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, 2006
 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 o þ
 o þ
  Class
    
    Shares outstanding as of May 12, 2006Common Stock, $0.01 Par Value
    
    20,542,900









SeaBright Insurance Holdings, Inc.


Index to Form 10-Q


PagePart I. Financial InformationItem 1. Financial Statements
    
    
    2Condensed Consolidated Balance Sheets as of March 31, 2006 and
December 31, 2005
    
    
    2Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2006 and 2005
    
    
    3Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2006 and 2005
    
    
    4Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    24Part II. Other InformationItem 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 6. Exhibits
    
    
    26Signatures
    
    
    27Exhibit 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,
2006 |  | December 31,
2005 |        
|----------------------------------------------------------------------------- | -------------- |  | ----------------- | -------
|
|
|ASSETS                                                                        |               
|Fixed income securities available-for-sale, at fair value (amortized cost     |                |  |                   |        
|$332,645 in 2006 and $260,015 in 2005)                                        |                |  | $                 | 326,795
|Equity securities available-for-sale, at fair value (amortized cost $3,076 in |                | 
|2006 and $3,037 in 2005)                                                      |                |  |                   | 3,106  
|Cash and cash equivalents                                                     |                |  |                   | 23,822 
|Accrued investment income                                                     |                |  |                   | 3,587  
|Premiums receivable, net of allowance                                         |                |  |                   | 8,410  
|Deferred premiums                                                             |                |  |                   | 94,329 
|Federal income tax recoverable                                                |                |  |                   |       
|Service income receivable                                                     |                |  |                   | 594    
|Reinsurance recoverables                                                      |                |  |                   | 14,372 
|Receivable under adverse development cover                                    |                |  |                   | 3,352  
|Prepaid reinsurance                                                           |                |  |                   | 1,878  
|Property and equipment, net                                                   |                |  |                   | 907    
|Deferred federal income taxes, net                                            |                |  |                   | 12,524 
|Deferred policy acquisition costs, net                                        |                |  |                   | 10,929 
|Intangible assets, net                                                        |                |  |                   | 1,382  
|Goodwill                                                                      |                |  |                   | 1,527  
|Other assets                                                                  |                |  |                   | 8,871  
|Total assets                                                                  |                |  | $                 | 516,385
|                                                                             
|LIABILITIES AND STOCKHOLDERS EQUITY                                          |               
|Liabilities:                                                                  |               
|Unpaid loss and loss adjustment expense                                       |                |  | $                 | 160,063
|Unearned premiums                                                             |                |  |                   | 90,670 
|Reinsurance funds withheld and balances payable                               |                |  |                   | 248    
|Premiums payable                                                              |                |  |                   | 2,967  
|Accrued expenses and other liabilities                                        |                |  |                   | 33,540 
|Surplus notes                                                                 |                |  |                   | 12,000 
|Total liabilities                                                             |                |  |                   | 299,488
|                                                                              |               
|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 - 20,539,974 shares at March 31, 2006 and              |               
|16,411,143 shares at December 31, 2005                                        |                |  |                   | 205    
|Paid-in capital                                                               |                |  |                   | 189,211
|Accumulated other comprehensive loss                                          |                |  |                   | (3,783 
|Retained earnings                                                             |                |  |                   | 31,264 
|Total stockholders equity                                                    |                |  |                   | 216,897
|Total liabilities and stockholders equity                                    |                |  | $                 | 516,385

See accompanying
notes to 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                                  |                              | 
|Net investment income                            |                              | 
|Net realized loss                                |                              | 
|Claims service income                            |                              | 
|Other service income                             |                              | 
|Other income                                     |                              | 
|                                                 |                              | 
|                                                 |                             
|Losses and expenses:                             |                             
|Loss and loss adjustment expenses                |                              | 
|Underwriting, acquisition and insurance expenses |                              | 
|Other expenses                                   |                              | 
|                                                 |                              | 
|Income before federal income taxes               |                              | 
|                                                 |                             
|Federal 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 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                                   |                              | 
|Net realized loss on investments                                              |                              | 
|Benefit for deferred federal income taxes                                     |                              | 
|Other                                                                         |                              | 
|Changes in certain assets and liabilities:                                    |                              | 
|Federal income tax recoverable and payable                                    |                              | 
|Unpaid loss and loss adjustment expense                                       |                              | 
|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 other                                                          |                              | 
|Purchases of property and equipment                                           |                              | 
|Net cash used in investing activities                                         |                              | 
|                                                                              |                             
|Cash flows from financing activities:                                         |                              | 
|Proceeds from exercise of stock options                                       |                              | 
|Proceeds from issuance of common stock                                        |                              | 
|Net cash provided by financing activities                                     |                              | 
|                                                                              |                             
|Net increase 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 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), a Delaware corporation, was formed in June
2003. On July 14, 2003, SIH entered into a purchase agreement with Kemper Employers
Group, Inc. (KEG), Eagle Pacific Insurance Company, Inc. and Pacific Eagle
Insurance Company, Inc. (collectively Eagle or the Eagle
Entities), and Lumbermens Mutual Casualty Company (LMC)
(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.

SeaBright
Insurance Company (SBIC), formerly KEIC, is 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, SBIC focuses on
employers with complex workers compensation exposures and provides coverage under
multiple state and federal acts, applicable common law or negotiated agreements. 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.

PointSure
is engaged primarily in administrative and wholesale insurance brokerage activities. The
Eagle Entities, from whom the Company purchased certain assets, were both writers of state
act workers compensation insurance and United States Longshore and Harbor
Workers Compensation Act (USL&H) insurance, whose policies went into
run-off on September 30, 2003.

Under
new ownership, 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, the Illinois Department of Financial and Professional
Regulation, Division of Insurance (the Illinois Division of Insurance) granted
permission for KEIC to change its name to SeaBright Insurance Company.

# 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, PointSure and SBIC (collectively,
the Company). 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 Regulation
S-K. 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, 2005 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, 2005 included in the Companys Annual Report on
Form 10-K, which was filed with the U.S. Securities and Exchange Commission on March 29,
2006.

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, 2006 are not necessarily indicative of the results expected
for the full fiscal year or for any future period.

b.
Use of Estimates

The
preparation of the unaudited condensed consolidated financial statements in conformity
with GAAP requires management of the Company to make a number of estimates and assumptions
relating to the reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the unaudited condensed consolidated financial
statements and the reported amounts of revenues and expenses during the period. For
example, the Company used significant estimates in determining the unpaid loss and loss
adjustment expenses, goodwill and other intangibles, earned premiums on retrospectively
rated policies, earned but unbilled premiums, federal income taxes and amounts related to
reinsurance and stock-based compensation arrangements. Actual results

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##### Table of Contents

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

could differ from
those estimates. Such estimates and judgments could change in the future as more
information becomes known, which could impact the amounts reported and disclosed herein.

c.
Revenue Recognition

Premiums
for primary and reinsured risks are included in revenue over the lives of the contracts in
proportion to the amount of insurance protection provided (i.e., ratably over the policy
periods). The portions of premiums that are applicable to the unexpired periods of the
policies in-force are not included in revenue but are deferred and recorded 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. For the three month periods ended March 31, 2006 and 2005,
approximately 27.1% and 25.9%, respectively, of premiums written related to
retrospectively rated policies.

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. The loss adjustment expense component
is an estimate 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.

The
Company uses an independent actuary to assist in the evaluation of the adequacy of its
liability for unpaid loss and loss adjustment expense. In light of the Companys
short operating history and uncertainties concerning the effects of recent 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s predecessor as well as industry information in the
analysis of unpaid loss and loss adjustment expense. These techniques recognize, among
other factors:

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

Although
it is not possible to measure the degree of variability inherent in such estimates,
management believes that the liability for unpaid loss and loss adjustment expense is
adequate. 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 with nonaffiliated reinsurers
certain levels of risk in various areas of exposure. Reinsurance premiums, commissions,
expense reimbursements and liabilities related to ceded business are accounted for on a
basis consistent with that used in accounting for original policies

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##### Table of Contents

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 on a quarterly basis using generally
accepted actuarial methodology. 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 Statement of Financial Accounting Standards (SFAS)
No. 141, Business Combinations, with a corresponding amount receivable from the
seller. Amounts are shown net in the statement 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.

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.

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, 2006 and 2005:

|                                                                           | Three Months Ended March 31, | 
|-------------------------------------------------------------------------- | ---------------------------- | 
|
|
|Basic weighted average shares outstanding                                  |                              | 
|Weighted average shares issuable upon:                                     |                              | 
|Conversion of preferred stock outstanding prior to initial public offering |                              | 
|Exercise of stock options and vesting of restricted 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
statement of operations for the quarter ended March 31, 2006 was approximately $159,500
before income taxes and consisted of approximately $102,100 related to stock options and
approximately $57,400 related to nonvested stock. The related total tax benefit was
approximately $21,900. No compensation cost was capitalized during the quarter ended March
31, 2006.

The
following table shows the effect on net income and earnings per share for the quarter
ended March 31, 2005 as if compensation cost had been recognized based upon the estimated
fair value on the grant date of stock options in accordance with SFAS No. 123, as amended
by SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure, and as if such cost had been determined in accordance with SFAS No. 123R
(in thousands, except income per share data):

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##### Table of Contents

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|                                                                                   | 
|---------------------------------------------------------------------------------- | 
|
|Information as previously reported:                                                | 
|Net income                                                                         | 
|Less SFAS No. 123 compensation costs, net of taxes                                 | 
|Pro forma  net income                                                              | 
|                                                                                   | 
|Net income per common share:                                                       | 
|Basic - as reported                                                                | 
|Basic - pro-forma                                                                  | 
|                                                                                   | 
|Diluted - as reported                                                              | 
|Diluted - pro-forma                                                                | 
|                                                                                   | 
|Information calculated as if the fair value method had been applied to all awards: | 
|Net income                                                                         | 
|Less SFAS No. 123R compensation costs, net of taxes                                | 
|Pro forma  net income                                                              | 
|                                                                                   | 
|Net income per common share:                                                       | 
|Basic - as reported                                                                | 
|Basic - pro-forma                                                                  | 
|                                                                                   | 
|Diluted - as reported                                                              | 
|Diluted - pro-forma                                                                | 

Disclosures
for the quarter ended March 31, 2006 are not presented because the amounts are recognized
in the unaudited condensed consolidated financial statements.

i.
Comprehensive Income

The
following table summarizes the Companys comprehensive income for the three month
periods ended March 31, 2006 and 2005:

|                                                                               | Three Months Ended March 31, | 
|------------------------------------------------------------------------------ | ---------------------------- | 
|
|
|Net income                                                                     |                              | 
|Reclassification adjustment for realized losses recorded into income,          |                              | 
|net of tax benefit of $79 in 2006 and $19 in 2005                              |                              | 
|Increase in unrealized losses on investment securities available-for-sale, net |                             
|of tax benefit of $1,275 in 2006 and $952 in 2005                              |                              | 
|Total comprehensive income                                                     |                              | 

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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, 2006 are as follows:

|                                                 | Cost or
Amortized
Cost |  | Gross
Unrealized
Gains |         | Gross
Unrealized
Losses |   | Estimated
Fair Value | 
|------------------------------------------------ | ---------------------- |  | ---------------------- | ------- | ----------------------- | - | -------------------- | 
|
|U.S. Treasury securities                         |                        |  | $                      | 20,569  |                         | $ |                     | 
|Government sponsored agency securities           |                        |  |                        | 13,104  |                         |   |                     | 
|Corporate securities                             |                        |  |                        | 29,494  |                         |   |                     | 
|Tax-exempt municipal securities                  |                        |  |                        | 194,552 |                         |   | 60                   | 
|Mortgage pass-through securities                 |                        |  |                        | 53,971  |                         |   |                     | 
|Collateralized mortgage obligations              |                        |  |                        | 3,352   |                         |   | 1                    | 
|Asset-backed securities                          |                        |  |                        | 17,603  |                         |   |                     | 
|Total fixed income securities available for sale |                        |  |                        | 332,645 |                         |   | 61                   | 
|Equity securities                                |                        |  |                        | 3,076   |                         |   | 30                   | 
|Total investment securities available-for-sale   |                        |  | $                      | 335,721 |                         | $ | 91                   | 

Equity
securities consist of investments in a high-yield municipal bond mutual fund. The Company
had no direct investments in equity securities at March 31, 2006. The unrealized loss on
temporarily impaired investments totaled $5.9 million at March 31, 2006 for investment
securities available-for-sale with a fair value of $294.6 million. All were impaired for
less than one year. The Company evaluated investment securities with March 31, 2006 fair
values less than amortized cost and has determined that the decline in value is temporary
and is related to the change in market interest rates since purchase.

The
amortized cost and estimated fair value of fixed income securities available-for-sale at
March 31, 2006, by contractual maturity, are set forth below. Actual maturities may
differ from contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.

|Maturity                                       |  | Cost or
Amortized
Cost |   | Estimated
Fair Value | 
|---------------------------------------------- |  | ---------------------- | - | -------------------- | 
|
|Due in one year or less                        |  |                        | $ | 14,219               | 
|Due after one year through five years          |  |                        |   | 64,986               | 
|Due after five years through ten years         |  |                        |   | 146,851              | 
|Due after ten years                            |  |                        |   | 31,663               | 
|Securities not due at a single maturity date   |  |                        |   | 74,926               | 
|Total investment securities available for sale |  |                        | $ | 332,645              | 

The
consolidated amortized cost of investment securities available-for-sale deposited with
various regulatory authorities at March 31, 2006 was $119.4 million.

# 4. Premiums

Direct
premiums written totaled $51.2 million and $44.1 million for the three month periods ended
March 31, 2006 and 2005, respectively.

Premiums
receivable consist of the following at March 31, 2006 and December 31, 2005:

|                                | March 31,
2006 |  | December 31,
2005 |      
|------------------------------- | -------------- |  | ----------------- | -----
|
|Premiums receivable             |                |  | $                 | 9,323
|Allowance for doubtful accounts |                |  |                   | (913 
|                                |                |  | $                 | 8,410

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##### Table of Contents

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

# 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. Effective October 1, 2005, the Company entered into
reinsurance agreements with nonaffiliated reinsurers that provide coverage up to $50.0
million per loss occurrence, subject to certain limitations. Under the agreements, the
Company retains the first $500,000 of losses per occurrence. The next $500,000 of losses
per occurrence (excess of the first $500,000 of losses per occurrence retained by the
Company) are 50% reinsured, subject to an annual aggregate deductible of $1.5 million. The
next $4.0 million of losses per occurrence (excess of the first $1.0 million of losses per
occurrence) are reinsured, subject to an annual aggregate deductible of $2.0 million.
Policies covering losses per occurrence in excess of $5.0 million up to $50.0 million
contain no annual aggregate deductibles.

As
part of the Acquisition, SIH and LMC entered into an adverse development excess of loss
reinsurance agreement (the Agreement). The Agreement, after taking into
account any recoveries from third party reinsurers, requires LMC to reimburse SBIC 100% of
the excess of the actual loss at December 31, 2011 over the initial insurance
liabilities at September 30, 2003. The Agreement also requires SBIC to reimburse LMC
100% of the excess of the initial insurance liabilities at September 30, 2003 over
the actual loss results at December 31, 2011. The amount of adverse loss development
under the Agreement was $3.4 million at March 31, 2006. The increase in the amount due
from LMC is netted against loss and loss adjustment expense in the accompanying unaudited
condensed consolidated statements of operations.

As
part of the Agreement, LMC placed into trust (the Trust) an amount equal to
10% of the balance sheet insurance liabilities of SBIC on the date of the Acquisition.
Thereafter, the Trust shall be adjusted each quarter, if warranted, to an amount equal to
102% of LMCs obligations under the Agreement. Initial loss liabilities were $16.0
million. The balance of the Trust was $5.0 million at March 31, 2006 and $4.9 million at
December 31, 2005.

b.
Reinsurance Assumed

The
Company assumes business from the National Council for Compensation Insurance in the
states of Alabama, Alaska, Arizona, Illinois, Nevada, New Jersey, Oregon and South
Carolina as part of the Residual Market Pool program.

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, 2006 and December 31, 2005:

|                                                                     | March 31,
2006 |  | December 31,
2005 |       
|-------------------------------------------------------------------- | -------------- |  | ----------------- | ------
|
|Reinsurance recoverables on unpaid loss and loss adjustment expenses |                |  | $                 | 13,777
|Reinsurance recoverables on paid losses                              |                |  |                   | 595   
|Total reinsurance recoverables                                       |                |  | $                 | 14,372

The
effects of reinsurance on income statements amounts are as follows for the three month
periods ended March 31, 2006 and 2005:

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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|                                             | Three Months Ended March 31, | 
|-------------------------------------------- | ---------------------------- | 
|
|
|Reinsurance assumed:                         |                              | 
|Written premiums                             |                              | 
|Earned premiums                              |                              | 
|Losses and loss adjustment expenses incurred |                              | 
|                                             |                              | 
|Reinsurance ceded:                           |                              | 
|Written premiums                             |                              | 
|Earned premiums                              |                              | 
|Losses and loss adjustment 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, 2006 and 2005:

|                                                                      | Three Months Ended March 31, | 
|--------------------------------------------------------------------- | ---------------------------- | 
|
|
|Beginning balance, net of reinsurance recoverables of $13,745 in 2006 |                              | 
|and $12,582 in 2005                                                   |                              | 
|Incurred related to:                                                  |                              | 
|Current period                                                        |                              | 
|Prior periods                                                         |                              | 
|Total incurred                                                        |                              | 
|Paid related to:                                                      |                              | 
|Current period                                                        |                              | 
|Prior periods                                                         |                              | 
|Total paid                                                            |                              | 
|Ending balance, net of reinsurance recoverables of $13,777 in 2006    |                              | 
|and $13,909 in 2005                                                   |                              | 

# 7. Surplus Notes

In
a private placement on May 26, 2004, SBIC issued $12.0 million in subordinated
floating rate surplus notes due in 2034. Interest, paid quarterly in arrears, is
calculated at the beginning of the interest payment period using the 3-month LIBOR rate
plus 400 basis points, subject to certain limitations. Interest expense for the three
month periods ended March 31 totaled $256,000 in 2006 and $197,000 in 2005.

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, 2006, SBIC had a liability for guaranty fund and other assessments
          of $4.2 million and a guaranty fund receivable of $1.7 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.

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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

b.       
          In June 2004, the Company was notified of a claim for damages brought by an
          individual against PointSure. In April 2005, a complaint against PointSure in
          connection with this matter was filed in the Superior Court of Washington for
          King County. The complaint alleges breach and unjust enrichment related to the
          termination of an alleged contract between PointSure and the plaintiff and
          seeks a judgment awarding damages to the plaintiff in an amount to be proven at
          trial, plus attorneys fees and costs. The Company disputes the allegations
          in the complaint and is defending this case vigorously. Management believes the
          outcome of this matter will not have a material adverse effect on the
          Companys consolidated financial position.

c.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.

# 9. Follow-on Public
Offering

On
February 1, 2006, the Company closed a follow-on public offering of 3,910,000 shares of
common stock, including the underwriters over-allotment option to purchase 510,000
shares of 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. The Company contributed $50.0 million of the net
proceeds to SeaBright Insurance Company, which intends to use the capital to expand its
business in its core markets and to new territories. The remaining proceeds will be used
for general corporate purposes, including supporting the growth of PointSure. The use of
proceeds from the offering does not represent a material change from the use of proceeds
described in the prospectus that was included in the related Registration Statement on
Form S-1. Except for the contribution of proceeds to SBIC, no proceeds or expenses were
paid to the Companys directors, officers, ten percent shareholders or affiliates.

# 10. Share-Based Payment
Arrangements

At
March 31, 2006, 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 approved the 2005
Long-Term Equity Incentive Plan (the 2005 Plan and, together with the 2003
Plan, the Stock Option Plans) in December 2004.

The
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 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, 2006, the Company reserved 776,458
shares of common stock for issuance under the 2003 Plan, of which options to purchase
489,595 shares had been granted, and 1,375,978 shares for issuance under the 2005 Plan, of
which 616,913 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
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
one-third on the first anniversary of the grant date and the remaining two-thirds monthly
over the next 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. All
stock options granted to employees are incentive stock options, while options granted to
non-employee directors are non-qualified stock options.

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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, 2006 and 2005
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
2006, 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 2006, 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. Prior to the adoption of
SFAS No. 123R, expected term was based on the Companys historical experience and
future expectations and price volatility was estimated using the Companys historical
volatility. 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, 2006:

|                                 | 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, 2005 |                           |  |                                             | 804,524 |                                                         | $ | 8.13                                     | 
|Granted                          |                           |  |                                             | 79,600  |                                                         |   | 17.49                                    | 
|Forfeited                        |                           |  |                                             | (3,348  | )                                                       |   | 8.80                                     | 
|Exercised                        |                           |  |                                             | (956    | )                                                       |   | 10.50                                    | 
|Cancelled                        |                           |  |                                             | (478    | )                                                       |   | 6.54                                     | 
|Outstanding at March 31, 2006    |                           |  |                                             | 879,342 |                                                         |   | 8.98                                     | 
|                                 |                           |  |                                             |         |                                                         |   |                                          | 
|Exercisable at March 31, 2006    |                           |  |                                             | 301,100 |                                                         |   | 7.64                                     | 

The
aggregate intrinsic values in the table above are before applicable income taxes and are
based on the Companys closing stock price of $17.42 on March 31, 2006. As of
March 31, 2006, total unrecognized stock-based compensation cost related to nonvested
stock options was approximately $1.3 million, which is expected to be recognized over a
weighted average period of approximately 35.8 months. During the three months ended March
31, 2006, the total intrinsic value of stock options exercised was approximately $6,100.
During the three months ended March 31, 2006, the Company received approximately $10,000
from the exercise of incentive stock options. There

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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

were no associated tax benefits.

As
of March 31, 2006, there were 759,065 shares of common stock available for issuance of
future share-based awards. The following table presents additional information regarding
options outstanding as of March 31, 2006:

|         | Options Outstanding |  | Options Exercisable |        
|-------- | ------------------- |  | ------------------- | -------
|
|$ 6.54   |                     |  |                     | 487,260
|10.50-12 |                     |  |                     | 312,482
|15.96-17 |                     |  |                     | 79,600 
|         |                     |  |                     | 879,342

b.
Nonvested Stock

The
following table summarizes nonvested stock activity for the quarter ended March 31, 2006:

|                                 | Number of
Shares |  | Weighted
Average
Grant Date
Fair Value
|-------------------------------- | ---------------- |  | --------------------------------------
|Outstanding at December 31, 2005 |                  |  |                                       
|Granted                          |                  |  |                                       
|Vested                           |                  |  |                                       
|Forfeited                        |                  |  |                                       
|Outstanding at March 31, 2006    |                  |  |                                       

As
of March 31, 2006, there was $3.8 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 35.4 months. No shares vested during the quarter ended
March 31, 2006.

# 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, 2005 filed with the SEC on March 29, 2006.

The
discussion under the heading Risk Factors 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.

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

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

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 2005 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 43 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

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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.

SeaBright
Insurance Holdings, Inc. (SeaBright or the Company) 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 completing a
management-led buyout that closed on September 30, 2003 (the Acquisition). In
the Acquisition, we acquired from Lumbermens Mutual Casualty Company (LMC) and
certain of its affiliates the renewal rights and substantially all of the operating assets
and employees of Eagle Pacific Insurance Company and Pacific Eagle Insurance Company
(collectively, Eagle or the Eagle Entities). 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
Kemper Employers Insurance Company (KEIC) and PointSure Insurance Services,
Inc. (PointSure), a wholesale insurance broker and third party claims
administrator. 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.

At
closing of the Acquisition, $4.0 million of the purchase price was placed into escrow for
a period of two years. These funds were available to us as security for various
obligations of LMC pursuant to various agreements entered into in connection with the
Acquisition. As of March 31, 2006, the escrow agent had returned approximately $3.9
million of the funds, including accumulated interest, to Kemper Employers Group, Inc.
(KEG). The balance of approximately $223,000 will be retained in escrow until
LMCs outstanding obligations have been satisfied. Any amount remaining after
settlement of these obligations will be returned to KEG.

To
minimize our exposure to any past business underwritten by KEIC, we entered into an
adverse development cover agreement in connection with the Acquisition. Under the terms of
this agreement, we and LMC are required to indemnify each other with respect to
developments in KEICs insurance liabilities as they existed at the date of the
Acquisition. Accordingly, if KEICs insurance liabilities increase, LMC must
indemnify us in the amount of the increase. If KEICs insurance liabilities decrease,
we must share with LMC the 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 at March 31, 2006 was
approximately $5.0 million. If LMC is placed into receivership and the 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.

Premiums
Earned

Gross
premiums written include 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, 2005, one-half of the premiums would be
earned in 2005 and the other half would be earned in 2006.

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Premiums
earned are the earned portion of our net premiums written. Net premiums written 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 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 plan. Premiums from the Washington
USL&H Assigned Risk Plan are included in both direct premiums written and ceded
premiums written.

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.

Claims
Service Income

The
majority of our claims service income is from contracts we have with LMC to provide claims
handling services for the policies written by the Eagle Entities prior to the Acquisition.
The claims service income we receive for providing these services approximates our costs
and will substantially decrease over the next several years as transactions related to the
Eagle Entities diminish.

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 the Eagle Entities
prior to the Acquisition. The fee income we receive for providing these services
approximates our costs and will substantially decrease over the next several years as
transactions related to the Eagle Entities diminish.

Our
expenses consist primarily of:

Loss
and Loss Adjustment Expenses

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

Underwriting,
Acquisition and Insurance Expenses

We
refer to the expenses that we incur to underwrite risks as underwriting, acquisition and
insurance expenses. Underwriting expenses consist of commission expenses, premium taxes
and fees and other underwriting expenses incurred in writing and maintaining our business.

Commission
Expenses.We pay commission expense to our brokers for the premiums that they produce
for us.

Premium
Taxes and Fees.We pay state and local taxes based on premiums, as well as licenses,
fees, assessments and contributions to workers compensation security funds.

Other
Underwriting Expenses.Other underwriting expenses consist of general administrative
expenses such as salaries, rent, office supplies, depreciation 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.

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##### Table of Contents

Interest
Expense

Included
in other expense is interest expense we incur on $12.0 million of surplus notes that our
insurance subsidiary issued in May 2004. Interest is based on the three-month LIBOR rate,
plus 400 basis points, and is paid quarterly in arrears.

# Results of Operations

Three
Months Ended March 31, 2006 and 2005

Gross
Premiums Written. Gross premiums written for the three months ended March 31, 2006
totaled $54.7 million, an increase of $10.4 million, or 23.5%, over $44.3 million of gross
premiums written in the same period of 2005. California continues to be our largest
market, accounting for approximately 62% of our in-force premiums at March 31, 2006. Gross
premiums written in California during the first quarter of 2006 accounted for 58.4% of
total premiums written in the quarter, down from approximately 67.0% in the same period of
2005. This reduction is part of our plan to achieve optimal diversification of our book of
business. Premiums written in Arizona, Louisiana and Missouri in the first quarter of 2006
increased from the same period in 2005. As of March 31, 2006, our in-force book of
business was split as follows between our three primary market segments: state act 
54%, ADR  31% and maritime  15%.

On
March 24, 2006, the Workers Compensation Insurance Rating Bureau (the
WCIRB), an industry-backed private organization that provides statistical
analysis, submitted a filing with the California Insurance Commissioner recommending a
16.4% decrease in advisory pure premium rates on new and renewal policies effective July
1, 2006. The filing was based on an analysis of loss experience valued as of December 31,
2005 and was made in response to continued reductions in workers compensation claim
costs in California as a result of reform legislation enacted primarily in 2003 and 2004.
The rate is advisory only and requires approval by the California Insurance Commissioner.
A public hearing on the matters contained in the WCIRBs filing was held on April 27,
2006 and the California Insurance Commissioner is expected to make his recommendation in
June 2006. If the advisory rate reduction is approved, 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.

Net
Premiums Written. Net premiums written totaled $50.8 million for the three months
ended March 31, 2006 compared to $39.0 million in the same period in 2005, representing an
increase of $11.8 million, or 30.3%. Net premiums written are affected by premiums ceded
under reinsurance agreements with external reinsurers. Ceded written premiums for the
three months ended March 31, 2005 totaled $3.9 million (7.1% of gross premiums written)
compared to $5.3 million (12.0% of gross premiums written) in the same period of 2005. Our
current reinsurance contracts provide for the ceding of premiums on a gross premiums
earned basis.

Net
Premiums Earned. Net premiums earned were $44.0 million for the three months ended
March 31, 2006 compared to $29.2 million for the same period in 2005, representing an
increase of $14.8 million, or 50.7%. As previously discussed, this increase is due to the
increase in net premiums written. 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. Net premiums earned in the first quarter of 2006 reflect a reduction of
approximately $2.2 million related to our retrospectively rated policies, reflective of
improved loss ratios that generate return premiums. Retrospectively rated policies
currently account for approximately one-third of our book of business.

Net
Investment Income. Net investment income was $3.1 million for the three months ended
March 31, 2006 compared to $1.3 million for the same period in 2005, representing an
increase of $1.8 million, or 138.5%. This increase is due primarily to an increase of
approximately $154.0 million (96.6%) in average invested funds for the three months ended
March 31, 2006 over the same period in 2005. In January 2005, we completed the initial
public offering of our common stock, resulting in net proceeds of approximately $80.4
million. In February 2006, we completed a follow-on offering of 3,910,000 shares of our
common stock, resulting in net proceeds of approximately $57.6 million. Our yield on
average invested assets for the three months ended March 31, 2006 was approximately 4.0%
compared to approximately 3.3% for the same period in 2005.

Service
Income. Service income totaled $551,000 for the three months ended March 31, 2006
compared to $632,000 for the same period in 2005, representing a decrease of $81,000, or
12.8%. Our service income results primarily from service arrangements we have with LMC for
claims processing services, policy administration and

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administrative services we perform
for the Eagle Entities insurance policies. Average monthly fees are declining as the
volume of work decreases as a result of the run off of our predecessors business.
Approximately 25.8% of our service income in the quarter ended March 31, 2006 came from
third party claims administration services that we provide to other independent, unrelated
companies, compared to 13.1% of service income from unrelated companies in the same period
of 2005.

Other
Income. Other income totaled $0.8 million for the three months ended March 31, 2006
compared to $1.2 million for the same period in 2005, representing a decrease of $0.4
million, or 33.3%. Other income results primarily from the operations of PointSure, our
wholesale insurance broker and third party claims administrator subsidiary. The decrease
in other income for the three month period ended March 31, 2006 resulted primarily from a
decrease in PointSures agency and direct billed commission income, which totaled
approximately $756,000 million for the three months ended March 31, 2006 compared to $1.2
million in the same period of 2005, representing a decrease of $444,000, or 37.0%. Most of
this income is passed through as commission expense to brokers and producers.

Loss
and Loss Adjustment Expenses. Loss and loss adjustment expenses totaled $28.4 million
for the three months ended March 31, 2006 compared to $20.3 million for the same period in
2005, representing an increase of $8.1 million, or 39.9%. The higher loss and loss
adjustment expenses for the quarter ended March 31, 2006 are attributable to the increase
in premiums earned for the period. 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, 2006 was 63.5% compared to 67.5% for the same period in 2005.
Included in the 2006 loss ratio was a release of approximately $1.8 million of 2004
accident year loss reserves. During the first quarter of 2006, paid losses totaled $10.6
million compared to $6.7 million for the same period in 2005.

As
of March 31, 2006, we had recorded a receivable of approximately $3.4 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,
2006, we have access to approximately $5.0 million under the collateralized reinsurance
trust in the event that LMC fails to satisfy its obligations under the adverse development
cover.

Underwriting
Expenses. Underwriting expenses totaled $9.6 million for the three months ended March
31, 2006, compared to $6.4 million for the same period in 2005, representing an increase
of $3.2 million, or 50.0%. 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, 2006 was 21.8%, compared to 21.7%
for the same period in 2005. The slight increase in the net underwriting expense ratio
resulted primarily from the effect of business assumed from the National Council on
Compensation Insurance (NCCI) residual market pools. Assumed commissions were
$1.4 million for the three months ended March 31, 2006 compared to $87,000 for the same
period in 2005. Direct commissions in the first quarter of 2006 increased $1.0 million
compared to the same period in 2005. Commissions as a percentage of direct earned premiums
increased from 6.0% in the first quarter of 2005 to 6.8% in the same period of 2006.

Other
Expenses. Other expenses totaled $1.5 million for the three months ended March 31,
2006, compared to $1.7 million for same period in 2005, representing a decrease of $0.2
million, or 11.8%. This decrease resulted primarily from a reduction in PointSures
operating expenses, offset by costs associated with the implementation of SFAS No. 123R.
As explained above under Other Income, the majority of the decrease is due to
a reduction in PointSures commission expense, which totaled $600,000 for the three
months ended March 31, 2006 compared to $1.2 million in the same period of 2005,
representing a decrease of $600,000, or 50.0%. Most of this expense is a pass-through of
agency and direct billed commission income received from insurance companies.

Federal
Income Tax Expense. The effective tax rate for the three months ended March 31, 2006
was 30.5%, compared to 29.5% for the same period in 2005. At March 31, 2006, approximately
58.7% of our portfolio was invested in tax-exempt securities, compared to approximately
51.4% at March 31, 2005.

Net
Income. Net income was $6.0 million for the three months ended March 31, 2006,
compared to $2.7 million for the same period in 2005. The increase in net income resulted
primarily from increases in premiums earned and investment income for the period, offset
by increases in loss and loss adjustment expenses, underwriting, acquisition and insurance
expenses, and realized losses from the sale of securities.

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# 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, 2006 has an effective duration of 5.3 years with individual
maturities extending out to 26 years. Currently, we make claim payments from positive cash
flow from operations and invest excess cash in securities with appropriate maturity dates
to balance against anticipated future claim payments. As these securities mature, we
intend to invest any excess funds in investments with appropriate durations to match
against expected future claim payments.

At
March 31, 2006, our investment portfolio is made up almost entirely of investment grade
fixed income securities with market values subject to fluctuations in interest rates.
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 rate environment, we would expect to incur losses
from such sales.

Our
ability to adequately provide funds to pay claims comes from our disciplined underwriting
and pricing standards and the purchase of reinsurance to protect us against severe claims
and catastrophic events. On October 1, 2005, we entered into new reinsurance contracts
that are effective through October 1, 2006. The contracts provide reinsurance coverage up
to $50.0 million per loss occurrence, subject to certain limitations. We retain the first
$500,000 of losses per loss occurrence. The next $500,000 of losses per occurrence (excess
of the first $500,000 of losses per occurrence that we retain) are 50% reinsured, subject
to an annual aggregate deductible of $1.5 million. The next $4.0 million of losses per
occurrence (excess of the first $1.0 million of losses per occurrence) are reinsured,
subject to an annual aggregate deductible of $2.0 million. Policies covering losses per
occurrence in excess of $5.0 million up to $50.0 million contain no annual aggregate
deductibles. We believe that we are sufficiently capitalized to retain the losses
described above.

Our
insurance subsidiary is required by law to maintain a certain minimum level of surplus on
a statutory basis. Surplus is calculated by subtracting total liabilities from total
admitted assets. The National Association of Insurance Commissioners has a risk-based
capital standard designed to identify property and casualty insurers that may be
inadequately capitalized based on inherent risks of each insurers assets and
liabilities and its mix of net premiums written. Insurers falling below a calculated
threshold may be subject to varying degrees of regulatory action. As of December 31, 2005,
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.

SeaBright
operates as a holding company and has minimal revenue and expenses. Currently, there are
no plans to have our insurance subsidiary or PointSure pay a dividend to SeaBright.

Our
unaudited consolidated net cash provided by operating activities for the three months
ended March 31, 2006 was $24.5 million, compared to our cash flow from operations of $15.4
million for the same period in 2005. The increase resulted primarily from the increase in
net income and increases in unpaid loss and loss adjustment expense, amortization of
deferred policy acquisition costs and federal income tax payable, offset by policy
acquisition costs deferred and deferred federal income tax benefit and an increase in
balances related to reinsurance recoverables, all as a result of the growth of our
business.

We
used net cash of $70.5 million for investing activities in the three months ended March
31, 2006, compared to $85.2 million for the same period in 2005. The difference between
periods is primarily attributable to a reduction in funds available for investing
activities. In 2005, we invested net proceeds totaling approximately $80.4 million
resulting from the sale of 8,625,000 shares of common stock in our initial public
offering. 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, 2006, financing activities provided cash of $57.6
million, compared to $80.4 million in the same period in 2005. As described below, the
majority of cash provided by financing activities

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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
SeaBright Insurance Company, which intends to use the capital to expand its business in
its core markets and to new territories. The remaining proceeds will be used for general
corporate purposes, including supporting the planned growth of PointSure.

# Contractual Obligations
and Commitments

The
following table identifies our contractual obligations by payment due period as of March
31, 2006:

|                                  | Payments Due by Period | 
|--------------------------------- | ---------------------- | 
|
|
|Long term debt obligations:       |                        | 
|Surplus notes                     |                        | 
|Loss and loss adjustment expenses |                        | 
|Operating and 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, 2006 and actuarial
estimates of expected payout patterns and are not contractual liabilities as to time
certain. Our contractual liability is to provide benefits under the policies. As a result,
our calculation of loss and loss adjustment expense payments due by period is subject to
the same uncertainties associated with determining the level of unpaid loss and loss
adjustment expenses generally and to the additional uncertainties arising from the
difficulty of predicting when claims (including claims that have not yet been reported to
us) will be paid. Actual payments of loss and loss adjustment expenses by period will
vary, perhaps materially, from the above table to the extent that current estimates of
loss and loss adjustment expenses vary from actual ultimate claims amounts and as a result
of variations between expected and actual payout patterns.

# Off-Balance Sheet
Arrangements

As
of March 31, 2006, we had no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources.

# Critical Accounting
Policies, Estimates and Judgments

It
is important to understand our accounting policies in order to understand our financial
statements. 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

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claims; claims incurred
but not yet reported to us; second injury fund assessments; 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 materially 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
amortized 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.

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

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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 the Companys 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.

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 market 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. 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.

# 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 $326.8 million at March 31, 2006 that
are subject to interest rate risk. 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. It illustrates the sensitivity of the fair
value of fixed-income investments to selected hypothetical changes in interest rates as of
March 31, 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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Hypothetical Change in Interest Rates
    
    EstimatedChange inFair Value
    
    Fair Value
    
    HypotheticalPercentageIncrease(Decrease) in
        ShareholdersEquity($ 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

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 Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (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 Securities and
Exchange Commission. There were no changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred
during the period covered in this report 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, together with all of the other
information included in this quarterly report. The risks and uncertainties described below
are not the only ones facing our company. If any of the following risks actually occurs,
our business, financial condition or operating results could be harmed. Any of the risks
described below 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. The risks discussed below
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.

The
following risk factor has been updated to reflect developments that occurred during the
quarter ended March 31, 2006.

Intense
competition could adversely affect our ability to sell policies at rates we deem adequate.

In most
of the states in which we operate, we face significant competition which, at times, is
intense. If we are unable to compete effectively, our business and financial condition
could be materially adversely affected. Competition in our businesses is based on many
factors, including premiums charged, services provided, financial strength ratings
assigned by independent rating agencies, speed of claims payments, reputation, perceived
financial strength and general experience. We compete with regional and national insurance
companies and state-sponsored insurance funds, as well as potential insureds that have
decided to self-insure. Our principal competitors include AIG, Alaska National Insurance
Company, Signal Mutual Indemnity Association Ltd., Zurich and the State Compensation
Insurance Fund of California. Many of our competitors have substantially greater financial
and marketing resources than we do, and some of our competitors, including the State
Compensation Insurance Fund of California, benefit financially by not being subject to
federal income tax. Intense competitive pressure on prices can result from the actions of
even a single large competitor, such as the State Compensation Insurance Fund of
California or AIG.

In
addition, our competitive advantage may be limited due to the small number of insurance
products that we offer. Some of our competitors, such as AIG, have additional competitive
leverage because of the wide array of insurance products that they offer. For example, it
may be more convenient for a potential customer to purchase numerous different types of
insurance products from one insurance carrier. We do not offer a wide array of

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insurance
products due to our targeted market niches, and we may lose potential customers to our
larger, more diverse competitors as a result.

On
May 31, 2005, the California Insurance Commissioner issued a decision adopting an advisory
pure premium rate reduction of 18% for California workers compensation policies
incepting on or after July 1, 2005. Pure premium is that portion of an insurance premium
necessary to cover the cost of paying claims, such as medical and indemnity costs and
allocated and unallocated loss adjustment expenses. The decision was issued in response to
reductions in 2004 workers compensation claim costs in California, as well as
anticipated future claim cost reductions, as a result of reform legislation enacted
primarily in 2003 and 2004. The California Insurance Commissioners decision is
advisory only and insurance companies may choose whether or not to adopt the new rates. On
June 6, 2005, after completing a study of our California loss data, we filed with the
California Department of Insurance our rates for new and renewal workers
compensation insurance policies written in California on or after July 1, 2005. The filing
was approved on June 28, 2005. The new rates reflect an average reduction of 14.2% from
prior rates and are in response to emerging favorable trends in loss costs resulting from
reform legislation. 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.

On
September 15, 2005, the Workers Compensation Insurance Rating Bureau
(WCIRB), an industry-backed private organization that provides statistical
analysis, submitted an amended filing with the California Insurance Commissioner
recommending a 15.9% decrease in advisory pure premium rates on new and renewal policies
effective January 1, 2006. As described above, such rates, if adopted by the California
Insurance Commissioner, are advisory only and insurance companies may choose whether or
not to adopt the new rates. The rate decrease was proposed following the WCIRBs
review of accident year experience valued as of June 30, 2005 and the cost impact of the
January 1, 2005 permanent disability rating schedule. On November 10, 2005, the
Commissioner recommended a 15.3% decrease in rates, and on November 28, 2005 we filed new
rates reflecting an average reduction of 11.8% from prior rates for new and renewal
workers compensation insurance policies written in California on or after January 1,
2006. The filing was approved on December 22, 2005. Rate reductions have also been
proposed in other states in which we operate. 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.

On
March 24, 2006, the WCIRB submitted a filing with the California Insurance Commissioner
recommending a 16.4% decrease in advisory pure premium rates on new and renewal policies
effective July 1, 2006. The filing was based on an analysis of loss experience valued as
of December 31, 2005 and was made in response to continued reductions in workers
compensation claim costs in California as a result of reform legislation enacted primarily
in 2003 and 2004. The rate is advisory only and requires approval by the California
Insurance Commissioner. A public hearing on the matters contained in the WCIRBs
filing was held on April 27, 2006 and the California Insurance Commissioner is expected to
make his recommendation in June 2006. If the advisory rate reduction is approved,
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.

# 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. The managing underwriters
in the offering were Friedman, Billings, Ramsey & Co., Inc., Piper Jaffray & Co.
and Cochran, Caronia & Co. Proceeds to SeaBright, after accounting for approximately
$6.3 million in underwriting discounts and commissions and approximately
$3.9 million in other expenses of the offering, were approximately
$80.4 million. The offering closed on January 26, 2005.

On
January 26, 2005, we contributed approximately $74.8 million of the net proceeds to
SeaBright Insurance Company. We intend to use the remaining net proceeds for general
corporate purposes, including supporting the growth of PointSure. Except for the capital
contribution to SeaBright Insurance Company, as of March 31, 2006, we had not used any of
the remaining net proceeds from the offering. Our use of the proceeds from the offering
does not represent a material change in the use of proceeds described in the prospectus
included as part of the Registration Statement.

We
did not purchase any of our equity securities during the three months ended March 31,
2006.

- 25 -

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##### Table of Contents

# Item 6. Exhibits

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

- 26 -

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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 15, 2006 |                                    |                                                                                                      | 
|                    | By:                                | /s/  Joseph S. De Vita                                                                               | 
|                    |                                    | Joseph S. De Vita                                                                                    | 
|                    |                                    | Senior Vice President, Chief Financial Officer
and Assistant Secretary (Principal Financial Officer)
|                   

- 27 -

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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 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
    
    Description31.1
    
    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)


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