##### Table of Contents



UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2005
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from ___ to ___
 Commission File Number 000-51124
 SeaBright Insurance Holdings, Inc.
  Delaware
(State or other jurisdiction of incorporation or organization)
    
    56-2393241
(IRS Employer Identification No.)
 2101 4 th Avenue, Suite 1600
Seattle, Washington 98121
 (206) 269-8500
 þ o
 o þ
  Class
    
    Shares outstanding as of August 10, 2005Common Stock, $0.01 Par Value
    
    16,402,808




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##### Table of Contents



SeaBright Insurance Holdings, Inc.
 Index to Form 10-Q
 PagePart I. Financial InformationItem 1. Financial Statements
    
    
    2Condensed Consolidated Balance Sheets as of June 30, 2005 and
December 31, 2004
    
    
    2Condensed Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 2005 and 2004
    
    
    3Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2005 and 2004
    
    
    4Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Factors That May Affect Our Business, Future Operating Results and Financial Condition
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    33Part II. Other InformationItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 6. Exhibits
    
    
    34Signatures
    
    
    35EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    December 31,2005
    
    2004(Unaudited)(in thousands)ASSETSInvestment securities available for sale, at fair value
    
    $
    210,751
    
    
    $
    105,661Cash and cash equivalents
    
    
    28,158
    
    
    
    8,279Accrued investment income
    
    
    2,256
    
    
    
    1,096Premiums receivable, net of allowance
    
    
    9,752
    
    
    
    7,397Deferred premiums
    
    
    78,534
    
    
    
    59,243Retrospective premiums accrued
    
    
    4,146
    
    
    
    1,086Federal income tax recoverable
    
    
    
    
    
    
    397Service income receivable
    
    
    333
    
    
    
    304Reinsurance recoverables
    
    
    16,435
    
    
    
    13,484Receivable under adverse development cover
    
    
    2,853
    
    
    
    2,853Prepaid reinsurance
    
    
    5,554
    
    
    
    5,254Property and equipment, net
    
    
    728
    
    
    
    493Deferred federal income taxes, net
    
    
    6,445
    
    
    
    3,604Deferred policy acquisition costs, net
    
    
    9,184
    
    
    
    7,588Intangible assets, net
    
    
    1,727
    
    
    
    2,093Goodwill
    
    
    1,527
    
    
    
    1,821Other assets
    
    
    7,257
    
    
    
    5,459Total assets
    
    $
    385,640
    
    
    $
    226,112LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Unpaid loss and loss adjustment expense
    
    $
    103,896
    
    
    $
    68,228Unearned premiums
    
    
    86,424
    
    
    
    67,626Reinsurance funds withheld and balances payable
    
    
    3,009
    
    
    
    1,553Premiums payable
    
    
    3,423
    
    
    
    3,128Accrued expenses and other liabilities
    
    
    29,423
    
    
    
    15,207Federal income tax payable
    
    
    610
    
    
    
    Surplus notes
    
    
    12,000
    
    
    
    12,000Total liabilities
    
    
    238,785
    
    
    
    167,742Commitments and contingenciesStockholders equity:Series A preferred stock, $0.01 par value; 750,000 shares authorized;
issued and outstanding  no shares at June 30, 2005 and
508,265.25 shares at December 31, 2004
    
    
    
    
    
    
    5Undesignated preferred stock, $0.01 par value; 10,000,000 shares
authorized; no shares issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value; authorized  75,000,000 shares at
June 30, 2005 and 10,000,000 shares at December 31, 2004;
issued and outstanding  16,402,808 shares at June 30, 2005
and no shares at December 31, 2004
    
    
    164
    
    
    
    Paid-in capital
    
    
    131,453
    
    
    
    50,831Accumulated other comprehensive income
    
    
    1,310
    
    
    
    530Retained earnings
    
    
    13,928
    
    
    
    7,004Total stockholders equity
    
    
    146,855
    
    
    
    58,370Total liabilities and stockholders equity
    
    $
    385,640
    
    
    $
    226,112
 See accompanying notes to condensed consolidated financial statements.
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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(dollars in thousands, except income per share amounts)Revenue:Premiums earned
    
    $
    39,645
    
    
    $
    15,650
    
    
    $
    68,804
    
    
    $
    24,163Net investment income
    
    
    1,796
    
    
    
    497
    
    
    
    3,095
    
    
    
    945Net realized gain (loss)
    
    
    118
    
    
    
    (10
    )
    
    
    62
    
    
    
    17Claims service income
    
    
    694
    
    
    
    785
    
    
    
    1,276
    
    
    
    1,570Other service income
    
    
    50
    
    
    
    208
    
    
    
    100
    
    
    
    595Other income
    
    
    812
    
    
    
    755
    
    
    
    1,986
    
    
    
    1,30843,115
    
    
    
    17,885
    
    
    
    75,323
    
    
    
    28,598Losses and expenses:Loss and loss adjustment expenses
    
    
    26,988
    
    
    
    11,370
    
    
    
    47,255
    
    
    
    17,969Underwriting, acquisition and insurance
expenses
    
    
    8,637
    
    
    
    3,669
    
    
    
    15,016
    
    
    
    6,216Other expenses
    
    
    1,510
    
    
    
    1,335
    
    
    
    3,231
    
    
    
    2,35037,135
    
    
    
    16,374
    
    
    
    65,502
    
    
    
    26,535Income before federal income taxes
    
    
    5,980
    
    
    
    1,511
    
    
    
    9,821
    
    
    
    2,063Federal income tax expense (benefit):Current
    
    
    3,439
    
    
    
    1,086
    
    
    
    6,159
    
    
    
    1,798Deferred
    
    
    (1,675
    )
    
    
    (542
    )
    
    
    (3,262
    )
    
    
    (1,056
    )1,764
    
    
    
    544
    
    
    
    2,897
    
    
    
    742Net income
    
    $
    4,216
    
    
    $
    967
    
    
    $
    6,924
    
    
    $
    1,321Basic earnings per share
    
    $
    0.26
    
    
    $
    
    
    
    $
    0.47
    
    
    $
    Diluted earnings per share
    
    $
    0.25
    
    
    $
    0.14
    
    
    $
    0.44
    
    
    $
    0.19Weighted average basic shares outstanding
    
    
    16,402,808
    
    
    
    
    
    
    
    14,590,343
    
    
    
    Weighted average diluted shares outstanding
    
    
    16,613,182
    
    
    
    6,996,792
    
    
    
    15,653,942
    
    
    
    6,992,453
 See accompanying notes to condensed consolidated financial statements.
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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six Months Ended June 30,2005
    
    2004(in thousands)Cash flows from operating activities:Net income
    
    $
    6,924
    
    
    $
    1,321Adjustments to reconcile net income to cash provided
by operating activities:Amortization of deferred policy acquisition costs
    
    
    8,956
    
    
    
    2,556Policy acquisition costs deferred
    
    
    (10,552
    )
    
    
    (7,382
    )Provision for depreciation and amortization
    
    
    1,209
    
    
    
    733Net realized gain on investments
    
    
    (62
    )
    
    
    (12
    )Gain on sale of fixed assets
    
    
    
    
    
    
    (5
    )Benefit for deferred federal income taxes
    
    
    (3,262
    )
    
    
    (1,055
    )Amortization of compensation expense
    
    
    6
    
    
    
    Changes in certain assets and liabilities:Federal income tax recoverable and payable
    
    
    1,007
    
    
    
    213Unpaid loss and loss adjustment expense
    
    
    35,668
    
    
    
    10,042Reinsurance recoverables, net of reinsurance withheld
    
    
    (4,193
    )
    
    
    (2,668
    )Unearned premiums, net of deferred premiums
and premiums receivable
    
    
    (5,908
    )
    
    
    7,416Accrued investment income
    
    
    (1,160
    )
    
    
    (237
    )Other assets and other liabilities
    
    
    4,133
    
    
    
    4,314Net cash provided by operating activities
    
    
    32,766
    
    
    
    15,236Cash flows from investing activities:Purchases of investments
    
    
    (233,053
    )
    
    
    (22,560
    )Sales of investments
    
    
    126,425
    
    
    
    8,258Maturities and other
    
    
    13,327
    
    
    
    1,542Purchases of property and equipment
    
    
    (361
    )
    
    
    (173
    )Net cash used in investing activities
    
    
    (93,662
    )
    
    
    (12,933
    )Cash flows from financing activities:Issuance of common stock
    
    
    80,775
    
    
    
    Issuance of surplus notes
    
    
    
    
    
    
    12,000Issuance of preferred stock
    
    
    
    
    
    
    5,161Net cash provided by financing activities
    
    
    80,775
    
    
    
    17,161Net increase in cash and cash equivalents
    
    
    19,879
    
    
    
    19,464Cash and cash equivalents at beginning of period
    
    
    8,279
    
    
    
    5,008Cash and cash equivalents at end of period
    
    $
    28,158
    
    
    $
    24,472Supplemental disclosures:Accrued expenses for purchases of investments
    
    $
    11,184
    
    
    $
    8,986Federal income taxes paid
    
    
    5,216
    
    
    
    1,585Interest paid on surplus notes
    
    
    399
    
    
    
    
 See accompanying notes to condensed consolidated financial statements.
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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Organization
     2. Summary of Significant Accounting Policies
 a. Basis of Presentation
    b. Use of Estimates
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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 c. Revenue Recognition
   d. Unpaid Loss and Loss Adjustment Expense
   
    
    the Companys claims experience and that of its predecessor;
    
    the industrys claims experience;
    
    historical trends in reserving patterns and loss payments;
    
    the impact of claim inflation;
    
    the pending level of unpaid claims;
    
    the cost of claim settlements;
    
    legislative reforms affecting workers compensation; and
    
    the environment in which insurance companies operate.
  e. Reinsurance
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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  f. Income Taxes
  g. Earnings Per Share
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Basic weighted average shares outstanding
    
    
    16,402,808
    
    
    
    
    
    
    
    14,590,343
    
    
    
    Weighted average shares issuable upon:Conversion of preferred stock outstanding
prior to initial public offering
    
    
    
    
    
    
    6,996,792
    
    
    
    859,426
    
    
    
    6,992,453Exercise of stock options and vesting of
restricted stock
    
    
    210,374
    
    
    
    
    
    
    
    204,173
    
    
    
    Diluted weighted average shares outstanding
    
    
    16,613,182
    
    
    
    6,996,792
    
    
    
    15,653,942
    
    
    
    6,992,453
 h. Stock Based Compensation
   Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(in thousands, except income per share data)Net income:As reported
    
    $
    4,216
    
    
    $
    967
    
    
    $
    6,924
    
    
    $
    1,321Less SFAS No. 123
compensation costs, net of
taxes
    
    
    (60
    )
    
    
    (18
    )
    
    
    (120
    )
    
    
    (35
    )Pro forma net income
    
    $
    4,156
    
    
    $
    949
    
    
    $
    6,804
    
    
    $
    1,286Net income per common share:Basic  as reported
    
    $
    0.26
    
    
    $
    
    
    
    $
    0.47
    
    
    $
    Basic  pro-forma
    
    $
    0.25
    
    
    $
    
    
    
    $
    0.47
    
    
    $
    Diluted  as reported
    
    $
    0.25
    
    
    $
    0.14
    
    
    $
    0.44
    
    
    $
    0.19Diluted  pro-forma
    
    $
    0.25
    
    
    $
    0.14
    
    
    $
    0.43
    
    
    $
    0.18
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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  i. Recent Accounting Statements
   j. Comprehensive Income
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(in thousands)Net income
    
    $
    4,216
    
    
    $
    967
    
    
    $
    6,924
    
    
    $
    1,321Reclassification adjustment for
net realized gains (losses)
recorded into income
    
    
    118
    
    
    
    (15
    )
    
    
    62
    
    
    
    12Tax (expense) benefit related to
reclassification adjustment
    
    
    (41
    )
    
    
    5
    
    
    
    (22
    )
    
    
    (4
    )Increase (decrease) in unrealized
gain on investment securities
available for sale
    
    
    3,857
    
    
    
    (1,814
    )
    
    
    1,138
    
    
    
    (1,148
    )Tax (expense) benefit related to
unrealized gains (losses)
    
    
    (1,350
    )
    
    
    617
    
    
    
    (398
    )
    
    
    391Total comprehensive income (loss)
    
    $
    6,800
    
    
    $
    (240
    )
    
    $
    7,704
    
    
    $
    572
 3. Investments
  June 30, 2005Cost or
    
    Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    EstimatedCost
    
    Gains
    
    Losses
    
    Fair Value(In thousands)U.S. Treasury securities
    
    $
    19,182
    
    
    $
    258
    
    
    $
    (26
    )
    
    $
    19,414Government sponsored agency securities
    
    
    9,600
    
    
    
    53
    
    
    
    (19
    )
    
    
    9,634Corporate securities
    
    
    23,325
    
    
    
    166
    
    
    
    (130
    )
    
    
    23,361Tax-exempt municipal securities
    
    
    115,711
    
    
    
    1,625
    
    
    
    (38
    )
    
    
    117,298Mortgage pass-through securities
    
    
    32,115
    
    
    
    136
    
    
    
    (34
    )
    
    
    32,217Collateralized mortgage obligations
    
    
    1,972
    
    
    
    6
    
    
    
    (11
    )
    
    
    1,967Asset-backed securities
    
    
    6,830
    
    
    
    32
    
    
    
    (2
    )
    
    
    6,860Total investment securities available for sale
    
    $
    208,735
    
    
    $
    2,276
    
    
    $
    (260
    )
    
    $
    210,751
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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   Cost orAmortized
    
    EstimatedMaturity
    
    Cost
    
    Fair Value(In thousands)Due in one year or less
    
    $
    4,943
    
    
    $
    4,920Due after one year through five years
    
    
    40,975
    
    
    
    40,984Due after five years through ten years
    
    
    98,131
    
    
    
    99,561Due after ten years
    
    
    23,769
    
    
    
    24,242Securities not due at a single maturity date
    
    
    40,917
    
    
    
    41,044Total investment securities available for sale
    
    $
    208,735
    
    
    $
    210,751
  4. Premiums
   June 30,
    
    December 31,2005
    
    2004(In thousands)Premiums receivable
    
    $
    10,598
    
    
    $
    8,068Allowance for doubtful accounts
    
    
    (846
    )
    
    
    (671
    )$
    9,752
    
    
    $
    7,397
 5. Reinsurance
 a. Reinsurance Ceded
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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 b. Reinsurance Assumed
  c. Reinsurance Recoverables and Income Statement Effects
  June 30,
    
    December 31,2005
    
    2004(In thousands)Reinsurance recoverables on unpaid loss and loss adjustment expenses
    
    $
    15,343
    
    
    $
    12,582Reinsurance recoverables on paid losses
    
    
    1,092
    
    
    
    902Total reinsurance recoverables
    
    $
    16,435
    
    
    $
    13,484
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(in thousands)Reinsurance assumed:Written premiums
    
    $
    3,910
    
    
    $
    
    
    
    $
    4,129
    
    
    $
    Earned premiums
    
    
    3,175
    
    
    
    
    
    
    
    3,400
    
    
    
    Losses and loss adjustment expenses incurred
    
    
    2,282
    
    
    
    
    
    
    
    2,410
    
    
    
    Reinsurance ceded:Written premiums
    
    $
    6,556
    
    
    $
    4,089
    
    
    $
    11,818
    
    
    $
    6,978Earned premiums
    
    
    6,069
    
    
    
    2,475
    
    
    
    11,519
    
    
    
    3,806Losses and loss adjustment expenses incurred
    
    
    1,963
    
    
    
    105
    
    
    
    4,140
    
    
    
    96
 6. Unpaid Loss and Loss Adjustment Expenses
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(in thousands)Beginning balance
    
    $
    69,183
    
    
    $
    22,000
    
    
    $
    55,646
    
    
    $
    18,495Incurred related to:Current period
    
    
    26,988
    
    
    
    11,370
    
    
    
    47,255
    
    
    
    17,969Prior periods
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total incurred
    
    
    26,988
    
    
    
    11,370
    
    
    
    47,255
    
    
    
    17,969Paid related to:Current period
    
    
    (4,354
    )
    
    
    (2,251
    )
    
    
    (6,863
    )
    
    
    (3,678
    )Prior periods
    
    
    (3,264
    )
    
    
    (1,507
    )
    
    
    (7,485
    )
    
    
    (3,174
    )Total paid
    
    
    (7,618
    )
    
    
    (3,758
    )
    
    
    (14,348
    )
    
    
    (6,852
    )Unpaid loss and loss adjustment
expense, net of reinsurance
recoverables
    
    
    88,553
    
    
    
    29,612
    
    
    
    88,553
    
    
    
    29,612Reinsurance recoverables
    
    
    15,343
    
    
    
    10,164
    
    
    
    15,343
    
    
    
    10,164Unpaid loss and loss adjustment expense
    
    $
    103,896
    
    
    $
    39,776
    
    
    $
    103,896
    
    
    $
    39,776
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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 7. Surplus Notes
  8. Contingencies
 a.
 b.
 c.
 9. Initial Public Offering
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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 10. Common Stock Options and Restricted Stock Awards
  Number ofOptionsStock options outstanding at December 31, 2004
    
    
    491,508Options granted
    
    
    310,351Options forfeited
    
    
    Stock options outstanding at June 30, 2005
    
    
    801,859
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion of our financial condition and results of operations should be read
in conjunction with our unaudited condensed consolidated financial statements and accompanying
notes to those statements included in this quarterly report and with our 2004 audited financial
statements and notes thereto included in our Annual Report on Form 10-K , which was filed with the
Securities and Exchange Commission on March 28, 2005.
 Overview
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Principal Revenue and Expense Items
  Premiums Earned
    Net Investment Income and Realized Gains and Losses on Investments
  Claims Service Income
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Other Service Income
   Loss and Loss Adjustment Expenses
  Underwriting, Acquisition and Insurance Expenses
  Commission Expenses.
 Premium Taxes and Fees.
 Other Underwriting Expenses.
 Interest Expense
  Results of Operations
 Three Month and Six Month Periods Ended June 30, 2005 and 2004
 Gross Premiums Written.
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Net Premiums Written.
 Net Premiums Earned.
 Net Investment Income.
 Service Income.
 Other Income.
 Loss and Loss Adjustment Expenses.
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Underwriting Expenses.
 Other Expenses.
 Federal Income Tax Expense.
 Net Income.
 Liquidity and Capital Resources
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Contractual Obligations and Commitments
  Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    5 Years(in thousands)Long term debt obligations:Surplus notes
    
    $
    12,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    12,000Loss and loss adjustment
expenses
    
    
    103,896
    
    
    
    14,857
    
    
    
    50,078
    
    
    
    14,961
    
    
    
    24,000Operating and lease obligations.
    
    
    3,210
    
    
    
    809
    
    
    
    2,164
    
    
    
    237
    
    
    
    Total
    
    $
    119,106
    
    
    $
    15,666
    
    
    $
    52,242
    
    
    $
    15,198
    
    
    $
    36,000
  Off-Balance Sheet Arrangements
  Critical Accounting Policies, Estimates and Judgments
   Unpaid Loss and Loss Adjustment Expenses
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Reinsurance Recoverables
  Adverse Development Cover
 ,
 Deferred Policy Acquisition Costs
  Deferred Taxes
   Goodwill and Other Intangible Assets
  Retrospective Premiums
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Earned But Unbilled Premiums
  Impairment of Investment Securities
  Recent Accounting Pronouncements
   
 Factors That May Affect Our Business, Future Operating Results and Financial Condition
 You should carefully consider the risks described below, together with all of the other
information included in this quarterly report. The risks and uncertainties described below are not
the only ones facing our company. If any
of the following risks actually occurs, our business, financial condition or operating results
could be harmed. Any of the risks described below could result in a significant or material adverse
effect on our financial condition or results of operations, and a corresponding decline in the
market price of our common stock. You could lose all or part of your investment. The risks
discussed below also include forward-looking statements and our actual results may differ
substantially from those discussed in those forward-looking statements. Please refer to the
discussion under the heading Note on Forward-Looking Statements in this Item 2.
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Risks Related to Our Business
 Our loss reserves are based on estimates and may be inadequate to cover our actual losses.
   Our geographic concentration ties our performance to the business, economic and regulatory
conditions in California, Hawaii and Alaska. Any single catastrophe or other condition affecting
losses in these states could adversely affect our results of operations.
  If we are unable to obtain or collect on our reinsurance protection, our business, financial
condition and results of operations could be materially adversely affected.
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The insurance business is subject to extensive regulation and legislative changes, which impact
the manner in which we operate our business.
  
    
    place limitations on our ability to transact business with our affiliates;
    
    regulate mergers, acquisitions and divestitures involving our insurance company subsidiary;
    
    require SeaBright Insurance Company and PointSure to comply with various licensing
requirements and approvals that affect our ability to do business;
    
    approve or reject our policy coverage and endorsements;
    
    place limitations on our investments and dividends;
    
    set standards of solvency to be met and maintained;
    
    regulate rates pertaining to our business;
    
    require assessments for the provision of funds necessary for the settlement of covered
claims under certain policies provided by impaired, insolvent or failed insurance
companies;
    
    require us to comply with medical privacy laws; and
    
    prescribe the form and content of, and examine, our statutory financial statements.
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A downgrade in the A.M. Best rating of our insurance subsidiary could reduce the amount of
business we are able to write.
  The effects of emerging claim and coverage issues on our business are uncertain.
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Intense competition could adversely affect our ability to sell policies at rates we deem
adequate.
    If we are unable to realize our investment objectives, our financial condition may be adversely
affected.
  We could be adversely affected by the loss of one or more principal employees or by an inability
to attract and retain staff.
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We may require additional capital in the future, which may not be available or only available on
unfavorable terms.
  Our status as an insurance holding company with no direct operations could adversely affect our
ability to pay dividends in the future.
  We rely on independent insurance brokers to distribute our products.
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We have a limited operating history as a stand-alone entity and may experience difficulty in
transitioning to an independent public company.
   Assessments and other surcharges for guaranty funds and second injury funds and other mandatory
pooling arrangements may reduce our profitability.
  In the event LMC is placed into receivership, we could lose our rights to fee income and
protective arrangements that were established in connection with the Acquisition, our reputation
and credibility could be adversely affected and we could be subject to claims under applicable
voidable preference and fraudulent transfer laws.
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
    
    A receiver could seek to reject or terminate one or more of the services agreements
that were established in connection with the Acquisition between us and LMC or its
affiliates, including Eagle. In that event, we could lose the revenue we currently receive
under these services agreements. Our projected revenue under these agreements is
approximately $1.5 million in 2005 and $0.9 million in 2006.
    
    To minimize our exposure to any past business underwritten by KEIC, we entered into an
arrangement with LMC at the time of the Acquisition requiring LMC to indemnify us in the
event of adverse development of the loss reserves in KEICs balance sheet as they existed
on the date of closing of the Acquisition. We refer to this arrangement as the adverse
development cover. To support LMCs obligations under the adverse development cover, LMC
funded a trust account at the time of the Acquisition. 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. We refer to this trust account as the collateralized reinsurance trust
because the funds on deposit in the trust account serve as collateral for LMCs potential
future obligations to us under the adverse development cover. LMC initially funded the
trust account with $1.6 million to support its obligations under the adverse development
cover. In September 2004, we and LMC retained an independent actuary to determine the
appropriate amount of loss reserves that are subject to the adverse development cover as of
September 30, 2004. In accordance with the terms of the protective arrangements that we
have established with LMC, on December 23, 2004, LMC deposited into the collateralized
reinsurance trust an additional approximately $3.2 million, resulting in a total balance in
the trust account, including interest earnings, of approximately $4.9 million at June 30,
2005. 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 owed by LMC to
us under the adverse development cover in excess of the amounts currently held in trust
because the director of the Illinois Division of Insurance would have control of the assets
of LMC.
    
    Some of our customers are insured under Eagle insurance policies that we service
pursuant to the claims administration servicing agreement described above. Although
SeaBright is a separate legal entity from LMC and its affiliates, including Eagle, Eagles
policyholders may not readily distinguish SeaBright from Eagle and LMC if those policies
are not honored in the event LMC is found to be insolvent and placed into court-ordered
liquidation. If that were to occur, our market reputation, credibility and ability to renew
the underlying policies could be adversely affected.
    
    In connection with the Acquisition, LMC and its affiliates made various transfers and
payments to SeaBright, including approximately $13.0 million under the commutation
agreement and approximately $4.9 million to fund the collateralized reinsurance trust. In
the event that LMC is placed into receivership, it is possible that a receiver or creditor
could assert a claim seeking to unwind or recover these payments under applicable voidable
preference and fraudulent transfer laws.
 Risks Related to Our Industry
 Recent investigations into insurance brokerage practices could cause volatility in our stock and
adversely affect our business.
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We may face substantial exposure to losses from terrorism for which we are required by law to
provide coverage.
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The threat of terrorism and military and other actions may result in decreases in our net
income, revenue and assets under management and may adversely affect our investment portfolio.
    Our results of operations and revenues may fluctuate as a result of many factors, including
cyclical changes in the insurance industry, which may cause the price of our common stock to be
volatile.
  
    
    competition;
    
    rising levels of loss costs that we cannot anticipate at the time we price our products;
    
    volatile and unpredictable developments, including man-made, weather-related and other
natural catastrophes or terrorist attacks;
    
    changes in the level of reinsurance capacity and capital capacity;
    
    changes in the amount of loss reserves resulting from new types of claims and new or
changing judicial interpretations relating to the scope of insurers liabilities; and
    
    fluctuations in interest rates, inflationary pressures and other changes in the
investment environment, which affect returns on invested assets and may impact the ultimate
payout of losses.
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Risks Related to Our Common Stock
 The price of our common stock may decrease.
  
    
    quarterly variations in our results of operations;
    
    changes in expectations as to our future results of operations, including financial
estimates by securities analysts and investors;
    
    announcements of claims against us by third parties;
    
    changes in law and regulation;
    
    results of operations that vary from those expected by securities analysts and investors; and
    
    future sales of shares of our common stock.
  Future sales of shares of our common stock may affect their market price and the future exercise
of options may depress our stock price and will result in immediate and substantial dilution.
   Applicable insurance laws may make it difficult to effect a change of control of our company.
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Entities affiliated with Summit Partners have the ability to significantly influence our
business, which may be disadvantageous to other stockholders and adversely affect the trading
price of our common stock.
  Anti-takeover provisions in our amended and restated certificate of incorporation and by-laws
and under the laws of the State of Delaware could impede an attempt to replace or remove our
directors or otherwise effect a change of control of our company, which could diminish the value
of our common stock.
   
    
    stockholders have limited ability to call stockholder meetings and to bring business
before a meeting of stockholders;
    
    stockholders may not act by written consent; and
    
    our board of directors may authorize the issuance of preferred stock with such rights,
powers and privileges as the board deems appropriate.
  Note on Forward-Looking Statements
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
    
    ineffectiveness or obsolescence of our business strategy due to changes in current or
future market conditions;
    
    increased competition on the basis of pricing, capacity, coverage terms or other
factors;
    
    greater frequency or severity of claims and loss activity, including as a result of
natural or man-made catastrophic events, than our underwriting, reserving or investment
practices anticipate based on historical experience or industry data;
    
    the effects of acts of terrorism or war;
    
    developments in financial and capital markets that adversely affect the performance of our investments;
    

    changes in regulations or laws applicable to us, our subsidiaries, brokers or customers;
    
    our dependency on a concentrated geographic market;
    
    changes in the availability, cost or quality of reinsurance and failure of our
reinsurers to pay claims timely or at all;
    
    decreased demand for our insurance products;
    
    loss of the services of any of our executive officers or other key personnel;
    
    the effects of mergers, acquisitions and divestitures that we may undertake;
    
    changes in rating agency policies or practices;
    
    changes in legal theories of liability under our insurance policies;
    
    changes in accounting policies or practices; and
    
    changes in general economic conditions, including inflation and other factors.
    
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
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Credit Risk
  Interest Rate Risk
   HypotheticalPercentageIncreaseEstimated
    
    
    
    
    
    (Decrease) inChange in
    
    
    
    
    
    ShareholdersHypothetical Change in Interest Rates
    
    Fair Value
    
    Fair Value
    
    Equity($ in thousands)200 basis point increase
    
    $
    (23,544
    )
    
    $
    187,207
    
    
    
    (11.2
    )%100 basis point increase
    
    
    (11,680
    )
    
    
    199,071
    
    
    
    (5.5
    )%No change
    
    
    
    
    
    
    210,751
    
    
    
    100 basis point decrease
    
    
    11,680
    
    
    
    222,431
    
    
    
    5.5
    %200 basis point decrease
    
    
    23,544
    
    
    
    234,295
    
    
    
    11.2
    %
 
 Item 4. Controls and Procedures
  
 PART II  OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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Item 6. Exhibits
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SIGNATURES
  SEABRIGHT INSURANCE HOLDINGS, INC.Date: August 12, 2005By:
    
    /s/ Joseph S. De VitaJoseph S. De VitaSenior Vice President, Chief Financial Officer andAssistant Secretary (Principal Financial Officer)
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EXHIBIT INDEX
  ExhibitNumber
    
    Description31.1
    
    Rule 13a-14(a) Certification (Chief Executive Officer)31.2
    
    Rule 13a-14(a) Certification (Chief Financial Officer)32.1
    
    Section 1350 Certification (Chief Executive Officer)32.2
    
    Section 1350 Certification (Chief Financial Officer)