UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 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.
  Delaware
(State or other jurisdiction of incorporation or organization)
    
    56-2393241
(IRS Employer Identification No.)
 2101 4 th Avenue, Suite 1600
Seattle, Washington 98121
 (206) 269-8500
 þ o
 o þ o
 o þ
  Class
    
    Shares outstanding as of May 8, 2007Common Stock, $0.01 Par Value
    
    20,797,827


##### Table of Contents








SeaBright Insurance Holdings, Inc.


Index to Form 10-Q


PagePart I. Financial InformationItem 1. Financial Statements (unaudited)
    
    
    2Condensed Consolidated Balance Sheets as of March 31, 2007 and
December 31, 2006
    
    
    2Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2007 and 2006
    
    
    3Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2007 and 2006
    
    
    4Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    28Part II. Other InformationItem 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 6. Exhibits
    
    
    29Signatures
    
    
    30Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2 - 1 -


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##### Table of Contents

# PART I 
FINANCIAL INFORMATION

# Item 1. Financial Statements

# SEABRIGHT INSURANCE
HOLDINGS, INC. AND SUBSIDIARIES

# CONDENSED CONSOLIDATED
BALANCE SHEETS

|                                                                              | March 31,
2007 |  | December 31,
2006 |        
|----------------------------------------------------------------------------- | -------------- |  | ----------------- | -------
|
|
|ASSETS                                                                        |               
|Fixed income securities available-for-sale, at fair value (amortized cost     |                |  |                   |        
|$418,109 in 2007 and $399,433 in 2006)                                        |                |  | $                 | 417,992
|Equity securities available-for-sale, at fair value (amortized cost $3,225 in |                | 
|2007 and $802 in 2006)                                                        |                |  |                   | 3,248  
|Cash and cash equivalents                                                     |                |  |                   | 17,354 
|Accrued investment income                                                     |                |  |                   | 4,471  
|Premiums receivable, net of allowance                                         |                |  |                   | 6,082  
|Deferred premiums                                                             |                |  |                   | 129,092
|Federal income tax recoverable                                                |                |  |                   |       
|Service income receivable                                                     |                |  |                   | 600    
|Reinsurance recoverables                                                      |                |  |                   | 12,374 
|Receivable under adverse development cover                                    |                |  |                   | 2,781  
|Prepaid reinsurance                                                           |                |  |                   | 1,977  
|Property and equipment, net                                                   |                |  |                   | 1,269  
|Deferred income taxes, net                                                    |                |  |                   | 12,178 
|Deferred policy acquisition costs, net                                        |                |  |                   | 17,058 
|Intangible assets, net                                                        |                |  |                   | 1,215  
|Goodwill                                                                      |                |  |                   | 1,527  
|Other assets                                                                  |                |  |                   | 10,618 
|Total assets                                                                  |                |  | $                 | 639,836
|                                                                             
|LIABILITIES AND STOCKHOLDERS EQUITY                                          |               
|Liabilities:                                                                  |               
|Unpaid loss and loss adjustment expense                                       |                |  | $                 | 206,463
|Unearned premiums                                                             |                |  |                   | 122,078
|Reinsurance funds withheld and balances payable                               |                |  |                   | 362    
|Premiums payable                                                              |                |  |                   | 2,757  
|Accrued expenses and other liabilities                                        |                |  |                   | 36,283 
|Surplus notes                                                                 |                |  |                   | 12,000 
|Total liabilities                                                             |                |  |                   | 379,943
|                                                                              |               
|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 - 20,776,704 shares at March 31, 2007 and              |               
|20,553,400 shares at December 31, 2006                                        |                |  |                   | 208    
|Paid-in capital                                                               |                |  |                   | 191,148
|Accumulated other comprehensive loss                                          |                |  |                   | (61    
|Retained earnings                                                             |                |  |                   | 68,598 
|Total stockholders equity                                                    |                |  |                   | 259,893
|Total liabilities and stockholders equity                                    |                |  | $                 | 639,836

See accompanying
notes to unaudited condensed consolidated financial statements.

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##### Table of Contents

# SEABRIGHT INSURANCE
HOLDINGS, INC. AND SUBSIDIARIES

# CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS(Unaudited)

|                                                 | Three Months Ended March 31, | 
|------------------------------------------------ | ---------------------------- | 
|
|
|Revenue:                                         |                              | 
|Premiums earned                                  |                              | 
|Claims service income                            |                              | 
|Other service income                             |                              | 
|Net investment income                            |                              | 
|Net realized loss                                |                              | 
|Other income                                     |                              | 
|                                                 |                              | 
|                                                 |                             
|Losses and expenses:                             |                             
|Loss and loss adjustment expenses                |                              | 
|Underwriting, acquisition and insurance expenses |                              | 
|Interest expense                                 |                              | 
|Other expenses                                   |                              | 
|                                                 |                              | 
|Income before taxes                              |                              | 
|                                                 |                             
|Income tax expense (benefit):                    |                              | 
|Current                                          |                              | 
|Deferred                                         |                              | 
|                                                 |                              | 
|Net income                                       |                              | 
|                                                 |                             
|Basic earnings per share                         |                              | 
|Diluted earnings per share                       |                              | 
|                                                 |                             
|Weighted average basic shares outstanding        |                              | 
|Weighted average diluted shares outstanding      |                              | 

See accompanying
notes to unaudited condensed consolidated financial statements.

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##### Table of Contents

# SEABRIGHT INSURANCE
HOLDINGS, INC. AND SUBSIDIARIES

# CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)

|                                                                              | Three Months Ended March 31, | 
|----------------------------------------------------------------------------- | ---------------------------- | 
|
|
|Cash flows from operating activities:                                         |                              | 
|Net income                                                                    |                              | 
|Adjustments to reconcile net income to cash provided by operating activities: |                             
|Amortization of deferred policy acquisition costs                             |                              | 
|Policy acquisition costs deferred                                             |                              | 
|Provision for depreciation and amortization                                   |                              | 
|Grant of restricted shares of common stock                                    |                              | 
|Compensation cost on stock options                                            |                              | 
|Net realized loss on investments                                              |                              | 
|Gain on sale of fixed assets                                                  |                              | 
|Benefit for deferred income taxes                                             |                              | 
|Changes in certain assets and liabilities:                                    |                              | 
|Unpaid loss and loss adjustment expense                                       |                              | 
|Income tax payable                                                            |                              | 
|Reinsurance recoverables, net of reinsurance withheld                         |                              | 
|Unearned premiums, net of deferred premiums                                   |                              | 
|and premiums receivable                                                       |                              | 
|Accrued investment income                                                     |                              | 
|Other assets and other liabilities                                            |                              | 
|Net cash provided by operating activities                                     |                              | 
|                                                                              |                             
|Cash flows from investing activities:                                         |                             
|Purchases of investments                                                      |                              | 
|Sales of investments                                                          |                              | 
|Maturities and redemption of investments                                      |                              | 
|Purchases of property and equipment                                           |                              | 
|Net cash used in investing activities                                         |                              | 
|                                                                              |                             
|Cash flows from financing activities:                                         |                              | 
|Proceeds from exercise of stock options                                       |                              | 
|Deferred tax benefit from disqualifying dispositions                          |                              | 
|Grant of restricted shares of common stock                                    |                              | 
|Net proceeds from follow-on public offering of common stock                   |                              | 
|Net cash provided by financing activities                                     |                              | 
|                                                                              |                             
|Net increase (decrease) in cash and cash equivalents                          |                              | 
|Cash and cash equivalents at beginning of period                              |                              | 
|Cash and cash equivalents at end of period                                    |                              | 
|                                                                              |                             
|Supplemental disclosures:                                                     |                             
|Interest paid on surplus notes                                                |                              | 

See accompanying
notes to unaudited condensed consolidated financial statements.

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##### Table of Contents

# 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.

At
the time of the Acquisition, KEIC was licensed to write workers compensation
insurance in 43 states and the District of Columbia. Domiciled in the State of
Illinois and commercially domiciled in the State of California, it wrote both state act
workers compensation insurance and United States Longshore and Harborworkers
Compensation Act (USL&H) insurance. 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. As further discussed in Note 5.a., in connection with the Acquisition,
KEIC and LMC entered into an agreement whereby LMC agreed to indemnify KEIC in the event
of adverse development of the reserves stated on KEICs balance sheet at the
Acquisition date, for a period of approximately eight years. In addition, KEIC agreed to
share with LMC any positive development of those reserves. December 31, 2011 is the date
to which the parties will look to determine whether the loss and loss adjustment expenses
with respect to KEICs insurance policies in effect at the date of the Acquisition
have increased or decreased from the amount existing at the date of the Acquisition.

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 March 31, 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. Eagle
wrote state act workers compensation insurance and USL&H insurance before their
policies went into run-off on September 30, 2003.

# 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 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 months ended March 31, 2007 are not necessarily indicative of the results expected
for the full fiscal year or for any future period.

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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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
period). The portion of premium that is applicable to the unexpired period of a policy
in-force is not included in revenue but is deferred and recorded 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
month periods ended March 31, 2007 and 2006, approximately 12.5% and 27.1%, respectively,
of direct premiums written related to retrospectively rated policies.

The
Company estimates the amount of premiums that have been earned but are unbilled at the end
of the period by analyzing historical earned premium adjustments made and applying an
adjustment percentage against premiums earned for the period. Included in deferred
premiums is an accrual for earned but unbilled premiums of $1.2 million at March 31, 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.

We
used a consulting actuary to assist in the evaluation of the reasonableness of our
liability for unpaid loss and loss adjustment expense. 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;  

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##### Table of Contents

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

| |  | 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 periodically and any necessary adjustment is
included in the results of operations of the period in which the adjustment is determined.

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 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 monitors the financial condition
of its reinsurers and does not believe that it is currently exposed to any material credit
risk through our 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 March 31, 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 March 31, 2007, the Company had no accrued interest or penalties
related to uncertain tax positions.

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##### Table of Contents

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 periods ended March
31, 2007 and 2006:

|                                                                    | Three Months Ended March 31, | 
|------------------------------------------------------------------- | ---------------------------- | 
|
|
|Basic weighted average shares outstanding                           |                              | 
|Weighted average shares issuable upon exercise of outstanding stock |                              | 
|options and vesting of nonvested stock                              |                              | 
|Diluted weighted average shares outstanding                         |                              | 

h.  
Stock-Based Compensation

The
Company adopted SFAS No. 123R, Share-Based Payment, on January 1, 2006, using the
modified-prospective transition method. Prior to adoption, the Company measured its
employee stock-based compensation arrangements using the provisions outlined in Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, which is an intrinsic value-based method of recognizing compensation costs,
and adopted the disclosure-only provisions of SFAS No. 123, Accounting for
Stock-based Compensation. None of the Companys stock options granted prior to
adoption had an intrinsic value at grant date and, accordingly, no compensation cost was
recognized for its stock option plan activity prior to adoption.

Under
the modified-prospective transition method, stock-based compensation cost is recognized in
the unaudited condensed consolidated financial statements for granted, modified, or
settled share-based payments. Compensation cost recognized includes the estimated cost for
stock options granted on or after January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123R, and the estimated expense
for the portion of awards granted prior to January 1, 2006 vesting in the current period,
based on the grant date fair value estimated in accordance with the original provisions of
SFAS No. 123. Results for prior periods have not been restated, as provided for under the
modified-prospective method.

Total
stock-based compensation expense recognized in the unaudited condensed consolidated
statements of operations for the three month periods ended March 31, 2007 and 2006 is
shown in the following table. No compensation cost was capitalized during the periods
shown.

|                                              | Three Months Ended March 31, | 
|--------------------------------------------- | ---------------------------- | 
|
|
|Stock option compensation expense related to: |                              | 
|Nonvested stock                               |                              | 
|Stock options                                 |                              | 
|Total                                         |                              | 
|                                              |                              | 
|Total related tax benefit                     |                              | 

i.  
Comprehensive Income

The
following table summarizes the Companys comprehensive income for the three month
periods ended March 31, 2007 and 2006:

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##### Table of Contents

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|                                                                                 | Three Months Ended March 31, | 
|-------------------------------------------------------------------------------- | ---------------------------- | 
|
|
|Net income                                                                       |                              | 
|Reclassification adjustment for realized losses recorded into income,            |                              | 
|net of tax benefit of $19 in 2007 and $79 in 2006                                |                              | 
|Decrease (increase) in unrealized losses on investment securities available-for- |                             
|sale, net of tax benefit of $92 in 2007 and $1,275 in 2006                       |                              | 
|Total comprehensive income                                                       |                              | 

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 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.

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##### Table of Contents

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

# 3.   Investments

The
consolidated cost or amortized cost, gross unrealized gains and losses, and estimated fair
value of investment securities available-for-sale at March 31, 2007 are as follows:

|                                                 | Cost or
Amortized
Cost |  | Gross
Unrealized
Gains |         | Gross
Unrealized
Losses |   | Estimated
Fair Value | 
|------------------------------------------------ | ---------------------- |  | ---------------------- | ------- | ----------------------- | - | -------------------- | 
|
|U.S. Treasury securities                         |                        |  | $                      | 13,504  |                         | $ |                     | 
|Government sponsored agency securities           |                        |  |                        | 33,282  |                         |   | 19                   | 
|Corporate securities                             |                        |  |                        | 39,995  |                         |   | 26                   | 
|Tax-exempt municipal securities                  |                        |  |                        | 213,068 |                         |   | 1,369                | 
|Mortgage pass-through securities                 |                        |  |                        | 71,378  |                         |   | 414                  | 
|Collateralized mortgage obligations              |                        |  |                        | 2,456   |                         |   | 1                    | 
|Asset-backed securities                          |                        |  |                        | 44,426  |                         |   | 111                  | 
|Total fixed income securities available-for-sale |                        |  |                        | 418,109 |                         |   | 1,940                | 
|Equity securities                                |                        |  |                        | 3,225   |                         |   | 41                   | 
|Total investment securities available-for-sale   |                        |  | $                      | 421,334 |                         | $ | 1,981                | 

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 Company had
no direct investments in equity securities at March 31, 2007. The unrealized loss on
temporarily impaired investments totaled $2.1 million at March 31, 2007 for investment
securities available-for-sale with a fair value of $199.8 million. Approximately $1.6
million of total unrealized losses at March 31, 2007 were from securities that had been
impaired for more than one year. At March 31, 2007, no unrealized loss exceeded 20% of the
related securitys book value at that date. The following table presents information
about fixed maturity securities with unrealized losses at March 31, 2007:

Fixed maturity securities with unrealized losses at March 31, 2007
    
    AggregateFair Value
    
    AggregateUnrealizedLoss
    
    Fair Valueas % of CostBasis($ in thousands)Greater than or equal to $50,000 and for:One year or longer (3 issues)
    
    $
    7,057
    
    $
    (212
    )
    
    97.1
    %Less than $50,000 and for:Less than one year (84 issues)
    
    
    92,239
    
    
    (425
    )
    
    99.5
    %One year or longer (152 issues)
    
    
    100,506
    
    
    (1,420
    )
    
    98.6
    %Total
    
    $
    199,802
    
    $
    (2,057
    )
    
    99.0
    %


---

The
Company regularly reviews its fixed maturity 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 fair values less than amortized cost at March 31, 2007 and 2006 and
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 or for a period of time sufficient for recovery of
their carrying amount. Therefore, no other-than-temporary impairment losses were recorded
in the three month periods ended March 31, 2007 and 2006.

The
amortized cost and estimated fair value of fixed income securities available-for-sale at
March 31, 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.

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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|Maturity                                       |  | Cost or
Amortized
Cost |   | Estimated
Fair Value | 
|---------------------------------------------- |  | ---------------------- | - | -------------------- | 
|
|Due in one year or less                        |  |                        | $ | 21,682               | 
|Due after one year through five years          |  |                        |   | 79,775               | 
|Due after five years through ten years         |  |                        |   | 164,947              | 
|Due after ten years                            |  |                        |   | 33,445               | 
|Securities not due at a single maturity date   |  |                        |   | 118,260              | 
|Total investment securities available-for-sale |  |                        | $ | 418,109              | 

The
consolidated amortized cost of investment securities available-for-sale deposited with
various regulatory authorities at March 31, 2007 was $162.7 million.

# 4.   Premiums

Direct
premiums written totaled $57.8 million and $51.2 million for the three month periods ended
March 31, 2007 and 2006, respectively.

Premiums
receivable consist of the following at March 31, 2007 and December 31, 2006:

|                                | March 31,
2007 |  | December 31,
2006 |       
|------------------------------- | -------------- |  | ----------------- | ------
|
|Premiums receivable             |                |  | $                 | 7,317 
|Allowance for doubtful accounts |                |  |                   | (1,235
|                                |                |  | $                 | 6,082 

# 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.

On
October 1, 2006, the Company entered into new reinsurance agreements with nonaffiliated
reinsurers wherein it retains the first $1.0 million of each loss occurrence. The new
reinsurance program, which is effective through October 1, 2007, provides coverage up to
$75.0 million per loss occurrence as follows:

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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|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 an aggregate annual limit of $7.5 million maximum for any
one loss and an aggregate limit of $20.0 million.                                                                                                                                                                                                                                                                                                                                                                               
|$55.0 million excess of $20.0 million each los occurrence  |  | Fully reinsured in two sub-layers. The first sub-layer
         affords coverage of up to $30.0 million for each loss
         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 aggregate annual limit of $50.0
         million. Both
         sub-layers are subject to a limit of $5.0
         million maximum for any one loss.

The
above coverage is 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, calls for LMC to reimburse SBIC 100%
of the excess of the actual loss at December 31, 2011 over the initial loss reserves
at September 30, 2003. The Agreement also calls for SBIC to reimburse LMC 100% of the
excess of the initial loss reserves 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 consolidated balance sheets was $2.8 million at
March 31, 2007. Any increase or decrease in the amount receivable from LMC is netted
against loss and loss adjustment expense in the accompanying consolidated statements of
operations.

As
part of the Agreement, LMC placed into trust (the Trust) $1.6 million, equal
to 10% of the balance sheet reserves of SBIC at 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 $3.4 million at March 31, 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, we
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 March
31, 2007 include the following: Alabama, Alaska, Arizona, Arkansas, Georgia, Illinois,
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 March 31, 2007 and December 31, 2006:

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##### Table of Contents

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|                                                                     | March 31,
2007 |  | December 31,
2006 |       
|-------------------------------------------------------------------- | -------------- |  | ----------------- | ------
|
|Reinsurance recoverables on unpaid loss and loss adjustment expenses |                |  | $                 | 12,252
|Reinsurance recoverables on paid losses                              |                |  |                   | 122   
|Total reinsurance recoverables                                       |                |  | $                 | 12,374

The
effects of reinsurance are as follows for the three month periods ended March 31,
2007 and 2006:

|                                             | Three Months Ended March 31, | 
|-------------------------------------------- | ---------------------------- | 
|
|
|Reinsurance assumed:                         |                              | 
|Written premiums                             |                              | 
|Earned premiums                              |                              | 
|Losses and loss adjustment expenses incurred |                              | 
|Commission expenses incurred                 |                              | 
|                                             |                              | 
|Reinsurance ceded:                           |                              | 
|Written premiums                             |                              | 
|Earned premiums                              |                              | 
|Losses and loss adjustment expenses incurred |                              | 
|Commission expenses incurred                 |                              | 

# 6.   Unpaid Loss and Loss
Adjustment Expenses

The
following table summarizes the activity in unpaid loss and loss adjustment expense for the
three month periods ended March 31, 2007 and 2006:

|                                        | Three Months Ended March 31, | 
|--------------------------------------- | ---------------------------- | 
|
|
|Beginning balance:                      |                              | 
|Unpaid loss and loss adjustment expense |                              | 
|Reinsurance recoverables                |                              | 
|Net balance, beginning of period        |                              | 
|Incurred related to:                    |                              | 
|Current period                          |                              | 
|Prior periods                           |                              | 
|Total incurred                          |                              | 
|Paid related to:                        |                              | 
|Current period                          |                              | 
|Prior periods                           |                              | 
|Total paid                              |                              | 
|Net balance, end of period              |                              | 
|Reinsurance recoverables                |                              | 
|Unpaid loss and loss adjustment expense |                              | 

Loss
and loss adjustment expenses are net of the release of loss reserves totaling
approximately $7.2 million and $1.7 million in the three month periods ended March 31,
2007 and 2006, respectively. These reserve releases reflect the better-than-expected
impacts on losses related primarily to the Companys California book of business 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

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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3-month LIBOR rate
plus 400 basis points, subject to certain limitations. Interest expense for the three
month periods ended March 31 totaled $281,000 in 2007 and $256,000 in 2006.

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 March 31, 2007, SBIC had a liability for guaranty fund and other assessments
          of $3.1 million and a guaranty fund receivable of $2.7 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.

# 9.   Share-Based Payment
Arrangements

At
March 31, 2007, the Company had outstanding stock options and nonvested 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 in April 2007, 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, and amended and
restated the 2005 Plan in April 2007.

The
Board of Directors reserved an initial total of 776,458 shares of common stock under the
2003 Plan and 1,047,755 shares of common stock under the 2005 Plan, plus an automatic
annual increase under the 2005 Plan on the first day of each fiscal year beginning in 2006
and ending in 2015 equal to the lesser of: (i) 2% of the shares of common stock
outstanding on the last day of the immediately preceding fiscal year or; (ii) such lesser
number of shares as determined by the Board of Directors. At March 31, 2007, the Company
reserved 487,683 shares of common stock for issuance under the 2003 Plan, all of which had
been granted, and 1,787,046 shares for issuance under the 2005 Plan, of which 980,563
shares had been granted. In January 2006, the Compensation Committee of the Board of
Directors terminated the ability to grant future stock options awards under the 2003 Plan.
Therefore, the Company anticipates that all future awards will be made under the 2005
Plan.

The
2005 Plan provides for the grant of incentive or non-qualified stock options, restricted
stock, restricted stock units, deferred stock units, performance awards, or any
combination of the foregoing. The Board of Directors has the authority to determine all
matters relating to awards granted under the Stock Option Plans, including designation as
incentive or nonqualified stock options, the selection of individuals to be granted
options, the number of shares subject to each grant, the exercise price, the term and the
vesting period, if any. Options to purchase the Companys common stock are granted at
prices at or above the fair value of the common stock on the date of grant, generally vest
25% per year on each of the first four anniversaries of the vesting start date, and expire
10 years from the date of grant. Options granted to non-employee directors generally vest
over a three-year period, with one-fourth of the options vesting on the first anniversary
of the grant date and the remaining two-thirds vesting equally on a monthly basis over the
following 24 months. Nonvested stock issued to employees and directors generally vests on
the third anniversary of the grant date, assuming the holder is still employed by or
providing service to the Company and satisfies all other conditions of the grant. Stock
options granted to employees may be incentive stock options or non-qualified stock
options, while options granted to non-employee directors are non-qualified stock options.

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##### Table of Contents

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The
Company issues new shares of common stock upon exercise of stock options or award of
nonvested shares.

a.  
Stock Options

The
fair values of stock options granted during the quarters ended March 31, 2007 and 2006
were determined on the dates of grant using the Black-Scholes-Merton
(Black-Scholes) option valuation model with the following weighted average
assumptions:

|                                | Three Months Ended March 31, | 
|------------------------------- | ---------------------------- | 
|
|Expected term (years)           |                              | 
|Expected stock price volatility |                              | 
|Risk-free interest rate         |                              | 
|Expected dividend yield         |                              | 
|                                |                              | 
|Estimated fair value per option |                              | 

For
2007, the expected term of options was determined using the simplified method,
which averages an awards weighted average vesting period and its contractual term.
For 2007, expected stock price volatility was based on a weighted average of the
Companys historical stock price volatility since the initial public offering of its
common stock in January 2005 and the historical volatility of a peer companys stock
for a period of time equal to the expected term of the option. The risk-free interest rate
is based on the yield of U.S. Treasury securities with an equivalent remaining term. The
Company has not paid dividends in the past and does not plan to pay any dividends in the
near future.

The
assumptions used to calculate the fair value of options granted are evaluated and revised,
as necessary, to reflect market conditions and the Companys historical experience
and future expectations. The calculated fair value is recognized as compensation cost in
the Companys financial statements over the requisite service period of the entire
award. Compensation cost is recognized only for those options expected to vest, with
forfeitures estimated at the date of grant and evaluated and adjusted periodically to
reflect the Companys historical experience and future expectations. Any change in
the forfeiture assumption is accounted for as a change in estimate, with the cumulative
effect of the change on periods previously reported being reflected in the financial
statements of the period in which the change is made.

The
following table summarizes stock option activity for the quarter ended March 31, 2007:

|                                 | Shares
Subject to
Options |  | Weighted
Average Exer-
cise Price
per Share |           | Weighted
Average Re-
maining Con-
tractual Life
(years) |   | Aggregate
Intrinsic
Value
(in
thousands) | 
|-------------------------------- | ------------------------- |  | ------------------------------------------- | --------- | ------------------------------------------------------- | - | ---------------------------------------- | 
|
|Outstanding at December 31, 2006 |                           |  |                                             | 918,154   |                                                         | $ | 9.39                                     | 
|Granted                          |                           |  |                                             | 90,500    |                                                         |   | 18,17                                    | 
|Forfeited                        |                           |  |                                             |          |                                                         |   |                                         | 
|Exercised                        |                           |  |                                             | (4,304    | )                                                       |   | 9.18                                     | 
|Cancelled                        |                           |  |                                             |          |                                                         |   |                                         | 
|Outstanding at March 31, 2007    |                           |  |                                             | 1,004,350 |                                                         |   | 10.18                                    | 
|                                 |                           |  |                                             |           |                                                         |   |                                          | 
|Exercisable at March 31, 2007    |                           |  |                                             | 512,044   |                                                         |   | 8.20                                     | 

The aggregate
intrinsic values in the table above are before applicable income taxes and are based on
the Companys closing stock price of $18.40 on March 31, 2007. As of March 31, 2007,
total unrecognized stock-based compensation cost related to nonvested stock options was
approximately $1.6 million, which is expected to be recognized over a weighted average
period of approximately 34 months. Proceeds from the exercise of stock options totaled
approximately $39,500 for the three months ended March 31, 2007. The total intrinsic value
of stock options exercised during the three months ended March 31, 2007 was approximately
$38,900.

As
of March 31, 2007, there were 806,483 shares of common stock available for issuance of
future share-based

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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

awards. The following table presents additional information regarding
options outstanding as of March 31, 2007:

|            | Options Outstanding |  | Options Exercisable |          
|----------- | ------------------- |  | ------------------- | ---------
|
|$ 6.54      |                     |  |                     | 480,488  
|10.50-12.54 |                     |  |                     | 309,612  
|15.44-18.40 |                     |  |                     | 214,250  
|            |                     |  |                     | 1,004,350

b.  
Nonvested Stock

The
following table summarizes nonvested stock activity for the quarter ended March 31, 2007:

|                                 | Number of
Shares |  | Weighted
Average
Grant Date
Fair Value
|-------------------------------- | ---------------- |  | --------------------------------------
|Outstanding at December 31, 2006 |                  |  |                                       
|Granted                          |                  |  |                                       
|Vested                           |                  |  |                                       
|Forfeited                        |                  |  |                                       
|Outstanding at March 31, 2007    |                  |  |                                       

As of March 31, 2007, there was $6.6 million of total unrecognized compensation cost related to nonvested stock granted under the
2005 Plan. That cost is expected to be recognized over a weighted-average period of 31.0 months. No shares vested during the quarter
ended March 31, 2007.

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##### Table of Contents

# 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                                                                                                                                                                                                           

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##### Table of Contents

| |  | changes in general economic conditions, including inflation and other factors.
| | - | ------------------------------------------------------------------------------

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 the
development of 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 positive 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 $3.4
million at March 31, 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. If LMC is placed into receivership and the

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amount held in the collateralized
reinsurance trust is inadequate to satisfy the obligations of LMC to us under the adverse
development cover, 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, net investment income and net realized
gains and losses from investments, and service income. 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
Washington 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 and net premiums written. The following table provides
a reconciliation of gross premiums written and net premiums written to net premiums
earned:

|                                                | Three Months Ended March 31, | 
|----------------------------------------------- | ---------------------------- | 
|
|
|Direct premiums written                         |                              | 
|Assumed premiums written                        |                              | 
|Gross premiums written                          |                              | 
|Ceded premiums                                  |                              | 
|Net premiums written                            |                              | 
|Change in unearned premiums, net of reinsurance |                              | 
|Premiums earned                                 |                              | 

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.

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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 three months ended March 31, 2007 and 2006, approximately
49.8% and 72.8%, respectively, of our claims service income was generated by contracts we
have with LMC to provide claims handling services for the policies written by Eagle prior
to the Acquisition. We expect income from these contracts to decrease substantially over
the next several years as transactions related to Eagle diminish.

Other
Service Income

Following
the Acquisition, we entered into servicing arrangements with LMC to provide policy
administration and accounting services for the policies written by Eagle 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
Eagle 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 we use in measuring
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; licenses and 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 we
use in measuring 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

Included
in other expense is interest expense we incur 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
Months Ended March 31, 2007 and 2006

Gross
Premiums Written. Gross premiums written for the three months ended March 31, 2007
totaled $59.9 million, an increase of $5.2 million, or 9.5%, over $54.7 million of gross
premiums written 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 at March 31, 2007 increased 45.5% to 745 from 512 at March
31, 2006 and in-force payrolls, one of the factors used in determining premium charges,
increased 59.3% from $2.7 billion at March 31, 2006 to $4.3 billion one year later.
California continues to be our largest market, accounting for approximately

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$25.8 million
(44.8%) of our direct premiums written in the quarter. This represents a decrease of $4.1
million (13.7%) from approximately $29.9 million (58.4%) of direct premiums written for
the same period of 2006.

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 new Southeast region is developing business in selected southeastern states, including
Florida. This new region contributed approximately $1.4 million to our direct premiums
written in the quarter ended March 31, 2007. The Gulf region, which is based in Houston,
Texas, now focuses primarily on developing business in the states of Texas and Louisiana.
This new region contributed approximately $6.1 million to our direct premiums written in
the first quarter of 2007. Louisiana is our third largest market, accounting for $5.1
million (8.9%) of our direct premiums written in the first quarter of 2007. This
represents an increase of $3.7 million (264.3%) from the same period in 2006. Our second
largest market for the first quarter of 2007 was Alaska, which accounted for $5.6 million
(9.8%) of our direct premiums written. Our three top markets of California, Alaska and
Louisiana accounted for combined direct written premiums for the quarter ended March 31,
2007 of $36.5 million, or approximately 63.5% of our total direct written premiums for
that period.

As
previously announced, on November 22, 2006, we filed with the California Department of
Insurance our rates for new and renewal workers compensation insurance policies
written in California on or after January 1, 2007. The filing was approved on December 19,
2006. The new rates reflect an average reduction of 9.5% from prior rates and are in
response to emerging favorable trends in loss costs resulting from reform legislation. On
March 30, 2007, the California Workers Compensation Insurance Rating Bureau (the
WCIRB) submitted a filing with the California Insurance Commissioner to
recommend 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. The California Insurance
Commissioner has not announced his recommendation regarding the proposed rate reduction.
The California Insurance Commissioners decision is advisory only and insurance
companies may choose whether or not to adopt the new rates. At this time, we are unable to
predict the impact that the proposed rate reductions, if approved and adopted by us, might
have on our future financial position and results of operations.

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.

Net
Premiums Written. Net premiums written totaled $56.3 million for the three months
ended March 31, 2007 compared to $50.8 million in the same period in 2006, representing an
increase of $5.4 million, or 10.6%. Net premiums written are affected by premiums ceded
under reinsurance agreements. Ceded written premiums for the three months ended March 31,
2007 totaled $3.7 million (6.2% of gross premiums written) compared to $3.9 million (7.1%
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 totaled $48.6 million for the three months ended
March 31, 2007 compared to $44.0 million for the same period in 2006, representing an
increase of $4.6 million, or 10.5%. 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 increased $5.8 million or 13.1% to $50.2 million at March 31, 2007 from
$44.4 million at March 31, 2006 due to our premium growth as described above. Net premiums
earned are also affected by premiums ceded under reinsurance agreements. Ceded premiums
earned at March 31, 2007 totaled $3.6 million compared to $4.0 million at March 31, 2006,
representing a decrease of $0.4 million or 10.0%. A decrease in ceded premiums earned is
an increase to our overall net premiums earned. Offsetting the increases in net premiums
earned is a decrease 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.
Assumed premiums earned decreased $1.6 million from $3.6 million at March 31, 2007 to $2.0
million at March 31, 2007.

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Net
Investment Income. Net investment income was $4.8 million for the three months ended
March 31, 2007 compared to $3.1 million for the same period in 2006, representing an
increase of $1.7 million, or 54.8%. Average invested assets increased $116.0 million
(37.0%) from $313.5 million as of March 31, 2006 to $429.5 million as of March 31, 2007.
This increase is due primarily to a larger portfolio base at March 31, 2007 as a result of
the $57.6 million in proceeds from our follow-on offering of common stock in February 2006
and strong cash flow from operations of $90.3 for the year ended December 31, 2006 and
$18.7 million for the three months ended March 31, 2007. Our yield on average invested
assets for the three months ended March 31, 2007 was approximately 4.4% compared to
approximately 4.0% for the same period in 2006.

Service
Income. Service income totaled $580,000 for the three months ended March 31, 2007
compared to $551,000 for the same period in 2006, representing an increase of $29,000, or
5.3%. Our service income results primarily from service arrangements we have with LMC for
claims processing and policy administration services that we perform for Eagles
insurance policies and from claims processing services that we perform for other unrelated
companies. Average monthly fees from Eagle are declining as the volume of work decreases
as a result of the run off of our predecessors business. Service income related to
our arrangements with LMC decreased $119,000 (29.1%) to $290,000 for the three months
ended March 31, 2007 from $409,000 for the same period in 2006. Service income related to
claims processing services that we perform for other unrelated companies increased
approximately $148,000 and accounted for approximately 50.0% of our service income for the
three months ended March 31, 2007, compared to 25.8% of service income in the same period
of 2006.

Other
Income. Other income totaled $1.0 million for the three months ended March 31, 2007
compared to $0.8 million for the same period in 2006, representing an increase of $0.2
million, or 25.0%. Other income is derived primarily from the operations of PointSure, our
non-insurance subsidiary which, due to the expansion of its portfolio of insurance
products during 2006, has been able to increase the amount income from sources other than
us. PointSure represents 20 insurance companies at March 31, 2007.

Loss
and Loss Adjustment Expenses. Loss and loss adjustment expenses totaled $25.9 million
for the three months ended March 31, 2007 compared to $28.5 million for the same period in
2006, representing a decrease of $2.6 million, or 9.1%. 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 March 31, 2007 was 52.2% compared to 63.6% for
the same period in 2006. Included in the 2007 loss ratio was a reduction of approximately
$7.2 million of previously recorded direct net loss reserves to reflect a continuation of
deflation trends in the paid loss data for recent accident years. Our direct net loss
reserves are net of reinsurance and exclude reserves associated with KEIC and the business
that we involuntarily assume from the NCCI. Approximately $2.0 million of the reserve
adjustment related to accident year 2006, approximately $5.0 million related to accident
year 2005 and approximately $0.2 million related to accident years 2004 and prior.

There
is uncertainty about whether recent lower paid loss trends, which result primarily from
California legislative reforms enacted 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 March 31, 2007 that are based upon our current best
estimate of loss costs, taking into consideration the recent lower paid loss claim data,
incurred loss trends and the uncertainty regarding the permanence of recent legislative
reforms.

As
of March 31, 2007, we had recorded a receivable of approximately $2.8 million for adverse
loss development under the adverse development cover 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. At March 31,
2007, we have access to approximately $3.4 million under the collateralized reinsurance
trust in the event that LMC fails to satisfy its obligations under the adverse development
cover. 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.

Underwriting
Expenses. Underwriting expenses totaled $12.6 million for the three months ended March
31, 2007, compared to $9.7 million for the same period in 2006, representing an increase
of $2.9 million, or 30.0%. Our net underwriting expense ratio, which is calculated by
dividing underwriting, acquisition and insurance expenses less other service income by
premiums earned, for the three months ended March 31, 2007 was 25.9%, compared to 22.1%
for the same period in 2006. The increase in the expense ratio is primarily the result of
increased number of staff and staffing related costs and other premium production related
expenses as we continue to grow our business in existing offices and the opening of new
offices in Philadelphia and Atlanta. These two new offices have not yet

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reached the
premium production levels required to contribute to earnings. As of March 31, 2007, we had
197 full-time equivalent employees, compared to 162 at March 31, 2006.

Interest
Expense. Interest expense related to the surplus notes issued by our insurance
subsidiary in May 2004 totaled $281,000 for the three months ended March 31, 2007,
compared to $256,000 for the same period in 2006, representing an increase of $25,000, or
9.8%. 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
8.78% at March 31, 2006 to 9.36% at March 31, 2007.

Other
Expenses. Other expenses totaled $1.6 million for the three months ended March 31,
2007, compared to $1.1 million for same period in 2006, representing an increase of $0.5
million, or 45.5%. Other expenses are derived primarily from the operations of PointSure,
our non-insurance subsidiary which experienced direct costs associated with the expansion
of insurance products they offer.

Income Tax Expense. The effective tax rate for the three months ended March 31, 2007
and 2006 was 30.5%. Our effective tax rate for the three months ended March 31, 2007 and
2006 was lower than the statutory tax rate of 35.0% primarily as a result of tax exempt
interest income. At March 31, 2007, approximately 51.1% of our fixed-income portfolio was
invested in tax-exempt securities, compared to approximately 58.7% at March 31, 2006.

Net
Income. Net income was $10.1 million for the three months ended March 31, 2007,
compared to $6.0 million for the same period in 2006, representing an increase of $4.1
million, or 68.3%. The increase in net income resulted primarily from increases in
premiums earned and investment income and decreases in loss and loss adjustment expenses
recognized in the period, offset by increases in underwriting, acquisition and insurance
expenses, and other expenses.

# 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 March 31, 2007 has an effective duration of 4.9 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.

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. Effective October 1, 2006, our reinsurance program provides us
with reinsurance protection for each loss occurrence in excess of $1.0 million, up to
$75.0 million, subject to various additional limitations and exclusions as 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.

At
March 31, 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
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 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

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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 three months
ended March 31, 2007 was $18.7 million, compared to our cash flow from operations of $24.5
million for the same period in 2006. The decrease resulted primarily from the decreases in
unpaid loss and loss adjustment expense and deferred income tax benefit, increases in
policy acquisition costs deferred and other assets and liabilities, offset by increases in
the amortization of policy acquisition costs and balances related to reinsurance
recoverables, all as a result of the growth of our business and the continued favorable
development on our loss reserves.

We
used net cash of $21.8 million for investing activities in the three months ended March
31, 2007, compared to $70.5 million for the same period in 2006. The difference between
periods is primarily attributable to a reduction in funds available for investment from
financing activities, offset by an increase in funds available for investment from
operating activities. In 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
described below.

For
the three months ended March 31, 2007, financing activities provided cash of $56,000,
compared to $57.6 million in the same period in 2006. As described below, 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, including the underwriters over-allotment option to purchase 510,000 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. We contributed $50.0 million of the net proceeds to
SBIC, which is using the capital to expand its business in its core markets and to new
territories. The remaining proceeds are being used for general corporate purposes,
including supporting the growth of PointSure.

# Contractual Obligations
and Commitments

The
following table identifies our contractual obligations by payment due period as of March
31, 2007:

|                                  | Payments Due by Period | 
|--------------------------------- | ---------------------- | 
|
|
|Long term debt obligations:       |                        | 
|Surplus notes                     |                        | 
|Loss and loss adjustment expenses |                        | 
|Operating lease obligations       |                        | 
|Total                             |                        | 

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 March 31, 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 we write. 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
March 31, 2007, we had no off-balance sheet arrangements that have or are reasonably
likely to have a material current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.

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# Critical Accounting
Policies, Estimates and Judgments

It
is important to understand our accounting policies in order to understand our financial
statements. We consider some of these policies to be critical to the presentation of our
financial results, since they require management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures at the financial reporting date and throughout the period
being reported upon. Some of the estimates result from judgments that can be subjective
and complex, 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;
accounting for our adverse development cover; deferred policy acquisition costs; deferred
taxes; goodwill and other intangible assets; retrospective premiums; earned but unbilled
premiums; and the impairment of investment securities. The following should be read in
conjunction with the notes to our financial statements.

Unpaid
Loss and Loss Adjustment Expenses

Unpaid
loss and loss adjustment expenses represent 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 expenses are amounts for case-based insurance
liabilities, including estimates of future developments on these claims; claims incurred
but not yet reported to us; second injury fund expenses; allocated claim adjustment
expenses; and unallocated claim adjustment expenses. We use actuarial methodologies to
assist us in establishing these estimates, including 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. Due to the inherent uncertainty associated with the cost of unsettled and
unreported claims, the ultimate liability may differ from the original estimates. These
estimates are regularly reviewed and updated and any resulting adjustments are included in
the current periods operating results. Because of the relative immaturity of our
unpaid loss and loss adjustment expense data, actuarial techniques are applied that use
the historical experience of our predecessor as well as industry information in the
analysis of our unpaid loss and loss adjustment expenses.

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
unaudited condensed consolidated balance sheets 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. In
addition, we bear credit risk with respect to the reinsurers, which can be significant
considering that some of the unpaid loss and loss adjustment expenses remain outstanding
for an extended period of time.

Adverse
Development Cover

The
unpaid loss and loss adjustment expense subject to the adverse development cover with LMC
is calculated on a quarterly basis using generally accepted actuarial methodologies.
Amounts recoverable in excess of acquired insurance liabilities at September 30, 2003 are
recorded gross in unpaid loss and loss adjustment expense in accordance with SFAS No. 141,
Business Combinations,with a corresponding amount receivable from the seller.
Amounts are shown net in the statement of operations.

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
investment income, anticipated losses and settlement expenses and certain other costs that
we expect to incur as the premium is earned. Judgments as to ultimate recoverability of
these deferred costs are highly dependent upon estimated future loss costs associated with
the premiums written.

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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 statement of operations 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. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this assessment. If
necessary, we would establish a valuation allowance to reduce the deferred tax assets to
the amounts more likely than not to be realized.

Goodwill
and Other Intangible Assets

Goodwill
represents the excess of costs over fair value of assets of businesses acquired. Goodwill
and other intangible assets acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but are instead tested for impairment at
least annually. Intangible assets with estimable useful lives are amortized over their
respective estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets.

Retrospective
Premiums

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.
Retrospectively rated policies accounted for approximately 12.5% and 27.1% of direct
premiums written in the three month periods ended March 31, 2007 and 2006, respectively.

Earned
But Unbilled Premiums

We
estimate the amount of premiums that have been earned but are unbilled at the end of the
period by analyzing historical earned premium adjustments made and applying an adjustment
percentage against premiums earned for the period.

Impairment
of Investment Securities

Impairment
of investment securities results in a charge to operations when the fair value of a
security declines to below our cost and is deemed to be other-than-temporary. We regularly
review our fixed maturity 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. In general, we focus on those securities whose fair values
were 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 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.

# 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

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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.

# 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 managers, 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 $418.0 million at March 31, 2007 that
are subject to interest rate risk, compared with $326.8 million at March 31, 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 March 31, 2007 and 2006. It
illustrates the sensitivity of the fair value of fixed-income investments to selected
hypothetical changes in interest rates as of March 31, 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.

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##### Table of Contents

Interest Rate Risk as of
March 31, 2007

Hypothetical Change in Interest Rates
    
    EstimatedChange inFair Value
    
    Fair Value
    
    HypotheticalPercentageIncrease(Decrease) in
        PortfolioValue($ in thousands)200 basis point increase
    
    $
    (33,443
    )
    $
    384,549
    
    
    (8.0
    )%100 basis point increase
    
    
    (16,416
    )
    
    401,576
    
    
    (3.9
    )%No change
    
    
    
    
    
    417,992
    
    
    100 basis point decrease
    
    
    15,804
    
    
    433,796
    
    
    3.8
    %200 basis point decrease
    
    
    30,997
    
    
    448,989
    
    
    7.4
    %


Interest Rate Risk as of March
31, 2006

Hypothetical Change in Interest Rates
    
    EstimatedChange inFair Value
    
    Fair Value
    
    HypotheticalPercentageIncrease(Decrease) in
        PortfolioValue($ in thousands)200 basis point increase
    
    $
    (26,989
    )
    $
    299,806
    
    
    (8.3
    )%100 basis point increase
    
    
    (13,535
    )
    
    313,260
    
    
    (4.1
    )%No change
    
    
    
    
    
    326,795
    
    
    100 basis point decrease
    
    
    13,617
    
    
    340,412
    
    
    4.2
    %200 basis point decrease
    
    
    27,316
    
    
    354,111
    
    
    8.4
    %


# Item 4.   Controls and
Procedures

Disclosure
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 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 first
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

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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 March 30, 2007, the WCIRB submitted an additional filing with the
California Insurance Commissioner to recommend 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.
The California Insurance Commissioner has not announced his recommendation regarding the
proposed rate reduction.

As
previously noted, we are unable to predict the impact that proposed rate reductions, 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 March 31,
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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##### Table of Contents

# 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.

|                    |                                    |                                                                                                      |  | 
|------------------- | ---------------------------------- | ---------------------------------------------------------------------------------------------------- |  | 
|                    | SEABRIGHT INSURANCE HOLDINGS, INC.
|Date:  May 10, 2007 |                                    |                                                                                                      | 
|                    | By:                                | /s/  Joseph S. De Vita                                                                               | 
|                    |                                    | Joseph S. De Vita                                                                                    | 
|                    |                                    | Senior Vice President, Chief Financial Officer
and Assistant Secretary (Principal Financial Officer)
|                   

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##### Table of Contents

# EXHIBIT INDEX

The
list of exhibits in the Exhibit Index to this quarterly report on Form 10-Q is
incorporated herein by reference. Exhibits 10.1, 10.2, 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.

ExhibitNumber
    
    Description10.1
    
    Second Amended and Restated 2003 Stock Option Plan (incorporated by reference
to Exhibit 10.1 of the Company's Current Report on Form 8-K, filed April 3, 2007)10.2
    
    Amended and Restated 2005 Long-Term Equity Incentive Plan (incorporated by reference
to Exhibit 10.2 of the Company's Current Report on Form 8-K, filed April 3, 2007)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)