UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549  FORM 10-Q (Mark One)x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
 Exchange Act of 1934For the quarterly period ended March 31, 2008oro
Transition Report Pursuant to Section 13 or 15(d) of the Securities
 Exchange Act of 1934For the transition period from ________ to ________ Commission File Number 000-51124 SeaBright Insurance Holdings, Inc.(Exact name of registrant as specified in its charter) Delaware

56-2393241(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.) 1501
4th Avenue, Suite 2600
Seattle, WA 98101(Address of principal executive offices,
including zip code) (206) 269-8500
(Registrants telephone number, including area code) Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes x
  No o Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
          Large accelerated
filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act): 
Yes o
  No x Indicate the
number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date: Class

Shares outstanding as of May 8, 2008Common Stock, $0.01 Par Value

21,197,708     SeaBright
Insurance Holdings, Inc.

Index
to Form 10-Q

PagePart I.
Financial InformationItem
 1.
Financial
 Statements (unaudited)

2Condensed
Consolidated Balance Sheets as of
 March 31, 2008 and
 December 31, 2007

2Condensed
Consolidated Statements of
 Operations for the Three Months
 Ended March 31, 2008 and 2007

3Condensed
Consolidated Statements of Cash
 Flows for the Three Months
 Ended March 31, 2008 and 2007

4Notes to
Unaudited Condensed Consolidated
 Financial Statements

5Item
 2.
Managements
Discussion and Analysis of
 Financial Condition and Results of Operations

17Item
 3.
Quantitative and
Qualitative Disclosures
 About Market Risk

33Item
 4.
Controls and
Procedures

34Part II.
Other
InformationItem 1A.
Risk
Factors

35Item 2.
Unregistered
Sales of Equity Securities and
 Use of Proceeds

35Item 6.
Exhibits

35Signatures


36- 1 -

PART I  FINANCIAL
INFORMATION

Item 1. Financial Statements

SEABRIGHT INSURANCE HOLDINGS, INC. AND
SUBSIDIARIES

CONDENSED
CONSOLIDATED BALANCE SHEETS

March
  31,
  2008

December
  31,
  2007(Unaudited)(in
  thousands, except share and
  per share amounts)ASSETSFixed income securities
available for sale,
  at fair value (amortized cost $489,111 in 2008 and $471,131 in 2007)

$
492,977

$
474,756Equity securities available for
sale, at
  fair value (cost $12,919 in 2008 and $11,301 in 2007)


11,649


11,193Preferred stock available for
sale, at fair
  value (cost $9,997 in 2008 and $9,485 in 2007


8,326


8,488Cash and cash
equivalents


6,936


20,292Accrued investment
income


5,291


5,055Premiums receivable, net of
allowance


9,389


9,223Deferred premiums


157,984


150,066Service income
receivable


305


436Reinsurance
recoverables


14,049


14,210Receivable under adverse
development cover


2,533


2,533Prepaid reinsurance


1,723


1,820Property and equipment,
net


4,379


1,707Deferred income taxes,
net


18,342


16,488Deferred policy acquisition
costs, net


21,511


19,832Intangible assets,
net


1,230


1,233Goodwill


2,881


2,881Other assets


17,168


15,356Total assets

$
776,673

$
755,569LIABILITIES
AND STOCKHOLDERS EQUITYLiabilities:Unpaid loss and loss adjustment
expense

$
255,095

$
250,085Unearned premiums


150,369


147,033Reinsurance funds withheld and
balances
  payable


167


220Premiums payable


3,940


4,136Accrued expenses and other
liabilities


49,981


47,789Surplus notes


12,000


12,000Total liabilities


471,552


461,263Commitments and
contingenciesStockholders
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  21,132,252 shares at March 31,
  2008 and 20,831,102 shares at December 31, 2007


211


208Paid-in capital


195,020


194,023Accumulated other comprehensive
income


601


1,638Retained earnings


109,289


98,437Total stockholders
equity


305,121


294,306Total liabilities and
stockholders equity

$
776,673

$
755,569See accompanying notes to unaudited condensed
consolidated financial statements.

- 2 -

SEABRIGHT INSURANCE HOLDINGS, INC. AND
SUBSIDIARIES

CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

Three
  Months Ended March 31,2008

2007(in
  thousands, except share and
  earnings per share information)Revenue:Premiums earned

$
56,722

$
48,631Claims service income


406


556Other service income


16


24Net investment income


5,724


4,758Net realized loss


(117
)

(52
)Other income


1,409


95764,160


54,874Losses and
  expenses:Loss and loss adjustment
expenses


30,409


25,918Underwriting, acquisition and
insurance
  expenses


15,646


12,631Interest expense


251


281Other expenses


1,987


1,55148,293


40,381Income
  before taxes


15,867


14,493Income tax
  expense (benefit):Current


6,311


4,474Deferred


(1,296
)

(54
)5,015


4,420Net income

$
10,852

$
10,073Basic
  earnings per share

$
0.53

$
0.50Diluted
  earnings per share

$
0.52

$
0.48Weighted
  average basic shares outstanding


20,359,695


20,320,699Weighted
  average diluted shares outstanding


20,984,650


20,859,608See accompanying notes to unaudited condensed
consolidated financial statements.

- 3 -

SEABRIGHT INSURANCE HOLDINGS, INC. AND
SUBSIDIARIES

CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)

Three
  Months Ended March 31,2008

2007(in
  thousands)Cash flows
  from operating activities:Net income

$
10,852

$
10,073Adjustments to reconcile net
income to cash
  provided by operating activities:Amortization of deferred policy
acquisition
  costs


9,159


7,900Policy acquisition costs
deferred


(10,838
)

(9,526
)Provision for depreciation and
amortization


820


665Compensation cost on restricted
shares of
  common stock


714


354Compensation cost on stock
options


184


148Net realized loss on
investments


117


53Gain on sale of fixed
assets





(1
)Benefit for deferred income
taxes


(1,296
)

(54
)Changes in certain assets and
liabilities:Unpaid loss and loss adjustment
expense


5,010


8,107Income tax payable


3,223


4,080Reinsurance recoverables, net of
  reinsurance withheld


1,554


918Unearned premiums, net of
deferred premiums
  and premiums receivable


(4,748
)

258Accrued investment
income


(236
)

(263
)Other assets and other
liabilities


(3,028
)

(4,017
)Net cash provided by operating
activities


11,487


18,695Cash flows
  from investing activities:Purchases of
investments


(54,808
)

(40,445
)Sales of investments


10,579


9,184Maturities and redemption of
investments


23,486


9,621Purchases of property and
equipment


(4,201
)

(169
)Net cash used in investing
activities


(24,944
)

(21,809
)Cash flows
  from financing activities:Proceeds from exercise of stock
options


98


40Deferred tax benefit from
disqualifying
  dispositions





14Grant of restricted shares of
common stock


3


2Net cash provided by financing
activities


101


56Net decrease in cash and cash
equivalents


(13,356
)

(3,058
)Cash and
  cash equivalents at beginning of period


20,292


20,412Cash and
  cash equivalents at end of period

$
6,936

$
17,354Supplemental
  disclosures:Interest paid on surplus
notes

$
274

$
294Federal income taxes
paid


2,835


Accrued expenses for purchases
of
  investments


115


See accompanying notes to unaudited condensed
consolidated financial statements.

- 4 -

SEABRIGHT INSURANCE HOLDINGS, INC. AND
SUBSIDIARIES

NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.
OrganizationSeaBright
Insurance Holdings, Inc. (SIH or the Company), a Delaware corporation, was
formed in June 2003. On July 14, 2003, SIH entered into a purchase
agreement, effective September 30, 2003, with Kemper Employers Group, Inc.
(KEG), Eagle Pacific Insurance Company, Inc. and Pacific Eagle Insurance
Company, Inc. (referred to collectively as Eagle), and Lumbermens Mutual
Casualty Company (LMC), the ultimate owner of KEG and Eagle
(the Acquisition). Under this agreement, SIH acquired Kemper Employers
Insurance Company (KEIC), PointSure Insurance Services, Inc. (PointSure),
and certain assets of Eagle, primarily renewal rights.

Prior
to the Acquisition, beginning in 2000, KEIC wrote business only in California.
In May 2002, KEIC ceased writing business and by December 31, 2003, all
premiums related to business prior to the Acquisition were 100% earned. KEIC
resumed writing business effective October 1, 2003, primarily targeting
policy renewals for former Eagle business in the states of California, Hawaii
and Alaska. In November 2003, permission was granted by the Illinois Department
of Financial and Professional Regulation, Division of Insurance (the Illinois
Division of Insurance) for KEIC to change its name to SeaBright Insurance
Company (SBIC). As of March 31, 2008, SBIC is licensed to write workers
compensation insurance in 45 states and the District of Columbia. PointSure is
engaged primarily in administrative and brokerage activities.

In
December 2007, SIH acquired 100% of the outstanding common stock of Total
HealthCare Management, Inc. (THM), a privately held California based provider
of medical bill review, utilization review, nurse case management and other
related services.

2.       Summary of Significant Accounting Policies

a.
Basis of Presentation

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

The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
(GAAP) for interim financial information and pursuant to the instructions to Form
10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934,
as amended (the Exchange Act). Accordingly, they do not include all of the
information and notes required by GAAP for complete financial statements. The
condensed consolidated balance sheet at December 31, 2007 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, 2007 included in the Companys Annual
Report on Form 10-K, which was filed with the U.S. Securities and Exchange
Commission (the SEC) on March 17, 2008.

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, 2008 are
not necessarily indicative of the results expected for the full fiscal year or
for any future period.

b.
Use of Estimates

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

- 5 -

SEABRIGHT INSURANCE HOLDINGS, INC. AND
SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)

c.
Revenue Recognition

Premiums
for primary and reinsured risks are included in revenue over the lives of the
contracts in proportion to the amount of insurance protection provided (i.e.,
ratably over the policy period). The portion of premium that is applicable to
the unexpired period of a policy in-force is not included in revenue but is
deferred and recorded as unearned premium in the liability section of the
balance sheet. Deferred premiums represent the unbilled portion of annual
premiums.

Earned
premiums on retrospectively rated policies are based on the Companys estimate
of loss experience as of the measurement date. Loss experience includes known
losses specifically identifiable to a retrospective policy as well as
provisions for future development on known losses and for losses incurred but
not yet reported, which are developed using actuarial loss development factors
that are consistent with how the Company projects losses in general. For
retrospectively rated policies, the governing contractual minimum and maximum
rates are established at policy inception and are made a part of the insurance
contract. While the typical retrospectively rated policy has five annual
adjustment or measurement periods, premium adjustments continue until mutual
agreement to cease future adjustments is reached with the policyholder. For the
three month periods ended March 31, 2008 and 2007, approximately 17.3% and
12.5%, respectively, of direct premiums written related to retrospectively
rated policies.

The
Company estimates the amount of premiums that have been earned but are unbilled
at the end of the period by analyzing historical earned premium adjustments
made and applying an adjustment percentage against premiums earned for the
period. Included in deferred premiums is an accrual for earned but unbilled
premiums of $0 at March 31, 2008 and $44,000 at December 31, 2007.

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

d.
Unpaid Loss and Loss Adjustment Expense

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

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


the
 Companys claims experience and that of its predecessor;
the
 industrys claims experience;
historical
 trends in reserving patterns and loss payments;
the impact
 of claim inflation and/or deflation;
the pending
 level of unpaid claims;
the cost of
 claim settlements;
legislative
 reforms affecting workers compensation;
the
 environment in which insurance companies operate; and
trends in
 claim frequency and severity.- 6 -

SEABRIGHT INSURANCE HOLDINGS, INC. AND
SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)

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

e.
Reinsurance

The
Company protects itself from excessive losses by reinsuring certain levels of
risk in various areas of exposure with nonaffiliated reinsurers. Regardless of
type, reinsurance does not legally discharge the ceding insurer from primary
liability for the full amount due under the reinsured policies. Reinsurance
premiums, commissions, expense reimbursements and reserves related to ceded
business are accounted for on a basis consistent with that used in accounting
for original policies issued and the terms of the reinsurance contracts. The
unpaid loss and loss adjustment expense subject to the adverse development
cover with LMC is calculated periodically using generally accepted actuarial
methodologies for estimating unpaid loss and loss adjustment expense
liabilities, including incurred loss and paid loss development methods. Amounts
recoverable in excess of acquired reserves at September 30, 2003 are recorded
gross in unpaid loss and loss adjustment expense in accordance with Statement
of Financial Accounting Standards (SFAS) No. 141, Business Combinations, with
a corresponding amount receivable from the seller. Amounts are shown net in the
unaudited condensed consolidated statements of operations. Premiums ceded to
other companies are reported as a reduction of premiums written and earned.
Reinsurance recoverables are determined based on the terms and conditions of
the reinsurance contracts.

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

f.
Income Taxes

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

The
Company adopted the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109 (FIN 48) on January 1,
2007. At the date of adoption and as of March 31, 2008 and December 31, 2007,
the Company had no unrecognized tax benefits and no adjustments to liabilities
or operations were required.

The
Company recognizes interest on tax related matters as interest expense and
penalties as income tax expense. The Company had no interest or penalties
expense related to uncertain tax positions in the quarters ended March 31, 2008
and 2007.

The
tax years 2004 through 2007 remain open to examination by the major taxing
jurisdictions to which the Company is subject.

g.
Earnings Per Share

The
following table provides the reconciliation of basic and diluted weighted
average shares outstanding used in calculating earnings per share for the three
month periods ended March 31, 2008 and 2007:

- 7 -

SEABRIGHT INSURANCE HOLDINGS, INC. AND
SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)

Three Months Ended March 31,2008

2007(in thousands)Basic weighted average shares
outstanding


20,360


20,321Weighted
average shares issuable upon
 exercise of outstanding stock options and vesting of nonvested restricted
 stock


625


539Diluted weighted average shares
outstanding


20,985


20,860h.
Stock-Based Compensation

The
Company accounts for awards of stock options and nonvested restricted stock
according to the provisions of SFAS No. 123R, Share-Based
Payment. Total stock-based compensation expense recognized in the
unaudited condensed consolidated statements of operations for the three month
periods ended March 31, 2008 and 2007 is shown in the following table. No
compensation cost was capitalized during the periods shown.

Three Months Ended March 31,2008

2007(in thousands)Stock option
 compensation expense related to:Nonvested
restricted stock

$
714

$
354Stock
options


184


148Total

$
898

$
502Total
 related tax benefit

$
260

$
129i.
Comprehensive Income

The
following table summarizes the Companys comprehensive income for the three
month periods ended March 31, 2008 and 2007:

Three Months Ended March 31,2008

2007(in thousands)Net income

$
10,852

$
10,073Reclassification adjustment for
 realized losses recorded into income


(117
)

(53
)Tax benefit related to
 reclassification adjustment for realized losses recorded into income


41


19Decrease (increase) in
 unrealized losses on investment securities available for sale


(1,479
)

262Tax benefit (expense) related
 to change in unrealized losses


518


(92
)Total
comprehensive income

$
9,815

$
10,209j.
Recently Issued Accounting Pronouncements

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value and establishes a framework for measuring fair value
in GAAP and expands disclosures about fair value measurements. The provisions
for SFAS No. 157 are effective for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The Company adopted the
provisions of SFAS No. 157 as of January 1, 2008, which did not have a material
effect on its consolidated financial condition or results of operations.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities  Including an Amendment of FASB Statement No.
115, which permits entities to choose to measure many financial
instruments and certain other items at fair value in order to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently and without having to apply complex hedge accounting
provisions. The provisions for SFAS No. 159 are effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company adopted the provisions of SFAS No. 159 as of January 1,
2008, which did not have a material effect on its consolidated financial
condition or results of operations.

- 8 -

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, 2008 are as follows:

Cost orAmortizedCost

GrossUnrealizedGains

GrossUnrealizedLosses

EstimatedFair
  Value(in
thousands)U.S. Treasury
securities

$
9,476

$
477

$


$
9,953Government sponsored agency
securities


33,661


977





34,638Corporate securities


47,966


917


(411
)

48,472Tax-exempt municipal
securities


262,627


3,154


(2,200
)

263,581Mortgage pass-through
securities


81,008


1,672


(51
)

82,629Collateralized mortgage
obligations


1,836


21


(89
)

1,768Asset-backed
securities


52,537


75


(676
)

51,936Total fixed income securities
  available-for-sale


489,111


7,293


(3,427
)

492,977Equity securities


12,919





(1,270
)

11,649Preferred stock


9,997





(1,671
)

8,326Total investment securities
  available-for-sale

$
512,027

$
7,293

$
(6,368
)
$
512,952Equity
securities consist of investments in exchange traded funds designed to
correspond to the performance of certain indexes based on domestic or
international stocks. The Company had no direct investments in individual
equity securities at March 31, 2008. The unrealized loss on temporarily
impaired investments totaled $6.4 million at March 31, 2008 for investment
securities with a fair value of $166.0 million. Approximately $0.4 million of
the total unrealized losses at March 31, 2008 were from securities that had
been impaired for more than one year. At March 31, 2008, two securities had
unrealized losses that exceeded 20% of the related securitys book value at
that date. The following table presents information about investment securities
with unrealized losses at March 31, 2008:

Less Than 12 Months

12 Months or More

TotalInvestment Category

Aggregate
  Fair Value

AggregateUnrealizedLoss

Aggregate
  Fair Value

AggregateUnrealizedLoss

Aggregate
  Fair Value

AggregateUnrealizedLoss(in thousands)Fixed income
securities:U.S. Treasury
securities

$


$


$


$


$


$
Government sponsored agency
securities (1)

















Corporate securities


7,439


(145
)

5,602


(266
)

13,041


(411
)Tax-exempt municipal
securities


90,793


(2,194
)

102


(6
)

90,895


(2,200
)Mortgage pass-through
securities


6,727


(41
)

1,187


(10
)

7,914


(51
)Collateralized mortgage
obligations


895


(89
)







895


(89
)Asset-backed
securities


27,790


(565
)

5,519


(111
)

33,309


(676
)Total fixed income
securities


133,644


(3,034
)

12,410


(393
)

146,054


(3,427
)Equity securities


11,649


(1,270
)







11,649


(1,270
)Preferred stock


8,326


(1,671
)







8,326


(1,671
)Total

$
153,619

$
(5,975
)
$
12,410

$
(393
)
$
166,029

$
(6,368
)(1) Government sponsored agency securities are not backed by the full
faith and credit of the U.S. government.

The
Company regularly reviews its investment portfolio to evaluate the necessity of
recording impairment losses for other-than-temporary declines in the fair value
of investments. A number of criteria are considered during this process
including, but not limited to, the following: the current fair value as
compared to amortized cost or cost, as appropriate, of the security; the length
of time the securitys fair value has been below amortized cost; the Companys
intent and ability to retain the investment for a period of time sufficient to
allow for an anticipated recovery in value; specific credit issues related to
the issuer; and current economic conditions. In general, the Company focuses on
those securities whose fair values were less than 80% of their amortized cost
or cost, as appropriate, for six or more consecutive months.
Other-than-temporary impairment losses result in a permanent

- 9 -

SEABRIGHT INSURANCE HOLDINGS, INC. AND
SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)

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 unaudited
financial statements. The Company evaluated investment securities with fair
values less than amortized cost at March 31, 2008 and 2007 and determined that
the decline in value is temporary and is related primarily to the change in
market rates since purchase or to other market anomalies that are expected to
correct themselves over time. Furthermore, the Company has the intent and
ability to hold the impaired investments to maturity or for a period of time
sufficient for recovery of their carrying amount. Therefore, no other-than-temporary
impairment losses were recorded in the three month periods ended March 31, 2008
and 2007.

The Company
had no direct sub-prime mortgage exposure in its investment portfolio as of
March 31, 2008 and approximately $0.9 million of indirect exposure to sub-prime
mortgages. The average credit quality of the Companys $266.6 million fixed
income municipal portfolio was AA+ (AA based on the issuers underlying
ratings). Insured municipal bonds totaled $205.6 million and had a weighted
average credit rating of AA+ (AA based on the issuers underlying ratings).
The remaining $61.0 million in uninsured municipal bonds carried a weighted
average credit rating of AA. Consequently, the Company does not expect a
material impact to its investment portfolio or financial position as a result
of the problems currently facing monoline bond insurers.

The
amortized cost and estimated fair value of fixed income securities and
preferred stock available-for-sale at March 31, 2008, 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 orAmortizedCost

EstimatedFair Value(in thousands)Due in one year or
less

$
35,107

$
35,182Due after one year through five
years


109,180


111,365Due after five years through
ten years


185,130


186,091Due after ten years


24,314


24,010Securities not due at a single
maturity
  date


145,377


144,655Total
investment securities
  available-for-sale

$
499,108

$
501,303The
consolidated amortized cost of investment securities available-for-sale
deposited with various regulatory authorities at March 31, 2008 was $199.3
million.

4.       Premiums

Direct
premiums written totaled $61.2 million and $57.8 million for the three month
periods ended March 31, 2008 and 2007, respectively.

Premiums
receivable consist of the following at March 31, 2008 and December 31,
2007:

March 31,2008

December 31,2007(in thousands)Premiums
  receivable

$
10,833

$
10,639Allowance
  for doubtful accounts


(1,444
)

(1,416
)$
9,389

$
9,2235.       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.

- 10 -

SEABRIGHT INSURANCE HOLDINGS, INC. AND
SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)

On
October 1, 2007, the Company entered into new reinsurance agreements with
nonaffiliated reinsurers wherein it retains the first $1.0 million of each loss
occurrence. The new reinsurance program, which is effective through October 1,
2008, provides coverage up to $75.0 million per loss occurrence as follows:

Layer

General Description$1.0 million
  for each loss occurrence in excess of $1.0 million for each loss occurrence

Fully
  reinsured, subject to an aggregate annual limit of $8.0 million$3.0 million
  for each loss occurrence in excess of $2.0 million for each loss occurrence

Fully
  reinsured, subject to an aggregate annual limit of $12.0 million$5.0 million
  for each loss occurrence in excess of $5.0 million for each loss occurrence

Fully
  reinsured, subject to an aggregate annual limit of $15.0 million$10.0
  million for each loss occurrence in excess of $10.0 million for each loss
  occurrence

Fully
  reinsured, subject to a limit of $7.5 million maximum for any one loss and an
  aggregate limit of $20.0 million.$55.0
  million for each loss occurrence in excess of $20.0 million for each loss
  occurrence

Fully
  reinsured in two sub-layers. The first sub-layer affords coverage of up to
  $30.0 million for each loss occurrence in excess of $20.0 million, subject to
  an aggregate annual limit of $60.0 million, and the second sub-layer affords
  coverage up to $25.0 million for each loss occurrence in excess of $50.0
  million, subject to an annual aggregate limit of $50.0 million. Both
  sub-layers are subject to a limit of $5.0 million maximum for any one loss.The
above coverage is subject to various additional limitations and exclusions as
more fully described in the reinsurance agreements.

As
part of the purchase of SBIC, SIH and LMC entered into an adverse development
excess of loss reinsurance agreement (the Agreement). The Agreement, after
taking into account any recoveries from third party reinsurers, calls for LMC
to reimburse SBIC 100% of the excess of the actual loss at December 31,
2011 over the initial loss reserves at September 30, 2003. The Agreement
also calls for SBIC to reimburse LMC 100% of the excess of the initial loss
reserves at September 30, 2003 over the actual loss results at
December 31, 2011. The amount of adverse loss development under the
Agreement recorded in the accompanying unaudited condensed consolidated balance
sheets was $2.5 million at March 31, 2008 and December 31, 2007. Any increase
or decrease in the amount receivable 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) $1.6 million, equal
to 10% of the balance sheet reserves of SBIC at the date of sale. Thereafter,
the Trust shall be adjusted each quarter, if warranted, to an amount equal to
the greater of (a) $1.6 million or (b) 102% of LMCs obligations under the
Agreement. The balance of the Trust, including accumulated interest, was $3.6
million at March 31, 2008 and $3.5 million at December 31, 2007. In April 2008,
LMC submitted a request to withdraw approximately $0.8 million of excess funds
on deposit in the trust account. After due evaluation, the Company complied
with LMCs request, resulting in a balance in the trust account of
approximately $2.7 million immediately following the withdrawal.

b. Reinsurance
Assumed

The
Company involuntarily assumes residual market business either directly from
various states that operate their own residual market programs or indirectly
from the National Council for Compensation Insurance (the NCCI), which
operates residual market programs on behalf of some states. The states in which
the Company assumed residual market business at March 31, 2008 include the
following: Alabama, Alaska, Arizona, Arkansas, Connecticut, Delaware, District
of Columbia, Iowa, Georgia, Idaho, Illinois, Indiana, Kansas, Massachusetts,
Michigan, Mississippi, Nevada, New Jersey, New Mexico, Oregon, South Carolina,
South Dakota and Virginia.

- 11 -

SEABRIGHT INSURANCE HOLDINGS, INC. AND
SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)

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, 2008 and
December 31, 2007:

March 31,2008

December 31,2007(In thousands)Reinsurance recoverables on
  unpaid loss and loss adjustment expenses

$
13,786

$
14,034Reinsurance recoverables on
paid losses


263


176Total reinsurance
recoverables

$
14,049

$
14,210The effects of reinsurance are
as follows for the three month periods ended March 31, 2008 and 2007:

Three Months Ended March 31,2008

2007(in thousands)Reinsurance assumed:Written premiums

$
2,415

$
2,109Earned premiums


2,613


2,008Losses and loss adjustment
expenses
  incurred


1,806


1,269Commission expenses
incurred


1,035


767Reinsurance ceded:Written premiums

$
3,224

$
3,666Earned premiums


3,314


3,610Losses and loss adjustment
expenses
  incurred


442


(845
)Commission expenses
incurred


352


249- 12 -

SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.
Unpaid Loss and Loss Adjustment
 ExpensesThe
following table summarizes the activity in unpaid loss and loss adjustment
expense for the three month periods ended March 31, 2008 and 2007:

Three Months Ended March 31,2008

2007(in thousands)Beginning balance:Unpaid loss and
 loss adjustment expense

$
250,085

$
198,356Reinsurance
 recoverables


(14,034
)

(13,504
)Net


236,051


184,852Incurred related to:Current period


38,320


33,109Prior periods


(7,911
)

(7,191
)Total incurred


30,409


25,918Paid related to:Current period


(6,196
)

(4,488
)Prior periods


(18,955
)

(12,071
)Total paid


(25,151
)

(16,559
)Unpaid loss and
 loss adjustment expense, net of reinsurance recoverables


241,309


194,211Reinsurance
 recoverables


13,786


12,252Unpaid loss and loss adjustment expense

$
255,095

$
206,463Loss
and loss adjustment expenses are net of the release of loss reserves totaling
approximately $7.9 million and $7.2 million in the three month periods ended
March 31, 2008 and 2007, respectively. The majority of these reserve releases
related to the Companys California book of business and reflect a continuation
of lower than anticipated patterns of loss payments in recent accident years as
a result of reform legislation enacted there primarily in 2003 and 2004.

7.
Surplus NotesIn
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 $251,000 in
2008 and $281,000 in 2007.

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.
Contingenciesa. 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, 2008, SBIC
had a liability for guaranty fund and other assessments of $2.9 million and a
guaranty fund receivable of $3.5 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.

- 13 -

SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

9.
Share-Based Payment ArrangementsAt
March 31, 2008, the Company had outstanding stock options and nonvested
restricted stock granted according to the terms of two equity incentive plans.
The stockholders and Board of Directors approved the 2003 Stock Option Plan
(the 2003 Plan) in September 2003, and amended and restated the 2003 Plan in
February 2004 and April 2007, and approved the 2005 Long-Term Equity Incentive
Plan (the 2005 Plan and, together with the 2003 Plan, the Stock Option Plans)
in December 2004, and amended and restated the 2005 Plan in April 2007.

As
of March 31, 2008, options to purchase 436,778 shares of common stock were
outstanding under the 2003 Plan, and no additional shares were reserved for
issuance under the 2003 Plan. As of March 31, 2008, 754,030 shares of nonvested
restricted stock were outstanding under the 2005 Plan, options to purchase
676,593 shares of common stock were outstanding under the 2005 Plan and 752,799
shares were reserved for issuance under the 2005 Plan.

a. Stock Options

The
fair values of stock options granted during the quarters ended March 31, 2008
and 2007 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 31,2008

2007Expected term (years)



6.3




6.3Expected stock price volatility



29.5
%



26.3
%Risk-free interest rate



2.92
%



4.55
%Expected dividend yield








Estimated fair value per option


$
5.18



$
6.72The
following table summarizes stock option activity for the quarter ended March
31, 2008:

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, 2007


1,015,321

$
10.70


7.0

$
4,450Granted


113,050


14.62





Forfeited











Exercised


(15,000
)

6.54





Cancelled











Outstanding at March 31, 2008


1,113,371


11.15


7.1


3,983Exercisable at March 31, 2008


719,959


8.96


6.2


4,154The
aggregate intrinsic values in the table above are before applicable income
taxes and are based on the Companys closing stock price of $14.73 on March 31,
2008. Proceeds from the exercise of stock options totaled approximately $98,100
for the three months ended March 31, 2008. The total intrinsic value of stock
options exercised during the three months ended March 31, 2008 was
approximately $100,200.

The
following table presents additional information regarding options outstanding
as of March 31, 2008:

- 14 -

SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Options Outstanding

Options ExercisableRange ofExercise
 Prices

NumberOutstanding

Weighted-AverageRemainingContractualLife (years)

Weighted-AverageExercise Price

NumberOutstanding

Weighted-AverageExercise Price$   6.54

436,778

5.6


$
6.54


421,959


$
6.5410.50-12.54

299,093

6.8



10.61


223,446



10.6314.60-15.96

130,550

9.7



14.76


5,188



15.6817.16-18.68

246,950

8.6



18.06


69,366



17.811,113,371

7.1



11.15


719,959



8.96b. Restricted Stock

The
following table summarizes restricted stock activity for the three months ended
March 31, 2008:

Number of
 Shares

Weighted
 Average
 Grant Date
 Fair ValueOutstanding at December 31, 2007


473,880

$
17.80Granted


286,150


14.61Vested


(6,000
)

11.40Forfeited





Outstanding at March 31, 2008


754,030


16.64As
of March 31, 2008, there was $8.2 million of total unrecognized compensation
cost related to nonvested restricted stock granted under the 2005 Plan. That
cost is expected to be recognized over a weighted-average period of 28.0
months.

10.
Fair Values of Assets and
 LiabilitiesIn
accordance with SFAS 157, we group our financial assets and financial
liabilities measured at fair value in three levels, based on the markets in
which the assets and liabilities are traded and the reliability of the
assumptions used to determine fair value. These levels are:


Level 1  Valuations for assets and liabilities
 traded in active exchange markets, such as the New York Stock Exchange. Level
 1 includes U.S. Treasury securities, equity securities and preferred stocks
 that are traded by dealers or brokers in active markets. Valuations are
 obtained from readily available pricing sources for market transactions
 involving identical assets or liabilities.
Level 2  Valuations for assets and liabilities
 traded in less active dealer or broker markets. Level 2 valuations are based
 upon quoted prices for similar instruments in active markets, quoted prices
 for identical or similar instruments in markets that are not active, and
 model-based valuation techniques for which all significant assumptions are
 observable in the market. Level 2 includes government sponsored agency
 securities, corporate fixed-income securities, municipal bonds, and other
 collateralized obligations.
Level 3  Valuations for assets and liabilities that
 are derived from other valuation methodologies, including discounted cash
 flow models and similar techniques, and not based on market exchange, dealer,
 or broker traded transactions. Level 3 valuations incorporate certain
 assumptions and projections in determining the fair value assigned to such
 assets or liabilities. As of March 31, 2008, the Company has no Level 3
 financial assets or financial liabilities.- 15 -

SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The
table below presents the March 31, 2008 balances of assets and liabilities
measured at fair value on a recurring basis.

Total

Level 1

Level 2

Level 3(in thousands)Fixed income securities

$
492,977

$
9,953

$
483,024

$
Equity securities


11,649


11,649





Preferred stock


8,326


8,326





Total

$
512,952

$
29,928

$
483,024

$
Also,
we may be required, from time to time, to measure certain other financial
assets at fair value on a nonrecurring basis in accordance with GAAP. These
adjustments to fair value usually result from write-downs of individual assets.
None of these assets were measured to fair value during the first quarter 2008.

- 16 -

Item 2.
Managements Discussion and Analysis of Financial Condition and
 Results of OperationsCautionary 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 Part I of this quarterly report. 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, 2007 filed with the SEC on March 17, 2008.

The
discussion under the heading Risk Factors in our Annual Report on Form 10-K
for the year ended December 31, 2007, as updated by the discussion in Part II,
Item 1A of this quarterly report, and similar discussions in our other SEC
filings, describe some of the important risk factors that may affect our
business, results of operations and financial condition. You should carefully
consider those risks, in addition to the other information in this report and
in our other filings with the SEC, before deciding to purchase, hold or sell
our common stock.

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

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


ineffectiveness
 or obsolescence of our business strategy due to changes in current or future
 market conditions;
increased
 competition on the basis of pricing, capacity, coverage terms or other
 factors;
greater
 frequency or severity of claims and loss activity, including as a result of
 natural or man-made catastrophic events, than our underwriting, reserving or
 investment practices anticipate based on historical experience or industry
 data;
the effects
 of acts of terrorism or war;
developments
 in financial and capital markets that adversely affect the performance of our
 investments;
changes in
 regulations or laws applicable to us, our subsidiaries, brokers or customers;
our
 dependency on a concentrated geographic market;
changes in
 the availability, cost or quality of reinsurance and failure of our
 reinsurers to pay claims timely or at all;
decreased
 demand for our insurance products;
loss of the
 services of any of our executive officers or other key personnel;
the effects
 of mergers, acquisitions and divestitures that we may undertake;
changes in
 rating agency policies or practices;
changes in
 legal theories of liability under our insurance policies;
changes in
 accounting policies or practices; and- 17 -


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 2007 Annual Report on Form 10-K.

Overview

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

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

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

To minimize
our exposure to any past business underwritten by KEIC, we entered into an
adverse development cover agreement in connection with the Acquisition. Under
the terms of this agreement, we and LMC are required to indemnify each other
with respect to the development of KEICs insurance liabilities as they existed
at the date of the Acquisition. Accordingly, if KEICs insurance liabilities
increase, LMC must indemnify us in the amount of the increase. If KEICs
insurance liabilities decrease, we must share with LMC the positive development
of those reserves. To support LMCs obligations under the adverse development
cover, LMC funded a trust account at the time of the Acquisition in the amount
of $1.6 million as collateral for LMCs potential future obligations to us
under the adverse development cover. The minimum amount that must be maintained
in the trust account is equal to the greater of (a) $1.6 million or (b) 102% of
the then existing quarterly estimate of LMCs total obligations under the
adverse development cover. The amount on deposit in the trust account was
approximately $3.6 million at
March 31, 2008 and $3.5 million at
December 31, 2007. In April 2008, LMC submitted a request to withdraw
approximately $0.8 million of excess funds on deposit in the Trust. After due
evaluation, we complied with LMCs

- 18 -

request, resulting in a balance in the Trust account of approximately
$2.7 million immediately following the withdrawal. 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, the operations of our non-insurance
subsidiaries 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, 2007, one-half of the premiums would be
earned in 2007 and the other half would be earned in 2008.

Premiums
earned is 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 State United
States Longshore and Harbor Workers Compensation Act Assigned Risk Plan (the
Washington USL&H Assigned Risk Plan). We immediately cede 100% of those
premiums, net of our expenses, and 100% of the losses in connection with that business
back to the Washington USL&H Assigned Risk Plan. References
to direct premiums written generally exclude premiums from the Washington
USL&H Assigned Risk Plan because such business is not indicative of our
core business or material to our results of operations.

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 and preferred stocks. 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 value.

Claims
Service Income

We receive
claims service income in return for providing claims administration services
for other companies. The claims service income we receive for providing these
services approximates our costs. For the three months ended March 31, 2008 and
2007, approximately 56.8% and 49.8%, respectively, of our claims service income
was generated by contracts we have with LMC to provide claims handling services
for the policies written by Eagle prior to the Acquisition. We expect income
from these contracts to decrease substantially over the next several years as
transactions related to Eagle diminish.

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. For further information
regarding our loss and loss adjustment expenses, including amounts paid and
unpaid, see discussion under the heading Critical Accounting Policies,
Estimates and Judgments  Unpaid Loss and Loss Adjustment Expenses in this
Item 2 of Part I of this quarterly report.

- 19 -

Underwriting,
Acquisition and Insurance Expenses

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

Interest
Expense

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

Results of Operations

Three
Months Ended March 31, 2008 and 2007

Gross
Premiums Written. Gross premiums written for the three
months ended March 31, 2008 totaled $63.6 million, an increase of $3.7 million,
or 6.2%, over $59.9 million of gross premiums written in the same period of
2007 even though we continued to experience rate reductions in California, our
largest market, as well as in other states. Excluding work we perform as the
servicing carrier for the Washington USL&H Assigned Risk Plan, the number
of customers we serviced increased 31.8% from 745 at March 31, 2007 to 982 at
March 31, 2008 and in-force payrolls, one of the factors used in determining
premium charges, increased 32.5% from $4.3 billion at March 31, 2007 to $5.7
billion one year later. California continues to be our largest market,
accounting for approximately $109.3 million, or 40.7%, of our in-force premiums
at March 31, 2008. This represents a decrease of $1.7 million, or 1.5%, from
approximately $111.0 million, or 49.0%, of in-force premiums at March 31, 2007.

Illinois
is our second largest market and accounted for approximately $29.4 million
(11.0%) of our in-force premiums at March 31, 2008, representing an increase of
$7.9 million (36.7%) from $21.5 million (9.5%) at March 31, 2007. Louisiana is
our third largest market, accounting for approximately $22.2 million (8.2%) of
our in-force premiums as of March 31, 2008, representing an increase of $6.2
million (38.8%) from $16.0 million (7.1%) as of March 31, 2007. The remaining
states in our top five markets were Alaska and Hawaii, which accounted for
approximately $18.0 million (6.7%) and $12.9 million (4.8%) of our in-force
premiums at March 31, 2008, respectively, compared to $21.6 million (9.5%) and
$14.2 million (6.3%), respectively, of our in-force premiums at March 31, 2007.

We have
experienced significant reductions in our California premium rates over the
past four years. In 2007, in response to continued reductions in California
workers compensation claim costs, we reduced our rates by an average 14.2% for
new and renewal insurance policies written in California on or after July 1,
2007. This was the eighth California rate reduction we have filed since October
1, 2003, resulting in a net cumulative reduction of our California rates of
approximately 54.8%. Rate reductions have also been adopted in other states in
which we operate. For example, effective January 1, 2008, we adopted the
following rate decreases recommended by the NCCI: 10.9% in Alaska, 19.3% in
Hawaii and 18.4% in Florida. Effective July 1, 2007, we adopted the Louisiana
Insurance Commissioners recommendation of a 15.8% reduction in Louisiana,
which is 2.0% more than the 13.8% rate decrease recommended by the NCCI. On
February 5, 2008, the Louisiana Insurance Commissioner approved an
NCCI-proposed rate reduction of 8.6%, effective May 1, 2008. On March 7, 2008,
after completing a study of our Louisiana loss data, we filed with the
Louisiana Insurance Commissioner our new rates reflecting an average reduction
of 11.6% from prior rates for new and renewal workers compensation insurance
policies written in Louisiana on or after May 1, 2008. We have also recently adoptedrate increases insomestates. For example, effectiveOctober 1, 2007, we
adopted a 4.1% rate increasein Arizona andon January 1, 2008, we adopted a 4.0%rate increase in
Illinois.

Net
Premiums Written. Net premiums written totaled $60.3
million for the three months ended March 31, 2008 compared to $56.3 million in
the same period in 2007, representing an increase of $4.0 million, or 7.1%. Net
premiums written are affected by premiums ceded under reinsurance agreements.
Ceded written premiums for the three months ended March 31, 2008 totaled $3.2
million (5.0% of gross premiums written) compared to $3.7 million

- 20 -

(6.2% of gross
premiums written) in the same period of 2007. The decrease in ceded premiums as
a percentage of gross premiums written resulted primarily from the renewal of
our excess of loss reinsurance program on October 1, 2007 at average rates that
are approximately 25.6% lower than rates under the prior reinsurance program.

Net
Premiums Earned. Net premiums earned totaled $56.7
million for the three months ended March 31, 2008 compared to $48.6 million for
the same period in 2007, representing an increase of $8.1 million, or 16.7%. We
record the entire annual policy premium as unearned premium when written and
earn the premium over the life of the policy, which is generally twelve months.
Consequently, the amount of premiums earned in any given year depends on when
during the current or prior year the underlying policies were written. Our
direct premiums earned increased $7.2 million, or 14.3%, to $57.4 million at
March 31, 2008 from $50.2 million at March 31, 2007 due to our premium growth
as described above. Net premiums earned are also affected by premiums ceded
under reinsurance agreements. Ceded premiums earned at March 31, 2008 totaled
$3.3 million compared to $3.6 million at March 31, 2007, representing a
decrease of $0.3 million, or 8.3%. A decrease in ceded premiums earned is an
increase to our overall net premiums earned. Also adding to the increase in net
premiums earned is an increase in the amount of premiums we involuntarily
assume on residual market business from the NCCI, which operates residual
market programs on behalf of many states. Assumed premiums earned increased
$0.6 million from $2.0 million at March 31, 2007 to $2.6 million at March 31,
2008.

Net
Investment Income. Net investment income was $5.7 million
for the three months ended March 31, 2008 compared to $4.8 million for the same
period in 2007, representing an increase of $0.9 million, or 18.8%. Average
invested assets increased $87.8 million, or 20.4%, from $429.5 million as of
March 31, 2007 to $517.3 million as of March 31, 2008. The increase in net
investment income is due primarily to a larger portfolio base at March 31, 2008
as a result of strong cash flow from operations of $94.6 million for the year
ended December 31, 2007 and $11.5 million for the three months ended March 31,
2008. Our yield on average invested assets for the three months ended March 31,
2008 and 2007 was approximately 4.4%.

Service
Income. Service income totaled $422,000 for the three
months ended March 31, 2008 compared to $580,000 for the same period in 2007,
representing a decrease of $158,000, or 27.2%. Our service income results
primarily from service arrangements we have with LMC for claims processing and
policy administration services that we perform for Eagles insurance policies
and from claims processing services that we perform for other unrelated
companies. Average monthly fees from Eagle are declining as the volume of work
decreases as a result of the run off of our predecessors business. Service income
related to our arrangements with LMC decreased $40,000, or 13.8%, to $250,000
for the three months ended March 31, 2008 from $290,000 for the same period in
2007. Service income related to claims processing services that we perform for
other unrelated companies decreased approximately $130,000 and accounted for
approximately 38.8% of our service income for the three months ended March 31,
2008, compared to 50.0% of service income in the same period of 2007.

Other
Income. Other income totaled $1.4 million for the
three months ended March 31, 2008 compared to $1.0 million for the same period
in 2007, representing an increase of $0.4 million, or 40.0%. Other income is
derived primarily from the operations of PointSure, our wholesale broker and third
party administrator subsidiary which, due to the expansion of its portfolio of
insurance products during 2007, has been able to increase the amount of income
from external sources and THM, a provider of medical bill review, utilization review, nurse case management and
related services that we acquired in December 2007. PointSure represents
20 insurance companies at March 31, 2008 and 2007.

Loss
and Loss Adjustment Expenses. Loss and loss adjustment
expenses totaled $30.4 million for the three months ended March 31, 2008
compared to $25.9 million for the same period in 2007, representing an increase
of $4.5 million, or 17.4%. 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, 2008 was 52.9% compared to 52.2%
for the same period in 2007. Included in the 2008 loss ratio was a reduction of
approximately $7.9 million of previously recorded direct net loss reserves to
reflect a continuation of deflation trends in the paid loss data for recent
accident years. In the quarter ended March 31, 2007, we reduced loss reserves
by approximately $7.2 million. Our direct net loss reserves are net of
reinsurance and exclude reserves associated with KEIC and the business that we
involuntarily assume from the NCCI. Approximately $3.1 million of the reserve
adjustment related to accident year 2007, approximately $3.6 million related to
accident year 2006 and approximately $1.2 million related to accident years
2005 and prior.

There
is uncertainty about whether recent lower paid loss trends, which result
primarily from California legislative reforms enacted in 2003 and 2004, will be
sustained, particularly in light of current efforts to change or

- 21 -

repeal
portions of the reforms. We will not know the full impact of these reforms with
a high degree of confidence for several years. We have established loss
reserves at March 31, 2008 that are based upon our current best estimate of
loss costs, taking into consideration the recent lower paid loss claim data,
incurred loss trends and the uncertainty regarding the permanence of recent
legislative reforms. For further information regarding our loss and loss
adjustment expenses, including amounts paid and unpaid, see the discussion
under the heading Critical Accounting Policies, Estimates and Judgments 
Unpaid Loss and Loss Adjustment Expenses in this Item 2 of Part I of this quarterly report.

As
of March 31, 2008, we had recorded a receivable of approximately $2.5 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, 2008, we had access to
approximately $3.6 million under the collateralized reinsurance trust in the
event that LMC fails to satisfy its obligations under the adverse development
cover. The balance of the Trust, including interest, was $3.5 million at
December 31, 2007. In April 2008, LMC
submitted a request to withdraw approximately $0.8 million of excess funds on
deposit in the Trust. After due evaluation, we complied with LMCs request,
resulting in a balance in the Trust account of approximately $2.7 million
immediately following the withdrawal.

Underwriting
Expenses. Underwriting expenses totaled $15.6 million
for the three months ended March 31, 2008, compared to $12.6 million for the
same period in 2007, representing an increase of $3.0 million, or 23.8%. 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, 2008 was 27.6%, compared to 25.9%
for the same period in 2007. The increase in the expense ratio is primarily the
result of increased staffing costs and other premium production related
expenses as we invest in the geographic expansion and development of our
business. The total number of employees grew from 197 at March 31, 2007 to 259
at March 31, 2008, representing an increase of 31.5%.

Commission
expense as a percentage of net earned premiums averaged 9.6% for the three
months ended March 31, 2008 compared to 9.2% in the same period of 2007. These
increases are driven primarily by the California market, as well as other
markets that have experienced rate reductions, as brokers negotiate higher
commission rates during a period of declining premium rates.

Interest
Expense. Interest expense related to the surplus notes
issued by our insurance subsidiary in May 2004 totaled $251,000 for the three
months ended March 31, 2008, compared to $281,000 for the same period in 2007,
representing a decrease of $30,000, or 10.7%. The surplus notes interest rate,
which is calculated at the beginning of each interest payment period using the
3-month LIBOR rate plus 400 basis points, decreased from 9.36% at March 31,
2007 to 7.09% at March 31, 2008.

Other
Expenses. Other expenses totaled $2.0 million for the
three months ended March 31, 2008, compared to $1.6 million for same period in
2007, representing an increase of $0.4 million, or 25.0%. Other expenses are
derived primarily from the operations of PointSure, our non-insurance
subsidiary which experienced direct costs associated with the expansion of
insurance products they offer and, to a lesser extent, from the operations of
THM.

Income Tax Expense. The effective tax rate for the
three months ended March 31, 2008 was 31.6% compared to 30.5% for the same
period in 2007. Our effective tax rate for the three months ended March 31,
2008 and 2007 was lower than the statutory tax rate of 35.0% primarily as a
result of tax exempt interest income. At March 31, 2008, approximately 53.2% of
our fixed-income portfolio was invested in tax-exempt securities, compared to
approximately 51.1% at March 31, 2007.

Net
Income. Net income was $10.9 million for the three
months ended March 31, 2008, compared to $10.1 million for the same period in
2007, representing an increase of $0.8 million, or 7.9%. The increase in net
income resulted primarily from increases in premiums earned and investment
income and reserve releases recognized in the period, offset by increases in
loss and loss adjustment expenses; underwriting, acquisition and insurance
expenses; and other expenses.

- 22 -

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, 2008 has an
effective duration of 5.0 years with individual maturities extending out to 30
years. Currently, we make claim payments from positive cash flow from
operations and invest excess cash in securities with appropriate maturity dates
to balance against anticipated future claim payments. As these securities
mature, we intend to invest any excess funds in investments with appropriate
durations to match against expected future claim payments.

At
March 31, 2008, our portfolio was made up almost entirely of investment grade
fixed income securities with fair values subject to fluctuations in interest
rates. The remainder of our investment portfolio consisted of investments in
equity securities, which consist of investments in exchange traded funds
designed to correspond to the performance of certain indexes based on domestic
or international stocks, and preferred stocks. In November 2006, our investment
policy was revised to allow for investment in domestic and international
equities of up to 4% and 1%, respectively, of our statutory consolidated
capital and surplus. All of the securities in our investment portfolio are
accounted for as available for sale securities. While we have structured our
investment portfolio to provide an appropriate matching of maturities with
anticipated claim payments, if we decide or are required in the future to sell
securities in a rising interest environment, we would expect to incur losses
from such sales.

We
had no direct sub-prime mortgage exposure in our investment portfolio as of
March 31, 2008 and approximately $0.9 million of indirect exposure to sub-prime
mortgages. The average credit quality of our $266.6 million fixed income
municipal portfolio was AA+ (AA based on the issuers underlying ratings).
Insured municipal bonds totaled $205.6 million and had a weighted average
credit rating of AA+ (AA based on the issuers underlying ratings). The
remaining $61.0 million in uninsured municipal bonds carried a weighted average
credit rating of AA. Consequently, we do not expect a material impact to our
investment portfolio or financial position as a result of the problems
currently facing monoline bond insurers.

Our
ability to adequately provide funds to pay claims comes from our disciplined
underwriting and pricing standards and the purchase of reinsurance to protect
us against severe claims and catastrophic events. Effective October 1, 2007,
our reinsurance program provides us with reinsurance protection for each loss
occurrence in excess of $1.0 million, up to $75.0 million, subject to various
additional limitations and exclusions as more fully described in Note 5.a. to
our unaudited condensed consolidated financial statements in Part I, Item 1 of
this quarterly report and in the reinsurance agreements. Given industry and
predecessor trends, we believe that we are sufficiently capitalized to cover our
retained losses.

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, 2007, the last date
that we were required to update the annual risk-based capital calculation, the
statutory surplus of our insurance subsidiary was in excess of the prescribed
risk-based capital requirements that correspond to any level of regulatory
action.

SIH
is a holding company with minimal unconsolidated revenue. Currently, there are
no plans to have SBIC or other subsidiaries pay a dividend to SIH.

Our
unaudited consolidated net cash provided by operating activities for the three
months ended March 31, 2008 was $11.5 million, compared to our cash flow from
operations of $18.7 million for the same period in 2007. The decrease resulted
primarily from the decreases in unpaid loss and loss adjustment expense and
deferred income tax benefit, increases in policy acquisition costs deferred and
other assets and liabilities, offset by increases in the amortization of policy
acquisition costs and balances related to reinsurance recoverables and unearned
premium reserves, all as a result of the growth of our business and the
continued favorable development of our loss reserves.

- 23 -

We
used net cash of $24.9 million for investing activities in the three months
ended March 31, 2008, compared to $21.8 million for the same period in 2007.
The difference between periods is primarily attributable to maintaining a lower
overall cash balance.

For
the three months ended March 31, 2008, financing activities provided cash of
$101,000, compared to $56,000 in the same period in 2007.

Contractual Obligations and Commitments

The
following table identifies our contractual obligations by payment due period as
of March 31, 2008:

Payments
 Due by PeriodTotal

Less
 than
 1 Year

1-3
 Years

4-5
 Years

More
 than
 5 Years(in
 thousands)Long term
 debt obligations:Surplus
notes

$
12,000

$


$


$


$
12,000Loss and
 loss adjustment expenses


255,095


84,181


109,946


23,469


37,499Operating
 lease obligations


14,484


2,627


5,968


1,672


4,217Total

$
281,579

$
86,808

$
115,914

$
25,141

$
53,716The
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, 2008
and actuarial estimates of expected payout patterns and are not contractual
liabilities as to time certain. Our contractual liability is to provide
benefits under the policies we write. As a result, our calculation of loss and
loss adjustment expense payments due by period is subject to the same
uncertainties associated with determining the level of unpaid loss and loss
adjustment expenses generally and to the additional uncertainties arising from
the difficulty of predicting when claims (including claims that have not yet
been reported to us) will be paid. For a discussion of our unpaid loss and loss
adjustment expense process, see the heading Critical Accounting Policies,
Estimates and Judgments  Unpaid Loss and Loss Adjustment Expenses in this
Part I, Item 2 of this quarterly report. 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, 2008, we had no off-balance sheet arrangements that have or are
reasonably likely to have a material current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies, Estimates and
Judgments

It
is important to understand our accounting policies in order to understand our
unaudited 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; deferred policy acquisition costs; income
taxes; the impairment of investment securities; earned but unbilled premiums;
and retrospective premiums. The following should be read in conjunction with
the notes to our financial statements.

Unpaid
Loss and Loss Adjustment Expenses

Unpaid
loss and loss adjustment expenses represent our estimate of the expected cost
of the ultimate settlement and administration of losses, based on known facts
and circumstances. Included in unpaid loss and loss adjustment expenses are
amounts for case-based insurance liabilities, including estimates of future
developments on these claims; claims incurred but not yet reported to us;
second injury fund expenses; allocated claim adjustment expenses; and
unallocated claim adjustment expenses. We use actuarial methodologies to assist
us in establishing these estimates, including judgments relative to estimates
of future claims severity and frequency, length of time to

- 24 -

achieve
ultimate resolution, judicial theories of liability and other third-party
factors that are often beyond our control. Due to the inherent uncertainty
associated with the cost of unsettled and unreported claims, the ultimate
liability may differ from the original estimates. These estimates are regularly
reviewed and updated and any resulting adjustments are included in the current
periods operating results.

Following
is a summary of the gross loss and loss adjustment expense reserves by line of
business as of March 31, 2008 and December 31, 2007. The workers compensation
line of business comprises over 99% of our total loss reserves as of both
dates.

As of
 March 31, 2008

As of
 December 31, 2007Line of
 Business

Case

IBNR

Total

Case

IBNR

Total(in
 thousands)Workers
 Compensation

$
99,679

$
153,685

$
253,364

$
93,457

$
155,042

$
248,499Ocean Marine


319


1,412


1,731


564


1,022


1,586Total

$
99,998

$
155,097

$
255,095

$
94,021

$
156,064

$
250,085Actuarial
Loss Reserve Estimation Methods

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

For
the current accident year, we establish the initial reserve for claims
incurred-but-not-reported (IBNR) using an expected loss ratio (ELR) method.
The ELR method is based on an analysis of historical loss ratios adjusted for
current pricing levels, exposure growth, anticipated trends in claim frequency
and severity, the impact of reform activity and any other factors that may have
an impact on the loss ratio. The actual paid and incurred loss data for the
accident year is reviewed each quarter and changes to the ELR may be made based
on the emerging data, although changes are typically not made until the end of
the accident year when the loss data can be analyzed as a complete accident
year. The ELR is multiplied by the year-to-date earned premium to determine the
ultimate losses for the current accident year. The actual paid and case
outstanding losses are subtracted from the ultimate losses to determine the IBNR
for the accident year. As the accident year matures, we incorporate a standard
actuarial reserving methodology referred to as the Bornhuetter-Ferguson method.
This method blends the loss development and expected loss ratio methods by
assigning partial weight to the initial expected losses, calculated from the
expected loss ratio method, with the remaining weight applied to the actual
losses, either paid or incurred. The weights assigned to the initial expected
losses decrease as the accident year matures. A reserve estimate implies a
pattern of expected loss emergence. If this emergence does not occur as
expected, it may cause us to revisit our previous assumptions. We may adjust
loss development patterns, the various method weights or the expected loss ratios
used in our analysis. Management employs judgment in each reserve valuation as
to how to make these adjustments to reflect current information.

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


We wrote our
 first policy on October 1, 2003 and, as a result, our total reserve portfolio
 is relatively immature when compared to other industry data.
We have been
 growing consistently since we began operations and have entered into several
 new states that are not included in our predecessors historical data.
At March 31,
 2008, approximately $156.3 million, or 49.5%, of our direct loss reserves
 were related to business written in California. Over the last several years,
 three significant comprehensive legislative reforms were enacted in
 California: AB 749 was enacted in February 2002; AB 227 and SB 228 were
 enacted in September 2003; and SB 899 was enacted in April 2004. This reform
 activity has resulted in uncertainty regarding the impact of the reforms on loss
 payments, loss development and, ultimately, loss reserves, making historical
 data less reliable as an indicator of future loss. All four bills enacted
 structural changes to the benefit delivery system in California, in addition
 to changes in the indemnity and medical benefits afforded injured workers. In
 response to the reform legislation and a continuing drop in the frequency of
 workers compensation claims, the pure premium rates approved by the
 California Insurance- 25 -

Commissioner
 effective January 1, 2008 were 65.1% lower than the pure premium rates in
 effect as of July 1, 2003.Key elements
 of the reforms as they relate to indemnity and medical benefits were as
 follows:Indemnity
 BenefitsAB 749
 significantly increased most classes of workers compensation indemnity
 benefits over a four-year period beginning in 2003.AB 227 and
 SB 228 repealed the mandatory vocational rehabilitation benefits and replaced
 them with a system of non-transferable education vouchers.SB 899
 required the Division of Workers Compensation (DWC) Administrative
 Director to adopt, on or before January 1, 2005, a new permanent disability
 rating schedule (PDRS) based in part on American Medical Association
 guidelines. Also, temporary disability was limited to a duration of two
 years.SB 899
 provided that, effective April 19, 2004, apportionment of disability for
 purposes of permanent disability determination must be based on causation.Medical
 BenefitsAB 749
 repealed the presumption given to the primary treating physician (except when
 the worker has pre-designated a personal physician), effective for injuries
 occurring on or after January 1, 2003. (SB 228 and SB 899 later extended this
 to all future medical treatment on earlier injuries.)SB 228
 required the DWC Administrative Director to establish, by December 1, 2004,
 an Official Medical Treatment Utilization Schedule meeting specific criteria.
 SB 228 also provided that beginning three months after the publication date
 of the updated American College of Occupational and Environmental Medical
 (ACOEM) Practice Guidelines and continuing until such time as the DWC
 Administrative Director establishes an Official Medical Treatment Utilization
 Schedule, the ACOEM standards will be presumed to be correct regarding the
 extent and scope of all medical treatment. The DWC Administrative Director
 has subsequently adopted the ACOEM Guidelines as the Official Medical
 Treatment Utilization Schedule.SB 228
 limited the number of chiropractic visits and the number of physical therapy
 visits to 24 each per claim.SB 228
 established a prescription medication fee schedule set at 100% of Medi-Cal
 Schedule amounts.SB 228
 provided that the maximum facility fee for services performed in an
 ambulatory surgical center may not exceed 120% of the Medicare fees for the
 same service performed in a hospital outpatient facility.SB 899
 provided that after January 1, 2005, an employer or insurer may establish
 medical provider networks meeting certain conditions and, with limited
 exceptions, medical treatment can be provided within those networks.These
reforms are a source of variability in the reserve estimates as legislative
changes affecting benefit levels not only impact the cost of benefits but also
the rate at which accident year benefits or losses develop over time. In
addition, the PDRS, one of the most significant reforms, faces ongoing
challenges. The PDRS was revised effective January 1, 2005. The revised
schedule has resulted in significantly reduced permanent disability awards,
leading to concerns that injured workers may not be adequately compensated for
their work related permanent injuries. The PDRS is currently being challenged
on three fronts  legislative, administrative and legal. Legislation has been
proposed in the 2008 legislative session that would modify the formula used to
determine the amount of permanent disability benefits. It is too early to
determine what impact the legislation may have on permanent disability
benefits, or if it will be enacted into law. A prior legislative effort to
modify the PDRS was vetoed by the Governor of California in 2007. On the
administrative front, the California Division of Workers Compensation has undertaken
a review of the PDRS. The nature and extent of proposed changes, if any, are
not yet known. The Division of Workers Compensation has not published a
schedule to communicate their

- 26 -

recommendations.
Finally, recent court decisions continue to lend uncertainty to the
interpretation and application of the PDRS. All of these factors contribute to
the uncertainty of California workers compensation claim costs.

Workers
compensation is considered a long-tail line of business, as it takes a
relatively long period of time to finalize claims from a given accident year.
Management believes that it generally takes workers compensation losses
approximately 48 to 60 months after the start of an accident year until the
data is viewed as fully credible for paid and incurred reserve evaluation
methods. Workers compensation losses can continue to develop beyond 60 months
and in some cases claims can remain open more than 20 years. As indicated
above, we wrote our first policy on October 1, 2003 so our first complete
accident year is 2004. As of March 31, 2008, accident year 2004 is 51 months
developed, accident year 2005 is 39 months developed and accident year 2006 is
27 months developed. Our loss reserve estimates are subject to considerable variation
due to the relative immaturity of the accident years from a development
standpoint.

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


IBNR
 reserves for losses  This includes amounts for the medical and indemnity
 components of the workers compensation claim payments, net of subrogation
 recoveries and deductibles;
IBNR
 reserves for defense and cost containment expenses (DCC, also referred to
 as allocated loss adjustment expenses (ALAE)), net of subrogation
 recoveries and deductibles;
reserve for
 adjusting and other expenses, also known as unallocated loss adjustment
 expenses (ULAE); and
reserve for
 loss based assessments, also referred to as the 8F reserve in reference to
 Section 8, Compensation for Disability, subsection (f), Injury increasing
 disability, of the United States Longshore and Harbor Workers Compensation
 Act (USL&H) Act.The
reserves for losses and DCC are also reviewed gross and net of reinsurance
(referred to as net). For gross losses, the claims for the Washington
USL&H Plan, the KEIC claims assumed in the Acquisition and claims assumed
from the NCCI residual market pools are excluded from this discussion.

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

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

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

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

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

The
State Act category is further split into California and excluding
non-California groupings. This is due to the extensive reform activity that has
taken place in California as discussed above. Since the California data is
subject to

- 27 -

additional
variation due to the reform activity, separating the data in this fashion
allows us to review the non-California State Act data with no impact from the
California reform activity.

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

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


paid loss
 (or ALAE) development;
incurred loss (or ALAE) development;
Bornhuetter-Ferguson
 using ultimate premiums and paid loss (or ALAE); and
Bornhuetter-Ferguson
 using ultimate premiums and incurred loss (or ALAE).A
gross ultimate value is selected by reviewing the various ultimate estimates
and applying actuarial judgment to achieve a reasonable point estimate of the
ultimate liability. The gross IBNR reserve equals the selected gross ultimate
loss minus the gross paid losses and gross case reserves as of the valuation
date. The selected gross ultimate loss and ALAE are reviewed and updated on a
quarterly basis.

Variation
in Ultimate Loss Estimates

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

These
techniques recognize, among other factors:


our claims
 experience and that of our predecessor;
the
 industrys claim experience;
historical
 trends in reserving patterns and loss payments;
the impact
 of claim inflation and/or deflation;
the pending
 level of unpaid claims;
the cost of
 claim settlements;
legislative
 reforms affecting workers compensation;
the overall
 environment in which insurance companies operate; and
trends in
 claim frequency and severity.In
addition, there are loss and loss adjustment expense risk factors that affect
workers compensation claims that can change over time and also cause our loss
reserves to fluctuate. Some examples of these risk factors include, but are not
limited to, the following:


recovery
 time from the injury;
degree of
 patient responsiveness to treatment;
use of
 pharmaceutical drugs;- 28 -


type and
 effectiveness of medical treatments;
frequency of visits to healthcare providers;
changes in
 costs of medical treatments;
availability
 of new medical treatments and equipment;
types of
 healthcare providers used;
availability
 of light duty for early return to work;
attorney
 involvement;
wage
 inflation in states that index benefits; and
changes in
 administrative policies of second injury funds.Variation
can also occur in the loss reserves due to factors that affect our book of
business in general. Some examples of these risk factors include, but are not limited
to, the following:


injury type
 mix;
change in
 mix of business by state;
change in
 mix of business by employer type;
small volume
 of internal data; and
significant
 exposure growth over recent data periods.Impact
of Changes in Key Assumptions on Reserve Volatility

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

Due
to the relative immaturity of our book of business, the challenge has been to
give the right weight in the ultimate loss estimation process to the new data
as it becomes available. As discussed above, management believes that it
generally takes workers compensation losses approximately 48 to 60 months
after the start of an accident year until the data is viewed as fully credible
for paid and incurred reserve evaluation methods. Due to our limited operating
history, we have four complete accident years that were developed 51 months, 39
months, 27 months and 15 months (2004, 2005, 2006 and 2007, respectively) at
March 31, 2008. Our oldest complete accident year was 51 months old as of March
31, 2008. For accident years 2003 through 2007, we are using a Bornhuetter-Ferguson
approach, which blends the loss development and expected loss ratio methods.
Due to the favorable development exhibited by the data for accident years 2004
and 2005 at 17 to 18 months of development, management began to place more
weight on the results of the Bornhuetter-Ferguson method in its ultimate loss
estimates for accident years 2005, 2006 and 2007. As new data emerges and
continues to demonstrate favorable development, this adds credibility to the
existing data which enables management to reflect it more fully in its
estimation process. For all accident years, we have not completely relied on
the most recent data points in our loss development selections.

- 29 -

Because of
recent favorable development trends, we believe this has the effect of
increasing our estimated reserves as compared to reserves calculated with
complete reliance on these data points. Estimating loss reserves is an
uncertain and complex process which involves actuarial techniques and
management judgment. Actuarial analysis generally assumes that past patterns
demonstrated in the data will repeat themselves and that the data provides a
basis for estimating future loss reserves. However, since conditions and trends
that have affected losses in the past may not occur in the future in the same
manner, if at all, future results may not be reliably predicted by the prior
data.

Our
paid loss data for state act indemnity, both California and excluding
California, displayed decreasing, or deflationary, trends over recent
valuations. The decreasing trends are exhibited in the paid loss development
data for the 15 months to 51 months development period. The decisions to
decrease the estimated ultimate losses for accident years 2005, 2006 and 2007
at March 31, 2008 were made, as the underlying loss data showed sustained and
continued improvement over the prior twelve months, which we determined was an
appropriate amount of time to be considered reliable for our estimate. We
believe that our loss development factor selections are appropriate given the
relative immaturity of our data. Over time, as the data for these accident
years mature and uncertainty surrounding the ultimate outcome of the claim costs
diminishes, the full impact of the actual loss development will be factored
into our assumptions and selections.

In
the first quarter of 2008, we experienced development in all three categories.
For State Act California, there was favorable development for accident years
2005, 2006 and 2007 that resulted in a reduction of our gross ultimate loss
estimates of $1.5 million, $2.7 million and $1.0 million, respectively. For
accident year 2004 there was unfavorable development for ALAE which resulted in
an increase in our gross ultimate ALAE estimate of $0.4 million. For
non-California State Act, there was favorable development for accident year
2006 and 2007 that resulted in a reduction of our gross ultimate loss estimate
of 0.6 million and $1.5 million, respectively. For USL&H, there was
favorable development for accident years 2006 and 2007 that resulted in a
reduction of our gross ultimate loss estimates by $0.3 million and $0.7
million, respectively. For accident years 2005 and 2004, there was unfavorable
development which resulted in an increase in our gross ultimate loss estimates
of $0.2 million and $0.1 million, respectively. For all other accident years,
the development was at expected levels which did not warrant a change to our
gross ultimate loss estimates.

Reserve
Sensitivities

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

As discussed in
the previous section, there are a number of variables that can impact,
individually or in combination, the adequacy of our loss and loss adjustment
expense liabilities. While the actuarial methods employed factor in amounts for
these circumstances, the loss reserves may prove to be inadequate despite the actuarial
methods used. Several examples are provided below to highlight the potential
variability present in our loss reserves. Each of these examples represents
scenarios that are reasonably likely to occur over time. For example, there may
be a number of claims where the unpaid loss and loss adjustment expense
associated with future medical treatment proves to be inadequate because the
injured workers do not respond to medical treatment as expected by the claims
examiner. If we assume this affects 10% of the open claims and, on average, the
unpaid loss and loss adjustment expenses on these claims are 20% inadequate,
this would result in our unpaid loss and loss adjustment expense liability
being inadequate by approximately $5.1 million, or 2%, as of March 31, 2008.
Another example is claim inflation. Claim inflation can result from medical
cost inflation or wage inflation. As discussed above, the actuarial methods
employed include an amount for claim inflation based on historical experience.
We assume that the historical effect of this factor, which is embedded in our
experience and industry experience, is representative of future effects for
claim inflation. To the extent that the historical factors, and the actuarial
methods utilized, are inadequate to recognize future inflationary trends, our
unpaid loss and loss adjustment expense liabilities may be inadequate. If our
estimate of future medical trend is two percentage points inadequate (e.g., if
we estimate a 9% annual trend and the actual trend is 11%), our unpaid loss and
loss adjustment expense liability could be inadequate.

- 30 -

The amount of
the inadequacy would depend on the mix of medical and indemnity payments and
the length of time until the claims are paid. For example, if we assume that
50% of the unpaid loss and loss adjustment expense is associated with medical
payments and an average payout period of 5 years, our unpaid loss and loss
adjustment expense liabilities would be inadequate by approximately $12.8
million on a pre-tax basis, or 5%, as of March 31, 2008. Under these
assumptions, the inadequacy of approximately $12.8 million represents
approximately 4.2% of total stockholders equity at March 31, 2008. The impact
of any reserve deficiencies, or redundancies, on our reported results and
future earnings is discussed below.

In
the event that our estimates of ultimate unpaid loss and loss adjustment
expense liabilities prove to be greater or less than the ultimate liability,
our future earnings and financial position could be positively or negatively
impacted. Future earnings would be reduced by the amount of any deficiencies in
the year(s) in which the claims are paid or the unpaid loss and loss adjustment
expense liabilities are increased. For example, if we determined our unpaid
loss and loss adjustment expense liability of $255.1 million as of March 31,
2008 to be 5% inadequate, we would experience a pre-tax reduction in future
earnings of approximately $12.8 million. This reduction could be realized in
one year or multiple years, depending on when the deficiency is identified. The
deficiency, after tax effects, would also impact our financial position because
our statutory surplus would be reduced by an amount equivalent to the reduction
in net income. Any deficiency is typically recognized in the unpaid loss and
loss adjustment expense liability and, accordingly, it typically does not have
a material effect on our liquidity because the claims have not been paid. Since
the claims will typically be paid out over a multi-year period, we have
generally been able to adjust our investments to match the anticipated future
claim payments. Conversely, if our estimates of ultimate unpaid loss and loss
adjustment expense liabilities prove to be redundant, our future earnings and
financial position would be improved.

Reinsurance
Recoverables

Reinsurance
recoverables on paid and unpaid losses represent the portion of the loss and
loss adjustment expenses that is assumed by reinsurers. These recoverables are
reported on our balance sheet separately as assets, as reinsurance does not
relieve us of our legal liability to policyholders and ceding companies. We are
required to pay losses even if a reinsurer fails to meet its obligations under
the applicable reinsurance agreement. Reinsurance recoverables are determined
based in part on the terms and conditions of reinsurance contracts, which could
be subject to interpretations that differ from ours based on judicial theories
of liability. We calculate amounts recoverable from reinsurers based on our
estimates of the underlying loss and loss adjustment expenses, which themselves
are subject to significant judgments and uncertainties described above under
the heading Unpaid Loss and Loss Adjustment Expenses. Changes in the estimates
and assumptions underlying the calculation of our loss reserves may have an
impact on the balance of our reinsurance recoverables. In general, one would
expect an increase in our underlying loss reserves on claims subject to
reinsurance to have an upward impact on our reinsurance recoverables. The
amount of the impact on reinsurance recoverables would depend on a number of
considerations including, but not limited to, the terms and attachment points
of our reinsurance contracts and the incurred amount on various claims subject
to reinsurance. We also bear credit risk with respect to our reinsurers, which
can be significant considering that some claims may remain open for an extended
period of time.

We
periodically evaluate our reinsurance recoverables, including the financial
ratings of our reinsurers, and revise our estimates of such amounts as
conditions and circumstances change. Changes in reinsurance recoverables are
recorded in the period in which the estimate is revised. As of March 31, 2008
and December 31, 2007, we had no reserve for uncollectible reinsurance
recoverables. We assessed the collectibility of our period-end receivables and
believe that all amounts are collectible based on currently available
information.

Deferred
Policy Acquisition Costs

We
defer commissions, premium taxes and certain other costs that vary with and are
primarily related to the acquisition of insurance contracts. These costs are
capitalized and charged to expense in proportion to the recognition of premiums
earned. The method followed in computing deferred policy acquisition costs
limits the amount of these deferred costs to their estimated realizable value,
which gives effect to the premium to be earned, related estimated investment income,
anticipated losses and settlement expenses and certain other costs we expect to
incur as the premium is earned. Judgments regarding the ultimate recoverability
of these deferred costs are highly dependent upon the estimated future costs
associated with our unearned premiums. If our expected claims and expenses,
after considering investment income, exceed our unearned premiums, we would be
required to write-off a portion of deferred policy acquisition costs. To date,
we have not needed to write-off any portion of our deferred acquisition costs.
If our estimate of anticipated losses and related costs was 10% inadequate, our
deferred acquisition

- 31 -

costs as of
March 31, 2008 would still be fully recoverable and no write-off would be
necessary. We will continue to monitor the balance of deferred acquisition
costs for recoverability.

Income
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. This analysis requires
management to make various estimates and assumptions, including the scheduled
reversal of deferred tax liabilities, projected future taxable income and the
effect of tax planning strategies. If actual results differ from managements
estimates and assumptions, we may be required to establish a valuation
allowance to reduce the deferred tax assets to the amounts more likely than not
to be realized. The establishment of a valuation allowance could have a
significant impact on our financial position and results of operations in the
period in which it is deemed necessary. To date, we have not needed to record a
valuation allowance against our deferred tax assets. We anticipate that our
deferred tax assets will increase as our business continues to grow. We will
continue to monitor the balance of our deferred tax assets for realizability.

Effective
January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainties in Income Taxes, an
Interpretation of FASB Statement No. 109 (FIN 48), and it did not
have a significant impact on our financial position or results of operations.
FIN 48 prescribes a recognition threshold and measurement process for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return, and also provides guidance on the derecognition of
previously recorded benefits and their classification, as well as the proper
recording of interest and penalties, accounting in interim periods, disclosures
and transition. As of March 31, 2008 and December 31, 2007, we had no
unrecognized tax benefits. We do not anticipate that the amount of unrecognized
tax benefits will significantly increase in the next 12 months. Our policy is
to recognize interest and penalties on unrecognized tax benefits as an element
of income tax expense (benefit) in our consolidated statements of operations.
We file consolidated U.S. federal and state income tax returns. The tax years
which remain subject to examination by the taxing authorities are the years
ending December 31, 2004, 2005, 2006 and 2007.

Impairment
of Investment Securities

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

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

- 32 -

Earned
But Unbilled Premiums

Shortly
following the expiration of an insurance policy, we perform a final payroll
audit of our insureds to determine the final premium to be billed and earned. These
final audits generally result in an audit adjustment, either increasing or
decreasing the estimated premium earned and billed to date. We estimate the
amount of premiums that have been earned but are unbilled at the end of a
reporting period by analyzing historical earned premium adjustments made at
final audit for the preceding 12 months and applying the average adjustment
percentage against our in-force earned premium for the period. These estimates
are subject to changes in policyholders payrolls due to growth, economic
conditions, seasonality and other factors and to fluctuations in our in-force
premium. For example, the amount of our accrual for premiums earned but
unbilled fluctuated between $0 and $1.2 million in 2007 and between $1.2
million and $1.8 million in 2006. The balance of our accrual for premiums
earned but unbilled was a $0 and $44,000 at March 31, 2008 and December 31,
2007, respectively. Although considerable variability is inherent in such
estimates, management believes that the accrual for earned but unbilled
premiums is reasonable. The estimates are reviewed quarterly and adjusted as
necessary as experience develops or new information becomes known. Any such
adjustments are included in current operations.

Retrospective
Premiums

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

We
bear credit risk with respect to retrospectively rated policies. Because of the
long duration of our loss sensitive plans, there is a risk that the customer
will fail to pay the additional premium. Accordingly, we obtain collateral in
the form of letters of credit or deposits to mitigate credit risk associated
with our loss sensitive plans. If we are unable to collect future retrospective
premium adjustments from an insured, we would be required to write-off the
related amounts, which could impact our financial position and results of
operations. To date, there have been no such write-offs. Retrospectively rated
policies accounted for approximately 9.3% of direct premiums written in the
three months ended March 31, 2008 and approximately 11.9% of direct premiums
written in the year ended December 31, 2007.

Recent Accounting Pronouncements

In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements, which defines fair value and establishes a
framework for measuring fair value in GAAP and expands disclosures about fair
value measurements. The provisions for SFAS No. 157 are effective for fiscal
years beginning after November 15, 2007, and interim periods within those
fiscal years. We adopted the provisions of SFAS No. 157 as of January 1, 2008,
which did not have a material effect on our consolidated financial condition or
results of operations.

In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities  Including an
Amendment of FASB Statement No. 115, which permits entities to
choose to measure many financial instruments and certain other items at fair
value in order to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently and without having to apply complex
hedge accounting provisions. The provisions for SFAS No. 159 are effective for
fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. We adopted the provisions of SFAS No. 159 as of January 1,
2008, which did not have a material effect on our consolidated financial
condition or results of operations.

Item 3.
Quantitative and Qualitative Disclosures About Market RiskMarket
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.

- 33 -

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 $493.0 million at March 31,
2008 that are subject to interest rate risk, compared with $474.8 million at
December 31, 2007. We manage the exposure to interest rate risk through a
disciplined asset/liability matching and capital management process. In the
management of this risk, the characteristics of duration, credit and
variability of cash flows are critical elements. These risks are assessed
regularly and balanced within the context of the liability and capital
position.

The
table below summarizes our interest rate risk as of March 31, 2008 and December
31, 2007. It illustrates the sensitivity of the fair value of fixed-income
investments to selected hypothetical changes in interest rates as of March 31,
2008 and December 31, 2007. The selected scenarios are not predictions of
future events, but rather illustrate the effect that such events may have on
the fair value of our fixed-income portfolio and shareholders equity.

Interest Rate Risk as of March 31, 2008

Hypothetical Change in Interest
  Rates

Estimated
  Change in
  Fair Value

Fair
  Value

Hypothetical
  Percentage
  Increase
  (Decrease) in
  Portfolio
  Value($ in
  thousands)200 basis
  point increase

$
(44,347
)
$
448,630



(9.0
)%100 basis
  point increase


(21,672
)

471,305



(4.4
)%No change





492,977



100 basis
  point decrease


20,651


513,628



4.2
%200 basis
  point decrease


40,299


533,276



8.2
%Interest Rate
Risk as of December 31, 2007

Hypothetical Change in Interest
  Rates

Estimated
  Change in
  Fair Value

Fair
  Value

Hypothetical
  Percentage
  Increase
  (Decrease) in
  Portfolio
  Value($ in
  thousands)200 basis
  point increase

$
(40,927
)
$
433,829



(8.6
)%100 basis
  point increase


(20,041
)

454,715



(4.2
)%No change





474,756



100 basis
  point decrease


19,195


493,951



4.0
%200 basis
  point decrease


37,545


512,301



7.9
%Item 4.
Controls and ProceduresDisclosure Controls
and Procedures

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

- 34 -

Changes
in Internal Control over Financial Reporting

There
have not been any changes in our internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during our first fiscal quarter of 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.

PART II 
OTHER INFORMATION

Item 1A.
Risk FactorsYou
should carefully consider the risks described below and in our Annual Report on
Form 10-K filed with the SEC on March 17, 2008, together with all of the other
information included in this quarterly report. Such risks and uncertainties are
not the only ones facing us. If any such risks actually occur, our business,
financial condition or operating results could be harmed. Any such risks could
result in a significant or material adverse effect on our financial condition
or results of operations, and a corresponding decline in the market price of
our common stock. You could lose all or part of your investment. Such risks
also include forward-looking statements and our actual results may differ
substantially from those discussed in those forward-looking statements. Please
refer to the discussion under the heading Cautionary Statement in Part I,
Item 2 of this quarterly report.

Under
the heading Item 1A. Risk Factors  Risk Related to Our Business  We could be
adversely affected by the loss of one or more principal employees or by an
inability to attract or retain staff in our Annual Report on Form 10-K filed
with the SEC on March 17, 2008, we included a discussion about the potential
adverse impact to our business of losing a member of our senior management
team, including our chief financial officer. Joseph S. De Vita, our senior vice
president and chief financial officer, passed away unexpectedly on Sunday,
April 20, 2008. We have begun the process of selecting a new chief financial
officer but are unable to predict how long the selection process, which could
be challenging, will take and when we will name a new chief financial officer.
In the meantime, the duties of the chief financial officer are being handled by
other senior officers on whom we will be more dependent during this transition
period.

Item 2.
Unregistered Sales of Equity Securities and Use of ProceedsWe
did not purchase any of our equity securities during the three months ended
March 31, 2008.

Item 6.
ExhibitsThe
list of exhibits in the Exhibit Index to this quarterly report is incorporated
herein by reference.

- 35 -

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 12, 2008By:
/s/ John G. PasqualettoJohn G. PasqualettoChairman, President and Chief
  Executive Officer(Principal Executive Officer)By:
/s/ M. Philip RomneyM. Philip RomneyVice President  Finance, Principal AccountingOfficer and Assistant Secretary(Chief Accounting Officer)- 36 -

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.

Exhibit
  Number

Description31.1

Rule 13a-14(a)
  Certification (Chief Executive Officer)31.2

Rule 13a-14(a)
  Certification (Principal Financial Officer)32.1

Section 1350
  Certification (Chief Executive Officer)32.2

Section 1350
  Certification (Principal Financial Officer)