SeaBright Holdings, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - SeaBright Holdings, Inc.	ex31_2.htm
EX-32.2 - EXHIBIT 32.2 - SeaBright Holdings, Inc.	ex32_2.htm
EX-31.1 - EXHIBIT 31.1 - SeaBright Holdings, Inc.	ex31_1.htm
EX-32.1 - EXHIBIT 32.1 - SeaBright Holdings, Inc.	ex32_1.htm

UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2010

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 001-34204

SeaBright Insurance Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware		56-2393241
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1501 4th Avenue, Suite 2600

Seattle, WA 98101

(Address of principal executive offices, including zip code)

(206) 269-8500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class	Shares outstanding as of May 7, 2010
Common Stock, $0.01 Par Value	22,007,824

SeaBright Insurance Holdings, Inc.

Index to Form 10-Q

		Page
Part I.	Financial Information

Item 1.	Financial Statements (unaudited)	2

	Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009	2

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009	3

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009	4

	Notes to Unaudited Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18

Item 4.	Controls and Procedures	19

Part II.	Other Information

Item 1A.	Risk Factors	19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19

Item 6.	Exhibits	19

Signatures		20

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Index

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2010		December 31, 2009
	(Unaudited)		(Audited)
	(in thousands, except share and per share amounts)
ASSETS

Fixed income securities available for sale, at fair value (amortized cost $620,868 in 2010 and $608,222 in 2009)	$	634,240	$	626,608
Cash and cash equivalents		37,169		12,896
Accrued investment income		6,378		6,734
Premiums receivable, net of allowance		15,830		14,477
Deferred premiums		190,105		182,239
Service income receivable		245		317
Reinsurance recoverables		37,293		34,339
Due from reinsurer		6,818		6,707
Receivable under adverse development cover		3,010		3,010
Prepaid reinsurance		6,243		6,760
Property and equipment, net		4,907		5,356
Federal income tax recoverable		3,767		4,774
Deferred income taxes, net		21,980		21,861
Deferred policy acquisition costs, net		27,512		25,537
Intangible assets, net		1,398		1,431
Goodwill		4,321		4,321
Other assets		5,215		7,494
Total assets	$	1,006,431	$	964,861

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Unpaid loss and loss adjustment expense	$	361,905	$	351,496
Unearned premiums		184,071		175,766
Reinsurance funds withheld and balances payable		7,859		7,312
Premiums payable		5,764		4,786
Accrued expenses and other liabilities		71,349		54,028
Surplus notes		12,000		12,000
Total liabilities		642,948		605,388

Commitments and contingencies

Stockholders’ equity:
Series A preferred stock, $0.01 par value; 750,000 shares authorized; no shares issued and outstanding		−		−
Undesignated preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued and outstanding		–		–
Common stock, $0.01 par value; 75,000,000 shares authorized; issued and outstanding – 21,921,249 shares at March 31, 2010 and 21,675,786 shares at December 31, 2009		219		217
Paid-in capital		205,858		205,079
Accumulated other comprehensive income		9,667		12,927
Retained earnings		147,739		141,250
Total stockholders’ equity		363,483		359,473
Total liabilities and stockholders’ equity	$	1,006,431	$	964,861

See accompanying notes to unaudited condensed consolidated financial statements.

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Index

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended March 31,
	2010		2009
	(in thousands, except share and earnings per share information)

Revenue:
Premiums earned	$	60,630	$	58,004
Claims service income		213		246
Other service income		33		64
Net investment income		6,079		5,647
Net realized gains		6,532		11
Other income		830		1,231
		74,317		65,203
Losses and expenses:
Loss and loss adjustment expenses		42,749		38,564
Underwriting, acquisition and insurance expenses		18,757		19,794
Interest expense		128		174
Other expenses		2,490		2,072
		64,124		60,604
Income before taxes		10,193		4,599

Income tax expense		2,606		611
Net income	$	7,587	$	3,988

Basic earnings per share	$	0.37	$	0.19
Diluted earnings per share	$	0.35	$	0.19

Dividends declared per share	$	0.05	$	–

Weighted average basic shares outstanding		20,745,761		20,614,696
Weighted average diluted shares outstanding		21,605,704		21,308,120

See accompanying notes to unaudited condensed consolidated financial statements.

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Index

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
	2010			2009
	(in thousands)

Cash flows from operating activities:
Net income	$	7,587		$	3,988
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of deferred policy acquisition costs		10,810			10,928
Policy acquisition costs deferred		(12,786	)		(12,548	)
Provision for depreciation and amortization		1,479			1,261
Compensation cost on restricted shares of common stock		1,109			1,086
Compensation cost on stock options		196			159
Net realized gain on investments		(6,532	)		(11	)
Deferred income tax (benefit) expense		1,649			(1,577	)
Changes in certain assets and liabilities:
Unpaid loss and loss adjustment expense		10,409			16,674
Income taxes payable		1,006			2,171
Reinsurance recoverables, net of reinsurance withheld		(2,000	)		(6,927	)
Unearned premiums, net of deferred premiums and premiums receivable		(914	)		1,150
Accrued investment income		356			352
Other assets and other liabilities		5,817			3,243
Net cash provided by operating activities		18,186			19,949

Cash flows from investing activities:
Purchases of investments		(120,512	)		(28,116	)
Sales of investments		116,113			8,899
Maturities and redemption of investments		11,053			16,355
Purchases of property and equipment		(44	)		(882	)
Net cash provided by (used in) investing activities		6,610			(3,744	)

Cash flows from financing activities:
Proceeds from grant of restricted shares of common stock		3			3
Surrender of stock in connection with restricted stock vesting		(526	)		(473	)
Net cash used in financing activities		(523	)		(470	)

Net increase in cash and cash equivalents		24,273			15,735
Cash and cash equivalents at beginning of period		12,896			22,872
Cash and cash equivalents at end of period	$	37,169		$	38,607

Supplemental disclosures:
Interest paid on surplus notes	$	131		$	189
Accrued expenses for purchases of investments		13,716			–

See accompanying notes to unaudited condensed consolidated financial statements.

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Index

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of SeaBright Insurance Holdings, Inc. (“SIH” or “SeaBright”) and its wholly owned subsidiaries, SeaBright Insurance Company (“SBIC”), PointSure Insurance Services, Inc. (“PointSure”), Total HealthCare Management, Inc. (“THM”), and Black/White and Associates, Inc., Black/White and Associates of Nevada and Black/White Rockridge Insurance Services, Inc. (referred to collectively as “BWNV”) (collectively, the “Company,” “we” or “us”). All significant intercompany transactions among these affiliated entities have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet at December 31, 2009 has been derived from the audited financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited financial statements and accompanying notes as of and for the year ended December 31, 2009 included in the Company’s Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 16, 2010.

In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial information set forth therein. Results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results expected for the full fiscal year or for any future period.

Certain reclassifications have been made to the prior year’s financial statements to confirm to classifications used in the current year. The Condensed Consolidated Statement of Operations for the three months ended March 31, 2009 has been revised to correct an immaterial error in the elimination of intercompany revenue and expense. The corrections had no impact on income before taxes, net income or the loss, expense and combined ratios. The following table summarizes the impact of the correction:

	As Reported		Adjustment			As Revised
	(in thousands)
Other income	$	2,677	$	(1,446	)	$	1,231
Other expense		3,518		(1,446	)		2,072

2.	Summary of Significant Accounting Policies

a. 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. Actual results could differ from those estimates. The Company has used significant estimates in determining 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; goodwill and other intangibles; retrospective premiums; earned but unbilled premiums; deferred policy acquisition costs; income taxes; and the valuation and other-than-temporary impairments of investment securities.

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Index

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Earnings Per Share

The following table provides the reconciliation of basic and diluted weighted average shares outstanding used in calculating earnings per share for the three month periods ended March 31, 2010 and 2009:

	Three Months Ended March 31,
	2010		2009
	(in thousands)
Basic weighted average shares outstanding		20,746		20,615
Weighted average shares issuable upon exercise of outstanding stock options and vesting of nonvested restricted stock		860		693
Diluted weighted average shares outstanding		21,606		21,308

Dividends

On March 2, 2010, the Company’s Board of Directors authorized a quarterly dividend of $0.05 per common share commencing in the first quarter 2010. The dividend was paid on April 9, 2010 to stockholders of record on March 23, 2010. Any future determination to pay cash dividends on the Company’s common stock will be at the discretion of its Board of Directors and will be dependent on the Company’s earnings, financial condition, operating results, capital requirements, any contractual restrictions, regulatory and other restrictions on the payment of dividends by the Company’s subsidiaries, and other factors that the Company’s Board of Directors deems relevant.

d. Comprehensive Income

The following table summarizes the Company’s comprehensive income for the three month periods ended March 31, 2010 and 2009:

	Three Months Ended March 31,
	2010			2009
	(in thousands)
Net income	$	7,587		$	3,988
Reclassification adjustment for net realized gains recorded into income		(6,532	)		(11	)
Tax expense related to reclassification adjustment for gains		2,286			4
Change in net unrealized gains on investment securities available for sale		1,518			5,943
Tax expense related to change in net unrealized gains		(532	)		(2,123	)
Total comprehensive income	$	4,327		$	7,801

e. Other Significant Accounting Policies

For a more complete discussion of the Company’s significant accounting policies, please see Note 2 to the Company’s consolidated financial statements as of and for the year ended December 31, 2009 in Part II, Item 8 of the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2010.

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Index

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 and carrying value of investment securities available for sale at March 31, 2010 were as follows:

	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Carrying Value
	(in thousands)
U.S. Treasury securities	$	24,167	$	387	$	(245	)	$	24,309	$	24,309
Government sponsored agency securities		25,942		941		(108	)		26,775		26,775
Corporate securities		130,856		1,848		(725	)		131,979		131,979
Tax-exempt municipal securities		312,202		8,658		(1,433	)		319,427		319,427
Mortgage pass-through securities		68,410		3,122		(100	)		71,432		71,432
Collateralized mortgage obligations		14,810		175		(53	)		14,932		14,932
Asset-backed securities		44,481		941		(36	)		45,386		45,386
Total investment securities available for sale	$	620,868	$	16,072	$	(2,700	)	$	634,240	$	634,240

The Company regularly reviews its investment portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of its investments. A number of criteria are considered during this process including, but not limited to: 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 or cost; the likelihood that the Company will be required to sell the security before recovery of its cost basis; objective information supporting recovery in a reasonable period of time; specific credit issues related to the issuer; and current economic conditions. The Company has the ability and intent to hold impaired investments to maturity or for a period of time sufficient for recovery of their carrying amount.

Approximately $0.2 million of the total unrealized losses at March 31, 2010 were from debt securities that had been impaired for one year or longer. Included in these securities is one security which had an unrealized loss that exceeded 20% of the related security’s book value at March 31, 2010. As of March 31, 2010, all payments to date are current on these debt securities and the Company expects to fully recover its investment in these securities no later than their scheduled maturities. The Company has no current intent to sell these securities. Therefore, based on management’s review of the financial strength of these debt securities and the Company’s expectation regarding future receipt of principal and interest, management concluded these debt securities were temporarily impaired as of March 31, 2010. For the three months ended March 31, 2010, the Company recognized no other-than-temporary impairment losses related to debt securities.

The following table presents information about investment securities with unrealized losses at March 31, 2010:

	Less Than 12 Months					12 Months or More					Total
Investment Category	Aggregate Fair Value		Aggregate Unrealized Loss			Aggregate Fair Value		Aggregate Unrealized Loss			Aggregate Fair Value		Aggregate Unrealized Loss
	(in thousands)
U.S. Treasury securities	$	10,074	$	(215	)	$	688	$	(30	)	$	10,762	$	(245	)
Government sponsored agency securities (1)		6,622		(108	)		–		–			6,622		(108	)
Corporate securities		68,678		(725	)		–		–			68,678		(725	)
Tax-exempt municipal securities		91,680		(1,282	)		8,139		(151	)		99,819		(1,433	)
Mortgage pass-through securities (2)		15,448		(100	)		–		–			15,448		(100	)
Collateralized mortgage obligations		1,894		(3	)		168		(50	)		2,062		(53	)
Asset-backed securities		11,859		(22	)		2,981		(14	)		14,840		(36	)
Total	$	206,255	$	(2,455	)	$	11,976	$	(245	)	$	218,231	$	(2,700	)

_____________

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

(2)	Includes adjustable rate mortgage securities.

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Index

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company had no direct sub-prime mortgage exposure in its investment portfolio as of March 31, 2010 and approximately $7.9 million of indirect exposure to sub-prime mortgages. The following table provides a breakdown of ratings on the bonds in the Company’s municipal portfolio as of March 31, 2010:

	Insured Bonds				Uninsured Bonds		Total Municipal Portfolio Based On
Rating	Insured Ratings		Underlying Ratings		Ratings		Overall Ratings (1)		Underlying Ratings
	(in thousands)
AAA	$	11,000	$	11,000	$	16,856	$	27,856	$	27,856
AA+		18,184		18,066		37,890		56,074		55,956
AA		35,159		19,856		46,432		81,591		66,288
AA-		52,250		57,114		18,475		70,725		75,589
A+		27,924		29,821		9,789		37,713		39,610
A		13,291		15,044		7,371		20,662		22,415
A-		3,152		8,899		521		3,673		9,420
BBB+		-		1,160		6,203		6,203		7,363
Pre-refunded (2)		20,458		20,458		9,096		29,554		29,554
Not rated		1,342		1,342		-		1,342		1,342
Total	$	182,760	$	182,760	$	152,633	$	335,393	$	335,393

__________

(1)

Represents insured ratings on insured bonds and ratings on uninsured bonds.

(2)

These bonds have been pre-refunded by the issuer depositing highly rated government-issued securities into irrevocable trust funds established for payment of principal and interest.

As of March 31, 2010, we had no direct investments in any bond insurer, and the following three bond insurers insured more than 10% of the municipal bond investments in our portfolio:

					Average Underlying
			Insurer Ratings		Bond
Bond Insurer	Fair Value		S&P	Moody’s	Rating
	(Millions)
National Public Finance Guarantee Corporation	$	83.0	A	Baa1	AA-/A+
Assured Guaranty Municipal Corporation		36.0	AAA	Aa3	AA/AA-
Ambac Assurance Corp.		35.0	R	Caa2	AA-

We do not expect a material impact to our investment portfolio or financial position as a result of the problems currently facing monoline bond insurers.

The amortized cost and estimated fair value of fixed income securities available for sale at March 31, 2010, by contractual maturity, are set forth below. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

Maturity	Cost or Amortized Cost		Estimated Fair Value
	(in thousands)
Due in one year or less	$	28,522	$	28,908
Due after one year through five years		181,803		189,268
Due after five years through ten years		237,558		239,295
Due after ten years		45,284		45,019
Securities not due at a single maturity date		127,701		131,750
Total fixed income securities	$	620,868	$	634,240

The consolidated amortized cost of investment securities available for sale deposited with various regulatory authorities at March 31, 2010 was $208.1 million.

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Index

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Premiums

Direct premiums written totaled $74.6 million and $76.8 million for the three month periods ended March 31, 2010 and 2009, respectively.

Premiums receivable consisted of the following at March 31, 2010 and December 31, 2009:

	March 31, 2010			December 31, 2009
	(in thousands)
Premiums receivable	$	16,414		$	15,057
Allowance for doubtful accounts		(584	)		(580	)
Premiums receivable, net of allowance	$	15,830		$	14,477

5.	Reinsurance

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. These reinsurance treaties do not relieve the Company from its obligations to policyholders. On October 1, 2009, the Company entered into reinsurance agreements with nonaffiliated reinsurers wherein it retains the first $500,000 of each loss occurrence and the next $500,000 of losses per occurrence are 50% reinsured. This reinsurance program, which expires on September 30, 2010, provides loss coverage up to $85.0 million per loss occurrence.

6.	Unpaid Loss and Loss Adjustment Expenses

The following table summarizes the activity in unpaid loss and loss adjustment expense for the three month periods ended March 31, 2010 and 2009:

	Three Months Ended March 31,
	2010			2009
	(in thousands)
Beginning balance:
Unpaid loss and loss adjustment expense	$	351,496		$	292,027
Reinsurance recoverables		(34,080	)		(18,231	)
Net balance, beginning of year		317,416			273,796
Incurred related to:
Current period		42,874			37,666
Prior periods		(125	)		324
Receivable under adverse development cover		−			574
Total incurred		42,749			38,564
Paid related to:
Current period		(5,031	)		(5,288	)
Prior periods		(30,082	)		(23,466	)
Total paid		(35,113	)		(28,754	)
Receivable under adverse development cover		−			(574	)
Net balance, end of year		325,052			283,032
Reinsurance recoverables		36,853			25,669
Unpaid loss and loss adjustment expense	$	361,905		$	308,701

As a result of changes in estimates of insured events in prior periods, unpaid loss and loss adjustment expenses decreased by a net amount of $0.1 million in the three months ended March 31, 2010. The net favorable development of $0.1 million related to accident year 2004.

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Index

SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Loss and loss adjustment expenses in the three months ended March 31, 2009 include an increase in loss reserves of approximately $0.3 million comprised of an increase of approximately $0.9 million in SeaBright reserves and a reduction of approximately $0.6 million of Kemper Employers Insurance Company (“KEIC”) reserves, a company we acquired in September 2003. The majority of the 2009 SeaBright loss reserve increase related to accident year 2008 and the KEIC loss reserve decrease related to accident years 2002 and prior.

7. 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. SBIC has accrued a liability for guaranty fund and other assessments of $8.7 million at March 31, 2010 and has recorded a related asset for premium tax offset and policy surcharges of $1.3 million at that date. This amount represents 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 insolvencies. Most assessments are paid out in the year following the year in which the premium is written or the losses are paid. Guaranty fund receivables and other surcharge items are generally realized by a charge to new and renewing policyholders in the year following the year in which the related assessments were paid.

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

8. Share-Based Payment Arrangements

At March 31, 2010, the Company had outstanding stock options and nonvested restricted stock granted according to the terms of two equity incentive plans. The stockholders and Board of Directors approved the 2003 Stock Option Plan (the “2003 Plan”) in September 2003, and amended and restated the 2003 Plan in February 2004 and April 2008, and approved the 2005 Long-Term Equity Incentive Plan (the “2005 Plan” and, together with the 2003 Plan, the “Stock Option Plans”) in December 2004, and amended and restated the 2005 Plan in April 2008.

At March 31, 2010, the Company reserved 776,458 shares of common stock for issuance under the 2003 Plan, of which options to purchase 481,946 shares had been granted, and 3,065,041 shares for issuance under the 2005 Plan, of which 2,425,698 shares had been granted. In January 2006, the Compensation Committee of the Board of Directors terminated the ability to grant future stock options awards under the 2003 Plan. Therefore, the Company anticipates that all future awards will be made under the 2005 Plan.

a. Stock Options

The following table summarizes stock option activity for the three months ended March 31, 2010:

	Shares Subject to Options			Weighted Average Exer- cise Price per Share		Weighted Average Re- maining Con- tractual Life (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2009		1,225,660		$	11.19		6.2	$	368
Granted		86,293			11.06		-		-
Forfeited		(5,000	)		13.95		-		-
Exercised		-			-		-		-
Cancelled		(7,750	)		13.32		-		-
Outstanding at March 31, 2010		1,299,203			11.16		6.2		-

Exercisable at March 31, 2010		875,655			10.69		5.0		277

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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The aggregate intrinsic values in the table above are before applicable income taxes and are based on the Company’s closing stock price of $11.01 on March 31, 2010. There were no proceeds from the exercise of stock options during the quarter ended March 31, 2010.

b. Restricted Stock

The following table summarizes restricted stock activity for the three months ended March 31, 2010:

	Number of Shares			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2009		936,020		$	13.78
Granted		303,320			11.06
Vested		(183,000	)		18.21
Forfeited		(9,750	)		12.55
Outstanding at March 31, 2010		1,046,590			12.23

As of March 31, 2010, there was $7.3 million of total unrecognized compensation cost related to restricted stock granted under the 2005 Plan. That cost is expected to be recognized over a weighted-average period of approximately 26 months.

c. Stock-Based Compensation

Total stock-based compensation expense recognized in the unaudited condensed consolidated statements of operations for the three month periods ended March 31, 2010 and 2009 is shown in the following table. No compensation cost was capitalized during the periods shown.

	Three Months Ended March 31,
	2010		2009
	(in thousands)
Stock-based compensation expense related to:
Nonvested restricted stock	$	1,109	$	1,086
Stock options		196		159
Total	$	1,305	$	1,245

Total related tax benefit	$	406	$	367

9. Fair Values of Assets and Liabilities

Estimated fair value amounts, defined as the exit price of willing market participants, have been determined using available market information and other appropriate valuation methodologies. However, considerable judgment is required in developing the estimates of fair value. Accordingly, these estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimating methodologies may have an effect on the estimated fair value amounts.

The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments in the accompanying consolidated financial statements and notes:

•

Cash and cash equivalents, premiums receivable, accrued expenses, other liabilities and surplus notes: The carrying amounts for these financial instruments as reported in the accompanying condensed consolidated balance sheets approximate their fair values.

•

Investment securities: The Company measures and reports its financial assets and liabilities, including investment securities, in accordance with the Fair Value Measurement and Disclosure Topic of the Codification. The estimated fair values for available-for-sale securities are generally based on quoted market value prices for securities traded in the public marketplace. The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity. Additional information with respect to fair values of the Company’s investment securities is disclosed in Note 3.

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SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other financial instruments qualify as insurance-related products and are specifically exempted from fair value disclosure requirements.

The Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

•

Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 includes U.S. Treasury securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

•

Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Level 2 valuations are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 includes government sponsored agency securities, corporate fixed-income securities, municipal bonds, mortgage pass-through securities, collateralized mortgage obligations and asset-backed securities.

•

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. As of March 31, 2010, the Company had no Level 3 financial assets or liabilities.

The table below presents the March 31, 2010 balances of assets and liabilities measured at fair value on a recurring basis.

	Total		Level 1 (1)		Level 2		Level 3
	(in thousands)
Securities available for sale	$	634,240	$	24,309	$	609,931	$	–

__________

(1)	Consists of the Company’s investments in U.S. Treasury securities.

At March 31, 2010 there were no liabilities measured at fair value on a recurring basis.

Active markets are those in which transactions occur with sufficient frequency and volume to provide reliable pricing information on an ongoing basis. Inactive markets are those in which there are few transactions for the asset, prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly. When the market for an investment is judged to be inactive, appropriate adjustments must be made to observable inputs to account for such inactivity. As of March 31, 2010, the Company’s investment portfolio consisted of securities that it considered to be traded in active markets. Therefore, no adjustment for market inactivity or illiquidity was necessary. There were no transfers between levels during the three months ended March 31, 2010.

10. Subsequent Events

Management has evaluated subsequent events from March 31, 2010 and concluded there were no subsequent events to be reported during this period.

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

Cautionary Statement

You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included in Item 1 of Part I of this quarterly report. The information contained in this quarterly report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this quarterly report and in our other reports filed with the U.S. Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 16, 2010.

The discussion under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, and similar discussions in our other SEC filings, describe some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.

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

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

•

greater frequency or severity of claims and loss activity, including as a result of catastrophic events, than our underwriting, reserving or investment practices anticipate based on historical experience or industry data;

•

changes in the U.S. economy and workforce levels;

•

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;

•

changes in regulations or laws applicable to us, our subsidiaries, brokers or customers;

•

potential downgrades in our rating or changes in rating agency policies or practices;

•

ineffectiveness or obsolescence of our business strategy due to changes in current or future market conditions;

•

unexpected issues relating to claims or coverage and changes in legal theories of liability under our insurance policies;

•

increased competition on the basis of pricing, capacity, coverage terms or other factors;

•

developments in financial and capital markets that adversely affect the performance of our investments;

•

loss of the services of any of our executive officers or other key personnel;

•

our inability to raise capital in the future;

•

our status as an insurance holding company with no direct operations;

•

our reliance on independent insurance brokers;

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Index

•

increased assessments or other surcharges by states in which we write policies;

•

our potential exposure to losses if Lumbermens Mutual Casualty Company (“LMC”) were to be placed into receivership;

•

the effects of acquisitions that we may undertake;

•

failure of our customers to pay additional premium under our retrospectively rated policies;

•

the effects of acts of terrorism or war;

•

cyclical changes in the insurance industry;

•

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 2009 Annual Report on Form 10-K.

Overview

We are a specialty provider of multi-jurisdictional workers’ compensation insurance and, on a limited basis, commercial general liability insurance. We are domiciled in Illinois, commercially domiciled in California and headquartered in Seattle, Washington. We are licensed in 49 states and the District of Columbia to write workers’ compensation and other lines of insurance. Traditional providers of workers’ compensation insurance provide coverage to employers under one or more state workers’ compensation laws, which prescribe benefits that employers are obligated to provide to their employees who are injured arising out of or in the course of employment. We focus on employers with complex workers’ compensation exposures and provide coverage under multiple state and federal acts, applicable common law or negotiated agreements. We also provide traditional state act coverage in markets we believe are underserved. Our workers’ compensation policies are issued to employers who also pay the premiums.

Results of Operations

Three Months Ended March 31, 2010 and 2009

Gross Premiums Written. Gross premiums written consists of direct premiums written and premiums assumed from the National Council on Compensation Insurance (“NCCI”) residual market pools. The number of customers we service, in-force payrolls and in-force premiums represent some of the factors we consider when analyzing gross premiums written.

Gross premiums written for the three months ended March 31, 2010 totaled $76.0 million, a decrease of $3.3 million, or 4.2%, from $79.3 million of gross premiums written in the same period of 2009. Much of the decrease in gross premiums written resulted from payroll declines from our “core” product lines. Our core product lines contributed $54.4 million or 71.6% of the total gross premiums for the three months ended March 31, 2010 compared to $68.3 million or 86.1% in the same period of 2009. The decrease in our core product lines was partially offset by a net $9.8 million increase in our “program” business. Our program business includes alternative markets and small maritime programs. Excluding work we perform as the servicing carrier for the Washington State USL&H Compensation Act Assigned Risk Plan (the “Washington USL&H Plan”), the total number of customers we serviced increased from over 1,260 at March 31, 2009 to over 1,500 at March 31, 2010. The majority of the customer increase related to our “program” book of business while the number of core customers remained flat. By design, our program business will have a larger number of customers with a smaller average premium size than our core book of business. Total in-force payrolls, one of the factors used in determining premium charges, increased 4.5% from $6.9 billion at March 31, 2009 to $7.2 billion at March 31, 2010. California continues to be our largest market, accounting for approximately $142.0 million, or 46.5% of our in-force premiums at March 31, 2010. This represents an increase of $22.4 million, or 18.7%, from approximately $119.6 million of in-force premiums in California, or 40.3% of total in-force premiums, at March 31, 2009.

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Premiums assumed from the NCCI residual markets for the three months ended March 31, 2010 decreased $1.1 million, or 44.0% to $1.4 million from $2.5 million for the same period in 2009.

Net Premiums Written. Net premiums written totaled $70.3 million for the three months ended March 31, 2010 compared to $72.0 million in the same period in 2009, representing a decrease of $1.7 million, or 2.4%. The decrease in net premiums written for the three months ended March 31, 2010 was primarily attributable to the decrease in gross written premiums mentioned above, offset in part by a decrease in ceded premiums written of $1.4 million primarily resulting from residual market business.

Net Premiums Earned. Net premiums earned totaled $60.6 million for the three months ended March 31, 2010 compared to $58.0 million for the same period in 2009, representing an increase of $2.6 million, or 4.5%. We record the entire annual policy premium as unearned premium when written and earn the premium over the life of the policy, which is generally twelve months. Consequently, the amount of premiums earned in any given year depends on when during the current or prior year the underlying policies were written and the actual reported payroll of the underlying policies. Our direct premiums earned increased $3.9 million, or 6.4%, to $64.9 million for the three months ended March 31, 2010 from $61.0 million for the same period in 2009 due to the increase in total in-force payrolls discussed above. Premiums earned in the three month period of 2010 were also reduced by net adjustments of $0.7 million on retrospectively rated policies due to favorable loss results on those policies.

The following is a summary of our top five markets based on direct premiums earned:

	Quarter Ended March 31,
	2010					2009
	Direct Premiums Earned		%			Direct Premiums Earned		%
	($ in thousands)
California	$	28,655		44.1	%	$	24,158		39.6	%
Louisiana		5,907		9.1			6,513		10.7
Illinois		3,967		6.1			4,614		7.6
Texas		3,749		5.8			4,304		7.1
Alaska		3,146		4.8			3,638		6.0
Total	$	45,424		69.9	%	$	43,227		71.0	%

Net premiums earned are also affected by premiums ceded under reinsurance agreements and premiums we involuntarily assumed from the NCCI residual markets. Ceded premiums earned for the three months ended March 31, 2010 totaled $6.4 million compared with $5.3 million for the same period in 2009, representing an increase of $1.1 million, or 20.1%. The majority of the increase related to reinsurance policies we entered into in 2008 and 2009 under which we cede 100% of NCCI assumed business for policy years 2009 and 2010. Earned premiums assumed from the NCCI residual markets for the three months ended March 31, 2010 decreased $0.2 million, or 7.5% to $2.1 million from $2.3 million for the same period in 2009.

Net Investment Income. Net investment income was $6.1 million for the three months ended March 31, 2010 compared to $5.6 million for the same period in 2009, representing an increase of $0.5 million, or 8.4%. Average invested assets for the three months ended March 31, 2010 increased $89.2 million, or 15.8%, from $566.3 million in 2009 to $655.5 million in 2010. Our yield on average invested assets for the three months ended March 31, 2010 was approximately 3.7% compared to approximately 4.0% for the same period in 2009.

Net Realized Gains. Net realized gains totaled $6.5 million for the three months ended March 31, 2010 compared to $11,000 for the same period in 2009. The realized gains in 2010 related to the sale of investment securities, and will enable us to utilize a portion of our capital loss carry forwards, which totaled approximately $15.3 million at December 31, 2009.

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Other Income. Other income totaled $0.8 million for the three months ended March 31, 2010 compared to $1.2 million for the same period in 2009, representing a decrease of $0.4 million, or 34.6%. Other income is derived primarily from the operations of PointSure (including BWNV), our wholesale broker and third party administrator, and THM, our provider of medical bill review, utilization review, nurse case management and related services.

Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses totaled $42.7 million for the three months ended March 31, 2010 compared to $38.6 million for the same period in 2009, representing an increase of $4.1 million, or 10.6%. Our net loss ratio, which is calculated by dividing loss and loss adjustment expenses less claims service income by premiums earned, for the three months ended March 31, 2010 was 70.2% compared to 66.1% for the same period in 2009. The increase in our net loss ratio for the three months ended March 31, 2010 was primarily attributable to an increase in the estimated loss ratio from 56.7% in the first quarter of 2009 to 61.5% in the same period of 2010. The increase in the estimated loss ratio was attributable to revised actuarial estimates based on the latest emerging loss experience, primarily in our state act businesses in California and Illinois.

Accident year 2010 is incomplete, as only three months of the year have been earned as of March 31, 2010. An expected loss ratio was established for each jurisdiction and type of loss (indemnity, medical, ALAE). The expected loss ratio of 61.5% for 2010 was multiplied by the booked accident year earned premium to produce the ultimate losses to date. The expected loss ratio selections are reviewed quarterly with each internal reserve study. Given the short experience period for the current accident year, the expected loss ratios are usually maintained at least through the first 12 months of the accident year and revised thereafter as the underlying data matures.

While there was some movement in the actuarial indicated ultimate values related to accident year 2009, it was not significant and, as a result, the carried ultimate loss estimates were not changed from the December 31, 2009 estimates.

For accident years 2008 and prior, the ultimate loss estimates at March 31, 2010 were slightly lower when compared to December 31, 2009 and resulted in a net decrease of our loss reserves of $0.1 million. Due to the longer tail nature of workers’ compensation claims, movements in an accident year’s ultimate loss estimate can be reasonably expected.

As of March 31, 2010, we had recorded a receivable of approximately $3.0 million for KEIC loss development under the adverse development cover we entered into with LMC on September 30, 2003, the date we acquired KEIC from LMC. We do not expect this receivable to have any material adverse effect on our future cash flows if LMC fails to perform its obligations under the adverse development cover. At March 31, 2010, we had access to approximately $3.8 million under the related collateralized reinsurance trust in the event that LMC fails to satisfy its obligations under the adverse development cover.

Underwriting, Acquisition and Insurance Expenses. Underwriting expenses totaled $18.8 million for the three months ended March 31, 2010, compared to $19.8 million for the same period in 2009, representing a decrease of $1.0 million, or 5.2%. Our net underwriting expense ratio, which is calculated by dividing underwriting, acquisition and insurance expenses less other service income by premiums earned, for the three months ended March 31, 2010 was 30.9%, compared to 34.0% for the same period in 2009. The decrease in the expense ratio for the three months ended March 31, 2010 was primarily the result of the $2.6 million increase in net premiums earned.

Interest Expense. Interest expense related to the surplus notes issued by our insurance subsidiary in May 2004 totaled $128,000 for the three months ended March 31, 2010, compared to $174,000 for the same period in 2009, representing a decrease of $46,000, or 26.4%. The surplus notes interest rate, which is calculated at the beginning of each interest payment period using the 3-month LIBOR plus 400 basis points, decreased from 5.2% at March 31, 2009 to 4.3% at March 31, 2010.

Other Expenses. Other expenses totaled $2.5 million for the three months ended March 31, 2010, compared to $2.1 million for same period in 2009, representing an increase of $0.4 million, or 20.2%. Other expenses result primarily from the operations of PointSure (including BWNV), which accounted for approximately $1.1 million of expenses in the quarter ended March 31, 2010 and 2009, and THM, which accounted for approximately $1.2 million of expenses for the three months ended March 31, 2010 compared to $0.8 million for the same period in 2009.

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Income Tax Expense. The effective tax rate for the three months ended March 31, 2010 was 25.6%, compared to 13.3% for the same period in 2009. Our effective tax rate for the period ended March 31, 2010 was lower than the statutory tax rate of 35.0% primarily as a result of tax exempt interest income. At March 31, 2010, approximately 50.4% of our investment portfolio was invested in tax-exempt municipal bonds, compared to approximately 54.1% at March 31, 2009. Our effective tax rate for the three month period ended March 31, 2009 was lower than the statutory tax rate of 35.0% primarily as a result of the reversal of a deferred tax valuation allowance which was originally established against our deferred tax asset at December 31, 2008. This amount was recorded as a reduction to income tax expense in the quarter ended March 31, 2009 and had the effect of increasing net income for that period by that amount. We subsequently concluded that the March 31, 2009 reversal should have been recorded in accumulated other comprehensive income rather than in income tax expense. The effect of this correction in the quarter ended June 30, 2009 was to increase income tax expense and to reduce net income by approximately $976,000.

Net Income. Net income was $7.6 million for the three months ended March 31, 2010, compared to $4.0 million for the same period in 2009, representing an increase of $3.6 million, or 90.2%. The increase in net income for the three months ended March 31, 2010 was primarily the result of $6.5 million in net realized gains and an increase of $2.6 million in net premiums earned. These amounts were offset by increases of $4.2 million in loss and loss adjustment expense and $2.0 million in income tax expense.

Liquidity and Capital Resources

Our principal sources of funds are underwriting operations, investment income and proceeds from sales and maturities of investments. Our primary use of funds is to pay claims and operating expenses, to purchase investments and to pay declared common stock dividends.

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 limited claims history, we have derived our expected future claim payments from industry and predecessor trends and included a provision for uncertainties. Our investment portfolio as of March 31, 2010 has an effective duration of 4.95 years with individual maturities extending to 30 years. Currently, we make claim payments from positive cash flows 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 with appropriate durations to match against expected future claim payments.

At March 31, 2010, our investment portfolio consisted of investment-grade fixed income securities with fair values subject to fluctuations in interest rates, as well as other factors such as credit. Our investment policy allows for investment in domestic and international equities up to 6% and 1.5%, respectively, of our statutory consolidated capital and surplus. All of the securities in our investment portfolio are accounted for as “available for sale” securities. While we have structured our investment portfolio to provide an appropriate matching of maturities with anticipated claim payments, if we decide or are required in the future to sell securities in a rising interest 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. Effective October 1, 2008 and as renewed on October 1, 2009, our reinsurance program provides for retention of the first $500,000 of each loss occurrence and the next $500,000 of losses per occurrence are 50% reinsured up to $85.0 million, subject to various deductibles and exclusions. Our reinsurance program that was effective October 1, 2007 to October 1, 2008, provides us with reinsurance protection for each loss occurrence in excess of $1.0 million, up to $75.0 million, subject to various deductibles and exclusions. Given industry and predecessor trends, we believe we are sufficiently capitalized to cover our retained losses.

SeaBright is a holding company with minimal unconsolidated revenue. As SeaBright pays dividends and has other capital needs in the future, we anticipate that it will be necessary for our insurance subsidiary to pay dividends to SeaBright. Our insurance subsidiary is required by law to maintain a certain minimum level of surplus on a statutory basis. The payment of such dividends will be regulated as described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II to our Annual Report on Form 10-K for the year ended December 31, 2009.

Our unaudited condensed consolidated net cash provided by operating activities for the three months ended March 31, 2010 was $18.2 million, compared to our cash flow from operations of $19.9 million for the same period in 2009. The decrease is mainly attributable to a decrease in premiums collections and an increase in paid losses, net of reinsurance.

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Net cash provided by investing activities was $6.6 million in the three months ended March 31, 2010, compared to $3.7 million of net cash used during the same period in 2009. The increase was primarily driven by lower net investment purchase activity (purchases, net of sales and maturities).

For the three months ended March 31, 2010 and 2009, financing activities used a total of $0.5 million due to the surrender of stock to cover tax withholding obligations associated with the vesting of restricted stock.

Contractual Obligations and Commitments

During the three months ended March 31, 2010, there were no material changes to our contractual obligations and commitments.

Off-Balance Sheet Arrangements

As of March 31, 2010, 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. Management considers some of these policies to be critical to the presentation of our financial results, since they require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the financial reporting date and throughout the period being reported upon. Some of the estimates result from judgments that can be subjective and complex, and consequently, actual results reflected in future periods might differ from these estimates.

The most critical accounting policies involve the reporting of unpaid loss and loss adjustment expenses including losses that have occurred but were not reported to us by the financial reporting date, the amount and recoverability of reinsurance recoverable balances, deferred policy acquisition costs, income taxes, the valuation of goodwill, the impairment of investment securities, earned but unbilled premiums and retrospective premiums. These critical accounting policies are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II of our Annual Report on Form 10-K for the year ended December 31, 2009.

Item 3. Quantitative and Qualitative Disclosures About Market 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 generally in fixed-income securities which are rated “A” or higher by Standard & Poor’s or another major rating agency. We also independently, and through our outside investment managers, monitor the financial condition of all of the issuers of fixed-income securities in the portfolio. To limit our exposure to risk, we employ stringent diversification rules that limit the credit exposure to any single issuer or business sector.

Interest Rate Risk

We had fixed-income investments with a fair value of $634.2 million at March 31, 2010 that are subject to interest rate risk compared with $626.6 million at December 31, 2009. 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.

Since December 31, 2009, there have been no material changes in the quantitative or qualitative aspect of our market risk profile. For additional information regarding our exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 16, 2010.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our first fiscal quarter of 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A. Risk Factors

During the quarter ended March 31, 2010, there were no material changes to the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 16, 2010.

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

The following table sets forth information in connection with purchases made by, or on behalf of, us or any affiliated purchaser, of shares of our common stock during the three months ended March 31, 2010:

(a)

Total Number of Shares (or Units) Purchased

(b)

Average Price Paid per Share (or Unit)

(c)

Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

(d)

Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

Month #1 (January 1, 2010 through January 31, 2010)

–

Month #2 (February 1, 2010 through February 28, 2010)

–

Month # 3 (March 1, 2010 through March 31, 2010)

48,107

10.94

–

We did not repurchase any of our common stock on the open market as part of a stock repurchase program during the three months ended March 31, 2010; however, our employees surrendered 48,107 shares of our common stock to satisfy the tax withholding obligation in connection with the vesting of restricted stock awards issued under our 2005 Plan.

Item 6. Exhibits

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

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SIGNATURES

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

	SEABRIGHT INSURANCE HOLDINGS, INC.

Date: May 10, 2010

	By:	/s/ John G. Pasqualetto
		John G. Pasqualetto
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Scott H. Maw
		Scott H. Maw
		Senior Vice President – Chief Financial Officer and Assistant Secretary
		(Principal Financial Officer)

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EXHIBIT INDEX

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

Exhibit
Number		Description

10.1		Employment offer letter with Scott H. Maw dated January 4, 2010 (incorporated by reference to the Company’s current report on Form 8-K (file no. 001-34204) filed on February 9, 2010)

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

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

32.1		Section 1350 Certification (Chief Executive Officer)

32.2		Section 1350 Certification (Chief Financial Officer)

Attached files

SeaBright Holdings, Inc. Reports

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