mid-1980’s. The Acquisition gave us renewal                    rights to an existing portfolio of business, representing a valuable asset                    given the renewal nature of our business, and a fully operational                    infrastructure that would have taken many years to develop. These renewal                    rights gave us access to Eagle’s customer lists and the right to seek to                    renew Eagle’s continuing in-force insurance contracts.

      In the Acquisition, we also                    acquired 100% of the issued and outstanding capital stock of KEIC and                    PointSure. We acquired KEIC, a shell company with no in-force policies or                    employees, solely for the purpose of acquiring its workers’ compensation                    licenses in 43 states and the District of Columbia and for its certification                    with the United States Department of Labor. Subsequent to the Acquisition, KEIC                    was renamed “SeaBright Insurance Company.” SeaBright Insurance                    Company received an “A–” (Excellent) rating from A.M. Best                    following the completion of the Acquisition.

        To minimize our exposure to                    any past business underwritten by KEIC, we entered into an adverse development                    cover agreement in connection with the Acquisition. Under the terms of this                    agreement, we and LMC are required to indemnify each other with respect to                    developments in KEIC’s insurance liabilities as they existed at the date                    of the Acquisition. Accordingly, if KEIC’s insurance liabilities                    increase, LMC must indemnify us in the amount of the increase. If KEIC’s                    insurance liabilities decrease, we must share with LMC the favorable                    development of those reserves. To support LMC’s obligations under the                    adverse development cover, LMC funded a trust account at the time of the                    Acquisition in the amount of $1.6 million as collateral for LMC’s                    potential future obligations to us under the adverse development cover. The                    minimum amount that must be maintained in the trust account is equal to the                    greater of (a) $1.6 million or (b) 102% of the then existing quarterly estimate                    of LMC’s total obligations under the adverse development cover. The                    amount on deposit in the trust account was approximately $3.5 million at                    September 30, 2007 and $5.2 million at December 31, 2006. In February                    2007, LMC submitted a request to withdraw approximately $1.8 million of excess                    funds on deposit in the Trust. After due evaluation, the Company complied with                    LMC’s request, resulting in a balance in the trust account of                    approximately $3.4 million immediately following the withdrawal. If LMC is                    placed into receivership and the amount held in the collateralized                    reinsurance |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - 17                    - |
|---------------------------|

| trust is inadequate to                    satisfy the obligations of LMC to us under the adverse development cover                    agreement, it is unlikely that we would recover any future amounts owing by LMC                    to us.

**Principal Revenue and                    Expense Items**

      We derive our revenue                    primarily from premiums earned and net investment income and, to a lesser                    extent, from service income and net realized gains and losses from investments.                    We show certain non-GAAP financial measures that we believe are valuable in                    managing our business and evaluating our performance. These measures include                    gross premiums written, net premiums written, net loss ratios and net                    underwriting expense ratios.

      ***Premiums                    Earned***

      Gross premiums written is a                    non-GAAP financial measure representing all premiums billed and unbilled by an                    insurance company during a specified policy period. Premiums are earned over                    the terms of the related policies. At the end of each accounting period, the                    portions of premiums that are not yet earned are included in unearned premiums                    and are realized as revenue in subsequent periods over the remaining terms of                    the policies. Our policies typically have terms of 12 months. Thus, for                    example, for a policy that is written on July 1, 2006, one-half of the premiums                    would be earned in 2006 and the other half would be earned in 2007.

      Premiums earned, the most                    comparable GAAP measure, represents the earned portion of our net premiums                    written. Net premiums written, another non-GAAP financial measure, is the                    difference between gross premiums written and premiums ceded or paid to                    reinsurers (ceded premiums written). Our gross premiums written is the sum of                    both direct premiums and assumed premiums before the effect of ceded                    reinsurance. Assumed premiums are premiums that we have received from an                    authorized state-mandated pool.

      We earn our direct premiums                    written from our maritime, alternative dispute resolution (“ADR”)                    and state act customers. We also earn a small portion of our direct premiums                    written from employers who participate in the Washington State United States                    Longshore and Harbor Workers Compensation Act Assigned Risk Plan (the                    “Washington USL&H Assigned Risk Plan”). We immediately cede                    100% of those premiums, net of our expenses, and 100% of the losses in                    connection with that business back to the USL&H Assigned Risk Plan.                    Premiums from the Washington USL&H Assigned Risk Plan are included in both                    direct premiums written and ceded premiums written.

      We analyze our growth and                    earnings potential, in part, through the non-GAAP financial measures of gross                    premiums written, net premiums written and in-force premiums. In-force premiums                    refers to our current annual gross premiums written that have active or                    unexpired policies, excluding premiums received from the Washington USL&H                    Assigned Risk Plan, and represents premiums from our total customer base.                    In-force premiums as of September 30, 2007 and 2006 were $258.5 million and                    $196.8 million, respectively. The following table provides a reconciliation of                    gross premiums written and net premiums written to net premiums                    earned: |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

|                                                                                                 | Three Months                Ended September 30, |   | Nine Months                Ended September 30, |   |
|-------------------------------------------------------------------------------------------------|-------------------------------------------------|--------|------------------------------------------------|--------|
||
||
||
||
| Direct                premiums written                                                          | $                                               | 65,633 |                                           | $      | 44,612 |   | $ | 188,667 |   | $ | 144,428 |   |
| Assumed                premiums written                                                         |                                            | 2,357  |                                           |   | (1,786 | ) |   | 6,809 |   |   | 5,460 |   |
|                                                                                            |
|    Gross                premiums written                                         |                                            | 67,990 |                                           |   | 42,826 |   |   | 195,476 |   |   | 149,888 |   |
| Ceded                premiums                                                                   |                                            | (4,200 | )                                              |   | (3,798 | ) |   | (11,781 | ) |   | (11,897 | ) |
|                                                                                            |
|    Net premiums                written                                           |                                            | 63,790 |                                           |   | 39,028 |   |   | 183,695 |   |   | 137,991 |   |
| Change in                unearned premiums, net of                   reinsurance |                                            | (4,069 | )                                              |   | 8,791 |   |   | (20,586 | ) |   | (4,415 | ) |
|                                                                                            |
|    Premiums                earned                                                | $                                               | 59,721 |                                           | $      | 47,819 |   | $ | 163,109 |   | $ | 133,576 |   |
|                                                                                            |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       ***Net Investment Income                    and Realized Gains and Losses on Investments***

      We invest our statutory                    surplus and the funds supporting our insurance liabilities (including unearned                    premiums and unpaid loss and loss adjustment expense) in cash, cash                    equivalents, fixed income securities and, to a lesser degree, in equity                    securities. Our investment income includes interest earned on our invested                    assets. Realized gains and losses on invested assets are reported separately                    from net investment income. We earn realized gains when invested assets are                    sold for an amount greater than their amortized cost in the case of fixed                    maturity securities and recognize realized losses when investment securities                    are written down as a result of an other-than-temporary impairment or sold for                    an amount less than their carrying cost. |

| - 18                    - |
|---------------------------|

|       ***Claims Service                    Income***

      We receive claims service                    income in return for providing claims administration services for other                    companies. The claims service income we receive for providing these services                    approximates our costs. For the nine months ended September 30, 2007 and 2006,                    approximately 51.9% and 65.8%, respectively, of our claims service income was                    generated by contracts we have with LMC to provide claims handling services for                    policies written by the Eagle Entities prior to the Acquisition. We expect                    income from these contracts to decrease substantially over the next several                    years as transactions related to the Eagle Entities diminish.

      ***Other Service                    Income***

      Following the Acquisition,                    we entered into servicing arrangements with LMC to provide policy                    administration and accounting services for policies written by the Eagle                    Entities prior to the Acquisition. The fee income we receive for providing                    these services approximates our costs and will substantially decrease over the                    next several years as transactions related to the Eagle Entities                    diminish.

      Our expenses consist                    primarily of:

      ***Loss and Loss                    Adjustment Expenses***

      Loss and loss adjustment                    expenses represent our largest expense item and include (1) claim payments                    made, (2) estimates for future claim payments and changes in those estimates                    for current and prior periods and (3) costs associated with investigating,                    defending and adjusting claims.

      The net loss ratio,                    expressed as a percentage, is a key non-GAAP financial measure that we use in                    monitoring our profitability. The net loss ratio is calculated by dividing loss                    and loss adjustment expenses for the period less claims service income by                    premiums earned for the period.

      ***Underwriting,                    Acquisition and Insurance Expenses***

      In our insurance                    subsidiary, we refer to the expenses that we incur to underwrite risks as                    underwriting, acquisition and insurance expenses. Such expenses consist of                    commission expenses, premium taxes and fees and other underwriting expenses                    incurred in writing and maintaining our business. We pay commission expense in                    our insurance subsidiary to our brokers for the premiums that they produce for                    us. We pay state and local taxes based on premiums, as well as licenses, fees,                    assessments and contributions to workers’ compensation security funds.                    Other underwriting expenses consist of general administrative expenses such as                    salaries and employee benefits, rent and all other operating expenses not                    otherwise classified separately, and boards, bureaus and assessments of                    statistical agencies for policy service and administration items such as rating                    manuals, rating plans and experience data.

      The net underwriting                    expense ratio, expressed as a percentage, is a key non-GAAP financial measure                    that we use in monitoring our profitability. The net underwriting expense ratio                    is calculated by dividing underwriting, acquisition and insurance expenses for                    the period less other service income by premiums earned for the                    period.

      ***Interest                    Expense***

      We incur interest expense                    on $12.0 million in surplus notes that our insurance subsidiary issued in May                    2004. The interest expense is paid quarterly in arrears. The interest expense                    for each interest payment period is based on the three-month LIBOR rate two                    London banking days prior to the interest payment period, plus 400 basis                    points.

**Results of                    Operations** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

|       ***Three month and nine month periods ended September 30, 2007 and                2006*** |
|-------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       *Gross Premiums                    Written.*  Gross premiums written for the three months ended September                    30, 2007 totaled $68.0 million, an increase of $25.2 million, or 58.9%, from                    $42.8 million in the same period of 2006. For the nine months ended September                    30, 2007, gross premiums written totaled $195.5 million, an increase of $45.6                    million, or 30.4%, from $149.9 million in the same period of 2006 even though                    we continued to experience rate reductions in California, our largest market,                    as well as in other states. Excluding work we perform as the servicing carrier                    for the Washington USL&H Assigned Risk Plan, the number of customers we                    serviced increased 56.4% from 573 at September 30, 2006 to 896 at September 30,                    2007 and in-force payrolls, one of the factors used in determining premium                    charges, increased 57.6% from $3.3 billion at September 30, 2006 to $5.2                    billion one year later. California |

| - 19                    - |
|---------------------------|

| continues to be our                    largest market, accounting for approximately $109.8 million (42.5%) of our                    in-force premiums as of September 30, 2007 compared to $112.2 million (57.0%)                    as of September 30, 2006, representing a decrease of $2.4 million (2.1%). The                    decrease in California in-force premiums resulted primarily from rate                    reductions brought about by reform legislation enacted several years                    ago.

      In December 2006, we                    announced the division of our Southern region into two markets, allowing us to                    devote greater focus and resources to further develop our key states in this                    region. Our Southeast region is developing business in selected states,                    including Florida. This region contributed approximately $3.2 million and $7.6                    million to our direct premiums written in the three month and nine month                    periods ended September 30, 2007, respectively. The Gulf region, which is based                    in Houston, Texas, now focuses primarily on developing business in the states                    of Texas and Louisiana. This region contributed approximately $8.3 million and                    $26.5 million to our direct premiums written for the three month and nine month                    periods ended September 30, 2007, respectively. Illinois is now our second                    largest market and accounted for approximately $24.8 million (9.6%) of our                    in-force premiums as of September 30, 2007, representing an increase of $14.4                    million (138.5%) from $10.4 million as of September 30, 2006. Louisiana is our                    third largest market, accounting for approximately $21.7 million (8.4%) of our                    in-force premiums as of September 30, 2007, representing an increase of $13.8                    million (174.7%) from $7.9 million (4.0%) as of September 30, 2006. The                    remaining states in our top five markets were Alaska and Hawaii, which                    accounted for approximately $21.5 million (8.3%) and $13.8 million (5.3%) of                    our in-force premiums as of September 30, 2007, respectively, compared to $23.2                    million (11.8%) and $13.8 million (7.0%), respectively, of our in-force                    premiums as of September 30, 2006.

        On March 30, 2007, the                    California Workers’ Compensation Insurance Rating Bureau (the                    “WCIRB”) submitted a filing with the California Insurance                    Commissioner recommending an 11.3% decrease in advisory pure premium rates on                    new and renewal policies effective on or after July 1, 2007. The filing was                    based on a review of loss and loss adjustment experience through December 31,                    2006 and was made in response to continued reductions in California                    workers’ compensation claim costs. On May 29, 2007, the California                    Insurance Commissioner recommended a 14.2% decrease in rates effective July 1,                    2007. On June 8, 2007, after completing a study of our California loss data, we                    filed with the California Insurance Commissioner our new rates reflecting an                    average reduction of 14.2% from prior rates for new and renewal workers’                    compensation insurance policies written in California on or after July 1, 2007.                    The filing was approved on June 12, 2007. This was the eighth California rate                    reduction we have filed since October 1, 2003, resulting in a net cumulative                    reduction of our California rates of approximately 54.8%. On September 20,                    2007, the WCIRB submitted a filing with the California Insurance Commissioner                    recommending a 4.2% increase in advisory pure premium rates on new and renewal                    policies effective on or after January 1, 2008. The filing was based on a                    review of loss and loss adjustment experience through June 30, 2007. On October                    19, 2007, the WCIRB amended its filing, increasing the proposed rate increase                    to 5.2% based on the projected impact of Assembly Bill No. 338 (AB 338) that                    was signed into law on October 13, 2007. AB 338 increases the period of time,                    from two years to five years, from the date of injury during which disability                    benefits, limited to a maximum of 104 weeks, may be provided. A public hearing                    to consider the proposed rate increase was held on October 23, 2007. As of                    November 7, 2007, the California Insurance Commissioner had not announced his                    recommendation regarding the proposed rate increase.

        Rate reductions have also                    been proposed in other states in which we operate. For example, effective                    January 1, 2007, we adopted the following rate decreases recommended by the                    National Council for Compensation Insurance (the “NCCI”): 10.5% in                    Alaska, 12.3% in Hawaii and 2.0% in Illinois. Effective July 1, 2007, we                    adopted a 15.8% reduction in Louisiana, which is 2.0% more than the 13.8% rate                    decrease recommended by the NCCI. An NCCI-proposed rate reduction of 10.9% in                    Alaska, to be effective January 1, 2008, is currently pending and awaiting a                    decision by the Alaska Division of Insurance. On October 12, 2007, the Hawaii                    Insurance Commissioner approved a 19.3% rate reduction effective January 1,                    2008. We have not yet decided whether to adopt all or some portion of the                    approved decrease.

      *Net Premiums                    Written.*  Net premiums written for the three months ended September                    30, 2007 totaled $63.8 million, an increase of $24.8 million, or 63.6%, from                    $39.0 million in the same period of 2006. For the nine months ended September                    30, 2007, net premiums written totaled $183.7 million, an increase of $45.7                    million, or 33.1%, from $138.0 million in the same period of 2006. The                    increases in net premiums written for the three month and nine month periods                    ended September 30, 2007 are reflective of similar increases in gross premiums                    written and reductions in premium rates on our ceded reinsurance contracts. Net                    premiums written are affected by premiums ceded under reinsurance agreements                    with external reinsurers. For the three months ended September 30, 2007, ceded                    written premiums totaled $4.2 million (6.2% of gross premiums written) compared                    to $3.8 million (8.9% of gross premiums written) in the same period of 2006.                    Ceded written premiums for the nine months ended September 30, |
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| 2007 totaled $11.8                    million (6.0% of gross premiums written) compared to $11.9 million (7.9% of                    gross premiums written) in the same period of 2006. The decrease in ceded                    premiums as a percentage of gross premiums written resulted primarily from the                    renewal of our excess of loss reinsurance program on October 1, 2006 at average                    rates that are approximately 16.8% lower than rates under the prior reinsurance                    program. We were able to achieve savings at the lower tiers of our program                    while increasing our catastrophe coverage from $50.0 million to $75.0                    million.

      *Net Premiums Earned.*                     Net premiums earned for the three months ended September 30, 2007 totaled                    $59.7 million, an increase of $11.9 million, or 24.9%, over $47.8 million in                    the same period of 2006. For the nine months ended September 30, 2007, net                    premiums earned totaled $163.1 million, an increase of $29.5 million, or 22.1%,                    from $133.6 million in the same period of 2006. We record the entire annual                    policy premium as unearned premium when written and earn the premium over the                    life of the policy, which is generally twelve months. Consequently, the amount                    of premiums earned in any given year depends on when during the current or                    prior year the underlying policies were written. Our direct premiums earned for                    the three months ended September 30, 2007 increased $8.7 million (16.4%) to                    $61.8 million from $53.1 million in 2006. Our direct premiums earned for the                    nine months ended September 30, 2007 increased $27.1 million (19.2%) to $168.5                    million from $141.4 million for the same period in 2006. The increase in our                    direct premiums earned is the result of our premium growth as described                    above.

      Net premiums earned are                    also affected by premiums ceded under reinsurance agreements. Ceded premiums                    earned for the three month and nine month periods ended September 30, 2007 were                    $4.3 million and $11.8 million, respectively. This represents an increase of                    $0.2 million (4.9%) from $4.1 million in the three months ended September 30,                    2006 and a decrease of $0.3 million (2.5%) from $12.1 million in the nine                    months ended September 30, 2006. A decrease in ceded premiums earned is an                    increase to our overall net premiums earned. Included in the net premiums                    earned for the three months ended September 30, 2007 is an increase of $1.1                    million (95.2%) in the amount of premiums we involuntarily assume on residual                    market business from the NCCI, which operates residual market programs on                    behalf of many states. For the nine months ended September 30, 2007, assumed                    premiums earned increased $2.1 million (48.8%) to $6.4 million from $4.3                    million in the same period of 2006.

      *Net Investment                    Income.*  Net investment income for the three months ended September                    30, 2007 totaled $5.2 million, an increase of $1.2 million, or 30.0%, over $4.0                    million in the same period of 2006. For the nine months ended September 30,                    2007, net investment income totaled $14.8 million, an increase of $4.0 million,                    or 37.0%, from $10.8 million in the same period of 2006. Average invested                    assets for the three months ended September 30 increased $89.1 million (23.5%)                    from $378.9 million in 2006 to $468.0 million in 2007. For the nine months                    ended September 30, average invested assets increased $117.1 million (34.9%)                    from $335.8 million in 2006 to $452.9 million in 2007. This increase in our                    investment portfolio is due primarily to strong cash flow from operations of                    $90.3 million for the year ended December 31, 2006 and $68.0 million for the                    nine months ended September 30, 2007 and, to a lesser degree, the $57.6 million                    in proceeds from the follow-on offering of our common stock in February 2006.                    Our yield on average invested assets for the three months ended September 30,                    2007 was approximately 4.4% compared to approximately 4.2% for the same period                    in 2006. For the nine months ended September 30, 2007, our yield on average                    invested assets was 4.4% compared to approximately 4.3% for the same period in                    2006.

      *Service Income.*                      Service income for the three months ended September 30, 2007                    totaled $487,000, a decrease of $41,000, or 7.8%, from $528,000 in the same                    period of 2006. For the nine months ended September 30, 2007, service income                    totaled $1.4 million, a decrease of $0.2 million, or 12.5%, from $1.6 million                    in the same period of 2006. Our service income results primarily from service                    arrangements we have with LMC and other companies for claims processing, policy                    administration and administrative services that we perform for them. Average                    monthly fees from arrangements with LMC for services we provide in connection                    with the Eagle Entities’ insurance policies are declining as the volume                    of work decreases due to the run off of our predecessor’s business.                    Approximately 50.0% of our service income in the three-month period ended                    September 30, 2007 came from third party claims administration services that we                    provide to independent, unrelated companies and, to a lesser degree,                    administrative fees charged to our policyholders that have high deductible                    policies, compared to 46.4% in the same period of 2006. For the nine-month                    period ended September 30, 2007, approximately 50.1% of our service income came                    from such services and fees, compared to approximately 34.2% in the same period                    of 2006.

      *Other Income.*                      Other income for the three months ended September 30, 2007 totaled                    $1.4 million, an increase of $0.9 million, or 180.0%, from $0.5 million in the                    same period of 2006. For the nine months ended September 30, 2007, service                    income totaled $3.0 million, an increase of $0.9 million, or 42.9%, from $2.1                    million in the same period of 2006. Other income is derived primarily from the                    operations of PointSure, our non-insurance subsidiary. |
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| PointSure represented 20                    insurance companies as of September 30, 2007 and 19 companies as of September                    30, 2006.

      *Loss and Loss Adjustment                    Expenses.*  Loss and loss adjustment expenses for the three months                    ended September 30, 2007 totaled $34.9 million, an increase of $7.0 million, or                    25.1%, from $27.9 million in the same period of 2006. For the nine months ended                    September 30, 2006, loss and loss adjustment expenses totaled $89.9 million, an                    increase of $11.5 million, or 14.7%, from $78.4 million in the same period of                    2006. Our net loss ratio, which is calculated by dividing loss and loss                    adjustment expenses less claims service income by premiums earned, for the                    three months ended September 30, 2007 was 57.8% compared to 57.3% for the same                    period in 2006. Our net loss ratio for the nine months ended September 30, 2007                    was 54.3% compared to 57.5% for the same period in 2006. Included in the loss                    ratios for the three month and nine month periods ended September 30, 2007 were                    reductions of approximately $5.5 million and $20.5 million, respectively, of                    previously recorded direct net loss reserves to reflect a continuation of lower                    than anticipated patterns of loss payments in recent accident years. Included                    in the loss ratios for the three month and nine month periods ended September                    30, 2006, were reductions of approximately $3.5 million and $13.9 million,                    respectively. Our direct net loss reserves are net of reinsurance and exclude                    reserves associated with KEIC and the business we involuntarily assume from the                    NCCI.

      There is uncertainty about                    whether recent lower paid loss trends, which result primarily from California                    legislative reforms enacted primarily in 2003 and 2004, will be sustained,                    particularly in light of current efforts to change or repeal portions of the                    reforms. We will not know the full impact of these reforms with a high degree                    of confidence for several years. We have established loss reserves at September                    30, 2007 that are based upon our current best estimate of loss costs, taking                    into consideration the recent lower paid loss claim data and incurred loss                    trends.

      As of September 30, 2007,                    we had recorded a receivable of approximately $2.8 million for adverse loss                    development of KEIC reserves since the date of the Acquisition. We do not                    expect this receivable to have any material adverse effect on our future cash                    flows if LMC fails to perform its obligations under the adverse development                    cover agreement. At September 30, 2007, we have access to approximately $3.5                    million under the collateralized reinsurance trust in the event that LMC fails                    to satisfy its obligations under the adverse development cover agreement. The                    balance of the Trust, including interest, was $5.2 million at December 31,                    2006. In February 2007, LMC submitted a request to withdraw approximately $1.8                    million of excess funds on deposit in the trust account. After due evaluation,                    we complied with LMC’s request, resulting in a balance in the trust                    account of approximately $3.4 million immediately following the                    withdrawal.

      *Underwriting                    Expenses.*  Underwriting expenses for the three months ended September                    30, 2007 totaled $15.2 million, an increase of $5.1 million, or 50.5%, from                    $10.1 million in the same period of 2006. For the nine months ended September                    30, 2007, underwriting expenses totaled $42.5 million, an increase of $12.9                    million, or 43.6%, from $29.6 million in the same period of 2006. Our net                    underwriting expense ratio for the three months ended September 30, 2007, which                    is calculated by dividing underwriting, acquisition and insurance expenses less                    other service income by premiums earned, was 25.3%, compared to 21.1% for the                    same period in 2006. For the nine months ended September 30, 2007, our net                    underwriting expense ratio was 26.0%, compared to 22.1% for the same period of                    2006. The increases in the net underwriting expense ratio for the three month                    and nine month periods ended September 30, 2007 are primarily the result of                    increases in the number of staff, staffing related costs and other premium                    production-related expenses, including commission expense, as we continue to                    grow our business in existing offices and in new offices recently opened in                    Philadelphia, Atlanta, and Phoenix. These new offices have not yet reached the                    premium production levels required to contribute to earnings. The total number                    of employees grew from 174 at September 30, 2006 to 215 at September 30, 2007,                    representing an increase of 23.6%. For the three month and nine month periods                    ended September 30, 2007, the number of employees grew 2.4% and 20.8%,                    respectively.

      Commission expense as a                    percentage of net earned premiums averaged 9.3% for the three months ended                    September 30, 2007 compared to 6.2% in the same period of 2006. Commission                    expense as a percentage of net earned premiums for the nine months ended                    September 30, 2007 and 2006 averaged 9.2% and 7.6%, respectively. These                    increases are driven primarily by the California market, as well as other                    markets that have experienced rate reductions, as brokers negotiate higher                    commission rates during a period of declining premium rates.

      *Interest Expense*.                     Interest expense related to the surplus notes issued by our insurance                    subsidiary in May 2004 totaled $289,000 for the three months ended September                    30, 2007, compared to $285,000 for the same period in 2006, representing an                    increase of $4,000, or 1.4%. Interest expense for the nine months ended                    September 30, 2007 |
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| totaled $854,000,                    compared to $813,000 for the same period in 2006, representing an increase of                    $41,000, or 5.0%. The surplus notes interest rate, which is calculated at the                    beginning of each interest payment period using the 3-month LIBOR rate plus 400                    basis points, increased from 9.40% at September 30, 2006 to 9.5% at September                    30, 2007.

      *Other Expenses.*                      Other expenses for the three months ended September 30, 2007                    totaled $2.0 million, an increase of $0.6 million, or 42.9%, over $1.4 million                    in the same period of 2006. For the nine months ended September 30, 2007, other                    expenses totaled $5.2 million, an increase of $1.3 million, or 33.3%, from $3.9                    million in the same period of 2006. Other expenses result primarily from the                    operations of PointSure, our non-insurance subsidiary. Other expenses for the                    three month and nine month periods ended September 30, 2006 included a one-time                    charge of $305,000 related to a legal settlement.

      *Federal Income Tax                    Expense.*  The effective tax rate for the three months ended September                    30, 2007 was 32.7%, compared to 30.2% for the same period in 2006. For the nine                    months ended September 30, 2007 our effective tax rate was 31.7% compared to                    30.4% in the same period of 2006. The increases in our effective tax rate are                    primarily attributable to a decrease in the proportion of tax-exempt municipal                    securities in our portfolio and an overall increase in taxable income as a                    result of our continued growth. At September 30, 2007, approximately 50.0% of                    our investment portfolio was invested in tax-exempt municipal securities,                    compared to approximately 55.0% at September 30, 2006.

      *Net Income.*                      Net income was $9.7 million for the three months ended September                    30, 2007, compared to $9.1 million for the same period in 2006, representing an                    increase of $0.6 million, or 6.6%. Net income for the nine months ended                    September 30, 2007 totaled $29.9 million, an increase of $5.5 million, or                    22.5%, from $24.4 million in the same period of 2006. The increase in net                    income for the three and nine months ended September 30, 2007 resulted                    primarily from the factors discussed above.

**Liquidity and Capital                    Resources**

      Our principal sources of                    funds are underwriting operations, investment income and proceeds from sales                    and maturities of investments. Our primary use of funds is to pay claims and                    operating expenses and to purchase investments.

      Our investment portfolio is                    structured so that investments mature periodically over time in reasonable                    relation to current expectations of future claim payments. Since we have a                    limited claims history, we have derived our expected future claim payments from                    industry and predecessor trends and included a provision for uncertainties. Our                    investment portfolio as of September 30, 2007 has an effective duration of 4.89                    years with individual maturities extending out to 30 years. Currently, we make                    claim payments from positive cash flow from operations and invest excess cash                    in securities with appropriate maturity dates to balance against anticipated                    future claim payments. As these securities mature, we intend to invest any                    excess funds in investments with appropriate durations to match against                    expected future claim payments.

      At September 30, 2007, our                    portfolio was made up almost entirely of investment grade fixed income                    securities with fair values subject to fluctuations in interest rates. Prior to                    March 2005, we did not invest in common equity securities and we had no                    exposure to foreign currency risk. In November 2006, our investment policy was                    revised to allow for investment in domestic and international equities of up to                    4% and 1%, respectively, of our statutory consolidated capital and surplus.                    While we have structured our investment portfolio to provide an appropriate                    matching of maturities with anticipated claim payments, if we decide or are                    required in the future to sell securities in a rising interest environment, we                    would expect to incur losses from such sales.

      Our ability to adequately                    provide funds to pay claims comes from our disciplined underwriting and pricing                    standards and the purchase of reinsurance to protect us against severe claims                    and catastrophic events. For the period from October 1, 2006 through October 1,                    2007 and for the period from October 1, 2007 through October 1, 2008, our                    reinsurance program provided us with reinsurance protection for each loss                    occurrence in excess of $1.0 million, up to $75.0 million, subject to                    retentions, annual aggregate deductibles and other limitations. Our reinsurance                    programs are more fully described in Note 5.a. to our unaudited condensed                    consolidated financial statements in Part I, Item 1 of this quarterly report                    and in the reinsurance agreements. Given industry and predecessor trends, we                    believe that we are sufficiently capitalized to retain the losses described                    above.

      Our insurance subsidiary is                    required by law to maintain a certain minimum level of surplus on a statutory                    basis. Surplus is calculated by subtracting total liabilities from total                    admitted assets. The National Association of Insurance |
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| Commissioners has a                    risk-based capital standard designed to identify property and casualty insurers                    that may be inadequately capitalized based on inherent risks of each                    insurer’s assets and liabilities and its mix of net premiums written.                    Insurers falling below a calculated threshold may be subject to varying degrees                    of regulatory action. As of December 31, 2006, the last date that we were                    required to update the annual risk-based capital calculation, the statutory                    surplus of our insurance subsidiary was in excess of the prescribed risk-based                    capital requirements that correspond to any level of regulatory                    action.

      SIH has minimal revenue and                    expenses. Currently, there are no plans to have SBIC or PointSure pay a                    dividend to SIH.

      Our unaudited consolidated                    net cash provided by operating activities for the nine months ended September                    30, 2007 was $68.0 million, compared to $59.9 million for the same period in                    2006. The increase resulted primarily from increases in net income, deferred                    federal income tax and the net of deferred and unearned premiums, offset by                    amounts related to unpaid loss and loss adjustment expense.

      We used net cash of $47.3                    million for investing activities in the nine months ended September 30, 2007,                    compared to $103.6 million for the same period in 2006. In February 2006, we                    invested net proceeds totaling approximately $57.6 million resulting from a                    follow-on public offering of 3,910,000 shares of our common stock.

      For the nine months ended                    September 30, 2007, financing activities provided cash of $0.4 million,                    compared to $57.6 million in the same period in 2006. The majority of cash                    provided by financing activities resulted from the sale of our common stock                    and, to a much lesser degree, from the exercise of common stock options by our                    employees. On February 1, 2006, we closed a follow-on public offering of                    3,910,000 shares of our common stock at a price of $15.75 per share for net                    proceeds of approximately $57.6 million, after deducting underwriters’                    fees, commissions and offering costs totaling approximately $4.0                    million.

**Contractual                    Obligations and Commitments**

      The following table                    identifies our contractual obligations by payment due period as of September                    30, 2007: |
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

|                                                  | Payments Due                by Period |    |        |
|--------------------------------------------------|---------------------------------------|---------|--------|
||
||
||
||
| Long term debt                obligations:       |                                  |         |   |   |  |   |   |  |   |   |  |   |   |  |   |
|   Surplus                notes         | $                                     | 12,000  |   | $ | — |   | $ | — |   | $ | — |   | $ | 12,000 |   |
| Loss and loss                adjustment expenses |                                  | 233,717 |   |   | 77,127 |   |   | 100,732 |   |   | 21,502 |   |   | 34,356 |   |
| Operating                lease obligations       |                                  | 13,533  |   |   | 1,799 |   |   | 5,426 |   |   | 2,776 |   |   | 3,532 |   |
|                                             |
|   Total                                | $                                     | 259,250 |   | $ | 78,926 |   | $ | 106,158 |   | $ | 24,278 |   | $ | 49,888 |   |
|                                             |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
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|       The loss and loss                    adjustment expense payments due by period in the table above are based upon the                    loss and loss adjustment expense estimates as of September 30, 2007 and                    actuarial estimates of expected payout patterns and are not contractual                    liabilities as to time certain. Our contractual liability is to provide                    benefits under the policies. As a result, our calculation of loss and loss                    adjustment expense payments due by period is subject to the same uncertainties                    associated with determining the level of unpaid loss and loss adjustment                    expenses generally and to the additional uncertainties arising from the                    difficulty of predicting when claims (including claims that have not yet been                    reported to us) will be paid. Actual payments of loss and loss adjustment                    expenses by period will vary, perhaps materially, from the above table to the                    extent that current estimates of loss and loss adjustment expenses vary from                    actual ultimate claims amounts and as a result of variations between expected                    and actual payout patterns.

**Off-Balance Sheet                    Arrangements**

      As of September 30, 2007,                    we had no off-balance sheet arrangements that had or are reasonably likely to                    have a current or future effect on our financial condition, changes in                    financial condition, revenues or expenses, results of operations, liquidity,                    capital expenditures or capital resources.

**Critical Accounting                    Policies, Estimates and Judgments**

        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 |

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| throughout the period                    being reported upon. Some of the estimates result from judgments that can be                    subjective and complex, and consequently, actual results reflected in future                    periods might differ from these estimates.

        The most critical                    accounting policies involve the reporting of unpaid loss and loss adjustment                    expenses including losses that have occurred but were not reported to us by the                    financial reporting date, the amount and recoverability of reinsurance                    recoverable balances, deferred policy acquisition costs, deferred taxes, the                    impairment of investments, earned but unbilled premiums and retrospective                    premiums. The following should be read in conjunction with the notes to our                    financial statements.

        ***Unpaid Loss and Loss                    Adjustment Expense***

        Unpaid loss and loss                    adjustment expense represents our estimate of the expected cost of the ultimate                    settlement and administration of losses, based on known facts and                    circumstances. Included in unpaid loss and loss adjustment expense are amounts                    for case-based reserves, including estimates of future developments on those                    claims, and claims incurred but not yet reported to us, second injury fund                    expenses, and allocated and unallocated claim adjustment expenses. Due to the                    inherent uncertainty associated with the cost of unsettled and unreported                    claims, the ultimate liability may differ, perhaps materially, from the                    original estimate. These estimates are regularly reviewed and updated and any                    resulting adjustments are included in the current period’s operating                    results.

        Following is a summary of                    the gross loss and loss adjustment expense reserves by line of business as of                    September 30, 2007 and December 31, 2006. The workers’ compensation line                    of business comprises over 99% of our total loss reserves as of both                    dates. |
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

|                                            | As of September                31, 2007 |   | As of December                31, 2006 |   |
|--------------------------------------------|-----------------------------------------|--------|----------------------------------------|--------|
||
||
||
||
| Workers’                Compensation | $                                       | 85,440 |                                   | $      | 147,316 |   | $ | 232,756 |   | $ | 66,866 |   | $ | 130,838 |   | $ | 197,704 |   |
| Ocean                Marine                |                                    | 202    |                                   |   | 759 |   |   | 961 |   |   | 210 |   |   | 442 |   |   | 652 |   |
|                                       |
|   Total                          | $                                       | 85,642 |                                   | $      | 148,075 |   | $ | 233,717 |   | $ | 67,076 |   | $ | 131,280 |   | $ | 198,356 |   |
|                                       |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
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|         *Actuarial Loss                    Reserve Estimation Methods*

        We use a variety of                    actuarial methodologies to assist us in establishing the reserve for unpaid                    loss and loss adjustment expense. We also make judgments relative to estimates                    of future claims severity and frequency, length of time to achieve ultimate                    resolution, judicial theories of liability and other third-party factors that                    are often beyond our control.

        For the current accident                    year, we establish the initial reserve for claims incurred-but-not-reported                    (“IBNR”) using an expected loss ratio (“ELR”) method.                    The ELR 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. The actual paid and incurred loss data for the                    accident year is reviewed each quarter and changes to the ELR may be made based                    on the emerging data, although changes are typically not made until the end of                    the accident year when the loss data can be analyzed as a complete accident                    year. The ELR is multiplied by the year-to-date earned premium to determine the                    ultimate losses for the current accident year. The actual paid and case                    outstanding losses are subtracted from the ultimate losses to determine the                    IBNR for the accident year. As the accident year matures, we incorporate                    a Bornhuetter-Ferguson approach, which blends the loss development and                    expected loss ratio methods. As each year continues to mature, this approach                    relies more on losses developed to date and less on the expected loss ratio. A                    reserve estimate implies a pattern of expected loss emergence. If this                    emergence does not occur as expected, it may cause us to revisit our previous                    assumptions. We may adjust loss development patterns, the various method                    weights or the expected loss ratios used in our analysis. Management employs                    judgment in each reserve valuation as to how to make these adjustments to                    reflect current information.

        For all other accident                    years, the estimated ultimate losses are developed using a variety of actuarial                    techniques as described below. In reviewing this information, we consider the                    following factors to be especially important at this time because they increase                    the variability risk factors in our loss reserve estimates: |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

|  | • | We wrote our                first policy on October 1, 2003 and, as a result, our total reserve portfolio is                relatively immature when compared to other industry data. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - 25                    - |
|---------------------------|

|        |
|--------|
|   |

|  | • | We have been                growing consistently since we began operations and have entered into several new                states that are not included in our predecessor’s historical                data.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|  | • | At September                30, 2007, approximately $126.6 million, or 56.6%, of our direct loss reserves were                related to business written in California. Over the last several years, three                significant comprehensive legislative reforms were enacted in California: AB 749                was enacted in February, 2002; AB 227 and SB 228 were enacted in September, 2003;                and SB 899 was enacted in April, 2004. This reform activity has resulted in                uncertainty regarding the impact of the reforms on loss payments, loss development                and, ultimately, loss reserves. All four bills enacted structural changes to the                benefit delivery system in California, in addition to changes in the indemnity and                medical benefits afforded injured workers. 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 July                1, 2007 were 65.1% lower than the pure premium rates in effect as of July 1,                2003. |
|  |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

|   | Key elements                of the reforms as they relate to indemnity and medical benefits were as                follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | Indemnity                Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | AB 749                significantly increased most classes of workers’ compensation indemnity                benefits over a four-year period beginning in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | AB 227 and SB                228 repealed the mandatory vocational rehabilitation benefits and replaced them                with a system of non-transferable education vouchers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | SB 899                required the Division of Workers’ Compensation (“DWC”)                Administrative Director to adopt, on or before January 1, 2005, a new permanent                disability rating schedule (“PDRS”) based in part on American Medical                Association guidelines. Also, temporary disability was limited to a duration of two                years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | SB 899                provided that, effective April 19, 2004, apportionment of disability for purposes                of permanent disability determination must be based on causation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | Medical                Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | AB 749                repealed the presumption given to the primary treating physician (except when the                worker has pre-designated a personal physician), effective for injuries occurring                on or after January 1, 2003. (SB 228 and SB 899 later extended this to all future                medical treatment on earlier injuries.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | SB 228                required the DWC Administrative Director to establish, by December 1, 2004, an                Official Medical Treatment Utilization Schedule meeting specific criteria. SB 228                also provided that beginning three months after the publication date of the updated                American College of Occupational and Environmental Medical (“ACOEM”)                Practice Guidelines and continuing until such time as the DWC Administrative                Director establishes an Official Medical Treatment Utilization Schedule, the ACOEM                standards will be presumed to be correct regarding the extent and scope of all                medical treatment. The DWC Administrative Director has subsequently adopted the                ACOEM Guidelines as the Official Medical Treatment Utilization                Schedule. |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | SB 228 limited                the number of chiropractic visits and the number of physical therapy visits to 24                each per claim.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | SB 228                established a prescription medication fee schedule set at 100% of Medi-Cal Schedule                amounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | SB 228                provided that the maximum facility fee for services performed in an ambulatory                surgical center may not exceed 120% of the Medicare fees for the same service                performed in a hospital outpatient facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | SB 899                provided that after January 1, 2005, an employer or insurer may establish medical                provider networks meeting certain conditions and, with limited exceptions, medical                treatment can be provided within those networks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

| - 26                    - |
|---------------------------|

|         These reforms are a source                    of variability in the reserve estimates as legislative changes affecting                    benefit levels not only impact the cost of benefits but also the rate at which                    accident year benefits or losses develop over time. In addition, several                    of the reforms face ongoing challenges, as noted below: |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

|  | – | The PDRS                was revised effective January 1, 2005. The revised schedule has                resulted in significantly reduced permanent disability awards. Proposed                legislation to revise the PDRS was recently vetoed by the Governor. It is                possible, however, that the PDRS will be modified by the California Division                of Workers’ Compensation through the regulatory process. A change to the                PDRS could result in increased claim costs. |
|--|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|  | – | Legislation                was recently passed that extends the period in which injured workers are                eligible for wage replacement benefits. This legislation applies to injuries                occurring on or after January 1, 2008. The change could result in increased                temporary disability claim costs.                                                                                                                                                                                                                |
|  |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|  | – | Legislation                enacted in 2004 placed a cap of 24 visits on certain categories of physical                medicine, including physical therapy and chiropractic care. Legislation was                recently passed that eliminates the cap for post surgical care. The legislation may                increase claim costs for claims involving post surgical physical                medicine.                                                                                                                                                   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         Workers’ compensation                    is considered a long-tail line of business, as it takes a relatively long                    period of time to finalize claims from a given accident year. Management                    believes that it generally takes workers’ compensation losses                    approximately 48 to 60 months after the start of an accident year until the                    data is viewed as fully credible for paid and incurred reserve evaluation                    methods. As indicated above, we wrote our first policy on October 1, 2003 so                    our first complete accident year is 2004. As of September 30, 2007, accident                    year 2004 is 45 months developed, accident year 2005 is 33 months developed and                    accident year 2006 is 21 months developed. Our loss reserve estimates are                    subject to considerable variation due to the relative immaturity of the                    accident years from a development standpoint.

        We review the following                    significant components of loss reserves on a quarterly basis: |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

|  | • | IBNR reserves                for losses – This includes amounts for the medical and indemnity components                of the workers’ compensation claim payments, net of subrogation recoveries                and deductibles;                                                                                                                  |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |        |                                                                                                                                                                                                                                                                                                                                                            |
|  | • | IBNR reserves                for defense and cost containment expenses (“DCC”, also referred to as                allocated loss adjustment expenses (“ALAE”)), net of subrogation                recoveries and deductibles;                                                                                                           |
|  |        |                                                                                                                                                                                                                                                                                                                                                            |
|  | • | reserve for                adjusting and other expenses, also known as unallocated loss adjustment expenses                (“ULAE”); and                                                                                                                                                                                                            |
|  |        |                                                                                                                                                                                                                                                                                                                                                            |
|  | • | reserve for                loss based assessments, also referred to as the “8F reserve” in                reference to Section 8, Compensation for Disability, subsection (f), Injury                increasing disability, of the United States Longshore and Harbor Workers’                Compensation Act (“USL&H”) Act. |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         The reserves for losses and                    DCC are also reviewed gross and net of reinsurance (referred to as                    “net”). For gross losses, the claims for the Washington USL&H                    Plan, the KEIC claims assumed in the Acquisition and claims assumed from the                    NCCI residual market pools are excluded from this discussion.

        IBNR reserves include a                    provision for future development on known claims, a reopened claims reserve, a                    provision for claims incurred but not reported and a provision for claims in                    transit (incurred and reported but not recorded).

        Our analysis is done                    separately for the indemnity, medical and DCC components of the total loss                    reserves within each accident year. In addition, the analysis is completed                    separately for the following three categories: State Act California; State Act                    excluding California; and USL&H. The business is divided into these three                    categories for the determination of ultimate losses due to differences in the                    laws that cover each of these categories.

        Workers’ compensation                    insurance is statutorily provided for in all of the states in which we do                    business. State laws and regulations provide for the form and content of policy                    coverage and the rights and benefits that are available to injured workers,                    their representatives and medical providers. Because the benefits are                    established by state statute there can be significant variation in these                    benefits by state. We refer to this coverage as State Act. |

| - 27                    - |
|---------------------------|

|         Our business is also                    affected by federal laws including the USL&H Act, which is administered by                    the Department of Labor, and the Merchant Marine Act of 1920, or Jones Act. The                    USL&H Act contains various provisions affecting our business, including the                    nature of the liability of employers of longshoremen, the rate of compensation                    to an injured longshoreman, the selection of physicians, compensation for                    disability and death and the filing of claims. We refer to the business covered                    under the USL&H Act and the Jones Act as USL&H.

        Because there are different                    laws and benefit levels that affect the State Act versus USL&H business,                    there is a strong likelihood that these categories will exhibit different loss                    development characteristics which will influence the ultimate loss                    calculations. Separating the data into the State Act and USL&H categories                    allows us to use actuarial methods that contemplate these                    differences.

        The State Act category is                    further split into California and non-California groupings. This is due to the                    extensive reform activity that has taken place in California as discussed                    above. Since the California data is subject to additional variation due to the                    reform activity, separating the data in this fashion allows us to review the                    non-California State Act data with no impact from the California reform                    activity.

        Development factors,                    expected loss rates and expected loss ratios are derived from the combined                    experience of us and our predecessor

        Gross ultimate loss                    (indemnity, medical and ALAE separately) for each category is estimated using                    the following actuarial methods: |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

|  | • | paid loss                (or ALAE) development;                                          |
|--|--------|------------------------------------------------------------------------------------------|
|  |   |                                                                                     |
|  | • | incurred                loss (or ALAE) development;                                      |
|  |   |                                                                                     |
|  | • | Bornhuetter-Ferguson using                ultimate premiums and paid loss (or ALAE); and |
|  |   |                                                                                     |
|  | • | Bornhuetter-Ferguson using                ultimate premiums and incurred loss (or ALAE). |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         A gross ultimate value is                    selected by reviewing the various ultimate estimates and applying actuarial                    judgment to achieve a reasonable point estimate of the ultimate liability. The                    gross IBNR reserve equals the selected gross ultimate loss minus the gross paid                    losses and gross case reserves as of the valuation date. The selected gross                    ultimate loss and ALAE are reviewed and updated on a quarterly                    basis.

        *Variation in Ultimate                    Loss Estimates*

        In light of our short                    operating history and uncertainties concerning the effects of recent                    legislative reforms, specifically as they relate to our California                    workers’ compensation experience, the actuarial techniques discussed                    above use the historical experience of our predecessor as well as industry                    information in the analysis of loss reserves. We are able to effectively draw                    on the historical experience of our predecessor because most of the current                    members of our management and adjusting staff also served as the management and                    adjusting staff of our predecessor.

        These techniques recognize,                    among other factors: |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

|  | • | our claims                experience and that of our predecessor;                |
|--|--------|----------------------------------------------------------------------------------|
|  |   |                                                                             |
|  | • | 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 |

| - 28                    - |
|---------------------------|

|  | • | trends in                claim frequency and severity. |
|--|--------|--------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         In addition, there are loss                    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;                                      |
|  |   |                                                                      |
|  | • | wage                inflation in states that index benefits; and          |
|  |   |                                                                      |
|  | • | changes in                administrative policies of second injury funds. |

|                                                                                                                                                                                                                                                                                                   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         Variation can also occur in                    the loss reserves due to factors that affect our book of business in general.                    Some examples of these risk factors include, but are not limited to, the                    following: |
|                                                                                                                                                                                                                                                                                                   |

|  | • | injury type                mix;                                      |
|--|--------|----------------------------------------------------------------------|
|  |   |                                                                 |
|  | • | 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 historical                    reserving patterns and loss payments from our predecessor and the industry,                    also referred to as loss development. This is due to our limited operating                    history as discussed above. 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 quantities 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 while                    unfavorable development indicates a basis for increasing the estimated ultimate                    loss amounts. 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.

        Due to the relative                    immaturity of our book of business, the challenge has been to give the right                    weight in the ultimate loss estimation process to the new data as it becomes                    available. As discussed above, management believes |

| - 29                    - |
|---------------------------|

| that it generally takes                    workers’ compensation losses approximately 48 to 60 months after the                    start of an accident year until the data is viewed as fully credible for paid                    and incurred reserve evaluation methods. Due to our limited operating history,                    our oldest complete accident year was 45 months old as of September 30, 2007.                    Due to the favorable development exhibited by the data for accident years 2004                    and 2005 at 17 to 18 months of development, management began to place more                    weight on the results of the Bornhuetter-Ferguson method in its ultimate loss                    estimates for accident year 2005. As new data emerges and continues to                    demonstrate favorable development, this adds credibility to the existing data                    which enables management to reflect it more fully in its estimation process.                    For all accident years, we have not completely relied on the most recent data                    points in our loss development selections. Because of recent favorable                    development trends, we believe this has the effect of increasing our estimated                    reserves as compared to reserves calculated with complete reliance on these                    data points. Estimating loss reserves is an uncertain and complex process which                    involves actuarial techniques and management judgment. Actuarial analysis                    generally assumes that past patterns demonstrated in the data will repeat                    themselves and that the data provides a basis for estimating future loss                    reserves. However, since conditions and trends that have affected losses in the                    past may not occur in the future in the same manner, if at all, future results                    may not be reliably predicted by the prior data. 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 diminishes, the                    full impact of the actual loss development will be factored into our                    assumptions and selections.

        In the third quarter of                    2007 we experienced development in all three categories. For State Act                    California there was favorable development for accident years 2005 and 2006                    that resulted in a reduction of our gross ultimate loss estimates of $1.9                    million and $2.3 million, respectively. For accident year 2004 there was                    unfavorable development for ALAE which resulted in an increase in our gross                    ultimate ALAE estimate of $150,000. For non-California State Act there was                    favorable development for accident year 2006 that resulted in a reduction to                    our gross ultimate loss estimate of $1.5 million. For USL&H there was                    favorable development for accident year 2006 that resulted in a reduction of                    our gross ultimate loss estimates by $603,000. For accident years 2003 and 2004                    there was unfavorable development which resulted in an increase in our gross                    ultimate loss estimates of $50,000 and $400,000, respectively. For all other                    accident years the development was at expected levels which did not warrant a                    change to our gross ultimate loss estimates.

        *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. This is due to the fact that 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, coverage                    interpretations and jury determinations. 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 claim settlement lags and the fact that                    not all events affecting future claim costs can be estimated.

        As discussed in the                    previous section, 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, they may prove to be inadequate. For example, there may be a                    number of claims where the unpaid loss and loss adjustment expense associated                    with future medical treatment proves to be inadequate because the injured                    workers do not respond to medical treatment as expected by the claims examiner.                    If we assume this affects 10% of the open claims and, on average, the unpaid                    loss and loss adjustment expenses on these claims are 20% inadequate, this                    would result in our unpaid loss and loss adjustment expense liability being                    inadequate by approximately $4.7 million, or 2%, as of September 30, 2007.                    Another example is claim inflation. Claim inflation can result from medical                    cost inflation or wage inflation. As discussed above, the actuarial methods                    employed include an amount for claim inflation based on historical experience.                    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. If our                    estimate of future medical trend is two percentage points inadequate (e.g., if                    we estimate a 9% annual trend and the actual trend is 11%), our unpaid loss and                    loss adjustment expense liability could be inadequate. The amount of the                    inadequacy would depend on the mix of medical and indemnity payments and the                    length of time until the claims |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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| - 30                    - |
|---------------------------|

| are paid. For example,                    if we assume that 50% of the unpaid loss and loss adjustment expense is                    associated with medical payments and an average payout period of 5 years, our                    unpaid loss and loss adjustment expense liabilities would be inadequate by                    approximately $11.7 million on a pre-tax basis, or 5%, as of September 30,                    2007. Under these assumptions, the inadequacy of approximately $11.7 million                    represents approximately 4.2% of total stockholders’ equity at September                    30, 2007. The impact of any reserve deficiencies, or redundancies, on our                    reported results and future earnings is discussed below.

      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 future earnings and                    financial position could be positively or negatively impacted. Future 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 $233.7 million as of September 30, 2007 to be 5%                    inadequate, we would experience a reduction in future earnings up to                    approximately $11.7 million, depending on a number of other factors including                    federal income taxes. This reduction could be realized in one year or multiple                    years, depending on when the deficiency is identified. The deficiency would                    also impact our financial position because our 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.

      ***Reinsurance                    Recoverables***

      Reinsurance recoverables on                    paid and unpaid losses represent the portion of the loss and loss adjustment                    expenses that is assumed by reinsurers. These recoverables are reported on our                    balance sheet separately as assets, as reinsurance does not relieve us of our                    legal liability to policyholders and ceding companies. We are required to pay                    losses even if a reinsurer fails to meet its obligations under the applicable                    reinsurance agreement. Reinsurance recoverables are determined based in part on                    the terms and conditions of reinsurance contracts, which could be subject to                    interpretations that differ from ours based on judicial theories of liability.                    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                    “Unpaid Loss 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, one                    would expect an increase in our underlying loss reserves on claims subject to                    reinsurance to have an upward impact on our reinsurance recoverables. The                    amount of the impact on reinsurance recoverables 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. We also bear credit risk with respect to our reinsurers, which                    can be significant considering that some claims may remain open for an extended                    period of time.

      We periodically evaluate                    our reinsurance recoverables, including the financial ratings of our                    reinsurers, and revise our estimates of such amounts as conditions and                    circumstances change. Changes in reinsurance recoverables are recorded in the                    period in which the estimate is revised. As of September 30, 2007 and December                    31, 2006, we had no reserve for uncollectible reinsurance recoverables. We                    assessed the collectibility of our period-end receivables and believe that all                    amounts are collectible based on currently available information.

      ***Deferred Policy                    Acquisition Costs***

      We defer commissions,                    premium taxes and certain other costs that vary with and are primarily related                    to the acquisition of insurance contracts. These costs are capitalized and                    charged to expense in proportion to the recognition of premiums earned. The                    method followed in computing deferred policy acquisition costs limits the                    amount of these deferred costs to their estimated realizable value, which gives                    effect to the premium to be earned, related estimated investment income,                    anticipated losses and settlement expenses and certain other costs we expect to                    incur as the premium is earned. Judgments regarding the ultimate recoverability                    of these deferred costs are highly dependent upon the estimated future costs                    associated with our unearned premiums. If our expected claims and expenses,                    after considering investment income, exceed our unearned premiums, we would be                    required to write-off a portion of deferred policy acquisition costs. To date,                    we have not needed to write-off any portion of our deferred acquisition costs.                    We will continue to monitor the balance of deferred acquisition costs for                    recoverability. |
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|       ***Deferred                    Taxes***

      We use the asset and                    liability method of accounting for income taxes. Under this method, deferred                    tax assets and liabilities are recognized for the future tax consequences                    attributable to differences between the financial statement carrying amounts of                    existing assets and liabilities and their respective tax bases and operating                    loss and tax credit carry-forwards. Deferred tax assets and liabilities are                    measured using tax rates expected to apply to taxable income in the years in                    which those temporary differences are expected to be recovered or settled. The                    effect on deferred tax assets and liabilities of a change in tax rates is                    recognized in the income statement in the period that includes the enactment                    date.

      In assessing the                    realizability of deferred tax assets, management considers whether it is more                    likely than not that some portion or all of the deferred tax assets will not be                    realized. The ultimate realization of deferred tax assets is dependent upon the                    generation of future taxable income during the periods in which those temporary                    differences become deductible. This analysis requires management to make                    various estimates and assumptions, including the scheduled reversal of deferred                    tax liabilities, projected future taxable income and the effect of tax planning                    strategies. If actual results differ from management’s estimates and                    assumptions, we may be required to establish a valuation allowance to reduce                    the deferred tax assets to the amounts more likely than not to be realized. The                    establishment of a valuation allowance could have a significant impact on our                    financial position and results of operations in the period in which it is                    deemed necessary. To date, we have not needed to record a valuation allowance                    against our deferred tax assets. We anticipate that our deferred tax assets                    will increase as our business continues to grow. We will continue to monitor                    the balance of our deferred tax assets for realizability.

      ***Impairment of                    Investment Securities***

      Impairment of investment                    securities results in a charge to operations when the fair value of a security                    declines below our cost and is deemed to be other-than-temporary. We regularly                    review our investment portfolio to evaluate the necessity of recording                    impairment losses for other-than-temporary declines in the fair value of                    investments. A number of criteria are considered during this process, including                    but not limited to the following: the current fair value as compared to                    amortized cost or cost, as appropriate, of the security; the length of time the                    security’s fair value has been below amortized cost; our intent and                    ability to retain the investment for a period of time sufficient to allow for                    an anticipated recovery in value; specific credit issues related to the issuer;                    and current economic conditions, including interest rates.

      In general, we focus on                    those securities whose fair value was less than 80% of their amortized cost or                    cost, as appropriate, for six or more consecutive months. We also analyze the                    entire portfolio for other factors that might indicate a risk of impairment.                    Other-than-temporary impairment losses result in a permanent reduction of the                    carrying value of the underlying investment. To date, we have not needed to                    record any other-than-temporary impairments of our investment securities.                    Please refer to the tables in Note 3 of the unaudited condensed consolidated                    financial statements in Part I, Item 1 of this quarterly report for additional                    information on unrealized losses on our investment securities. Please refer to                    Part I, Item 3 of this quarterly report for tables showing the sensitivity of                    the fair value of our fixed-income investments to selected hypothetical changes                    in interest rates.

      ***Earned But Unbilled                    Premiums***

      Shortly following the                    expiration of an insurance policy, we perform a final payroll audit of our                    insureds to determine the final premium to be billed and earned. These final                    audits generally result in an audit adjustment, either increasing or decreasing                    the estimated premium earned and billed to date. We estimate the amount of                    premiums that have been earned but are unbilled at the end of a reporting                    period by analyzing historical earned premium adjustments made at final audit                    for the preceding 12 months and applying the average adjustment percentage                    against our in-force earned premium for the period. These estimates are subject                    to changes in policyholders’ payrolls due to growth, economic conditions,                    seasonality and other factors and to fluctuations in our in-force premium. For                    example, the amount of our accrual for premiums earned but unbilled fluctuated                    between $0 and $1.2 million in 2007 and between $1.2 million and $1.8 million                    in 2006. The balance of our accrual for premiums earned but unbilled totaled $0                    and $1.5 million at September 30, 2007 and December 31, 2006, respectively.                    Although considerable variability is inherent in such estimates, management                    believes that the accrual for earned but unbilled premiums is reasonable. The                    estimates are reviewed quarterly and adjusted as necessary as experience                    develops or new information becomes known. Any such adjustments are included in                    current operations. |
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|       ***Retrospective                    Premiums***

      The premiums for our                    retrospectively rated loss sensitive plans are reflective of the                    customer’s loss experience because, beginning six months after the                    expiration of the relevant insurance policy, and annually thereafter, we                    recalculate the premium payable during the policy term based on the current                    value of the known losses that occurred during the policy term. While the                    typical retrospectively rated policy has around five annual adjustment or                    measurement periods, premium adjustments continue until mutual agreement to                    cease future adjustments is reached with the policyholder. Retrospective                    premiums for primary and reinsured risks are included in income as earned on a                    pro rata basis over the effective period of the respective policies. Earned                    premiums on retrospectively rated policies are based on our estimate of loss                    experience as of the measurement date. Unearned premiums are deferred and                    include that portion of premiums written that is applicable to the unexpired                    period of the policies in force and estimated adjustments of premiums on                    policies that have retrospective rating endorsements.

      We bear credit risk with                    respect to retrospectively rated policies. Because of the long duration of our                    loss sensitive plans, there is a risk that the customer will fail to pay the                    additional premium. Accordingly, we obtain collateral in the form of letters of                    credit or deposits to mitigate credit risk associated with our loss sensitive                    plans. If we are unable to collect future retrospective premium adjustments                    from an insured, we would be required to write-off the related amounts, which                    could impact our financial position and results of operations. To date, there                    have been no such write-offs. Retrospectively rated policies accounted for                    approximately 19.2% of direct premiums written in the nine months ended                    September 30, 2007 and approximately 25.8% of direct premiums written in the                    year ended December 31, 2006.

**Recent Accounting                    Pronouncements**

        In September 2005, the                    American Institute of Certified Public Accountants (“AICPA”)                    released Statement of Position 05-1, *Accounting by Insurance Enterprises for                    Deferred Acquisition Costs in Connection with Modifications or Exchanges of                    Insurance Contracts* (“SOP 05-1”). SOP 05-1 requires                    identification of transactions that result in a substantial change in an                    insurance contract. If it is determined that a substantial change to an                    insurance contract has occurred, the related unamortized deferred policy                    acquisition costs, unearned premiums and other related balances must be written                    off. SOP 05-1 is effective for fiscal years beginning after December 15, 2006.                    We adopted the provisions of SOP 05-1 as of January 1, 2007, which did not have                    a material effect on our consolidated financial condition or results of                    operations.

        In July 2006, the FASB                    issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income                    Taxes – an Interpretation of FASB Statement No. 109* (“FIN                    48”), which provides for the recognition, measurement, presentation and                    disclosure of uncertain tax positions. A tax benefit from an uncertain position                    may be recognized only if it is more likely than not that the position is                    sustainable based on its technical merits. The provisions of FIN 48 are                    effective for fiscal years beginning after December 15, 2006. We adopted the                    provisions of FIN 48 as of January 1, 2007, which did not have a material                    effect on our consolidated financial condition or results of                    operations.

        In September 2006, the FASB                    issued SFAS No. 157, *Fair Value Measurements*, which defines fair value                    and establishes a framework for measuring fair value in GAAP and expands                    disclosures about fair value measurements. The provisions for SFAS No. 157 are                    effective for fiscal years beginning after November 15, 2007, and interim                    periods within those fiscal years. Early adoption is permitted. We must adopt                    these new requirements no later than our first fiscal quarter of 2008. We                    expect that SFAS No. 157 will not have a material effect on our consolidated                    financial condition or result of operations.

        In February 2007, the FASB                    issued SFAS No. 159, *The Fair Value Option for Financial Assets and                    Financial Liabilities – Including an Amendment of FASB Statement No.                    115*, which permits entities to choose to measure many financial instruments                    and certain other items at fair value in order to mitigate volatility in                    reported earnings caused by measuring related assets and liabilities                    differently and without having to apply complex hedge accounting provisions.                    The provisions for SFAS No. 157 are effective for fiscal years beginning after                    November 15, 2007, and interim periods within those fiscal years. Early                    adoption is permitted. We must adopt these new requirements no later than our                    first fiscal quarter of 2008. We are currently evaluating the impact that the                    adoption of SFAS No. 159 will have on our consolidated financial condition and                    results of operations. |
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| **Item                    3.    Quantitative and Qualitative Disclosures About Market                    Risk**

        Market risk is the                    potential economic loss principally arising from adverse changes in the fair                    value of financial instruments. The major components of market risk affecting                    us are credit risk and interest rate risk.

**Credit                    Risk**

        Credit risk is the                    potential economic loss principally arising from adverse changes in the                    financial condition of a specific debt issuer. We address this risk by                    investing primarily in fixed-income securities which are rated “A”                    or higher by Standard & Poor’s. We also independently, and through                    our outside investment manager, monitor the financial condition of all of the                    issuers of fixed-income securities in the portfolio. To limit our exposure to                    risk, we employ stringent diversification rules that limit the credit exposure                    to any single issuer or business sector.

**Interest Rate                    Risk**

        We had fixed-income                    investments with a fair value of $429.3 million at September 30, 2007 that are                    subject to interest rate risk, compared with $372.3 million at September 30,                    2006. We manage the exposure to interest rate risk through a disciplined                    asset/liability matching and capital management process. In the management of                    this risk, the characteristics of duration, credit and variability of cash                    flows are critical elements. These risks are assessed regularly and balanced                    within the context of the liability and capital position.

        The table below summarizes                    our interest rate risk as of September 30, 2007 and 2006. It illustrates the                    sensitivity of the fair value of fixed-income investments to selected                    hypothetical changes in interest rates as of September 30, 2007 and 2006. The                    selected scenarios are not predictions of future events, but rather illustrate                    the effect that such events may have on the fair value of our fixed-income                    portfolio and shareholders’ equity.

Interest Rate Risk as                    of September 30, 2007 |
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

|   | Hypothetical Change in Interest                Rates | Estimated                Change in                Fair Value |    | Fair                Value |   | Hypothetical                Percentage                Increase                (Decrease) in                Portfolio                Value |
|--------|------------------------------------------------------|--------------------------------------------------------------|---------|---------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
||
||
|   | 200 basis                point increase              | $                                                            | (36,689 | )                         | $      | 392,626                                                                                                                                   |   |   | (8.5 | )% |
|   | 100 basis                point increase              |                                                         | (18,147 | )                         |   | 411,168                                                                                                                                   |   |   | (4.2 | )% |
|   | No                change                             |                                                         | — |                      |   | 429,315                                                                                                                                   |   |   | — |   |
|   | 100 basis                point decrease              |                                                         | 17,752  |                      |   | 447,067                                                                                                                                   |   |   | 4.1 | % |
|   | 200 basis                point decrease              |                                                         | 35,110  |                      |   | 464,425                                                                                                                                   |   |   | 8.2 | % |

|                                                          |
|---------------------------------------------------------------|
| Interest Rate Risk as                    of December 31, 2006 |
|                                                          |

|   | Hypothetical Change in Interest                Rates | Estimated                Change in                Fair Value |    | Fair                Value |   | Hypothetical                Percentage                Increase                (Decrease) in                Portfolio                Value |
|--------|------------------------------------------------------|--------------------------------------------------------------|---------|---------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
||
||
|   | 200 basis                point increase              | $                                                            | (33,246 | )                         | $      | 365,873                                                                                                                                   |   |   | (8.3 | )% |
|   | 100 basis                point increase              |                                                         | (16,349 | )                         |   | 382,770                                                                                                                                   |   |   | (4.1 | )% |
|   | No                change                             |                                                         | — |                      |   | 399,119                                                                                                                                   |   |   | — |   |
|   | 100 basis                point decrease              |                                                         | 15,802  |                      |   | 414,921                                                                                                                                   |   |   | 4.0 | % |
|   | 200 basis                point decrease              |                                                         | 31,056  |                      |   | 430,175                                                                                                                                   |   |   | 7.8 | % |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
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| **Item                    4.    Controls and Procedures**

        Under the supervision and                    with the participation of management, including our Chief Executive Officer and                    our Chief Financial Officer, we have carried out an evaluation of our                    disclosure controls and procedures (as defined in Rule 13a-15(e) under the                    Exchange Act). Based on that evaluation, our Chief Executive Officer and our                    Chief Financial Officer concluded that our disclosure controls and procedures                    were effective as of the end of the period covered by this report to ensure                    that information we are required to disclose in reports that are filed or                    submitted under the Exchange Act is recorded, processed, summarized and                    reported within the time periods specified in the rules and forms specified by                    the SEC and is accumulated and communicated to our management, including                    our |

| - 34                    - |
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| Chief Executive Officer                    and our Chief Financial Officer, as appropriate to allow timely decisions                    regarding required disclosure.

        ***Changes in Internal                    Control over Financial Reporting***

        There have not been any                    changes in our internal control over financial reporting (as such term is                    defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our                    third fiscal quarter of 2007 that have materially affected, or are reasonably                    likely to materially affect, our internal control over financial                    reporting.

**PART                    II -- OTHER INFORMATION**

**Item                    1A. Risk Factors**

        *You should carefully                    consider the risks described below and in our Annual Report on Form 10-K filed                    with the SEC on March 16, 2007, together with all of the other information                    included in this quarterly report. Such risks and uncertainties are not the                    only ones facing us. If any such risks actually occur, our business, financial                    condition or operating results could be harmed. Any such risks could result in                    a significant or material adverse effect on our financial condition or results                    of operations, and a corresponding decline in the market price of our common                    stock. You could lose all or part of your investment. Such risks also include                    forward-looking statements and our actual results may differ substantially from                    those discussed in those forward-looking statements. Please refer to the                    discussion under the heading “Cautionary Statement” in Part I, Item                    2.*

        Under the heading                    “Item 1A. Risk Factors—Risk Related to Our Business—Intense                    competition could adversely affect our ability to sell policies at rates we                    deem adequate” in our Annual Report on Form 10-K filed with the SEC on                    March 16, 2007, we include a discussion about a series of recent filings from                    the WCIRB to the California Insurance Commissioner recommending decreases in                    advisory pure premium rates on new and renewal policies and subsequent rate                    reductions. We hereby update such discussion by adding that, on September 20,                    2007, the WCIRB submitted an additional filing with the California Insurance                    Commissioner recommending a 4.2% increase in advisory pure premium rates on new                    and renewal policies effective on or after January 1, 2008. The filing was                    based on a review of loss and loss adjustment experience through June 30, 2007.                    On October 19, 2007, the WCIRB amended its filing, increasing the proposed rate                    increase to 5.2% based on the projected impact of Assembly Bill No. 338 (AB                    338) that was signed into law on October 13, 2007. AB 338 increases the period                    of time from the date of injury, from two years to five years, during which                    disability benefits, limited to a maximum of 104 weeks, may be provided. A                    public hearing to consider the proposed rate increase was held on October 23,                    2007. As of November 7, 2007, the California Insurance Commissioner had not                    announced his recommendation regarding the proposed rate increase.

        As previously noted, we are                    unable to predict the impact that proposed rate reductions in other states or                    the proposed rate increase in California, if approved and adopted by us, might                    have on our future financial position and results of operations. If any of our                    competitors adopt premium rate reductions that are greater than ours, we may be                    unable to compete effectively and our business, financial condition and results                    of operations could be materially adversely affected.

**Item                    2.    Unregistered Sales of Equity Securities and Use of                    Proceeds**

        On January 19, 2005, the                    SEC declared effective our Registration Statement on Form S-1, as amended                    (Registration No. 333-119111), as filed with the SEC in connection with the                    initial public offering of 8,625,000 shares of our common stock. Our use of the                    proceeds from the offering does not represent a change in the use of proceeds                    described in our Annual Report on Form 10-K for the fiscal year ended December                    31, 2006 filed with the SEC on March 16, 2007.

        We did not purchase any of                    our equity securities during the three months ended September 30,                    2007.

**Item                    6.    Exhibits**

        The list of exhibits in the                    Exhibit Index to this quarterly report is incorporated herein by                    reference. |
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| **SIGNATURES**

        Pursuant to the                    requirements of the Securities Exchange Act of 1934, the registrant has duly                    caused this report to be signed on its behalf by the undersigned thereunto duly                    authorized. |
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|                                                                                                                                                                                                                                                                                                              |

|                                  | SEABRIGHT INSURANCE HOLDINGS,                INC. |
|---------------------------------------|---------------------------------------------------|
|                                  |                                              |   |
| Date: November                9, 2007 |                                              |   |
|                                  |                                              |   |
|                                  | By:                                               | /s/ Joseph S.                De Vita |
|                                  |                                              |  |
|                                  |                                              | Joseph S. De                Vita |
|                                  |                                              | Senior Vice                President, Chief Financial Officer andAssistant Secretary (Principal                Financial Officer) |

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|---------------------------|

| **EXHIBIT                    INDEX**

        The list of exhibits in the                    Exhibit Index to this quarterly report on Form 10-Q is incorporated herein by                    reference. Exhibits 31.1 and 31.2 are being filed as part of this quarterly                    report on Form 10-Q. Exhibits 32.1 and 32.2 are being furnished with this                    quarterly report on Form 10-Q. |
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

| **Exhibit                Number** |   | **Description**                                                       |
|-----------------------------------|--------|-----------------------------------------------------------------------|
|                                   |        |                                                                       |
| 31.1                              |        | Rule                13a-14(a) Certification (Chief Executive Officer) |
|                                   |        |                                                                  |
| 31.2                              |        | Rule                13a-14(a) Certification (Chief Financial Officer) |
|                                   |        |                                                                  |
| 32.1                              |        | Section                1350 Certification (Chief Executive Officer)   |
|                                   |        |                                                                  |
| 32.2                              |        | Section                1350 Certification (Chief Financial Officer    |

|  |
|--|