##### 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 September 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 November 7, 2005Common Stock, $0.01 Par Value
    
    16,405,143


##### 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 September 30, 2005 and
December 31, 2004
    
    
    2Condensed Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 30, 2005 and 2004
    
    
    3Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 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
    
    
    13Factors That May Affect Our Business, Future Operating Results and Financial Condition
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    25Part II. Other InformationItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 6. Exhibits
    
    
    25Signatures
    
    
    26Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2 - 1 -


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# PART
I  FINANCIAL INFORMATION

# Item 1.
Financial Statements

# SEABRIGHT INSURANCE
HOLDINGS, INC. AND SUBSIDIARIES

# CONDENSED CONSOLIDATED
BALANCE SHEETS

|                                                                      | September 30,
2005 |  | December 31,
2004 |        
|--------------------------------------------------------------------- | ------------------ |  | ----------------- | -------
|
|
|
|Investment securities available for sale, at fair value               |                    |  | $                 | 236,194
|Cash and cash equivalents                                             |                    |  |                   | 15,992 
|Accrued investment income                                             |                    |  |                   | 2,641  
|Premiums receivable, net of allowance                                 |                    |  |                   | 9,746  
|Deferred premiums                                                     |                    |  |                   | 70,347 
|Retrospective premiums accrued                                        |                    |  |                   | 3,349  
|Federal income tax recoverable                                        |                    |  |                   | 751    
|Service income receivable                                             |                    |  |                   | 196    
|Reinsurance recoverables                                              |                    |  |                   | 15,297 
|Receivable under adverse development cover                            |                    |  |                   | 2,853  
|Prepaid reinsurance                                                   |                    |  |                   | 5,019  
|Property and equipment, net                                           |                    |  |                   | 877    
|Deferred federal income taxes, net                                    |                    |  |                   | 8,079  
|Deferred policy acquisition costs, net                                |                    |  |                   | 8,870  
|Intangible assets, net                                                |                    |  |                   | 1,545  
|Goodwill                                                              |                    |  |                   | 1,527  
|Other assets                                                          |                    |  |                   | 6,357  
|Total assets                                                          |                    |  | $                 | 389,640
|
|
|Liabilities:                                                          |                   
|Unpaid loss and loss adjustment expense                               |                    |  | $                 | 121,126
|Unearned premiums                                                     |                    |  |                   | 77,751 
|Reinsurance funds withheld and balances payable                       |                    |  |                   | 3,712  
|Premiums payable                                                      |                    |  |                   | 3,514  
|Accrued expenses and other liabilities                                |                    |  |                   | 21,876 
|Surplus notes                                                         |                    |  |                   | 12,000 
|Total liabilities                                                     |                    |  |                   | 239,979
|                                                                     
|Commitments and contingencies                                         |                   
|                                                                      |                   
|Stockholders equity:                                                 |                    | 
|Series A preferred stock, $0.01 par value; 750,000 shares authorized; |                   
|issued and outstanding - no shares at September 30, 2005 and          |                   
|508,265.25 shares at December 31, 2004                                |                    |  |                   |       
|Undesignated 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      |                   
|September 30, 2005 and 10,000,000 shares at December 31, 2004;        |                   
|issued and outstanding - 16,405,143 shares at September 30, 2005      |                   
|and no shares at December 31, 2004                                    |                    |  |                   | 164    
|Paid-in capital                                                       |                    |  |                   | 131,474
|Accumulated other comprehensive income (loss)                         |                    |  |                   | (972   
|Retained earnings                                                     |                    |  |                   | 18,995 
|Total stockholders equity                                            |                    |  |                   | 149,661
|Total liabilities and stockholders equity                            |                    |  | $                 | 389,640

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 September 30, |  | Nine Months Ended September 30, |           
|------------------------------------------- | -------------------------------- |  | ------------------------------- | ----------
|
|
|Revenue:                                    |                                  |  |                                 |           
|Premiums earned                             |                                  |  | $                               | 40,719    
|Net investment income                       |                                  |  |                                 | 2,132     
|Net realized gain (loss)                    |                                  |  |                                 | (14       
|Claims service income                       |                                  |  |                                 | 523       
|Other service income                        |                                  |  |                                 | 41        
|Other income                                |                                  |  |                                 | 874       
|                                            |                                  |  |                                 | 44,275    
|Losses and expenses:                        |                                  | 
|Loss and loss adjustment expenses           |                                  |  |                                 | 27,095    
|Underwriting, acquisition and insurance     |                                 
|expenses                                    |                                  |  |                                 | 8,058     
|Other expenses                              |                                  |  |                                 | 1,411     
|                                            |                                  |  |                                 | 36,564    
|Income before federal income taxes          |                                  |  |                                 | 7,711     
|Federal income tax expense (benefit):       |                                 
|Current                                     |                                  |  |                                 | 3,049     
|Deferred                                    |                                  |  |                                 | (405      
|                                            |                                  |  |                                 | 2,644     
|Net income                                  |                                  |  | $                               | 5,067     
|                                           
|Basic earnings per share                    |                                  |  | $                               | 0.31      
|Diluted earnings per share                  |                                  |  | $                               | 0.30      
|                                           
|Weighted average basic shares outstanding   |                                  |  |                                 | 16,403,929
|Weighted average diluted shares outstanding |                                  |  |                                 | 16,703,313

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)

|                                                                              | Nine Months Ended September 30, | 
|----------------------------------------------------------------------------- | ------------------------------- | 
|
|
|
|
|Cash flows from operating activities:                                         |                                 | 
|Net income                                                                    |                                 | 
|Adjustments to reconcile net income to cash provided by operating activities:
|Amortization of deferred policy acquisition costs                             |                                 | 
|Policy acquisition costs deferred                                             |                                 | 
|Provision for depreciation and amortization                                   |                                 | 
|Net realized gain (loss) on investments                                       |                                 | 
|Gain on sale of fixed assets                                                  |                                 | 
|Benefit for deferred federal income taxes                                     |                                 | 
|Amortization of compensation expense                                          |                                 | 
|Changes in certain assets and liabilities:                                   
|Federal income tax recoverable                                                |                                 | 
|Unpaid loss and loss adjustment expense                                       |                                 | 
|Reinsurance recoverables, net of reinsurance withheld                         |                                 | 
|Unearned premiums, net of deferred premiums                                  
|and premiums receivable                                                       |                                 | 
|Accrued investment income                                                     |                                 | 
|Other assets and other liabilities                                            |                                 | 
|Net cash provided by operating activities                                     |                                 | 
|                                                                             
|Cash flows from investing activities:                                         |                                 | 
|Purchases of investments                                                      |                                 | 
|Sales of investments                                                          |                                 | 
|Maturities and other                                                          |                                 | 
|Purchases of property and equipment                                           |                                 | 
|Net cash used in investing activities                                         |                                 | 
|                                                                              |                                 | 
|Cash flows from financing activities:                                        
|Issuance of common stock                                                      |                                 | 
|Exercise of stock options                                                     |                                 | 
|Issuance of surplus notes                                                     |                                 | 
|Debt issuance costs                                                           |                                 | 
|Issuance of preferred stock                                                   |                                 | 
|Net cash provided by financing activities                                     |                                 | 
|                                                                              |                                 | 
|Net increase in cash and cash equivalents                                     |                                 | 
|Cash and cash equivalents at beginning of period                              |                                 | 
|Cash and cash equivalents at end of period                                    |                                 | 
|                                                                              |                                 | 
|Supplemental disclosures:                                                    
|Accrued expenses for purchases of investments                                 |                                 | 
|Federal income taxes paid                                                     |                                 | 
|Interest paid on surplus notes                                                |                                 | 

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

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

SeaBright
Insurance Company (SBIC), formerly KEIC, is licensed to write workers
compensation insurance in 43 states and the District of Columbia. Domiciled in the
State of Illinois and commercially domiciled in the State of California, SBIC focuses on
employers with complex workers compensation exposures and provides coverage under
multiple state and federal acts, applicable common law or negotiated agreements. Prior to
the Acquisition, beginning in 2000, KEIC wrote business only in California. In May 2002,
KEIC ceased writing business and by December 31, 2003, all premiums related to
business prior to the Acquisition were 100% earned.

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

Under
new ownership, KEIC resumed writing business effective October 1, 2003, primarily
targeting policy renewals for former Eagle business in the states of California, Hawaii
and Alaska. In November 2003, the Illinois Department of Financial and Professional
Regulation, Division of Insurance (the Illinois Division of Insurance) granted
permission for KEIC to change its name to SeaBright Insurance Company.

# 2.  Summary of
Significant Accounting Policies

# a.  Basis of
Presentation

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

The
accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) for
interim financial information and pursuant to the instructions to Form 10-Q. 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, 2004 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
financial statements and notes should be read in conjunction with the audited financial
statements and notes for the year ended December 31, 2004 included in the Companys
Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on
March 28, 2005.

In
the opinion of management, the unaudited condensed consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments, necessary to
state fairly the financial information set forth therein. Results of operations for the
three month and nine month periods ended September 30, 2005 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 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 consolidated financial statements and the reported amounts
of revenues and expenses during the period. For example, the Company used significant
estimates in determining the unpaid loss and loss adjustment expenses, goodwill and other
intangibles, earned premiums on retrospectively rated policies, earned but unbilled
premiums, federal income taxes and amounts related to reinsurance. Actual results could
differ from those estimates. Such estimates and judgments could change in the future as
more information becomes known, which could impact the amounts reported and disclosed
herein.

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# 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 life of the contract in
proportion to the amount of insurance protection provided (i.e., ratably over the policy
period). The portion of the premium that is applicable to the unexpired period of the
policies 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. Premiums from retrospectively rated policies totaled 21.2%
and 15.0% of total premiums written for the three month periods ended September 30, 2005
and 2004, respectively, and 30.8% and 33.5% of total premiums written for the nine month
periods then ended, respectively.

# d.  Unpaid Loss and
Loss Adjustment Expense

Unpaid
loss and loss adjustment expense represents an estimate of the ultimate net cost of all
unpaid losses incurred through the specified period. The loss adjustment expense component
is an estimate of unpaid expenses to be incurred in settlement of the claims included in
the liability for unpaid losses. These liabilities, which anticipate salvage and
subrogation recoveries and are presented gross of amounts recoverable from reinsurers,
include estimates of future trends in claim severity and frequency and other factors that
could vary as the losses are ultimately settled.

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

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

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

# e.  Reinsurance

The
Company protects itself from excessive losses by reinsuring with nonaffiliated reinsurers
certain levels of risk in various areas of exposure. Reinsurance premiums, commissions,
expense reimbursements and liabilities related to ceded business are accounted for on a basis
consistent with that used in accounting for original policies issued and the terms of the
reinsurance contracts. The unpaid loss and loss adjustment expense subject to the adverse
development cover with LMC is calculated on a quarterly basis using generally accepted
actuarial methodology.

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# SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts recoverable in excess of acquired insurance liabilities at September 30,
2003 are recorded gross in unpaid loss and loss adjustment expense in accordance with SFAS
No. 141, Business Combinations, with a corresponding amount receivable from
the seller. Amounts are shown net in the statement of operations. Premiums ceded to other
companies are reported as a reduction of premiums written and earned. Reinsurance
recoverables are determined based on the terms and conditions of the reinsurance
contracts.

# f.  Income Taxes

The
asset and liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are expected to
reverse, net of any applicable valuation allowances.

# g.  Earnings Per Share

The
following table provides the reconciliation of basic and diluted weighted average shares
outstanding used in calculating earnings per share for the three month and nine month
periods ended September 30, 2005 and 2004:

|                                                                                      | Three Months Ended September 30, |  | Nine Months Ended September 30, |           
|------------------------------------------------------------------------------------- | -------------------------------- |  | ------------------------------- | ----------
|
|Basic weighted average shares outstanding                                             |                                  |  |                                 | 16,403,929
|Weighted average shares issuable upon:                                                |                                  |  |                                 |           
|Conversion of preferred stock
      outstanding prior to initial public      offering |                                  |  |                                 |          
|Exercise of stock options and vesting of
      restricted stock                       |                                  |  |                                 | 299,384   
|Diluted weighted average shares outstanding                                           |                                  |  |                                 | 16,703,313

# h.  Stock Based
Compensation

The
Company measures its employee stock-based compensation arrangements using the provisions
outlined in Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, which is an intrinsic value-based
method of recognizing compensation costs. The Company has adopted the disclosure-only
provisions of SFAS No. 123, Accounting for Stock-based Compensation. None
of the Companys stock options had an intrinsic value at grant date and, accordingly,
no compensation cost has been recognized for its stock option plan activity.

The
following table illustrates the effect on net income for the three month and nine month
periods ended September 30, 2005 and 2004 as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock based compensation:

|                                                         | Three Months Ended September 30, |  | Nine Months Ended September 30, |      
|-------------------------------------------------------- | -------------------------------- |  | ------------------------------- | -----
|
|
|Net income:                                              |                                  |  |                                 |      
|As reported                                              |                                  |  | $                               | 5,067
|Less SFAS No. 123 compensation costs,
      net of taxes |                                  |  |                                 | (61  
|Pro forma net income                                     |                                  |  | $                               | 5,006
|                                                        
|Net income per common share:                             |                                  |  |                                 |      
|Basic  as reported                                      |                                  |  | $                               | 0.31 
|Basic  pro-forma                                        |                                  |  | $                               | 0.31 
|                                                        
|Diluted  as reported                                    |                                  |  | $                               | 0.30 
|Diluted  pro-forma                                      |                                  |  | $                               | 0.30 

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# SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The
compensation expense included in pro forma net income is not likely to be representative
of the effect on reported net income for future years because options vest over several
years and additional awards may be made each year.

# i.  Recent Accounting
Statements

SFAS
No. 123 (revised 2004), Share-based Payment, was issued in December 2004. SFAS
No. 123(R) is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25
and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in
SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No.
123(R) requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the statement of operations based on their fair values. Pro
forma disclosure is no longer an alternative.

SFAS
No. 123(R) must be adopted no later than January 1, 2006, and the Company expects to adopt
the Statement on or before that date. As permitted by SFAS No. 123, the Company currently
accounts for share-based payments to employees using the intrinsic value method as
detailed in Opinion No. 25 and, as such, generally recognizes no compensation cost for
employee stock options. Accordingly, the adoption of SFAS No. 123(R)s fair value
method will have an impact on the Companys results of operations, although it will
have no impact on the Companys overall financial position. The impact of adoption of
SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had the Company adopted SFAS No.
123(R) in prior periods, the impact of the standard would have approximated the impact of
SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share
discussed above.

# j.  Comprehensive
Income

The
following table summarizes the Companys comprehensive income for the three month and
nine month periods ended September 30, 2005 and 2004:

|                                                                                       | Three Months Ended September 30, |  | Nine Months Ended September 30, |       
|-------------------------------------------------------------------------------------- | -------------------------------- |  | ------------------------------- | ------
|
|
|Net income                                                                             |                                  |  | $                               | 5,067 
|Reclassification adjustment for net
   realized gains (losses) recorded into
   income |                                  |  |                                 | (14   
|Tax (expense) benefit related to
   reclassification adjustment                        |                                  |  |                                 | 5     
|Increase (decrease) in unrealized gain on
   investment securities available for sale  |                                  |  |                                 | (3,497
|Tax (expense) benefit related to unrealized
   gains (losses)                          |                                  |  |                                 | 1,224 
|Total comprehensive income                                                             |                                  |  | $                               | 2,785 

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# 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 September 30, 2005 are as follows:

|                                               | Cost or
Amortized
Cost |  | Gross
Unrealized
Gains |         | Gross
Unrealized
Losses |   | Estimated
Fair Value | 
|---------------------------------------------- | ---------------------- |  | ---------------------- | ------- | ----------------------- | - | -------------------- | 
|
|U.S. Treasury securities                       |                        |  | $                      | 20,039  |                         | $ | 1                    | 
|Government sponsored agency securities         |                        |  |                        | 11,623  |                         |   | 8                    | 
|Corporate securities                           |                        |  |                        | 32,178  |                         |   | 14                   | 
|Tax-exempt municipal securities                |                        |  |                        | 127,754 |                         |   | 373                  | 
|Mortgage pass-through securities               |                        |  |                        | 34,135  |                         |   | 6                    | 
|Collateralized mortgage obligations            |                        |  |                        | 3,811   |                         |   |                     | 
|Asset-backed securities                        |                        |  |                        | 8,150   |                         |   |                     | 
|Total investment securities available for sale |                        |  | $                      | 237,690 |                         | $ | 402                  | 

The
unrealized loss on temporarily impaired investments totaled $1.9 million at September 30,
2005 for investment securities available for sale with a fair value of $177.5 million. All
were impaired for less than one year. The Company evaluated investment securities with
September 30, 2005 fair values less than amortized cost and has determined that the
decline in value is temporary and is related to the change in market interest rates since
purchase.

The
amortized cost and estimated fair value of investment securities available for sale at
September 30, 2005, 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 |        
|---------------------------------------------- | -------------------- |  | ------------------- | -------
|
|Due in one year or less                        |                      |  | $                   | 5,197  
|Due after one year through five years          |                      |  |                     | 49,340 
|Due after five years through ten years         |                      |  |                     | 113,825
|Due after ten years                            |                      |  |                     | 23,232 
|Securities not due at a single maturity date   |                      |  |                     | 46,096 
|Total investment securities available for sale |                      |  | $                   | 237,690

The
amortized cost of investment securities available for sale deposited with various
regulatory authorities was $51.2 million at September 30, 2005.

# 4.  Premiums

Direct
premiums written totaled $37.5 million and $21.6 million for the three month periods ended
September 30, 2005 and 2004, respectively, and $134.4 million and $85.2 million for the
nine month periods then ended, respectively.

Premiums
receivable consisted of the following at September 30, 2005 and December 31, 2004:

|                                | September 30,2005 |  | December 31,2004 |       
|------------------------------- | ----------------- |  | ---------------- | ------
|
|Premiums receivable             |                   |  | $                | 10,486
|Allowance for doubtful accounts |                   |  |                  | (740  
|                                |                   |  | $                | 9,746 

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# SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

# 5.  Reinsurance

# a.  Reinsurance Ceded

Under
reinsurance agreements, the Company cedes various amounts of risk to nonaffiliated
insurance companies for the purpose of limiting the maximum potential loss arising from
the underlying insurance risks. For the period from October 1, 2004 through October 1,
2005, the Company entered into reinsurance agreements wherein it retained the first
$500,000 of each loss occurrence. Losses in excess of $500,000 up to $100.0 million were
100% reinsured with nonaffiliated reinsurers. On October 1, 2005, the Company entered into
new reinsurance agreements with nonaffiliated reinsurers that are effective through
October 1, 2006. The new reinsurance program provides coverage up to $50.0 million per
loss occurrence, subject to certain limitations. Under the new program, the Company
retains the first $500,000 of losses per occurrence. The next $500,000 of losses per
occurrence (excess of the first $500,000 of losses per occurrence retained by the Company)
are 50% reinsured, subject to an annual aggregate deductible of $1.5 million. The next
$4.0 million of losses per occurrence (excess of the first $1.0 million of losses per
occurrence) are reinsured, subject to an annual aggregate deductible of $2.0 million.
Policies covering losses per occurrence in excess of $5.0 million up to $50.0 million
contain no annual aggregate deductibles.

As
part of the Acquisition, SIH and LMC entered into an adverse development excess of loss
reinsurance agreement (the Agreement). The Agreement, after taking into
account any recoveries from third party reinsurers, requires LMC to reimburse SBIC 100% of
the excess of the actual loss at December 31, 2011 over the initial insurance liabilities at
September 30, 2003. The Agreement also requires SBIC to reimburse LMC 100% of the
excess of the initial insurance liabilities at September 30, 2003 over the actual loss
results at December 31, 2011. The amount of adverse loss development under the
Agreement was $2.9 million at September 30, 2005. The increase in the amount due from LMC
is netted against loss and loss adjustment expense in the accompanying unaudited condensed
consolidated statements of operations.

As
part of the Agreement, LMC placed into trust (the Trust) an amount equal to
10% of the balance sheet insurance liabilities of SBIC on the date of the Acquisition. Thereafter, the
Trust shall be adjusted each quarter, if warranted, to an amount equal to 102% of
LMCs obligations under the Agreement. Initial loss liabilities were $16.0 million. The
balance of the Trust was $4.9 million at September 30, 2005 and $4.8 million at December
31, 2004.

# b.  Reinsurance Assumed

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

# c.  Reinsurance
Recoverables and Income Statement Effects

Balances
affected by reinsurance transactions are reported gross of reinsurance in the accompanying
condensed consolidated balance sheets. Reinsurance recoverables are comprised of the
following amounts at September 30, 2005 and December 31, 2004:

|                                                                     | September 30,2005 |  | December 31,2004 |       
|-------------------------------------------------------------------- | ----------------- |  | ---------------- | ------
|
|Reinsurance recoverables on unpaid loss and loss adjustment expenses |                   |  | $                | 14,621
|Reinsurance recoverables on paid losses                              |                   |  |                  | 676   
|Total reinsurance recoverables                                       |                   |  | $                | 15,297

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# SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The
effects of reinsurance on statement of operations amounts are as follows for the three
month and nine month periods ended September 30, 2005 and 2004:

|                                                  | Three Months Ended September 30, |  | Nine Months Ended September 30, |      
|------------------------------------------------- | -------------------------------- |  | ------------------------------- | -----
|
|
|Reinsurance assumed:                             
|Written premiums                                  |                                  |  | $                               | 2,059
|Earned premiums                                   |                                  |  |                                 | 2,035
|Losses and loss adjustment expenses      incurred |                                  |  |                                 | 1,590
|                                                 
|Reinsurance ceded:                               
|Written premiums                                  |                                  |  | $                               | 6,083
|Earned premiums                                   |                                  |  |                                 | 6,617
|Losses and loss adjustment expenses      incurred |                                  |  |                                 | (57  

# 6.  Unpaid Loss and Loss
Adjustment Expenses

The
following table summarizes the activity in unpaid loss and loss adjustment expense for the
three month and nine month periods ended September 30, 2005 and 2004:

|                                                                                   | Three Months Ended September 30, |  | Nine Months Ended September 30, |        
|---------------------------------------------------------------------------------- | -------------------------------- |  | ------------------------------- | -------
|
|
|Beginning balance                                                                  |                                  |  | $                               | 88,553 
|Incurred related to:                                                               |                                  |  |                                 |        
|Current period                                                                     |                                  |  |                                 | 29,181 
|Prior periods                                                                      |                                  |  |                                 | (2,086 
|Total incurred                                                                     |                                  |  |                                 | 27,095 
|Paid related to:                                                                   |                                  |  |                                 |        
|Current period                                                                     |                                  |  |                                 | (7,902 
|Prior periods                                                                      |                                  |  |                                 | (1,241 
|Total paid                                                                         |                                  |  |                                 | (9,143 
|Unpaid loss and loss adjustment      expense,
     net of reinsurance recoverables |                                  |  |                                 | 106,505
|Reinsurance recoverables                                                           |                                  |  |                                 | 14,621 
|Unpaid loss and loss adjustment      expense                                       |                                  |  | $                               | 121,126

The
$2.1 million reduction of insurance liabilities in the three months and nine months ended
September 30, 2005 resulted from favorable development of accident year 2004 losses.

# 7.  Surplus Notes

In
a private placement on May 26, 2004, SBIC issued $12.0 million in subordinated
floating rate surplus notes due in 2034. Interest, paid quarterly in arrears, is
calculated at the beginning of the interest payment period using the 3-month LIBOR rate
plus 400 basis points, subject to certain limitations. Interest expense totaled $233,000
and $641,000 for the three month and nine month periods ended September 30, 2005,
respectively, and $168,000 and $231,000 for the three month and nine month periods ended
September 30, 2004.

# 8.  Contingencies

a.  
          SBIC is subject to guaranty fund and other assessments by the states in which it
          writes business. Guaranty fund assessments are accrued at the time premiums are
          written. Other assessments are accrued either at the time of assessment or in
          the case of premium-based assessments, at the time the premiums are written, or
          in the case of loss-based assessments, at the time the losses are incurred. As
          of September 30, 2005, SBIC has recorded a liability for guaranty fund and other
          assessments of $4.2 million and a guaranty fund receivable of $1.6 million.
          These amounts

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# SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

represent managements best estimate based on information
          received from the states in which it writes business and may change due to many
          factors, including the Companys share of the ultimate cost of current and
          future insolvencies. The majority of assessments are paid out in the year
          following the year in which the premium is written or the losses are paid.
          Guaranty fund receivables and other surcharge items are generally realized by a
          charge to new and renewing policyholders in the year following the year in which
          the related assessments were paid.

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

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

# 9.  Initial Public
Offering

On
January 26, 2005, the Company closed its initial public offering of 8,625,000 shares of
common stock, including the underwriters over-allotment option to purchase 1,125,000
shares of common stock, at a price of $10.50 per share for net proceeds of approximately
$80.8 million, after deducting underwriters fees, commissions and offering costs
totaling approximately $9.8 million. As part of the initial public offering, all
508,365.25 outstanding shares of the Companys Series A convertible preferred stock
were converted into 7,777,808 shares of the Companys common stock. Included in other
assets at December 31, 2004 was approximately $1.3 million of offering costs associated
with the initial public offering. These costs were deducted from the gross proceeds of the
offering at closing.

On
January 26, 2005, the Company contributed approximately $74.8 million of the net proceeds
to SBIC. The Company is using the remaining net proceeds for general corporate
purposes, including supporting the growth of PointSure. The use of proceeds from the
offering does not represent a material change from the use of proceeds described in the
prospectus that was included in the related Registration Statement on Form S-1. Except for
the contribution of proceeds to SBIC, no proceeds or expenses were paid to the
Companys directors, officers, ten percent shareholders or affiliates.

# 10.  Common Stock Options
and Restricted Stock Awards

The
following table summarizes stock option activity since December 31, 2004:

|                                                | Number ofOptions | 
|----------------------------------------------- | ---------------- | 
|Stock options outstanding at December 31, 2004  |                  | 
|Options granted                                 |                  | 
|Options exercised                               |                  | 
|Options forfeited                               |                  | 
|Stock options outstanding at September 30, 2005 |                  | 

In
March 2005, the Compensation Committee of the Board of Directors granted 2,000 shares of
restricted common stock to each of three non-employee directors. The restricted shares
automatically vest on the third anniversary of the date of grant. In the nine month period
ended September 30, 2005, the Company recorded compensation expense totaling $11,900 in
connection with these shares.

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##### Table of Contents

# 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

We
are a specialty provider of multi-jurisdictional workers compensation insurance. We
are domiciled in Illinois, commercially domiciled in California and headquartered in
Seattle, Washington. We are licensed in 43 states and the District of Columbia to write
workers compensation insurance. Traditional providers of workers compensation
insurance provide coverage to employers under one or more state workers compensation
laws, which prescribe benefits that employers are obligated to provide to their employees
who are injured arising out of or in the course of employment. We focus on employers with
complex workers compensation exposures and provide coverage under multiple state and
federal acts, applicable common law or negotiated agreements. We also provide traditional
state act coverage in markets we believe are underserved. Our workers compensation
policies are issued to employers who also pay the premiums. The policies provide payments
to covered, injured employees of the policyholder for, among other things, temporary or
permanent disability benefits, death benefits and medical and hospital expenses. The
benefits payable and the duration of such benefits are set by statute and vary by
jurisdiction and with the nature and severity of the injury or disease and the wages,
occupation and age of the employee.

SeaBright
Insurance Holdings, Inc. (SeaBright or the Company) was formed in
2003 by members of our current management and entities affiliated with Summit Partners, a
leading private equity and venture capital firm, for the purpose of completing a
management-led buyout that closed on September 30, 2003 (the Acquisition). In
the Acquisition, we acquired from Lumbermens Mutual Casualty Company (LMC) and
certain of its affiliates the renewal rights and substantially all of the operating assets
and employees of Eagle Pacific Insurance Company and Pacific Eagle Insurance Company
(collectively, Eagle or the Eagle Entities). Eagle Pacific began
writing specialty workers compensation insurance policies in the mid-1980s.
The Acquisition gave us renewal rights to an existing portfolio of business, representing
a valuable asset given the renewal nature of our business, and a fully operational
infrastructure that would have taken many years to develop. These renewal rights gave us
access to Eagles customer lists and the right to seek to renew Eagles
continuing in-force insurance contracts.

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

At
closing of the Acquisition, $4.0 million of the purchase price was placed into escrow for
a period of two years. These funds were available to us as security for various
obligations of LMC pursuant to various agreements entered into in connection with the
Acquisition. In October 2005, the escrow agent returned approximately $3.2 million of the
escrow funds to Kemper Employers Group, Inc. (KEG). The balance of
approximately $775,000 will be retained in escrow until LMCs outstanding obligations
have been satisfied. Any amount remaining after settlement of these obligations will be
returned to KEG.

To
minimize our exposure to any past business underwritten by KEIC, we entered into an
adverse development cover agreement in connection with the Acquisition. Under the terms of
this agreement, we and LMC are required to indemnify each other with respect to
developments in KEICs insurance liablities as they existed at the date of the Acquisition.
Accordingly, if KEICs insurance liablities increase, LMC must indemnify us in the amount of
the increase. 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 increased to $4.8 million on December 23, 2004 and totaled
approximately $4.9 million at September 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 owing by LMC to us.

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# Principal Revenue and
Expense Items

We
derive our revenue primarily from premiums earned, net investment income and realized
gains and losses on investments, and service fee 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 a term of 12 months. Thus,
for example, for a policy that is written on July 1, 2005, one-half of the premiums would
be earned in 2005 and the other half would be earned in 2006.

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

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

# Net Investment Income
and Realized Gains and Losses on Investments

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

# Claims Service Income

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

# Other Service Income

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

Our
expenses consist primarily of:

# Loss and Loss
Adjustment Expenses

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

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##### Table of Contents

# Underwriting,
Acquisition and Insurance Expenses

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

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

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

Other
Underwriting Expenses.Other underwriting expenses consist of general administrative
expenses such as salaries, rent, office supplies, depreciation and all other operating
expenses not otherwise classified separately, and boards, bureaus and assessments of
statistical agencies for policy service and administration items such as rating manuals,
rating plans and experience data.

# Interest Expense

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

# Results of Operations

# Three month and nine
month periods ended September 30, 2005 and 2004

Gross
Premiums Written. Gross premiums written for the three months ended September 30, 2005
totaled $39.5 million, an increase of $17.0 million, or 75.6%, from $22.5 million in the
same period of 2004. For the nine months ended September 30, 2005, gross premiums written
totaled $140.5 million, an increase of $54.4 million, or 63.2%, from $86.1 million in the
same period in 2004. We began writing new insurance contracts on October 1, 2003 and began
renewing some of the existing contracts of our predecessor expiring after that date. The
three months ended September 30, 2004 was only our fourth quarter of operations as
SeaBright Insurance Company. A significant portion of the 2005 increase in gross premiums
written is attributable to our expansion in California state act contractor business,
which accounted for approximately 59.7% and 59.6% of premiums written in the three month
and nine month periods ended September 30, 2005, respectively, compared to approximately
60.5% and 48.8% in the three month and nine month periods ended September 30, 2004,
respectively.

On
May 31, 2005, the California Insurance Commissioner issued a decision adopting an advisory
pure premium rate reduction of 18% for California workers compensation policies
incepting on or after July 1, 2005. The decision was issued in response to reductions in
2004 workers compensation claim costs in California, as well as anticipated future
claim cost reductions, as a result of reform legislation enacted primarily in 2003 and
2004. The California Insurance Commissioners decision is advisory only and insurance
companies may choose whether or not to adopt the new rates. On June 6, 2005, after
completing a study of our California loss data, we filed with the California Department of
Insurance our rates for new and renewal workers compensation insurance policies
written in California on or after July 1, 2005. The filing was approved on June 28, 2005.
The new rates reflect an average reduction of 14.2% from prior rates and are in response
to emerging favorable trends in loss costs resulting from reform legislation. We expect
this reduction in premium revenue to be offset by a reduction in claim costs. Therefore,
we do not expect this rate reduction to have a significant negative impact on our
financial position or results of operations. If the anticipated claim cost reductions are
not realized, we may file new rates to increase our pure premium rates accordingly.

On
September 15, 2005, the Workers Compensation Insurance Rating Bureau (the
WCIRB), an industry-backed private organization that provides statistical
analysis, submitted an amended filing with the California Insurance Commissioner
recommending a 15.9% decrease in advisory pure premium rates on new and renewal policies
effective January 1, 2006. As described above, such rates, if adopted by the California
Insurance Commissioner, are advisory only and insurance companies may choose whether or
not to adopt the new rates. The rate decrease was proposed following the WCIRBs
review of accident year experience valued as of June 30, 2005 and the cost impact of the
January 1, 2005 permanent disability rating schedule. A public hearing took place on
September 16, 2005 and the Commissioner has not yet issued a recommendation. Rate
reductions have also been

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proposed in other states in which we operate. At this time, we
are unable to predict the impact that the proposed rate reductions, if approved and
adopted by us, might have on our future financial position and results of operations.

Net
Premiums Written. Net premiums written totaled $33.4 million for the three months
ended September 30, 2005 compared to $19.9 million in the same period in 2004,
representing an increase of $13.5 million, or 67.8%. For the nine months ended September
30, 2005, net premiums written totaled $122.6 million, an increase of $46.1 million, or
60.3%, from $76.5 million in the same period in 2004. Net premiums written are affected by
premiums ceded under reinsurance agreements with external reinsurers. Ceded written
premiums for the nine months ended September 30, 2005 totaled $17.9 million (12.7% of
gross premiums written) compared to $9.6 million (11.1% of gross premiums written) in the
same period of 2004. Certain of our reinsurance contracts provide for the ceding of
premiums on a direct premiums written basis, while others provide for the ceding on a
direct premiums earned basis. As further described below under Liquidity and Capital
Resources, on October 1, 2005, we entered into new reinsurance agreements that
provide for reinsurance coverage up to $50.0 million per loss occurrence, subject to
certain limitations, as opposed to the $100.0 million limit of coverage provided under our
October 1, 2004 to October 1, 2005 treaty year reinsurance program.

Net
Premiums Earned. Net premiums earned were $40.7 million for the three months ended
September 30, 2005 compared to $24.0 million for the same period in 2004, representing an
increase of $16.7 million, or 69.6%. For the nine months ended September 30, 2005, net
premiums earned totaled $109.5 million, an increase of $61.3 million, or 127.2%, from
$48.2 million in the same period of 2004. As previously discussed, this increase is due to
the increase in net premiums written and to the fact that we had been in business for only
one year at September 30, 2004. 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. Because we acquired renewal rights and not policies in the Acquisition, our
actual results for the three month and nine month periods ended September 30, 2004 do not
reflect premiums earned on any policies written prior to September 30, 2003, the date of
the Acquisition.

Net
Investment Income. Net investment income was $2.1 million for the three months ended
September 30, 2005 compared to $693,000 for the same period in 2004, representing an
increase of $1.4 million, or 203.0%. For the nine months ended September 30, 2005, net
investment income totaled $5.2 million, an increase of $3.6 million, or 225.0%, from $1.6
million in the same period of 2004. These increases are due primarily to an increase of
approximately $102.1 million, or 126.1%, in average invested funds for the nine months
ended September 30, 2005 over the same period in 2004. In May 2004, SeaBright Insurance
Company issued, in a private placement, $12.0 million in subordinated floating rate
surplus notes due in 2034. In June 2004, we sold 51,615.25 shares of Series A convertible
preferred stock to our then-existing preferred stockholders and certain members of
management for total gross proceeds of $5.2 million. In January 2005, we completed the
initial public offering of our common stock, resulting in net proceeds of approximately
$80.8 million. Our annualized yield on average invested assets for the nine months ended
September 30, 2005 was approximately 3.8% compared to approximately 2.7% for the same
period in 2004.

Service
Income. Service income totaled $564,000 for the three months ended September 30, 2005
compared to $860,000 for the same period in 2004, representing a decrease of $296,000, or
34.4%. For the nine months ended September 30, 2005, service income totaled $1.9 million,
a decrease of $1.1 million, or 36.7%, from $3.0 million in the same period of 2004. Our
service income results from service arrangements we have with LMC for claims processing
services, policy administration and administrative services that we perform in connection
with the Eagle Entities insurance policies. Average monthly service income is
declining as the volume of work decreases as a result of the run off of our
predecessors business.

Other
Income. Other income totaled $874,000 for the three months ended September 30, 2005
compared to $492,000 for the same period in 2004, representing an increase of $382,000, or
77.6%. For the nine months ended September 30, 2005, other income totaled $2.9 million, an
increase of $1.1 million, or 61.1%, from $1.8 million in the same period of 2004. Other
income results primarily from the operations of PointSure, our wholesale insurance broker
and third party claims administrator subsidiary. The increases in other income for the
three month and nine month periods ended September 30, 2005 resulted primarily from an
increase in PointSures agency and direct billed commission income, which totaled
$2.7 million for the nine months ended September 30, 2005 compared to $1.1 million in the
same period of 2004, representing an increase of $1.6 million, or 145.5%. Most of this
income is passed through as commission expense to brokers and producers.

Loss
and Loss Adjustment Expenses. Loss and loss adjustment expenses totaled $27.1 million
for the three months ended September 30, 2005 compared to $16.9 million for the same
period in 2004, representing an increase

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of $10.2 million, or 60.4%. For the nine months
ended September 30, 2005, loss and loss adjustment expenses totaled $74.4 million, an
increase of $39.6 million, or 113.8%, from $34.8 million in the same period of 2004. The
higher loss and loss adjustment expenses for the quarter and nine months ended September
30, 2005 are attributable to the increase in premiums earned for the periods. Our net loss
ratios for the three month and nine month periods ended September 30, 2005 was 65.3% and
66.2%, respectively, compared to 67.1% and 67.5%, respectively, for the same periods in
2004. As a result of favorable development of accident year 2004 losses, we reduced our
insurance liabilities for that accident year by approximately $2.1 million in the third quarter of
2005. Offsetting this favorable development was a related reduction of $1.3 million in
earned premium from retrospective policies and an increase of $281,000 in liabilities for
unallocated loss adjustment expenses.

As
a result of the impact of regulatory reforms enacted in California primarily in 2003 and
2004, we are using a selected current accident year loss ratio, excluding unallocated loss
adjustment expenses, of 60.0% compared to a current accident year loss ratio of 62.0% used
in 2004. Unallocated loss adjustment expenses are currently reserved at a rate of eight
percent of direct loss liabilities. The increase in loss and loss adjustment expenses was
also influenced by insurance liabilities related to business assumed from NCCI residual market pools in
eight states in which we do business. The net loss ratio on this business for the nine
months ended September 30, 2005 was approximately 73.6%.

At
September 30, 2005, we had recorded a receivable from LMC, and an associated reduction in
loss and loss adjustment expenses, of approximately $2.9 million for adverse loss
development since the date of the Acquisition, according to the terms of the adverse
development cover. If LMC fails to pay its obligation under the adverse development cover,
we do not expect such failure to have a material adverse impact on our financial position
or results of operations since this amount is fully secured by the collateralized
reinsurance trust, the balance of which was approximately $4.9 million at September 30,
2005.

Underwriting
Expenses. Underwriting expenses totaled $8.1 million for the three months ended
September 30, 2005 compared to $4.3 million for the same period in 2004, representing an
increase of $3.8 million, or 88.4%. For the nine months ended September 30, 2005,
underwriting expenses totaled $23.1 million, an increase of $12.6 million, or 120.0%, from
$10.5 million in the same period of 2004. Our net underwriting expense ratios for the three
month and nine month periods ended September 30, 2005 were 19.7% and 20.9%, compared
to 17.3% and 20.3% for the same periods in 2004. The primary reasons for the increases in
our net underwriting expense ratio were a reduction in other service income (an offset to
underwriting expenses) of approximately $586,000 for the nine months ended September 30,
2005 (accounting for an increase of approximately 0.5% in our net underwriting expense
ratio) and an increase in our average net commissions for the same period of approximately
1.6 percentage points, offset by reductions in taxes, licenses and fees and other
underwriting expense as a percentage of net premiums earned. The 17.3% underwriting
expense ratio in the three months ended September 30, 2004 reflected a one-time adjustment
of our expense accrual and is not representative of our run rate.

Other
Expenses. Other expenses totaled $1.4 million for the three months ended September 30,
2005 compared to $1.2 million for the same period in 2004, representing an increase of
$0.2 million, or 16.7%. For the nine months ended September 30, 2005, other expenses
totaled $4.6 million, an increase of $1.0 million, or 27.8%, from $3.6 million in the same
period of 2004. These increases resulted primarily from an increase in PointSures
operating expenses and interest expense related to $12.0 million in surplus notes issued
by our insurance subsidiary in May 2004. As explained above under Other
Income, the majority of the increase is due to an increase in PointSures
commission expense, which totaled $2.7 million for the nine months ended September 30,
2005 compared to $989,000 in the same period of 2004, representing an increase of $1.7
million, or 171.9%. Most of this expense is a pass-through of agency and direct billed
commission income received from insurance companies.

Federal
Income Tax Expense. The effective tax rate for the nine months ended September 30,
2005 was 31.6%, compared to 30.1% for the same period in 2004. The effective tax rate for
the third quarter of 2005 was 34.3%. The higher quarterly rate reflects adjustments to
increase our estimated annual effective tax rate as a result of lower-than-anticipated tax
exempt interest income and a true-up of our 2004 taxes in connection with the filing of
our 2004 Federal income tax return. At September 30, 2005, approximately 53.3% of our
investment portfolio was invested in tax-exempt securities.

Net
Income. Net income was $5.1 million for the three months ended September 30, 2005,
compared to $2.7 million for the same period in 2004, representing an increase of $2.4
million. Net income for the nine months ended September 30, 2005 totaled $12.0 million, an
increase of $8.0 million from $4.0 million in the same period of 2004. The increase in net
income resulted primarily from increases in premiums earned and investment income for the

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period, offset by decreases in service income and increases in loss and loss adjustment
expenses, underwriting acquisition and insurance expenses, and other expenses, including
interest expense related to the surplus notes.

# Liquidity and Capital
Resources

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

Our
investment portfolio is structured so that investments mature periodically over time in
reasonable relation to current expectations of future claim payments. Since we have a
limited claims history, we have derived our expected future claim payments from industry
and predecessor trends and included a provision for uncertainties. Our investment
portfolio as of September 30, 2005 has an effective duration of 5.5 years with individual
maturities extending out to 27 years. Currently, we make claim payments from positive cash
flow from operations and invest excess cash in securities with appropriate maturity dates
to balance against anticipated future claim payments. As these securities mature, we
intend to invest any excess funds in investments with appropriate durations to match
against expected future claim payments.

At
September 30, 2005, our investment portfolio is made up almost entirely of investment
grade fixed income securities with market values subject to fluctuations in interest
rates. While we have structured our investment portfolio to provide an appropriate
matching of maturities with anticipated claim payments, if we decide or are required in
the future to sell securities in a rising interest rate environment, we would expect to
incur losses from such sales.

Our
ability to adequately provide funds to pay claims comes from our disciplined underwriting
and pricing standards and the purchase of reinsurance to protect us against severe claims
and catastrophic events. For the period from October 1, 2004 through October 1, 2005, our
reinsurance program provided us with 100% reinsurance protection for each loss occurrence
in excess of $500,000, up to $100.0 million. On October 1, 2005, we entered into new
reinsurance contracts that are effective through October 1, 2006. The new program provides
reinsurance coverage up to $50.0 million per loss occurrence, subject to certain
limitations. Under the new program, we retain the first $500,000 of losses per loss
occurrence. The next $500,000 of losses per occurrence (excess of the first $500,000 of
losses per occurrence that we retain) are 50% reinsured, subject to an annual aggregate
deductible of $1.5 million. The next $4.0 million of losses per occurrence (excess of the
first $1.0 million of losses per occurrence) are reinsured, subject to an annual aggregate
deductible of $2.0 million. Policies covering losses per occurrence in excess of $5.0
million up to $50.0 million contain no annual aggregate deductibles. We believe that we
are sufficiently capitalized to retain the losses described above.

Our
insurance subsidiary is required by law to maintain a certain minimum level of surplus on
a statutory basis. Surplus is calculated by subtracting total liabilities from total
admitted assets. The National Association of Insurance Commissioners has a risk-based
capital standard designed to identify property and casualty insurers that may be
inadequately capitalized based on inherent risks of each insurers assets and
liabilities and its mix of net premiums written. Insurers falling below a calculated
threshold may be subject to varying degrees of regulatory action. As of December 31, 2004,
the last date that we were required to update the annual risk-based capital calculation,
the statutory surplus of our insurance subsidiary was in excess of the prescribed
risk-based capital requirements that correspond to any level of regulatory action.

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

Our
consolidated net cash provided by operating activities for the nine month period ended
September 30, 2005 was $57.6 million, compared to our cash flow from operations of $28.0
million for the same period in 2004. The increase resulted from a substantial increase in
net income and increases in unpaid loss and loss adjustment expense, amortization of
deferred policy acquisition costs and other assets and liabilities, offset by increases in
policy acquisition costs deferred, unearned premiums net of deferred premiums and premiums
receivable, accrued investment income, deferred federal income tax benefit and balances
related to reinsurance recoverables, all as a result of the growth of our business.

We
used net cash of $130.6 million for investing activities for the nine month period ended
September 30, 2005, compared to $39.9 million for the same period in 2004. The difference
between periods is primarily attributable to the fact that we invested net proceeds
totaling approximately $80.8 million resulting from the sale of 8,625,000

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shares of common
stock in our initial public offering described below. Additionally, a portion of the
increase in net written premium discussed earlier was also invested to provide for the
future payment of claims.

For
the nine months ended September 30, 2005, financing activities provided cash of $80.8
million, primarily from the sale of 8,625,000 shares of common stock in our initial public
offering described below. For the nine months ended September 30, 2004, $12.0 million of
cash was provided from the issuance of surplus notes and $5.2 million was provided from
the issuance of shares of preferred stock. Debit issuance costs associated with the
surplus notes totaled approximately $591,000.

On
January 26, 2005, we closed the initial public offering of 8,625,000 shares of our common
stock, including the underwriters over-allotment option to purchase 1,125,000 shares
of our common stock, at a price of $10.50 per share for net proceeds of approximately
$80.8 million, after deducting underwriters fees, commissions and offering costs
totaling approximately $9.8 million. On January 26, 2005, we contributed approximately
$74.8 million of the net proceeds to SeaBright Insurance Company. We are using the
remaining net proceeds for general corporate purposes, including supporting the growth of
PointSure. In connection with the initial public offering, all 508,365.25 outstanding
shares of our Series A convertible preferred stock were converted into 7,777,808 shares of
common stock.

# Contractual Obligations
and Commitments

The
following table identifies our contractual obligations due by period as of September 30,
2005:

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

The
loss and loss adjustment expense payments due by period in the table above are based upon
the loss and loss adjustment expense estimates as of September 30, 2005 and actuarial
estimates of expected payout patterns and are not contractual liabilities as to time
certain. Our contractual liability is to provide benefits under the policies. As a result,
our calculation of loss and loss adjustment expense payments due by period is subject to
the same uncertainties associated with determining the level of unpaid loss and loss
adjustment expenses generally and to the additional uncertainties arising from the
difficulty of predicting when claims (including claims that have not yet been reported to
us) will be paid. Actual payments of loss and loss adjustment expenses by period will
vary, perhaps materially, from the above table to the extent that current estimates of
loss and loss adjustment expenses vary from actual ultimate claims amounts and as a result
of variations between expected and actual payout patterns.

# Off-Balance Sheet
Arrangements

As
of September 30, 2005, we had no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.

# Critical Accounting
Policies, Estimates and Judgments

It
is important to understand our accounting policies in order to understand our financial
statements. We consider some of these policies to be critical to the presentation of our
financial results, since they require management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures at the financial reporting date and throughout the period
being reported upon. Some of the estimates result from judgments that can be subjective
and complex, and consequently, actual results reflected in future periods might differ
from these estimates.

The
most critical accounting policies involve the reporting of unpaid loss and loss adjustment
expenses, including losses that have occurred but were not reported to us by the financial
reporting date; the amount and recoverability of reinsurance recoverable balances;
accounting for our adverse development cover; deferred policy acquisition costs; deferred
taxes; goodwill and other intangible assets; retrospective premiums; earned but unbilled

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premiums; and the impairment of investment securities. The following should be read in
conjunction with the notes to our financial statements.

# Unpaid Loss and Loss
Adjustment Expenses

Unpaid
loss and loss adjustment expenses represent our estimate of the expected cost of the
ultimate settlement and administration of losses, based on known facts and circumstances.
Included in unpaid loss and loss adjustment expenses are amounts for case-based insurance liabilities,
including estimates of future developments on these claims; claims incurred but not yet
reported to us; second injury fund assessments; allocated claim adjustment expenses; and
unallocated claim adjustment expenses. We use actuarial methodologies to assist us in
establishing these estimates, including judgments relative to estimates of future claims
severity and frequency, length of time to achieve ultimate resolution, judicial theories
of liability and other third-party factors that are often beyond our control. Due to the
inherent uncertainty associated with the cost of unsettled and unreported claims, the
ultimate liability may differ materially from the original estimates. These estimates are
regularly reviewed and updated and any resulting adjustments are included in the current
periods operating results. Because of the relative immaturity of our unpaid loss and
loss adjustment expense data, actuarial techniques are applied that use the historical
experience of our predecessor as well as industry information in the analysis of our
unpaid loss and loss adjustment expenses.

# Reinsurance
Recoverables

Reinsurance
recoverables on paid and unpaid losses represent the portion of the loss and loss
adjustment expenses that is assumed by reinsurers. These recoverables are reported on our
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. In addition, we bear credit risk with respect to
the reinsurers, which can be significant considering that some of the unpaid loss and loss
adjustment expenses remain outstanding for an extended period of time.

# Adverse Development
Cover

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

# Deferred Policy
Acquisition Costs

We
defer commissions, premium taxes and certain other costs that vary with and are primarily
related to the acquisition of insurance contracts. These costs are capitalized and
amortized to expense in proportion to the recognition of premiums earned. The method
followed in computing deferred policy acquisition costs limits the amount of these
deferred costs to their estimated realizable value, which gives effect to the premium to
be earned, related investment income, anticipated losses and settlement expenses and
certain other costs that we expect to incur as the premium is earned. Judgments as to
ultimate recoverability of these deferred costs are highly dependent upon estimated future
loss costs associated with the premiums written.

# Deferred Taxes

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

In
assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences

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

# Goodwill and Other
Intangible Assets

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

# Retrospective Premiums

Retrospective
premiums for primary and reinsured risks are included in income as earned on a pro rata
basis over the effective period of the respective policies. Earned premiums on
retrospectively rated policies are based on the Companys estimate of loss experience
as of the measurement date. Unearned premiums are deferred and include that portion of
premiums written that is applicable to the unexpired period of the policies in force and
estimated adjustments of premiums on policies that have retrospective rating endorsements.

# Earned But Unbilled
Premiums

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

# Impairment of
Investment Securities

Impairment
of investment securities results in a charge to operations when the market value of a
security declines to below our cost and is deemed to be other-than-temporary. We regularly
review our fixed maturity portfolio to evaluate the necessity of recording impairment
losses for other-than-temporary declines in the fair value of investments. A number of
criteria are considered during this process, including, but not limited to, the following:
the current fair value as compared to amortized cost or cost, as appropriate, of the
security; the length of time the securitys fair value has been below amortized cost;
our intent and ability to retain the investment for a period of time sufficient to allow
for an anticipated recovery in value; specific credit issues related to the issuer; and
current economic conditions. In general, we focus on those securities whose fair values
were less than 80% of their amortized cost or cost, as appropriate, for six or more
consecutive months. Other-than-temporary impairment losses result in a permanent reduction
of the carrying amount of the underlying investment. Significant changes in the factors
considered when evaluating investments for impairment losses could result in a significant
change in impairment losses reported in the financial statements.

# Recent Accounting
Pronouncements

SFAS
No. 123 (revised 2004), Share-based Payment, was issued in December 2004.
Statement No. 123(R) is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. Statement No. 123(R) supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash
Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach
described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the statement
of operations based on their fair values. Pro forma disclosure is no longer an
alternative.

SFAS
No. 123(R) must be adopted no later than January 1, 2006, and we expect to adopt the
Statement on or prior to that date. As permitted by SFAS No. 123, we currently account for
share-based payments to employees using the intrinsic value method as detailed in Opinion
No. 25 and, as such, generally recognize no compensation cost for employee stock options.
Accordingly, the adoption of SFAS No. 123(R)s fair value method will have an impact
on our results of operations, although it will have no impact on our overall financial
position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future. However,
had we adopted SFAS No. 123(R) in prior periods, the impact of the standard would have
approximated the impact of SFAS No. 123 as described in Note 2.h. of the Notes to
Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this
quarterly report.

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# 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.

The
following risk factor has been updated to reflect developments that occurred during the
quarter ended September 30, 2005.

# Risks Related to Our
Business

| | The
insurance business is subject to extensive regulation and legislative changes, which
impact the manner in which we operate our business.
| | --------------------------------------------------------------------------------------------------------------------------------------------

Our
insurance business is subject to extensive regulation by the applicable state agencies in
the jurisdictions in which we operate, perhaps most significantly by the Illinois
Department of Financial and Professional Regulation, Division of Insurance (the
Illinois Division of Insurance) and the California Department of Insurance.
These state agencies have broad regulatory powers designed to protect policyholders, not
stockholders or other investors. These powers include, among other things, the ability to:

| |  | 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.                                                                                                

We
received a letter on August 25, 2005 from the California Department of Industrial
Relations, Division of Workers Compensation indicating that it would audit our
claims reported in 2002, 2003, and 2004. It is our understanding that the
Division is generally reviewing the claims handling practices of workers
compensation companies for that period, evidenced by the Divisions clarification in
September that it also sought claim logs for the Eagle Entities. We have provided all
requested information.  On October 18, 2005 we received a preliminary
notice from the California Department of Insurance, Market Conduct Division informing
us that we were due for a market conduct examination by the Field Rating &
Underwriting Bureau. We are in the process of gathering and providing information in
response to this initial notification. The Market Conduct Division said in its letter that
it expects to schedule the examination within the next twelve months.

Our
ability to transact business with our affiliates and to enter into mergers, acquisitions
and divestitures involving our insurance company subsidiary is limited by the requirements
of the insurance holding company laws of Illinois and California. To comply with these
laws, we are required to file notices with the Illinois Division of

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Insurance and the
California Department of Insurance to seek their respective approvals at least 30 days
before engaging in any intercompany transactions, such as sales, purchases, exchanges of
assets, loans, extensions of credit, cost sharing arrangements and extraordinary dividends
or other distributions to shareholders. Under these holding company laws, any change of
control transaction also requires prior notification and approval. Because these
governmental agencies may not take action or give approval within the 30 day period, these
notification and approval requirements may subject us to business delays and additional
business expense. If we fail to give these notifications, we may be subject to significant
fines and penalties and damaged working relations with these governmental agencies.

In
addition, 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. For example, in California, on
January 1, 2003, workers compensation legislation became effective that provides for
increases in the benefits payable to injured workers. Also, in California, workers
compensation legislation intended to reduce certain costs was enacted in September 2003
and April 2004. Among other things, this legislation established an independent medical
review process for resolving medical disputes, tightened standards for determining
impairment ratings by applying specific medical treatment guidelines, capped temporary
total disability payments to 104 weeks from first payment and enables injured workers to
access immediate medical care up to $10,000 but requires them to get medical care through
a network of doctors chosen by the employer. The implementation of these reforms affects
the manner in which we coordinate medical care costs with employers and the manner in
which we oversee treatment plans. However, in the ordinary course, that implementation is
subject to opposition in the California legislature and in the courts. Regulatory rules
applicable to the legislation also continue to be developed and we cannot predict the
ultimate impact of the reforms.

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. Currently, builders of recreational boats over 65 feet in length
are subject to the USL&H Act. A proposed amendment to the USL&H Act would
eliminate builders of recreational boats from the reach of the USL&H Act. If this
proposed amendment is adopted, we expect that we would lose a total of approximately $3.0
million in annual direct written premium from policies currently providing USL&H Act
coverage. The proposed amendment would not have a material impact on our policies
providing coverage under the Jones Act, which gives certain employees at sea the right to
sue their employers if such employees are injured.

In
addition, we are impacted by the Terrorism Risk Insurance Act of 2002 and by the Gramm
Leach Bliley Act of 2002 related to disclosure of personal information. The Terrorism Risk
Act is scheduled to expire on December 31, 2005 and may not be renewed, or if it is
renewed, it may provide different and possibly reduced protection against the financial
impacts of acts of terrorism. Moreover, changes in federal tax laws could also impact our
business.

This
extensive regulation of our business may affect the cost or demand for our products and
may limit our ability to obtain rate increases or to take other actions that we might
desire to increase our profitability. In addition, we may be unable to maintain all
required approvals or comply fully with the wide variety of applicable laws and
regulations, which are continually undergoing revision, or the relevant authoritys
interpretation of such laws and regulations.

# Note on Forward-Looking
Statements

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:

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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.                                                                                                                                                                   

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 2004 Annual Report on Form 10-K.

# Item 3.  Quantitative and
Qualitative Disclosures About Market Risk

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

# Credit Risk

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

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# Interest Rate Risk

We
had fixed-income investments with a fair value of $236.2 million at September 30, 2005
that are subject to interest rate risk. We manage the exposure to interest rate risk
through a disciplined asset/liability matching and capital management process. In the
management of this risk, the characteristics of duration, credit and variability of cash
flows are critical elements. These risks are assessed regularly and balanced within the
context of the liability and capital position.

The
table below summarizes our interest rate risk. It illustrates the sensitivity of the fair
value of fixed-income investments to selected hypothetical changes in interest rates as of
September 30, 2005. 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.

Hypothetical Change in Interest Rates
    
    EstimatedChange inFair Value
    
    Fair Value
    
    HypotheticalPercentageIncrease(Decrease) in
        ShareholdersEquity($ in thousands)200 basis point increase
    
    $
    (26,805
    )
    $
    209,389
    
    
    (11.3
    )%100 basis point increase
    
    
    (13,195
    )
    
    222,999
    
    
    (5.6
    )%No change
    
    
    
    
    
    236,194
    
    
    100 basis point decrease
    
    
    13,195
    
    
    249,389
    
    
    5.6
    %200 basis point decrease
    
    
    26,805
    
    
    262,999
    
    
    11.3
    %


# Item 4.  Controls and
Procedures

Under
the supervision and with the participation of management, including our Chief Executive
Officer and our Chief Financial Officer, we have carried out an evaluation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on that
evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the end of the period covered by
this report to ensure that information we are required to disclose in reports that are
filed or submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms specified by the Securities and
Exchange Commission. There were no changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred
during the period covered in this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.

# PART II  OTHER
INFORMATION

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

On
January 19, 2005, the SEC declared effective our Registration Statement on Form S-1, as
amended (Registration No. 333-119111), as filed with the SEC in connection with the
initial public offering of 8,625,000 shares of our common stock. Proceeds to SeaBright,
after accounting for approximately $6.3 million in underwriting discounts and
commissions and approximately $3.5 million in other expenses of the offering, were
approximately $80.8 million. The offering closed on January 26, 2005.

On
January 26, 2005, we contributed approximately $74.8 million of the net proceeds to
SeaBright Insurance Company. We are using the remaining net proceeds for general
corporate purposes, including supporting the growth of PointSure. Except for the capital
contribution to SeaBright Insurance Company, as of September 30, 2005, we had not used any
of the remaining net proceeds from the offering. Our use of the proceeds from the offering
does not represent a material change in the use of proceeds described in the prospectus
included as part of the Registration Statement.

We
did not purchase any of our equity securities during the nine months ended September 30,
2005.

# Item 6.  Exhibits

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

- 25 -

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##### Table of Contents

# SIGNATURES

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

|                        |                                    |                                                                                                      |  | 
|----------------------- | ---------------------------------- | ---------------------------------------------------------------------------------------------------- |  | 
|                        | SEABRIGHT INSURANCE HOLDINGS, INC.
|Date:  November 9, 2005 |                                    |                                                                                                      | 
|                        | By:                                | /s/  Joseph S. De Vita                                                                               | 
|                        |                                    | Joseph S. De Vita                                                                                    | 
|                        |                                    | Senior Vice President, Chief Financial Officer
and Assistant Secretary (Principal Financial Officer)
|                       

- 26 -

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##### Table of Contents

# EXHIBIT INDEX

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

ExhibitNumber
    
    Description31.1
    
    Rule 13a-14(a) Certification (Chief Executive Officer)31.2
    
    Rule 13a-14(a) Certification (Chief Financial Officer)32.1
    
    Section 1350 Certification (Chief Executive Officer)32.2
    
    Section 1350 Certification (Chief Financial Officer)