S-1/A

As filed with the Securities and Exchange Commission on January 3, 2005

No. 333-119111

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 4

to

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

SeaBright Insurance Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware	6331	56-2393241
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

2101 4th Avenue, Suite 1600

Seattle, WA 98121

(206) 269-8500

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

John G. Pasqualetto

Chairman, President and Chief Executive Officer

SeaBright Insurance Holdings, Inc.

2101 4th Avenue, Suite 1600

Seattle, WA 98121

(206) 269-8500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies of all communications, including communications sent to agent for service, should be sent to:

James S. Rowe, Esq.
Kirkland & Ellis LLP
200 East Randolph Drive
Chicago, Illinois 60601
(312) 861-2000 J. Brett Pritchard, Esq.
Lord, Bissell & Brook LLP
115 South LaSalle Street
Chicago, Illinois 60603
(312) 443-0700

      Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

      If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: o

      If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

      If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

      If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

      If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

CALCULATION OF REGISTRATION FEE

Title of Each Class of	Proposed Maximum Aggregate	Amount of
Securities to be Registered	Offering Price(1)(2)	Registration Fee
Common Stock, par value $0.01 per share	$86,250,000	$10,927.88(3)

(1)	Includes amount attributable to shares of common stock that may be purchased by the underwriters under an option to purchase additional shares at the public offering price less the underwriters discount.
(2)	Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(3)	Previously paid.

    The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities, in any jurisdiction where the offer or sale is not permitted, or would require registration or qualification under the securities laws of the jurisdiction.

SUBJECT TO COMPLETION, DATED JANUARY 3, 2005

7,500,000 Shares

Common Stock

        This is our initial public offering of common stock. We are offering 7,500,000 shares of our common stock in an underwritten offering.

      Prior to this offering, there has been no public market for our common stock. We currently anticipate the initial public offering price to be between $9.00 and $11.00 per share. We have applied to list our common stock on the Nasdaq National Market under the symbol “SEAB.”

       Investing in our common stock involves risks. See “Risk Factors” beginning on page 12 to read about factors you should consider before buying our common stock.

	Per Share	Total
Public offering price	$	$
Underwriting discount*
Proceeds, before expenses, to us

*  See “Underwriting” on page 113 for a description of the underwriters’ compensation.

      To the extent that the underwriters sell more than 7,500,000 shares of common stock, we have granted the underwriters a 30-day option to purchase up to 1,125,000 additional shares of common stock at the public offering price, less the underwriting discount, to cover over-allotments, if any.

      Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

      The underwriters expect to deliver the shares of common stock to purchasers on or about                     , 2005.

Friedman Billings Ramsey

   Piper Jaffray

Cochran, Caronia & Co.

The date of this prospectus is                     , 2005.

TABLE OF CONTENTS

	Page
Prospectus Summary		1
Risk Factors		12
Certain Important Information		25
Note on Forward-Looking Statements		26
The Acquisition		27
Use of Proceeds		30
Dividend Policy		31
Capitalization		32
Dilution		33
Unaudited Pro Forma Financial Information		34
Selected Financial Information		38
Management’s Discussion and Analysis of Financial Condition and Results of Operations		40
Business		61
Management		92
Principal Stockholders		103
Certain Relationships and Related Transactions		105
Description of Capital Stock		107
Shares Eligible for Future Sale		111
Underwriting		113
Legal Matters		115
Experts		115
Where You Can Find More Information		115
Index to Consolidated Financial Statements		F-1
Form of Underwriting Agreement
Form of Amended and Restated Certificate of Incorporation
Form of Amended and Restated By-Laws
Opinion of Kirkland & Ellis LLP
2005 Long-Term Equity Incentive Plan
Form of Stock Option Award Agreement
Consent of KPMG LLP

PROSPECTUS SUMMARY

      This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the “Risk Factors” and “Note on Forward-Looking Statements” sections and our consolidated financial statements and the notes to those financial statements before making an investment decision.

Overview

      We are a specialty provider of multi-jurisdictional 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.

      We are able to offer these products as a result of our highly specialized underwriting, loss control and claims management expertise. We consider all of our customers on an individual basis and we conduct financial evaluations, loss exposure analyses and review of management safety controls to respond to distinctive risk characteristics. Competition in our niche markets tends to focus less on price and more on availability, service and other value-based considerations.

      We currently provide workers’ compensation insurance to customers in the following three targeted markets:

•  Maritime. We focus on employers with complex coverage needs over land, shore and navigable waters. This involves underwriting liability exposures subject to various state and federal statutes and applicable maritime common law. Our customers in this market are engaged primarily in ship building and repair, pier and marine construction and stevedoring. These customers generated $27.5 million, or 33.8%, of our direct premiums written during the nine months ended September 30, 2004. Our direct premiums written refers to all premiums billed by us during a specified policy period.

•  Alternative Dispute Resolution. We provide customized solutions to employers who are party to collectively bargained workers’ compensation agreements that provide for settlement of claims out of court in a negotiated process. This product currently is focused on the needs of the construction industry in California. These customers generated $31.6 million, or 38.8%, of our direct premiums written during the nine months ended September 30, 2004.

•  State Act. We underwrite coverage for benefits that employers are obligated to pay specifically under state workers’ compensation laws. We primarily target states that we believe are underserved, such as California, Hawaii and Alaska. These customers generated $22.4 million, or 27.4%, of our direct premiums written during the nine months ended September 30, 2004.

      SeaBright 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, which we refer to as the Acquisition. In the Acquisition, we acquired the renewal rights and substantially all of the operating assets and employees of Eagle Pacific Insurance Company and Pacific Eagle Insurance Company, which we collectively refer to as Eagle or the Eagle entities. Eagle Pacific began writing specialty workers’ compensation insurance almost 20 years ago. 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.

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      Upon completion of the Acquisition, our insurance company subsidiary received a rating of “A-” (Excellent) from A.M. Best Company, which is the fourth highest of its 15 rating levels. A.M. Best ratings reflect A.M. Best’s opinion of an insurance company’s operating performance and ability to meet its obligations to policyholders, and are an important factor in establishing the competitive position of insurance companies.

      Our chairman, chief executive officer and president joined Eagle in December 1998, and other senior members of our current management joined Eagle in 1999. The combined ratio on the Eagle book of business has improved from 176% in 1999, the first year in which our current management was responsible for the Eagle book of business, to 88% in pro forma 2003. By comparison, the industry average combined ratio was 115% in 1999 and 108% in 2003. We believe the improvement in the combined ratio has resulted primarily from our focus on the niche markets in which we currently operate and our emphasis on larger accounts and fewer customers. For the four-year period beginning with 2000 through pro forma 2003, the gross premiums written on our book of business increased at an average annual rate of 27%. For the nine months ended September 30, 2004, we had gross premiums written of $86.1 million, total revenues of $54.7 million and net income of $4.0 million. Our gross premiums written refers to our direct premiums written plus assumed premiums. Assumed premiums are premiums that we have received from another company under a reinsurance agreement or from an authorized state mandated pool.

Competitive Strengths

      We believe we enjoy the following competitive strengths:

•  Niche Product Offering. Our specialized workers’ compensation insurance products in maritime, alternative dispute resolution and selected state act markets enable us to address the needs of an underserved market. Our management team and staff have extensive experience serving the specific and complex needs of these customers.

•  Specialized Underwriting Expertise. We identify individual risks with complex workers’ compensation needs, such as multi-jurisdictional coverage, and negotiate customized coverage plans to meet those needs. Our underwriters average over 16 years of experience underwriting workers’ compensation coverage. Our specialized underwriting expertise enables us to align our interests with those of our insureds by encouraging the insured to bear a portion of the losses sustained under the policy. Approximately 35% of our direct premiums written for the nine months ended September 30, 2004 came from such arrangements. We have achieved a loss ratio of 67.5% for the nine months ended September 30, 2004.

•  Focus on Larger Accounts. We target a relatively small number of larger, more safety-conscious employers (businesses with 50 to 400 employees) within our niche markets. We have approximately 225 customers, with an average estimated annual premium size of approximately $436,000 at September 30, 2004. We believe this focus, together with our specialized underwriting expertise, increases the profitability of our book of business primarily because the more extensive loss history of larger customers enables us to better predict future losses, allowing us to price our policies more accurately. In addition, larger customers tend to purchase policies whose premium varies based on loss experience, and therefore have aligned interests with us. Our focus on larger accounts also enables us to provide individualized attention to our customers, which we believe leads to higher satisfaction and long-term loyalty.

•  Proactive Loss Control and Claims Management. We consult with employers on workplace safety, accident and illness prevention and safety awareness training. We also offer employers medical and disability management tools that help injured employees return to work more quickly. Our strong focus on proven claims management practices helps to minimize attorney involvement and to expedite the settlement of valid claims. In addition, our branch office network affords us extensive local knowledge of claims and legal environments, further enhancing our ability to achieve favorable results on claims. Our claims managers and claims examiners are highly experienced, with an average of over 17 years in the workers’ compensation insurance industry.

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•  Established Book of Business without Associated Liabilities. In the Acquisition, we acquired renewal rights with respect to policies written by the Eagle entities; we did not acquire any in-force Eagle policies or historical liabilities associated with those policies. Although we did not write our first policy until October 2003, we have been able to create an established book of business comprised primarily of policies with customers with whom we have long-standing relationships and with operations and claims histories that we know well. We believe this knowledge has allowed us to more appropriately price our policies.

•  Experienced Management Team. The members of our senior management team, consisting of John G. Pasqualetto, Richard J. Gergasko, Joseph S. De Vita, Richard W. Seelinger, Marc B. Miller, M.D. and Jeffrey C. Wanamaker, average over 25 years of insurance industry experience, and over 20 years of workers’ compensation insurance experience.

•  Strong Distribution Network. We market our products through independent brokers and through PointSure Insurance Services, Inc. (“PointSure”), our in-house wholesale broker and third party administrator. This two-tiered distribution system provides us with flexibility in originating premiums and managing our commission expense. PointSure produced approximately 24% of our direct premiums written and 20% of our customers in the nine months ended September 30, 2004. We are highly selective in establishing relationships with independent brokers. There were approximately 80 independent brokers appointed by Eagle at September 30, 2003 compared with 67 independent brokers appointed by us at September 30, 2004. In addition, we negotiate commissions for the placement of all risks that we underwrite, either through independent brokers or through PointSure. For the nine months ended September 30, 2004, our ratio of commissions to net premiums earned was 6.0%. Our net premiums earned refers to that portion of our net premiums written during a given period that are actually recognized as revenue during that period.

Strategy

      We plan to pursue profitable growth and favorable returns on equity through the following strategies:

•  Expand Business in Core Markets. We wrote approximately 57% of our direct premiums in California, 29% in Hawaii, Washington and Alaska and 10% in Pennsylvania, Texas and Louisiana for the nine months ended September 30, 2004. We believe that the proceeds from this offering will provide us with the additional capital that we need to increase the amount of insurance business that we are able to write in these and other markets. We believe that our product offerings, together with our specialized underwriting expertise and niche market focus, will position us to increase our market share of the business that we write in our core and other target markets.

•  Expand Territorially. We wrote approximately 86% of our direct premiums for the first nine months of 2004 in the top four states where we do business. We believe that our insurance products and services offer the potential for strong demand beyond these states. We believe our experience with maritime coverage issues in the states in which we now operate can be readily applied to other areas of the country that we do not now serve, and ten other states in addition to California have enabling legislation for collectively bargained alternative dispute resolution, or ADR, that is similar to the ADR legislation in California. We plan to expand our business by writing premiums in several of the 43 states where we are licensed but do not currently write business, particularly in the Great Lakes and the East Coast regions.

•  Generate Fee and Commission Income. We intend to expand our ability to generate non-risk bearing fee and commission income by utilizing the expertise of our in-house wholesale broker and third party administrator, PointSure, to serve additional insurance companies.

•  Focus on Profitability. We intend to continue our focus on underwriting discipline and profitability. We plan to do so by selecting risks prudently, by pricing our products appropriately and by focusing on larger accounts in our target markets.

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•  Continue Making Technological Improvements. Our in-house technology department has developed effective, customized analytical tools that we believe significantly enhance our ability to write profitable business and cost-effectively administer claims. In addition, these tools also allow for seamless connectivity with our branch offices. We intend to continue making investments in advanced and reliable technological infrastructure. Our technology is scalable and can be modified at minimal cost to accommodate our growth.

Our Challenges

      As part of your evaluation of our business, you should take into account the challenges we face in implementing our strategies, including the following:

•  Our premiums and loss reserves may be inadequate to cover our actual losses. If we fail to accurately assess the risks associated with the businesses that we insure, we may fail to establish appropriate premium rates, and our unpaid loss and loss adjustment expenses may be inadequate to cover our actual losses. Unpaid losses reflect the estimated cost of claims payments and the related expenses that we will ultimately be required to pay in respect of the insurance premiums we have earned. Loss adjustment expenses are expenses resulting from and associated with the handling of claims, including but not limited to investigation, adjustment and defense of claims. In this prospectus, “loss” and “unpaid loss” include loss adjustment expenses, unless otherwise noted. In this prospectus, we refer to our unpaid loss and loss adjustment expenses as our loss reserves. Our loss reserves are estimates and are inherently uncertain. If proven to be inadequate to cover our actual losses, any changes in our estimates will be reflected in our results of operations during the period in which the changes are made, with increases in our loss reserves resulting in a charge to our earnings.

•  A downgrade in our A.M. Best rating would negatively affect our business. We believe that the A.M. Best rating of “A–” (Excellent) of our insurance subsidiary has a significant influence on our business and that many brokers and customers would not place business with us if we experience a downgrade in our rating. As a result, a downgrade in our rating could cause a substantial reduction in the number of policies we write, which would have a material adverse effect on our results of operations and our financial position.

•  The concentration of our business in California, Hawaii and Alaska makes us susceptible to the economic conditions and risks from natural perils in those states. Our geographic concentration ties our performance to the business, economic and regulatory conditions in California, Hawaii and Alaska. Our business is concentrated in California (56.9% of direct premiums written for the nine months ended September 30, 2004), Alaska (13% of direct premiums written for the same period) and Hawaii (9.8% of direct premiums written for the same period). Because our business is concentrated in this manner, we may be exposed to economic and regulatory risks or risks from natural perils that are greater than the risk associated with greater geographic diversification.

•  Our business is subject to extensive regulation. Our insurance business is subject to extensive regulation by the applicable federal and state agencies in the jurisdictions in which we operate. 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 may wish to take to increase our profitability.

•  An inability to obtain or collect on our reinsurance protection could negatively affect our business. We buy reinsurance protection to protect us from the impact of large losses. The availability, amount and cost of reinsurance depends on market conditions and may vary significantly. Higher reinsurance costs, more restrictive terms or decreased availability of reinsurance could materially adversely affect our business, financial condition and results of operations.

•  We may be negatively impacted if LMC is placed into receivership. The assets that SeaBright acquired in the Acquisition were acquired from Lumbermens Mutual Casualty Company (“LMC”)

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and other affiliates of the Kemper companies. LMC and its affiliates have traditionally offered a wide array of personal, risk management and commercial property and casualty insurance products. LMC and its insurance company affiliates are financially distressed and are currently operating under a three-year “run off” plan. “Run off” is the professional management of an insurance company’s discontinued, distressed or non-renewed lines of insurance and associated liabilities outside of a judicial proceeding. In the event LMC is placed into receivership, we could lose our rights to fee income and certain protective arrangements that were established in connection with the Acquisition, our reputation and credibility could be adversely affected because our customers may not readily distinguish us from LMC and its affiliates and we could be subject to claims under applicable voidable preference and fraudulent transfer laws. One of the protective arrangements is the adverse development cover. At September 30, 2004, the liability of LMC under the adverse development cover was $2.5 million. LMC initially funded a trust account with $1.6 million to support its obligations under the adverse development cover. In September 2004, we and LMC retained an independent actuary to determine the appropriate amount of loss reserves that are subject to the adverse development cover as of September 30, 2004. In accordance with the terms of the protective arrangements that we have established with LMC, on December 23, 2004, LMC deposited into the trust account an additional approximately $3.2 million, resulting in a total balance in the trust account of approximately $4.8 million. We are waiting to receive a final report from the independent actuary as to the final amount required to be held in the trust account. In the event that LMC’s total obligations under the adverse development cover increase and LMC is placed into receivership before the trust is fully funded, we will be at risk for the difference.

      For further discussion of these and other challenges we face, see “Risk Factors.”

Industry Background

      Workers’ compensation was the fifth-largest property and casualty insurance line in the U.S. in 2003, according to A.M. Best. The workers’ compensation industry is estimated to have written over $42 billion in premium for 2003 which accounted for approximately 10% of the estimated $406 billion in net premiums written for the property and casualty industry in 2003, according to the National Council on Compensation Insurance, Inc. (“NCCI”). According to A.M. Best, direct premiums written in 2003 for the workers’ compensation industry was approximately $50 billion, and direct premiums written for the property and casualty industry as a whole was approximately $450 billion. Net premiums written refers to gross premiums written for a given period less premiums transferred to reinsurers during that period. Premium volume in the workers’ compensation industry was up 13% in 2003 compared to 2002, while the entire property and casualty industry experienced a 10% increase in net premiums written in 2003 compared to 2002, according to NCCI. Based on our internal calculations using data collected from NCCI, independent state rating bureaus, The Bureau of National Affairs, Inc., the Workers’ Compensation Insurance Rating Bureau, the California Department of Insurance, historical averages and information compiled internally by our staff, we believe the niches in which we operate account for approximately $8.4 billion in net premiums written in 2003. We estimate based on these internal calculations that $1.3 billion of these premiums come from the maritime market, $3.9 billion from the ADR market and $3.2 billion from our targeted states in the state act workers’ compensation market.

      We believe the workers’ compensation sector is currently recovering from a period characterized by deteriorating operating profitability caused primarily by rising medical costs, rising indemnity costs, poor investment performance and a reduction in market capacity. We believe the California workers’ compensation market, the largest workers’ compensation market in the United States, has faced even greater challenges than the United States workers’ compensation market as a whole. During the period from 1994 to 2001, we believe that rising loss costs, despite declines in loss frequency, severely eroded underwriting profitability in the workers’ compensation insurance industry.

      We believe the challenges faced by the workers’ compensation industry during this period have created significant opportunity for workers’ compensation insurers to increase the amount of business that they write. 2002 marked the first year in five years that private carriers in the property and casualty

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industry experienced an increase in annual after-tax returns on surplus, including capital gains, according to NCCI. Workers’ compensation industry calendar year combined ratios declined for the first time in seven years, falling from 122% in 2001 (with 1.9% attributable to the September 11, 2001 terrorist attacks) to 111% in 2002 and an estimated 108% in 2003 as the rate of increase in medical and indemnity claim costs slowed. Medical claim costs increased 9% in 2003 from 2002, compared to increases of 12% in 2001 and 11% in 2002; indemnity claim costs increased 4.5% in 2003 from 2002, compared to 7.3% in 2001 and 6.0% in 2002. We believe that opportunities remain for us to provide needed underwriting capacity at attractive rates and upon terms and conditions more favorable to insurers than in the past.

The Acquisition

      Our senior management assumed responsibility for the business of our predecessor, Eagle, in 1999. Eagle Pacific Insurance Company began writing specialty workers’ compensation insurance in the maritime sector almost 20 years ago and was acquired, along with Pacific Eagle Insurance Company, in July 1998 by LMC.

      We believe the growth of our predecessor’s business was limited due to rating downgrades at LMC. Current members of our senior management and entities affiliated with Summit Partners led a buyout in September 2003 to acquire from LMC and certain of its affiliates the renewal rights and substantially all of the operating assets and approximately 95 employees of the Eagle business, in a transaction we refer to as the Acquisition. Summit Partners is a leading private equity and venture capital firm that has raised in excess of $5.5 billion in capital and invested in more than 250 businesses in a wide variety of industries.

      As part of the Acquisition, we acquired the following:

•  Renewal Rights. We acquired the right to seek to renew Eagle’s insurance policies, which produced pro forma 2003 gross premiums written of $95.2 million and a combined ratio of 88.6%.

•  A Fully-Operational Infrastructure. We hired experienced Eagle employees with specialized underwriting, pricing and claims expertise, and inherited a number of valuable broker and customer relationships. We also acquired a variety of systems and other operating assets.

•  PointSure. We acquired PointSure, a wholesale broker and third-party claims administrator. PointSure produced approximately 23.4% of our 2003 pro forma gross premiums written and acts as our in-house underwriting agency.

•  Insurance Licenses. We also acquired Kemper Employers Insurance Company (“KEIC”), a shell insurance subsidiary of LMC with no employees at the time of the Acquisition. KEIC was acquired solely for its workers’ compensation licenses in 43 states and the District of Columbia and for its certification with the United States Department of Labor.

      In the Acquisition, SeaBright paid approximately $6.5 million for KEIC’s insurance licenses, Eagle’s renewal rights, internally developed software and other assets and PointSure and approximately $9.2 million for KEIC’s statutory surplus and capital, for a total purchase price of $15.7 million. In order to fund the Acquisition, Summit Partners, certain co-investors and members of our management team invested approximately $45 million in SeaBright and received convertible preferred stock in return. Following the Acquisition, SeaBright used the invested funds to contribute $30 million in additional capital to KEIC. KEIC was renamed “SeaBright Insurance Company” and received an “A–” (Excellent) rating from A.M. Best following the completion of the Acquisition.

      Prior to the Acquisition, KEIC had a limited operating history in California writing small business workers’ compensation policies. As of September 30, 2003, KEIC had established loss reserves in the amount of approximately $16 million for these policies. In an effort to minimize our exposure to the adverse development of loss reserves, in connection with the Acquisition, we: (1) entered into an agreement with LMC, which we refer to as the commutation agreement, releasing LMC from certain reinsurance obligations to KEIC in exchange for a current cash payment of approximately $13 million; (2) established an arrangement requiring us and LMC to indemnify each other with respect to

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developments in KEIC’s loss reserves existing at the date of the Acquisition, which we refer to as the adverse development cover; (3)established a trust account initially funded with $1.6 million (and increased by LMC to $4.8 million on December 23, 2004) to support LMC’s obligations under the adverse development cover, which we refer to as the collateralized reinsurance trust; and (4) placed $4 million of the Acquisition purchase price in an escrow account. For a discussion of these arrangements, see “The Acquisition” below.

Corporate Structure

      Our current corporate structure is as follows:

      SeaBright Insurance Company is our insurance company subsidiary and a specialty provider of multi-jurisdictional workers’ compensation insurance. PointSure currently acts primarily as an in-house wholesale broker and third party administrator for SeaBright Insurance Company.

      Our principal executive offices are located at 2101 4th Avenue, Suite 1600, Seattle, Washington 98121, and our telephone number at that location is (206) 269-8500. Our website is www.sbic.com. The information on our website should not be construed to be part of this prospectus.

The Offering

Shares of common stock offered by us	7,500,000 shares
Shares of common stock to be outstanding after the offering	15,277,818 shares
Over-allotment shares of common stock offered by us	1,125,000 shares
Use of proceeds	We estimate our net proceeds from this offering will be approximately $67.0 million, based on an assumed initial public offering price of $10.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting the underwriting discounts and commissions and estimated offering expenses we will pay. We estimate that our net proceeds will be approximately $77.4 million if the underwriters exercise their over-allotment option in full. We intend to use approximately 95% of the net proceeds of this offering to contribute capital to our insurance company subsidiary and the remaining 5% for general corporate purposes, including to support the growth of PointSure.

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Dividend policy

We do not expect to pay any cash dividends on our common stock for the foreseeable future. We currently intend to retain any additional future earnings to finance our operations and growth. Any future determination to pay cash dividends on our common stock will be at the discretion of our board of directors and will be dependent on our earnings, financial condition, operating results, capital requirements, any contractual, regulatory and other restrictions on the payment of dividends by our subsidiaries to us, and other factors that our board of directors deems relevant.

Proposed Nasdaq Stock Market symbol

“SEAB”

      The number of shares of common stock shown to be outstanding after the offering assumes the conversion of each share of our convertible preferred stock into 15.299664 shares of common stock and excludes:

•  1,125,000 shares that may be issued pursuant to the underwriters’ over-allotment option;

•  480,027 shares that may be issued pursuant to employee and director stock options, each at an exercise price of $6.54 per share;

•  309,818 shares that may be issued pursuant to employee and director stock options granted in connection with this offering, each at an exercise price equal to the initial price to the public; and

•  737,937 additional shares available for future issuance under our stock option and incentive plans.

      Unless otherwise stated, in this prospectus:

•  all figures assume no exercise of the underwriters’ over-allotment option; and

•  all share numbers for periods following completion of, or giving effect to, this offering assume the conversion of each share of SeaBright’s convertible preferred stock into 15.299664 shares of common stock upon the closing of this offering.

Abandoned Private Offering

      Beginning on June 21, 2004, we engaged in preliminary discussions with a select group of accredited investors concerning a possible offering of $25 million to $30 million in preferred securities in a private placement transaction to be completed in reliance upon Rule 506 under Regulation D under the Securities Act of 1933. We abandoned this potential private offering and terminated all offering activity in connection with it on July 23, 2004 in order to pursue this offering. No offers to buy or indications of interest given in the preliminary private offering discussions were accepted. This prospectus supersedes any offering materials used in the abandoned private offering.

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Recent Developments

Results for the three months ended September 30, 2004, June 30, 2004, and March 31, 2004.

      The following table sets forth summary unaudited financial information for the Company for the three month periods ended September 30, 2004, June 30, 2004 and March 31, 2004.

	Three Months Ended
	September 30, 2004			June 30, 2004			March 31, 2004
	(Unaudited)			(Unaudited)			(Unaudited)
	($ in thousands)
Income Statement Data:
Gross premiums written	$	22,486		$	39,924		$	23,686
Net premiums written		25,285			34,429			20,108
Earned premiums		24,038			15,651			8,513
Net investment income		693			497			448
Net realized gain (loss) on investments		—			(10	)		27
Claim service income		728			785			785
Other service income		132			208			387
Other revenue		492			755			553
Total revenues		26,083			17,885			10,713
Other expenses		1,217			1,335			1,015
Net income		2,695			967			354
Balance Sheet Data
Investment securities available-for-sale, at fair market value	$	95,450		$	69,181		$	56,567
Cash and cash equivalents		9,591			27,484			7,522
Total stockholders’ equity		55,318			51,338			46,416
Selected Insurance Ratios:
Net loss ratio(1)		67.1	%		67.6	%		68.3	%
Net underwriting expense ratio(2)		17.3	%		22.1	%		25.4	%
Net combined ratio(3)		84.4	%		89.7	%		93.7	%
Annualized return on average equity		20.2	%		7.9	%		3.1	%

(1)	The net loss ratio is calculated by dividing loss and loss adjustment expenses for the current accident year less claims service income by the current year’s net premiums earned.
(2)	The underwriting expense ratio is calculated by dividing the net underwriting expenses less other service income by the current year’s net premiums earned.
(3)	The net combined ratio is the sum of the net loss ratio and the net underwriting expense ratio.

9

Summary Financial Information

      The following table sets forth summary financial information for the Company and its predecessor for the periods ended and as of the dates indicated.

      We derived the summary balance sheet and income statement data as of and for the nine months ended September 30, 2004 from our unaudited financial statements, which include all adjustments, consisting of normal recurring adjustments, that management considers necessary for a fair presentation of our financial position and results of operations for the period presented. We derive the summary income statement data for the three months ended December 31, 2003 from our audited consolidated financial statements included elsewhere in this prospectus, which have been prepared in accordance with U.S. generally accepted accounting principles. We derived the summary income statement data for the nine months ended September 30, 2003 and for the years ended December 31, 2002 and 2001 from our predecessor’s audited financial statements included elsewhere in this prospectus, which have been prepared in accordance with U.S. generally accepted accounting principles. We derived the summary income statement data for the years ended December 31, 2000 and 1999 from our predecessor’s unaudited financial statements not included in this prospectus. These historical results are not necessarily indicative of results to be expected from any future period. You should read the following summary financial information together with the other information contained in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus, as well as “Unaudited Pro Forma Financial Information”.

		Company					Predecessor
				Three
		Nine Months		Months			Nine Months
		Ended		Ended			Ended		Year Ended December 31,
		September 30,		December 31,			September 30,
		2004		2003(1)			2003		2002			2001			2000		1999
		(Unaudited)													(Unaudited)		(Unaudited)
		($ in thousands, except per share data)
Income Statement Data
Gross premiums written		$	86,096	$	22,154		$	70,717	$	106,051		$	73,194		$	62,878	$	36,541
Ceded premiums written			6,275		2,759			4,079		86,983			59,509			47,472		28,985
Net premiums written		$	79,821	$	19,395		$	66,638	$	19,068		$	13,685		$	15,406	$	7,556
Premiums earned		$	48,201	$	3,134		$	36,916	$	17,058		$	12,638		$	8,264	$	11,418
Net investment income			1,638		313			1,735		3,438			3,388			2,512		5,406
Net realized gains (loss) on investments			17		(4	)		14		(4,497	)		(484	)		7		(2,867	)
Claim service income			2,298		663			698		1,169			954			—
Other service income			727		561
Other revenue			1,800		655			1,514		1,152			3,773			6,035		11,698
	Total revenues		54,681		5,322			40,877		18,320			20,269			16,818		25,655
Loss and loss adjustment expenses			34,823		3,024			25,395		4,992			8,464			4,496		13,630
Underwriting, acquisition, and insurance expenses(2)			10,507		1,789			6,979		3,681			3,409			2,975		6,420
Service expenses			—		—			—		—			—
Other expenses			3,567		812			1,791		3,339			2,123			5,522		5,283
	Total expenses		48,897		5,625			34,165		12,012			13,996			12,993		25,333
Income (loss) before federal income taxes			5,784		(303	)		6,712		6,308			6,273			3,825		322
Provision (benefit) for federal income taxes			1,768		(101	)		1,996		3,018			2,676			1,384		1,082
Net income (loss)		$	4,016	$	(202	)	$	4,716	$	3,290	(7)	$	3,597		$	2,441	$	(760	)

10

	Company						Predecessor
				Three
	Nine Months			Months			Nine Months
	Ended			Ended			Ended			Year Ended December 31,
	September 30,			December 31,			September 30,
	2004			2003(1)			2003			2002			2001			2000			1999
	(Unaudited)															(Unaudited)			(Unaudited)
	($ in thousands, except per share data)
Fully diluted earnings per common share equivalents	$	0.55
Diluted weighted average of common share equivalents outstanding		7,256,156
Selected Insurance Ratios
Current accident year loss ratio(3)		67.5	%		75.3	%		71.0	%		71.3	%		68.9	%		103.9	%		119.4%
Prior accident year loss ratio(4)								(4.1	%)		(48.8	%)		(9.4	%)		(49.5	%)
Net loss ratio		67.5	%		75.3	%		66.9	%		22.5	%		59.5	%		54.4	%		119.4%
Net underwriting expense ratio(5)		20.3	%		39.2	%		18.9	%		21.6	%		27.0	%		36.0	%		56.2%
Net combined ratio(6)		87.8	%		114.5	%		85.8	%		44.1	%		86.5	%		90.4	%		175.6%

(1)	There was no activity for SeaBright from June 19, 2003, its date of inception, through September 30, 2003.
(2)	Includes acquisition expenses such as commissions, premium taxes and other general administrative expenses related to underwriting operations in our insurance subsidiary and are included in the amortization of deferred policy acquisition costs.
(3)	The current accident year loss ratio is calculated by dividing loss and loss adjustment expenses for the current accident year less claims service income by the current year’s net premiums earned.
(4)	The prior accident year loss ratio is calculated by dividing the change in the loss and loss adjustment expenses for the prior accident years by the current year’s net premiums earned.
(5)	The underwriting expense ratio is calculated by dividing the net underwriting expenses less other service income by the current year’s net premiums earned.
(6)	The net combined ratio is the sum of the net loss ratio and the net underwriting expense ratio.
(7)	Net income before change in accounting principle. Our predecessor adopted Statement of Financial Accounting Standards (SFAS) No. 142 on January 1, 2002. Upon adoption of SFAS No. 142 our predecessor recognized an impairment loss of $4,731,000 related to goodwill.

	Company
	As of
	September 30,
	2004
	(Unaudited)
	($ in thousands)
Selected Balance Sheet Data
Investment securities available-for-sale, at fair market value	$	95,450
Cash and cash equivalents		9,591
Reinsurance recoverables		10,116
Prepaid reinsurance		4,491
Total assets		185,200
Unpaid loss and adjustment expense		51,395
Unearned premium		49,591
Total stockholders’ equity		55,319

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RISK FACTORS

      An investment in our common stock involves a number of risks. You should carefully consider the following information about these risks, together with the other information contained in this prospectus, before investing in our common stock. 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.

Risks Related to Our Business

Our loss reserves are based on estimates and may be inadequate to cover our actual losses.

      If we fail to accurately assess the risks associated with the businesses that we insure, our loss reserves may be inadequate to cover our actual losses and we may fail to establish appropriate premium rates. We establish loss reserves in our financial statements that represent an estimate of amounts needed to pay and administer claims with respect to insured events that have occurred, including events that have not yet been reported to us. Loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of liability. Accordingly, our loss reserves may prove to be inadequate to cover our actual losses. Any changes in these estimates are reflected in our results of operations during the period in which the changes are made, with increases in our loss reserves resulting in a charge to our earnings.

      Our loss reserve estimates are based on estimates of the ultimate cost of individual claims and on actuarial estimation techniques. Several factors contribute to the uncertainty in establishing these estimates. Judgment is required in actuarial estimation to ascertain the relevance of historical payment and claim settlement patterns under current facts and circumstances. Key assumptions in the estimation process are the average cost of claims over time, which we refer to as severity trends, including the increasing level of medical, legal and rehabilitation costs, and costs associated with fraud or other abuses of the medical claim process. If there are unfavorable changes in severity trends, we may need to increase our loss reserves, as described above.

Our geographic concentration ties our performance to the business, economic and regulatory conditions in California, Hawaii and Alaska. Any single catastrophe or other condition affecting losses in these states could adversely affect our results of operations.

      Our business is concentrated in California (56.9% of direct premiums written for the nine months ended September 30, 2004), Alaska (13% of direct premiums written for the same period) and Hawaii (9.8% of direct premiums written for the same period). Accordingly, unfavorable business, economic or regulatory conditions in those states could negatively impact our business. For example, California, Hawaii and Alaska are states that are susceptible to severe natural perils, such as tsunamis, earthquakes and hurricanes, along with the possibility of terrorist acts. Accordingly, we could suffer losses as a result of catastrophic events in those states. Although geographic concentration has not adversely affected our business in the past, we may in the future be exposed to economic and regulatory risks or risks from natural perils that are greater than the risks faced by insurance companies that conduct business over a greater geographic area. This concentration of our business could have a material adverse effect on our financial condition or results of operations.

If we are unable to obtain or collect on our reinsurance protection, our business, financial condition and results of operations could be materially adversely affected.

      We buy reinsurance protection to protect us from the impact of large losses. Reinsurance is an arrangement in which an insurance company, called the ceding company, transfers insurance risk by sharing premiums with another insurance company, called the reinsurer. Conversely, the reinsurer receives or assumes reinsurance from the ceding company. We currently participate in a workers’ compensation and employers’ liability excess of loss reinsurance treaty program covering all of the business that we write pursuant to which our reinsurers are liable for 100% of the ultimate net losses in excess of $500,000 for the business we write, up to a $100 million limit. The treaty program provides coverage in several layers. See “Business — Reinsurance.” The availability, amount and cost of reinsurance depend on market

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conditions and may vary significantly. As a result of catastrophic events, such as the events of September 11, 2001, we may incur significantly higher reinsurance costs, more restrictive terms and conditions, and decreased availability. For example, the second layer of our current excess of loss reinsurance treaty program provides for a sub-limit on our reinsurers’ maximum liability in the amount of $8 million for losses caused by acts determined by the U.S. Office of Homeland Security to be terrorist acts, and the third and fourth layers of our reinsurance program expressly do not cover losses caused by any act of terrorism, as defined in the Terrorism Risk Insurance Act of 2002. Because of these sub-limits and exclusions, which are common in the wake of the events of September 11, 2001, we have significantly greater exposure to losses resulting from acts of terrorism. The incurrence of higher reinsurance costs and more restrictive terms could materially adversely affect our business, financial condition and results of operations.

      The agreements for our current workers’ compensation excess of loss reinsurance treaty program expire on October 1, 2005. Although we currently expect to renew the program upon its expiration, any decrease in the amount of our reinsurance at the time of renewal, whether caused by the existence of more restrictive terms and conditions or decreased availability, will also increase our risk of loss and, as a result, could materially adversely affect our business, financial condition and results of operations. We have not experienced difficulty in qualifying for or obtaining sufficient reinsurance to appropriately cover our risks in the past. We currently have 10 reinsurers participating in our excess of loss reinsurance treaty program, and believe that this is a sufficient number of reinsurers to provide us with reinsurance in the volume that we require. However, it is possible that one or more of our current reinsurers could cancel participation, or we could find it necessary to cancel the participation of one of our reinsurers, in our excess of loss reinsurance treaty program. In either of those events, if our reinsurance broker is unable to spread the cancelled or terminated reinsurance among the remaining reinsurers in the program, we estimate that it could take approximately one to three weeks to identify and negotiate appropriate documentation with a replacement reinsurer. During this time, we would be exposed to an increased risk of loss, the extent of which would depend on the volume of cancelled reinsurance.

      In addition, we are subject to credit risk with respect to our reinsurers. Reinsurance protection that we receive does not discharge our direct obligations under the policies we write. We remain liable to our policyholders, even if we are unable to make recoveries to which we believe we are entitled under our reinsurance contracts. Losses may not be recovered from our reinsurers until claims are paid, and, in the case of long-term workers’ compensation cases, the creditworthiness of our reinsurers may change before we can recover amounts to which we are entitled. Although we have not experienced problems in the past resulting from the failure of a reinsurer to pay our claims in a timely manner, if we experience these problems in the future, our costs would increase and our revenues would decline. As of September 30, 2004, we had $10.1 million of amounts recoverable from our reinsurers that we would be obligated to pay if our reinsurers failed to pay us.

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 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;

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•  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.

      For example, 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 Department of Financial and Professional Regulation, Division of 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.

      Our business is also affected by federal laws, including the United States Longshore and Harbor Workers’ Compensation Act, or USL&H Act, which is administered by the Department of Labor, and the Merchant Marine Act of 1920, or Jones Act. See “Business — Regulation.” 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 the vessel length criteria, exempting all builders of recreational boats, regardless of size, from the reach of the USL&H Act. If this proposed amendment is adopted, we expect that we would lose a total of approximately $2.5 million in annual direct written premium from policies currently providing USL&H Act coverage. The proposed amendment would have no 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 were impacted by the Terrorism Risk Insurance Act of 2002, as discussed below, and by the Gramm Leach Bliley Act of 2002 related to disclosure of personal information. 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

14

wide variety of applicable laws and regulations, which are continually undergoing revision, or the relevant authority’s interpretation of such laws and regulations.

A downgrade in the A.M. Best rating of our insurance subsidiary could reduce the amount of business we are able to write.

      Rating agencies rate insurance companies based on the company’s ability to pay claims. Our insurance company subsidiary currently has a rating of “A–” (Excellent) from A.M. Best, which is the rating agency that we believe has the most influence on our business. The ratings of A.M. Best are subject to periodic review using, among other things, proprietary capital adequacy models, and are subject to revision or withdrawal at any time. Insurance ratings are directed toward the concerns of policyholders and insurance agents and are not intended for the protection of investors or as a recommendation to buy, hold or sell any of our securities. Our competitive position relative to other companies is determined in part by our A.M. Best rating. We believe that our business is particularly sensitive to our A.M. Best rating because we focus on larger customers which tend to give substantial weight to the A.M. Best rating of their insurers. We expect that any reduction in our A.M. Best rating below “A–” would cause a reduction in the number of policies we write and could have a material adverse effect on our results of operations and our financial position.

The effects of emerging claim and coverage issues on our business are uncertain.

      As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until some time after we have issued insurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a contract is issued. For example, the number or nature of existing occupational diseases may expand beyond our expectation. In addition, medical costs associated with permanent and partial disabilities may inflate more rapidly or higher than we currently expect. Expansions of this nature may expose us to more claims than we anticipated when we wrote the underlying policy.

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

      In most of the states in which we operate, we face significant competition which, at times, is intense. If we are unable to compete effectively, our business and financial condition could be materially adversely affected. Competition in our businesses is based on many factors, including premiums charged, services provided, financial strength ratings assigned by independent rating agencies, speed of claims payments, reputation, perceived financial strength and general experience. We compete with regional and national insurance companies and state-sponsored insurance funds, as well as potential insureds that have decided to self-insure. Our principal competitors include American International Group, Inc. (“AIG”), Majestic Insurance Company, Alaska National Insurance Company, Signal Mutual Indemnity Association Ltd., Zurich and the State Compensation Insurance Fund of California. Based on our internal calculations using information available to us, we estimate that the State Compensation Insurance Fund of California, AIG, Zurich and Signal Mutual Indemnity Association Ltd. have approximate market shares in the niche markets in which we operate of 16%, 9%, 5% and 1%, respectively. We also estimate, based on these internal calculations, that Majestic Insurance Company and Alaska National Insurance Company have market shares of less than 1% in our targeted niche markets. We estimate our own market share in our targeted niche markets to be approximately 1%. Many of our competitors have substantially greater financial and marketing resources than we do, and some of our competitors, including the State Compensation Insurance Fund of California, benefit financially by not being subject to federal income tax. Intense competitive pressure on prices can result from the actions of even a single large competitor, such as the State Compensation Insurance Fund in California or AIG.

      In addition, our competitive advantage may be limited due to the small number of insurance products that we offer. Some of our competitors, such as AIG, have additional competitive leverage because of the

15

wide array of insurance products that they offer. For example, it may be more convenient for a potential customer to purchase numerous different types of insurance products from one insurance carrier. We do not offer a wide array of insurance products due to our targeted market niches, and we may lose potential customers to our larger more diverse competitors as a result.

If we are unable to realize our investment objectives, our financial condition may be adversely affected.

      Investment income is an important component of our revenues and net income. The ability to achieve our investment objectives is affected by factors that are beyond our control. For example, United States participation in hostilities with other countries and large-scale acts of terrorism may adversely affect the economy generally, and our investment income could decrease. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. These and other factors also affect the capital markets, and, consequently, the value of the securities we own. Any significant decline in our investment income as a result of rising interest rates or general market conditions would have an adverse effect on our net income and, as a result, on our stockholders’ equity and our policyholders’ surplus.

      The outlook for our investment income is dependent on the future direction of interest rates and the amount of cash flows from operations that are available for investment. The fair values of fixed maturity investments that are “available-for-sale” fluctuate with changes in interest rates and cause fluctuations in our stockholders’ equity.

We could be adversely affected by the loss of one or more principal employees or by an inability to attract and retain staff.

      Our success will depend in substantial part upon our ability to attract and retain qualified executive officers, experienced underwriting talent and other skilled employees who are knowledgeable about our business. We rely substantially upon the services of our senior management team and key employees, consisting of John G. Pasqualetto, Chairman, President and Chief Executive Officer, Richard J. Gergasko, Executive Vice President, Joseph S. De Vita, Senior Vice President, Chief Financial Officer and Secretary, Richard W. Seelinger, Senior Vice President — Claims, Marc B. Miller, M.D., Senior Vice President and Chief Medical Officer, Jeffrey C. Wanamaker, Vice President — Underwriting, James L. Borland, III, Vice President and Chief Information Officer, M. Philip Romney, Vice President — Finance and Chris A. Engstrom, President — PointSure. Although we are not aware of any planned departures or retirements, if we were to lose the services of members of our management team, our business could be adversely affected. Many of our principal employees possess skills and extensive experience relating to our market niches. Were we to lose any of these employees, it may be challenging for us to attract a replacement employee with comparable skills and experience in our market niches. We have employment agreements with some of our executive officers, which are described under “Management — Employment Agreements.” We do not currently maintain key man life insurance policies with respect to any member of our senior management team or other employees.

We may require additional capital in the future, which may not be available or only available on unfavorable terms.

      Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish premium rates and loss reserves at levels sufficient to cover losses. To the extent that the funds generated by this offering are insufficient to support future operating requirements and/or cover claim losses, we may need to raise additional funds through financings or curtail our growth. We believe that the net proceeds to us from this offering will satisfy our capital requirements for the foreseeable future. However, because the timing and amount of our future needs for capital will depend on our growth and profitability, we cannot provide any assurance in that regard. If we had to raise additional capital, equity or debt financing may not be available at all or may be available only on terms that are not favorable to us. In the case of equity financings, dilution to our stockholders could result, and in any case such securities may have rights, preferences and privileges that are senior to those of the shares offered hereby. If we cannot obtain adequate capital on favorable terms or at all, we may be unable to support

16

future growth or operating requirements and, accordingly, our business, financial condition or results of operations could be materially adversely affected.

Our status as an insurance holding company with no direct operations could adversely affect our ability to pay dividends in the future.

      SeaBright is a holding company that transacts its business through its operating subsidiaries, SeaBright Insurance Company and PointSure. Our primary assets are the stock of these operating subsidiaries. Our ability to pay expenses and dividends depends, in the long run, upon the surplus and earnings of our subsidiaries and the ability of our subsidiaries to pay dividends to us. Payment of dividends by SeaBright Insurance Company is restricted by state insurance laws, including laws establishing minimum solvency and liquidity thresholds, and could be subject to contractual restrictions in the future, including those imposed by indebtedness we may incur in the future. SeaBright Insurance Company is required to report any ordinary dividends to the Illinois Department of Financial and Professional Regulation, Division of Insurance and the California Department of Insurance prior to the payment of the dividend. In addition, SeaBright Insurance Company is not authorized to pay any extraordinary dividends to SeaBright under Illinois or California insurance laws without prior regulatory approval from the Illinois Department of Financial and Professional Regulation, Division of Insurance or the California Department of Insurance. See “Business — Regulation — Dividend Limitations.” As a result, at times, we may not be able to receive dividends from SeaBright Insurance Company and we may not receive dividends in amounts necessary to pay dividends on our capital stock. In addition, the payment of dividends by us is within the discretion of our board of directors and will depend on numerous factors, including our financial condition, our capital requirements and other factors that our board of directors considers relevant. Currently, we do not intend to pay dividends on our capital stock.

We rely on independent insurance brokers to distribute our products.

      Our business depends in part on the efforts of independent insurance brokers to market our insurance programs successfully and produce business for us and on our ability to offer insurance programs and services that meet the requirements of the clients and customers of these brokers. The majority of the business in our workers’ compensation operations is produced by a group of approximately 60 licensed insurance brokers. Brokers are not obligated to promote our insurance programs and may sell competitors’ insurance programs. Several of our competitors, including AIG and Zurich, offer a broader array of insurance programs than we do. Accordingly, our brokers may find it easier to promote the broader range of programs of our competitors than to promote our niche selection of insurance products. If our brokers fail or choose not to market our insurance programs successfully or to produce business for us, our growth may be limited and our financial condition and results of operations may be negatively affected.

We have a limited operating history as a stand-alone entity and may experience difficulty in transitioning to an independent public company.

      We commenced operations in October 2003 after acquiring KEIC, the renewal rights from, and substantially all of the operating assets, systems and employees of, the Eagle entities and PointSure, a wholesale insurance broker and third party claims administrator affiliated with the Eagle entities. See “The Acquisition.” Although our management team is the same management team that operated the Eagle entities and PointSure for approximately five years prior to the Acquisition, we have a limited operating history as a stand-alone entity and do not have the same resources available to us that the Eagle entities and PointSure had prior to the Acquisition. Accordingly, our future results of operations or financial condition as a stand-alone entity may vary from the results realized by the Eagle entities and PointSure prior to the Acquisition. An investor in our common stock should consider that our history as a stand-alone entity is relatively short and that there is a limited basis for evaluating our performance.

      In addition, upon completion of this offering, we will become a publicly traded company and will be responsible for complying with the various federal and legal regulatory requirements applicable to public companies. We will incur increased costs as a result of being a public company, particularly in light of recently enacted and proposed changes in laws, regulations and listing requirements, including those related

17

to the Sarbanes-Oxley Act of 2002. Our business and financial condition may be adversely affected if we are unable to effectively manage these increased costs.

Assessments and other surcharges for guaranty funds and second injury funds and other mandatory pooling arrangements may reduce our profitability.

      Virtually all states require insurers licensed to do business in their state to bear a portion of the unfunded obligations of impaired or insolvent insurance companies. These obligations are funded by assessments that are expected to continue in the future as a result of insolvencies. Assessments are levied by guaranty associations within the state, up to prescribed limits, on all member insurers in the state on the basis of the proportionate share of the premium written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. See “Business — Regulation.” Accordingly, the assessments levied on us may increase as we increase our premiums written. Many states also have laws that established second injury funds to provide compensation to injured employees for aggravation of a prior condition or injury, which are funded by either assessments based on paid losses or premium surcharge mechanisms. For example, Alaska requires insurers to contribute to its second injury fund annually an amount equal to the compensation the injured employee is owed multiplied by a contribution rate based on the fund’s reserve rate. In addition, as a condition to the ability to conduct business in some states, including California, insurance companies are required to participate in mandatory workers’ compensation shared market mechanisms or pooling arrangements, which provide workers’ compensation insurance coverage from private insurers. Although we price our products to account for the obligations that we may have under these pooling arrangements, we may not be successful in estimating our liability for these obligations. Accordingly, our prices may not fully account for our liabilities under pooling arrangements, which may cause a decrease in our profits. In the third quarter of 2004, we recorded a net loss of approximately $251,000 for our required participation in these pooling arrangements from October 1, 2003 through June 30, 2004 in Alaska, Arizona, Nevada and Oregon. As we write policies in new states that have pooling arrangements, we will be required to participate in additional pooling arrangements. Further, the insolvency of other insurers in these pooling arrangements would likely increase the liability for other members in the pool. The effect of these assessments and mandatory shared market mechanisms or changes in them could reduce our profitability in any given period or limit our ability to grow our business.

In the event LMC is placed into receivership, we could lose our rights to fee income and protective arrangements that were established in connection with the Acquisition, our reputation and credibility could be adversely affected and we could be subject to claims under applicable voidable preference and fraudulent transfer laws.

      The assets that SeaBright acquired in the Acquisition were acquired from LMC, and certain of its affiliates. LMC and its insurance company affiliates are currently operating under a three-year “run off” plan approved by the Illinois Department of Financial and Professional Regulation, Division of Insurance. “Run off” is the professional management of an insurance company’s discontinued, distressed or non-renewed lines of insurance and associated liabilities outside of a judicial proceeding. Under the run off plan, LMC will attempt to buy back some of its commercial line policies and institute aggressive expense control measures in order to reduce its future loss exposure and allow it to meet its obligations to current policyholders. According to LMC’s third quarter statutory financial statements as of September 30, 2004, LMC had a statutory surplus of $80.0 million, a decline of approximately $122.4 million from its surplus of $202.4 million as of December 31, 2003. On an operating basis, LMC lost approximately $118.7 million in the first nine months of 2004. In connection with the Acquisition, we established various arrangements with LMC and certain of its affiliates, including (1) servicing arrangements entitling us to fee income for providing claims administration services for Eagle and (2) other protective arrangements designed to minimize our exposure to any past business underwritten by KEIC, the shell entity that we acquired from LMC for its insurance licenses, and any adverse developments in KEIC’s loss reserves as they existed at

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the date of the Acquisition. See “The Acquisition.” In the event LMC is placed into receivership, our business could be adversely affected in the following ways.

      • A receiver could seek to reject or terminate one or more of the services agreements that were established in connection with the Acquisition between us and LMC or its affiliates, including Eagle. In that event, we could lose the revenue we currently receive under these services agreements. Our projected revenue under these agreements is approximately $650,000 in 2005 and $480,000 in 2006.

      • As discussed under “The Acquisition,” to minimize our exposure to any past business underwritten by KEIC, we entered into an arrangement with LMC at the time of the Acquisition requiring LMC to indemnify us in the event of adverse development of the loss reserves in KEIC’s balance sheet as they existed on the date of closing of the Acquisition. We refer to this arrangement as the adverse development cover. To support LMC’s obligations under the adverse development cover, LMC funded a trust account at the time of the Acquisition. The minimum amount that must be maintained in the trust account is equal to the greater of (a) $1.6 million or (b) 102% of the then existing quarterly estimate of LMC’s total obligations under the adverse development cover. We refer to this trust account as the collateralized reinsurance trust because the funds on deposit in the trust account serve as collateral for LMC’s potential future obligations to us under the adverse development cover. At September 30, 2004, the liability of LMC under the adverse development cover was $2.5 million. LMC initially funded the trust account with $1.6 million to support its obligations under the adverse development cover. In September 2004, we and LMC retained an independent actuary to determine the appropriate amount of loss reserves that are subject to the adverse development cover as of September 30, 2004. In accordance with the terms of the protective arrangements that we have established with LMC, on December 23, 2004, LMC deposited into a trust account an additional approximately $3.2 million, resulting in a total balance in the trust account of approximately $4.8 million. We are waiting to receive a final report from the independent actuary as to the final amount required to be held in the trust account. If LMC is placed in receivership and the amount held in the collateralized reinsurance trust is inadequate to satisfy the obligations of LMC to us under the adverse development cover, it is unlikely that we would recover any future amounts owed by LMC to us under the adverse development cover in excess of the amounts currently held in trust because the director of the Illinois Department of Financial and Professional Regulation, Division of Insurance would have control of the assets of LMC.

      • Some of our customers are insured under Eagle insurance policies that we service pursuant to the claims administration servicing agreement described above. Although SeaBright is a separate legal entity from LMC and its affiliates, including Eagle, Eagle’s policyholders may not readily distinguish SeaBright from Eagle and LMC if those policies are not honored in the event LMC is found to be insolvent and placed into court-ordered liquidation. If that were to occur, our market reputation and credibility and ability to renew the underlying policies could be adversely affected.

      • In connection with the Acquisition, LMC and its affiliates made various transfers and payments to SeaBright, including approximately $13 million under the commutation agreement and approximately $4.8 million to fund the collateralized reinsurance trust. In the event that LMC is placed into receivership, it is possible that a receiver or creditor could assert a claim seeking to unwind or recover these payments under applicable voidable preference and fraudulent transfer laws.

Risks Related to Our Industry

Recent investigations into insurance brokerage practices could cause volatility in our stock and adversely affect our business.

      On October 14, 2004, the Attorney General of the State of New York filed a well-publicized civil complaint against a large insurance broker concerning, among other things, allegations that so-called contingent commissions conflicted with the broker’s duties to customers, that the broker steered unsuspecting commercial clients to insurers with which the broker had lucrative contingent commission arrangements, and that the broker and several insurers for whom it produced business engaged in bid-rigging in connection with insurance premium quotes for commercial property and casualty insurance. Press reports have indicated that the Attorney General’s investigation of the insurance industry is

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expanding to include tying practices in connection with the purchase of reinsurance through brokers as well as brokerage commissions paid in connection with producing group life and health insurance business. As a result of the complaint and the attendant publicity and expectations that the Attorney General’s investigation may expand to include additional companies and practices, and that other states’ attorneys general and insurance regulators have also initiated their own investigation of industry practices relating to broker compensation, stock prices of companies in the insurance industry have experienced substantial volatility and may experience continued volatility for the foreseeable future.

      The Illinois Department of Financial and Professional Regulation, Division of Insurance is among the regulators investigating insurance industry practices in the wake of the Attorney General’s investigation. Our insurance company subsidiary, which is incorporated in Illinois, has received and recently responded to a subpoena from the Illinois Department of Financial and Professional Regulation, Division of Insurance requesting answers to interrogatories and production of certain documents relating to the Department’s investigation of producer compensation arrangements. We have been informed that these inquiries are being made to all domestic Illinois insurers and major brokerages who transact business in Illinois. We anticipate that officials from other jurisdictions in which we do business may also initiate investigations into similar matters and, accordingly, we could receive additional subpoenas and requests for information with respect to these matters. The volatility caused by the many developments relating to broker compensation may affect the price of our stock regardless of our practices in dealing with brokers.

      Additionally, proposed legislation or new regulatory requirements are expected to be imposed on the insurance industry and will impact our business and the manner in which we compensate our brokers. In November 2004, the National Association of Insurance Commissioners’ newly formed Executive Task Force on Broker Activities released draft model legislation that would implement new disclosure requirements for brokers. As proposed, the draft model legislation would amend the current Producer Licensing Model Act of the National Association of Insurance Commissioners (the “NAIC”). Among the provisions contained in the draft model legislation, brokers would be required to first obtain the insured’s written consent before receiving compensation from the insurer for the same transaction. In addition, brokers would be required to disclose the amount of compensation from the insurer and the method for calculating the compensation, including any contingent compensation. As proposed, the draft model legislation would require brokers to provide a reasonable estimate of the amount and method for calculating such compensation. Finally, the draft model language would require all insurance producers to disclose to customers: (1) that the producer will receive compensation from the insurer for the sale; (2) that the compensation received by the producer may differ depending upon the product and insurer; and (3) that the producer may receive additional compensation from the insurer based upon other factors, such as premium volume placed with a particular insurer and loss or claims experience. The NAIC held a public hearing on the proposal during the NAIC’s December meeting and discussed its goal to adopt model producer disclosure language in the near future.

      The California Department of Insurance has also proposed new regulations concerning brokers. If adopted as currently written, the regulations would apply to all insurance transactions and would require brokers to disclose to clients the receipt or potential receipt of any income from a third party if that income derives from the broker’s transaction with the client. The regulations would also impose a fiduciary duty on the broker with respect to its client and would require brokers to obtain information concerning and advise clients regarding the best available insurer. In addition, Oregon has proposed new regulations which would require a written agreement between an insurance producer and a prospective insured and would govern the terms of that agreement when the insurance producer charges the prospective insured a services fee.

      Although PointSure, our in-house wholesale broker, currently provides disclosure to its customers regarding any contingent compensation arrangements it may receive, PointSure may become subject to additional disclosure requirements under the proposed regulations, and it is unclear how these regulations, which primarily target retail brokers, will be applied to wholesale brokers. The New York Attorney General’s investigation and all developing regulatory responses related to the investigation represent an evolving area of law, and we cannot, at this point, predict its consequences for the industry or for us.

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We may face substantial exposure to losses from terrorism for which we are required by law to provide coverage.

      Under our workers’ compensation policies, we are required to provide workers’ compensation benefits for losses arising from acts of terrorism. The impact of any terrorist act is unpredictable, and the ultimate impact on us would depend upon the nature, extent, location and timing of such an act. Notwithstanding the protection provided by the reinsurance we have purchased and any protection provided by the Terrorism Risk Insurance Act of 2002 (the “Terrorism Risk Act”), the risk of severe losses to us from acts of terrorism has not been eliminated because, as discussed above, our excess of loss reinsurance treaty program contains various sub-limits and exclusions limiting our reinsurers’ obligation to cover losses caused by acts of terrorism. Accordingly, events may not be covered by, or may exceed the capacity of, our reinsurance protection. Thus, any acts of terrorism could materially adversely affect our business and financial condition.

The threat of terrorism and military and other actions may result in decreases in our net income, revenue and assets under management and may adversely affect our investment portfolio.

      The threat of terrorism, both within the United States and abroad, and military and other actions and heightened security measures in response to these types of threats, may cause significant volatility and declines in the equity markets in the United States and abroad, as well as loss of life, property damage, additional disruptions to commerce and reduced economic activity. Actual terrorist attacks could cause a decrease in our stockholders’ equity, net income and/or revenue. The effects of these changes may result in a decrease in our stock price. In addition, some of the assets in our investment portfolio may be adversely affected by declines in the bond markets and declines in economic activity caused by the continued threat of terrorism, ongoing military and other actions and heightened security measures.

      We cannot predict at this time whether and the extent to which industry sectors in which we maintain investments may suffer losses as a result of potential decreased commercial and economic activity, or how any such decrease might impact the ability of companies within the affected industry sectors to pay interest or principal on their securities, or how the value of any underlying collateral might be affected.

      We can offer no assurances that terrorist attacks or the threat of future terrorist events in the United States and abroad or military actions by the United States will not have a material adverse effect on our business, financial condition or results of operations.

Our results of operations and revenues may fluctuate as a result of many factors, including cyclical changes in the insurance industry, which may cause the price of our common stock to be volatile.

      The results of operations of companies in the insurance industry historically have been subject to significant fluctuations and uncertainties. Our profitability can be affected significantly by:

•  competition;

•  rising levels of loss costs that we cannot anticipate at the time we price our products;

•  volatile and unpredictable developments, including man-made, weather-related and other natural catastrophes or terrorist attacks;

•  changes in the level of reinsurance capacity and capital capacity;

•  changes in the amount of loss reserves resulting from new types of claims and new or changing judicial interpretations relating to the scope of insurers’ liabilities; and

•  fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested assets and may impact the ultimate payout of losses.

      The supply of insurance is related to prevailing prices, the level of insured losses and the level of industry surplus which, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance industry. As a result, the insurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity permitted favorable premium levels. During 1998, 1999 and

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2000, the workers’ compensation insurance industry experienced substantial pricing competition, and this pricing competition greatly affected the ability of our predecessor to increase premiums. Beginning in 2001 we witnessed a decrease in pricing competition in the industry, which enabled us to raise our rates. Although rates for many products have increased in recent years, the supply of insurance may increase, either by capital provided by new entrants or by the commitment of additional capital by existing insurers, which may cause prices to decrease. Any of these factors could lead to a significant reduction in premium rates, less favorable policy terms and fewer submissions for our underwriting services. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and insurers may affect the cycles of the insurance business significantly, and we expect to experience the effects of such cyclicality. This cyclicality may cause the price of our securities to be volatile.

Risks Related to Our Common Stock and this Offering

There is no prior public market for our common stock and therefore, you cannot be certain that an active trading market or a specific share price will be established.

      Currently there is no public trading market for our common stock, and it is possible that an active trading market will not develop upon completion of this offering or that the market price of our common stock will decline below the initial public offering price. We have applied to list our common stock on the Nasdaq National Market under the symbol “SEAB”. The initial public offering price per share will be determined by agreement among us and the underwriters and may not be indicative of the market price of our common stock after our initial public offering.

The price of our common stock may decrease after this offering.

      The trading price of shares of our common stock may decline for many reasons, some of which are beyond our control, including, among others:

•  quarterly variations in our results of operations;

•  changes in expectations as to our future results of operations, including financial estimates by securities analysts and investors;

•  announcements of claims against us by third parties;

•  changes in law and regulation;

•  results of operations that vary from those expected by securities analysts and investors; and

•  future sales of shares of our common stock.

      In addition, the stock market in recent years has experienced substantial price and volume fluctuations that sometimes have been unrelated or disproportionate to the operating performance of companies whose shares are traded. As a result, the trading price of shares of our common stock may be below the initial public offering price and you may not be able to sell your shares at or above the price you pay to purchase them.

Future sales of shares of our common stock may affect their market price and the future exercise of options may depress our stock price and will result in immediate and substantial dilution.

      We cannot predict what effect, if any, future sales of shares of our common stock, or the availability of shares for future sale, will have on the market price of our common stock. Sales of substantial amounts of our common stock in the public market following our initial public offering, or the perception that such sales could occur, could adversely affect the market price of our common stock and may make it more difficult for you to sell your shares at a time and price which you deem appropriate. See “Description of Capital Stock” and “Shares Eligible for Future Sale” for further information regarding circumstances under which additional shares of our common stock may be sold.

      Upon completion of our initial public offering, there will be 15,277,818 shares of our common stock outstanding. If the underwriters’ over-allotment option for 1,125,000 additional shares of common stock is exercised, 16,402,818 shares of common stock will be outstanding. Moreover, 766,896 additional shares of our common stock will be issuable upon the full exercise or conversion of options currently outstanding or

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granted in connection with this offering. In the event that any outstanding options are exercised, you will suffer immediate and substantial dilution of your investment. See “Description of Capital Stock” and “Underwriting.”

      We and all of our current officers, directors and stockholders have entered into 180-day lock-up agreements as described in “Shares Eligible for Future Sale.” An aggregate of 7,777,818 shares of our common stock are subject to these lock-up agreements.

Public investors will suffer immediate and substantial dilution as a result of this offering.

      The initial public offering price per share is significantly higher than our pro forma net tangible book value per share of common stock. Accordingly, if you purchase shares in this offering, you will suffer immediate and substantial dilution of your investment. Based upon the issuance and sale of 7,500,000 shares of our common stock at an assumed initial offering price of $10.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), you will incur immediate dilution of approximately $2.27 in the net tangible book value per share if you purchase common stock in this offering. See “Dilution.” In addition, if you purchase shares in this offering, you will:

•  pay a price per share that substantially exceeds the value of our assets after subtracting liabilities; and

•  contribute 59.6% of the total amount invested to date to fund the Company based on an assumed initial offering price to the public of $10.00 per share (the midpoint of the price range set forth on the cover of this prospectus), but will only own 49.1% of the shares of common stock outstanding after the offering.

      To the extent outstanding stock options are exercised, there will be further dilution to new investors.

Applicable insurance laws may make it difficult to effect a change of control of our company.

      Our insurance company subsidiary is domiciled in the state of Illinois and commercially domiciled in the state of California. The insurance holding company laws of Illinois and California require advance approval by the Illinois Department of Financial and Professional Regulation, Division of Insurance and the California Department of Insurance of any change in control of SeaBright Insurance Company. “Control” is generally presumed to exist through the direct or indirect ownership of 10% or more of the voting securities of a domestic insurance company or of any entity that controls a domestic insurance company. In addition, insurance laws in many states contain provisions that require prenotification to the insurance commissioners of a change in control of a non-domestic insurance company licensed in those states. Any future transactions that would constitute a change in control of SeaBright Insurance Company, including a change of control of SeaBright, would generally require the party acquiring control to obtain the prior approval by the Illinois Department of Financial and Professional Regulation, Division of Insurance and the California Department of Insurance and may require pre-acquisition notification in applicable states that have adopted pre-acquisition notification provisions. Obtaining these approvals may result in a material delay of, or deter, any such transaction. See “Business — Regulation.”

      These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of SeaBright, including through transactions, and in particular unsolicited transactions, that some or all of the stockholders of SeaBright might consider to be desirable.

After the offering, our principal stockholders will still have the ability to significantly influence our business, which may be disadvantageous to other stockholders and adversely affect the trading price of our common stock.

      Upon completion of the offering, and based on the number of shares outstanding as of September 30, 2004, entities affiliated with Summit Partners, collectively, will beneficially own approximately 50.1% of our outstanding common stock. As a result, these stockholders, acting together, will have the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. In addition, these stockholders may have interests that are different

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from ours. Under our amended and restated certificate incorporation, none of the Summit entities or any director, officer, stockholder, member, manager or employee of the Summit entities has any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business that we do. In the event that any Summit entity acquires knowledge of a potential transaction or matter which may be a corporate opportunity for itself and us, the Summit entity will not have any duty to communicate or offer such opportunity to us and will not be liable to us or our stockholders for breach of any fiduciary duty relating to such corporate opportunity. See “Description of Capital Stock — Corporate Opportunities and Transactions with Summit Partners.” Our officers, directors and principal stockholders could delay or prevent an acquisition or merger even if the transaction would benefit other stockholders. Moreover, this concentration of stock ownership may make it difficult for stockholders to replace management. In addition, this significant concentration of stock ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with significant or controlling stockholders. This concentration could be disadvantageous to other stockholders with interests different from those of our officers, directors and principal stockholders and the trading price of shares of our common stock could be adversely affected. See “Principal Stockholders” for a more detailed description of our stock ownership.

Anti-takeover provisions in our amended and restated certificate of incorporation and by-laws and under the laws of the State of Delaware could impede an attempt to replace or remove our directors or otherwise effect a change of control of our company, which could diminish the value of our common stock.

      Our amended and restated certificate of incorporation and by-laws will contain provisions that may make it more difficult for stockholders to replace directors even if the stockholders consider it beneficial to do so. In addition, these provisions could delay or prevent a change of control that a stockholder might consider favorable. For example, these provisions may prevent a stockholder from receiving the benefit from any premium over the market price of our common stock offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future. In addition, Section 203 of the Delaware General Corporation Law may limit the ability of an “interested stockholder” to engage in business combinations with us. An interested stockholder is defined to include persons owning 15% or more of any class of our outstanding voting stock.

      Our amended and restated certificate of incorporation and by-laws will contain the following provisions that could have an anti-takeover effect:

•  stockholders have limited ability to call stockholder meetings and to bring business before a meeting of stockholders;

•  stockholders may not act by written consent; and

•  our board of directors may authorize the issuance of preferred stock with such rights, powers and privileges as the board deems appropriate.

      These provisions may make it difficult for stockholders to replace management and could have the effect of discouraging a future takeover attempt which is not approved by our board of directors but which individual stockholders might consider favorable.

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CERTAIN IMPORTANT INFORMATION

      You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with information that is different from that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We and the underwriters are offering to sell and seeking offers to buy these securities only in jurisdictions where offers and sales are permitted. You should assume that the information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

      In this prospectus:

•  references to the “Acquisition” refer to the series of transactions occurring on September 30, 2003 described under the caption “The Acquisition”;

•  references to our “predecessor,” for periods prior to the date of the Acquisition, refer collectively to PointSure Insurance Services, Inc, Eagle Pacific Insurance Company and Pacific Eagle Insurance Company;

•  references to the “Company,” “we,” “us” or “our” refer to SeaBright Insurance Holdings, Inc. and its subsidiaries, SeaBright Insurance Company and PointSure Insurance Services, Inc., and prior to the date of the Acquisition, include references to our predecessor;

•  The term “our business” refers to the business conducted by the Company since October 1, 2003 and with respect to periods prior to October 1, 2003, to the business conducted by our predecessor; and

•  references to “SeaBright” refer solely to SeaBright Insurance Holdings, Inc., unless the context suggests otherwise.

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NOTE ON FORWARD-LOOKING STATEMENTS

      Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus may include forward-looking statements that reflect our current views with respect to future events and financial performance. These statements include forward-looking statements both with respect to us specifically and the insurance sector in general. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “estimate,” “may,” “should,” “anticipate,” “will” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise.

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

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

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

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

•  the effects of acts of terrorism or war;

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

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

•  our dependency on a concentrated geographic market;

•  changes in the availability, cost or quality of reinsurance and failure of our reinsurers to pay claims timely or at all;

•  decreased demand for our insurance products;

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

•  the effects of mergers, acquisitions and divestitures that we may undertake;

•  changes in rating agency policies or practices;

•  changes in legal theories of liability under our insurance policies;

•  changes in accounting policies or practices; and

•  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 prospectus. 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 prospectus reflect our views as of the date of this prospectus 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 prospectus that could cause actual results to differ.

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THE ACQUISITION

      On July 14, 2003, SeaBright entered into a purchase agreement with Kemper Employers Group, Inc., LMC and the Eagle entities. Pursuant to the purchase agreement, we acquired 100% of the issued and outstanding capital stock of KEIC and PointSure, a wholesale insurance broker and third party claims administrator, and acquired tangible assets, specified contracts, renewal rights and intellectual property rights from LMC and the Eagle entities. 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. SeaBright paid approximately $6.5 million for KEIC’s insurance licenses, Eagle’s renewal rights, internally developed software and other assets and PointSure and approximately $9.2 million for KEIC’s statutory surplus and capital, for a total purchase price of $15.7 million. At the closing, $4 million of the purchase price was placed into escrow and will be distributed in accordance with the escrow agreement described below. In accordance with the purchase price adjustment provisions in the purchase agreement, we agreed in September 2004 to pay to LMC a purchase price adjustment in the amount of $771,116. Following this payment, neither we nor LMC have any further obligations to each other under these provisions.

      The Acquisition was completed on September 30, 2003, at which time entities affiliated with Summit Partners, certain co-investors and members of our management team invested approximately $45 million in SeaBright and received convertible preferred stock in return. See “Certain Relationships and Related Transactions.” These proceeds were used to pay for the assets under the purchase agreement and to contribute additional capital to KEIC, which was renamed “SeaBright Insurance Company.” SeaBright Insurance Company received an “A-” (Excellent) rating from A.M. Best following the completion of the Acquisition.

Corporate Structure

      Following the completion of the Acquisition, our corporate structure is as follows:

      SeaBright Insurance Company is our insurance company subsidiary and a specialty provider of multi-jurisdictional workers’ compensation insurance. PointSure acts primarily as an in-house wholesale broker and third party administrator for SeaBright Insurance Company.

Arrangements to Minimize Exposure

      Prior to the Acquisition, KEIC had a limited operating history in California writing small business workers’ compensation policies with an average annual premium size of approximately $4,100 per customer. KEIC had established loss reserves in the amount of approximately $16 million for these policies at September 30, 2003. In light of the deteriorating financial condition of LMC and its affiliates, we entered into a number of protective arrangements in connection with the Acquisition for the purpose of minimizing our exposure to this past business underwritten by KEIC and any adverse developments to KEIC’s loss reserves as they existed at the date of the Acquisition. One of our primary objectives in establishing these arrangements was to create security at the time of the Acquisition with respect to LMC’s potential obligations to us as opposed to having a mere future contractual right against LMC with respect to these obligations. The protective arrangements we established include a commutation agreement, an adverse development cover, a collateralized reinsurance trust and a $4 million escrow.

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      Commutation Agreement. Prior to the Acquisition, LMC and KEIC had entered into a reinsurance agreement requiring LMC to reinsure 80% of certain risks insured by KEIC in exchange for a premium paid to LMC. To help insulate us from the effects of a potential insolvency of LMC and the possibility that LMC may not continue to have the ability to make reinsurance payments to KEIC in the future, in connection with the Acquisition, KEIC entered into a commutation agreement with LMC to terminate the previously established reinsurance agreement. Under the commutation agreement, LMC paid KEIC approximately $13 million in cash in exchange for being released of its obligations under the reinsurance agreement, and KEIC reassumed all of the risks previously reinsured by LMC.

      Adverse Development Cover. At the time of the Acquisition, KEIC had loss reserves in the amount of approximately $16 million. In connection with the Acquisition, we entered into an agreement with LMC under which we both agreed to indemnify each other with respect to developments in these loss reserves over a period of approximately eight years. December 31, 2011 is the date that the parties will look to see whether the loss reserves with respect to KEIC’s insurance policies in effect at the date of the Acquisition have increased or decreased from the $16 million amount existing at the date of the Acquisition. If the loss reserves have increased, LMC must indemnify us in the amount of the increase. If they have decreased, we must indemnify LMC in the amount of the decrease.

      Collateralized Reinsurance Trust. Because of the poor financial condition of LMC and its affiliates, we required LMC to fund a trust account in connection with the Acquisition. The funds in the trust account serve as current security for potential future obligations of LMC 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, requiring LMC to fund additional amounts into the trust account on a quarterly basis, if necessary based on a quarterly review of LMC’s obligations. We are entitled to access the funds in the trust account from time to time to satisfy LMC’s obligations under the adverse development cover in the event that LMC fails to satisfy its obligations.

      As of September 30, 2004, we have recorded a receivable of approximately $2.5 million for adverse loss development under the adverse development cover since the date of the Acquisition. In September 2004, we and LMC retained an independent actuary to determine the appropriate amount of loss reserves that are subject to the adverse development cover as of September 30, 2004. In accordance with the terms of the adverse development cover and the collateralized reinsurance trust, on December 23, 2004, LMC deposited into the trust account an additional approximately $3.2 million, resulting in a total balance in the trust account of approximately $4.8 million. We are waiting to receive a final report from the independent actuary as to the final amount required to be held in the trust account.

      $4 Million Escrow. In connection with the Acquisition, $4 million of the purchase price was placed into escrow in an account at Wells Fargo Bank for a period of two years. These funds are available to us as security for the obligations of LMC and its affiliates under the commutation agreement, the adverse development cover, the collateralized reinsurance trust and the indemnification provisions of the purchase agreement. The escrow agent will release funds remaining in the escrow account to Kemper Employers Group, Inc. on October 2, 2005.

Services Arrangements

      In addition to these arrangements, we also entered into services agreements with LMC and certain of its affiliates that require us to provide certain service functions for the Eagle entities in exchange for fee income. The services that we are required to provide to the Eagle entities under these agreements include administrative services, such as underwriting services, billing and collections services, safety services and accounting services, and claims services, including claims administration, claims investigation and loss adjustment and settlement services. For the nine months ended September 30, 2004, we received approximately $3 million in service fee income from LMC and its affiliates under these services arrangements.

28

      We have entered into a service agreement with Broadspire Services, Inc., a third-party claims administrator and former subsidiary of LMC, pursuant to which Broadspire provides us with claims services for the claims that we acquired from KEIC in connection with the Acquisition in exchange for certain servicing fees.

Issues Relating to a Potential LMC Receivership

      LMC and its affiliates have traditionally offered a wide array of personal, risk management and commercial property and casualty insurance products. However, due to the distressed financial situation of LMC and its affiliates, LMC is no longer writing new business and is now operating under a three-year run off plan which has been approved by the Illinois Department of Financial and Professional Regulation, Division of Insurance. “Run off” is the professional management of an insurance company’s discontinued, distressed or non-renewed lines of insurance and associated liabilities outside of a judicial proceeding. Under the run off plan, LMC will attempt to buy back some of its commercial line policies and institute aggressive expense control measures in order to reduce its future loss exposure and allow it to meet its obligations to current policyholders.

      In the event that LMC is placed into receivership, a receiver may seek to recover certain payments made by LMC to us in connection with the Acquisition under applicable voidable preference and fraudulent transfer laws. However, we believe that there are factors that would mitigate the risk to us resulting from a potential voidable preference or fraudulent conveyance action brought by a receiver of LMC, including the fact that we believe LMC and KEIC were solvent at the time of the Acquisition and that the Acquisition was negotiated at arms length and for fair value, and the Director of the Illinois Department of Financial and Professional Regulation, Division of Insurance approved the Acquisition notwithstanding LMC’s financial condition.

      In addition, if LMC is placed into receivership, various arrangements that we established with LMC in connection with the Acquisition, including the servicing arrangements, the adverse development cover, the collateralized reinsurance trust and the commutation agreement, could be adversely affected. For a discussion of the risks relating to a potential LMC receivership, see “Risk Factors—In the event LMC is placed into receivership, we could lose our rights to fee income and protective arrangements that were established in connection with the Acquisition, our reputation and credibility could be adversely affected and we could be subject to claims under applicable voidable preference and fraudulent transfer laws.”

29

USE OF PROCEEDS

      We estimate that our net proceeds from this offering, based on an assumed initial public offering price of $10.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting the underwriting discounts and commissions and our estimated offering expenses, will be approximately $67.0 million. We estimate that our net proceeds will be approximately $77.4 million if the underwriters exercise their over-allotment option in full. We intend to use approximately 95% of the net proceeds of this offering to contribute capital to our insurance company subsidiary and the remaining 5% for general corporate purposes, including to support the growth of PointSure, our non-insurance subsidiary and in-house underwriting agency.

30

DIVIDEND POLICY

      We do not expect to pay any cash dividends on our common stock for the foreseeable future. We currently intend to retain any additional future earnings to finance our operations and growth. Any future determination to pay cash dividends on our common stock will be at the discretion of our board of directors and will be dependent on our earnings, financial condition, operating results, capital requirements, any contractual restrictions, regulatory and other restrictions on the payment of dividends by our subsidiaries to us, and other factors that our board of directors deems relevant.

      We are a holding company and have no direct operations. Our ability to pay dividends in the future depends on the ability of our operating subsidiaries to pay dividends to us. Our subsidiary, SeaBright Insurance Company, is a regulated insurance company and therefore is subject to significant regulatory restrictions limiting its ability to declare and pay dividends.

      SeaBright Insurance Company’s ability to pay dividends is subject to restrictions contained in the insurance laws and related regulations of Illinois and California. The insurance holding company laws in these states require that ordinary dividends be reported to the Illinois Department of Financial and Professional Regulation, Division of Insurance and the California Department of Insurance prior to payment of the dividend and that extraordinary dividends be submitted for prior approval. See “Business — Regulation.” As of December 31, 2003, SeaBright Insurance Company was unable to pay any dividends to SeaBright Insurance Holdings, Inc. under Illinois law.

      For information regarding restrictions on the payment of dividends by us and SeaBright Insurance Company, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and “Business — Regulation.”

31

CAPITALIZATION

      The following table sets forth our consolidated capitalization as of September 30, 2004 on:

•  an actual basis;

•  a pro forma basis to give effect to the conversion of each outstanding share of our convertible preferred stock into 15.299664 shares of common stock; and

•  a pro forma as adjusted basis to give effect to the sale of 7,500,000 shares of common stock in this offering at an assumed initial public offering price of $10.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting estimated underwriting discounts and our estimated offering expenses and assuming the underwriters do not exercise their over-allotment option.

			As of September 30, 2004
							Pro Forma
			Actual		Pro Forma		As Adjusted
					(Unaudited)		(Unaudited)
			($ in thousands, except share numbers)
Stockholders’ Equity:
	Convertible preferred stock, par value $0.01 per share, 750,000 shares, authorized; 508,365.25 shares issued and outstanding, actual; no shares issued and outstanding, pro forma and as adjusted		$	5	$	—	$	—
	Preferred stock, par value $0.01 per share, 10,000,000 shares authorized; no shares issued and outstanding, actual, pro forma and as adjusted			—		—		—
	Common stock, par value $0.01 per share, 75,000,000 shares authorized; no shares issued and outstanding, actual; 7,777,818 shares issued and outstanding, pro forma; 15,277,818 issued and outstanding, as adjusted			—		78		153
	Paid-in capital			50,831		50,758		117,633
	Retained earnings			3,814		3,814		3,814
	Accumulated other comprehensive income			669		669		669
		Total stockholders’ equity		55,319		55,319		122,269
Total Capitalization			$	55,319	$	55,319	$	122,269

      The table does not reflect:

•  1,125,000 shares that may be issued pursuant to the underwriters’ over-allotment option;

•  480,027 shares that may be issued pursuant to employee and director stock options outstanding as of September 30, 2004, each at an exercise price of $6.54 per share;

•  309,818 shares that may be issued pursuant to employee and director stock options granted in connection with this offering, each at an exercise price equal to the initial price to the public; and

•  737,937 additional shares available for future issuance under our stock option and incentive plans.

      You should read this table in conjunction with “Selected Combined Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes that are included elsewhere in this prospectus.

32

DILUTION

      Our net tangible book value as of September 30, 2004 is presented on a pro forma basis, assuming the conversion of each outstanding share of convertible preferred stock into 15.299664 shares of common stock, based on 508,365.25 shares of convertible preferred stock outstanding. As of September 30, 2004, our pro forma net tangible book value was $51.2 million, or $6.59 per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities divided by the number of shares of common stock outstanding. After giving effect to the issuance of 7,500,000 shares of our common stock at an assumed initial public offering price of $10.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) and the application of the estimated net proceeds therefrom, and after deducting estimated underwriting discounts and our estimated offering expenses and assuming that the underwriters’ over-allotment option is not exercised, our pro forma net tangible book value as of September 30, 2004 would have been $118.2 million, or $7.73 per share of common stock. This amount represents an immediate increase of $1.14 per share to the existing stockholders and an immediate dilution of $2.27 per share issued to the new investors purchasing shares offered hereby at the assumed public offering price. The following table illustrates this per share dilution:

Initial public offering price per share				$	10.00
	Pro forma net tangible book value per share as of September 30, 2004	$	6.59
	Increase in pro forma net tangible book value per share attributable to this offering		1.14
Pro forma net tangible book value per share after this offering					7.73
Dilution per share to new investors(1)				$	2.27

(1)  If the underwriters’ over-allotment option is exercised in full, dilution per share to new investors will be $2.16.

      The following table sets forth, as of September 30, 2004, the number of shares of our common stock issued (assuming the conversion of each share of our convertible preferred stock into 15.299664 shares of common stock), the total consideration paid and the average price per share paid by (i) all of our existing stockholders, and (ii) our new investors, after giving effect to the issuance of 7,500,000 shares of common stock in this offering at an assumed initial public offering price (before deducting estimated underwriting discounts and our estimated offering expenses) of $10.00 per share (the midpoint of the price range set forth on the cover page of this prospectus).

		Shares Issued					Total Consideration
												Average Price
		Number		Percent			Amount		Percent			Per Share
Existing stockholders			7,777,818		50.9	%	$	50,836,525		40.4	%	$	6.54
New investors			7,500,000		49.1			75,000,000		59.6			10.00
	Total		15,277,818		100	%	$	125,836,525		100	%	$	8.24

      This table does not give effect to:

•  1,125,000 shares that may be issued pursuant to the underwriters’ over-allotment option;

•  480,027 shares that may be issued pursuant to employee and director stock options outstanding as of September 30, 2004, each at an exercise price of $6.54 per share;

•  309,818 shares that may be issued pursuant to employee and director stock options granted in connection with this offering, each at an exercise price equal to the initial price to the public; and

•  737,937 additional shares available for future issuance under our stock option and incentive plans.

      To the extent that options with an exercise price below the initial price to the public are exercised, there will be further dilution to new investors.

33

UNAUDITED PRO FORMA FINANCIAL INFORMATION

      The following unaudited pro forma financial information has been derived by the application of pro forma adjustments to our predecessor’s September 30, 2003 audited combined financial statements and our December 31, 2003 audited consolidated financial statements, which appear elsewhere in this prospectus. The pro forma statement of operations does not include operations of our insurance subsidiary prior to September 30, 2003. The pro forma financial information gives effect to the Acquisition as described under “The Acquisition” as if those events had occurred on January 1, 2003.

      When we write a policy, we record the entire premium as unearned premium when written and earn the premium over the life of the policy, generally twelve months. Because this pro forma information assumes the Acquisition occurred on January 1, 2003 and because we acquired renewal rights on policies to be issued in the future rather than existing in-force policies in the Acquisition, the historical financial statements have been adjusted to eliminate the activity on policies written prior to January 1, 2003.

      The unaudited pro forma information is included to provide investors with information about the continuing impact of a transaction by showing how it might have affected the historical financial statements of the Company had the Acquisition in fact occurred on January 1, 2003. The unaudited pro forma financial information does not purport to represent what our results of operations would actually have been had the Acquisition in fact occurred on January 1, 2003 or to project our results of operations for any future period. The unaudited financial information should be read in conjunction with our predecessor’s historical combined financial statements and related notes, our historical consolidated financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other financial information included elsewhere in this prospectus.

      The unaudited pro forma results of operations differ materially in certain respects from our predecessor’s historical financial performance. Our predecessor entered into quota share reinsurance agreements with LMC, its ultimate parent, whereby our predecessor ceded to LMC 80% of the net premiums written after external reinsurance, 80% of the net retained liabilities after application of all external reinsurance and 80% of operating expenses for all policies written by our predecessor from January 1, 1999 through December 31, 2002. During this period our predecessor also entered into excess of loss reinsurance agreements and loss portfolio reinsurance agreements with LMC, which affected our predecessor’s results as further explained in the predecessor’s historical combined financial statements and notes thereto included in this prospectus.

      Since we acquired renewal rights and not in-force insurance contracts in the Acquisition, we would not have been a party to the above mentioned reinsurance agreements with LMC. Therefore the unaudited pro forma results of operations do not include the effect of our predecessor’s reinsurance agreements with LMC. Consequently, the pro forma results of operations differ materially in certain respects from our predecessor’s historical financial statements.

      In preparing the pro forma financial information, all pre-Acquisition underwriting expenses have been retained in the presentation with the exception of commissions and premium taxes, which can be directly identifiable with a particular policy, and adjustments were made for these expenses.

      The pro forma and other adjustments, as described in the accompanying notes to the unaudited pro forma statement of operations, are based on available information and the assumptions that management believes are reasonable to reflect the acquisition of the policy renewal rights of our predecessor’s business.

34

Pro Forma Consolidated Statement of Operations

For the Year Ended December 31, 2003

	Predecessor							Company
	($ in thousands)
						Adjusted
	Nine Months					Nine Months		Three Months
	Ended					Ended		Ended
	September 30,		Predecessor			September 30,		December 31,			Company			Company
	2003		Adjustments			2003		2003(f)			Adjustments			Pro Forma
Net Premiums Earned	$	36,916	$	(3,220	)(a)	$	33,696	$	3,134		$	18,114	(g)	$	54,944
Net Investment Income		1,735		—			1,735		313			—			2,048
Net Realized Gains (Losses) on Investments		14		—			14		(4	)		—			10
Claims Service Income		698		—			698		663			—			1,361
Other Service Income		—		—			—		561						561
Other Income		131		(131	)(b)		—		35			—			35
Total Revenue		39,494		(3,351	)		36,143		4,702			18,114			58,959
Loss and Loss Adjustment Expenses		25,395		(786	)(c)		24,609		3,024			12,860	(h)		40,493
Underwriting Expenses		6,979		(286	)(d)		6,693		1,789			1,611	(i)		10,093
Other Expenses		408		—			408		192			541	(j)		1,141
Total Expenses		32,782		(1,072	)		31,710		5,005			15,012			51,726
Pretax Income (Loss)		6,712		(2,279	)		4,433		(303	)		3,102			7,233
Tax Expense (Benefit)		1,996		(775	)(e)		1,221		(101	)		1,338	(k)		2,459
Net Income (Loss)	$	4,716	$	(1,504	)	$	3,212	$	(202	)	$	1,764		$	4,774
Fully diluted earnings per common share equivalents														$	0.68
Diluted weighted average common share equivalents outstanding															6,988,122	(l)

35

SEABRIGHT INSURANCE HOLDINGS, INC.

NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

(Dollars in thousands)

a. Since we acquired renewal rights and not the underlying policies in the Acquisition, this adjustment is made to eliminate actual premiums earned during this period related to policies issued prior to January 1, 2003. This adjustment is made by first adding back ceded premiums earned on policies written prior to January 1, 2003 under the quota share reinsurance agreement with LMC, cancelled effective January 1, 2003, and then eliminating direct premiums earned less reinsurance ceded to outside parties on policies written prior to January 1, 2003, as follows:

Ceded premiums earned on policies written prior to January 1, 2003 under the quota share agreement with LMC	$	30,189
Direct premiums earned less reinsurance ceded to outside parties on policies written prior to January 1, 2003		(33,409	)
Net reduction to premiums earned	$	(3,220	)

This adjustment was computed based on actual premiums earned for the period January 1, 2003 through September 30, 2003.

The gross premiums written, premiums ceded and net premiums written for the year ended December 31, 2003 on a pro forma basis would be as follows:

	Predecessor									Company
							Adjusted
	Nine Months						Nine Months			Three Months
	Ended						Ended			Ended
	September 30,			Predecessor			September 30,			December 31,			Company			Company
	2003			Adjustments			2003			2003			Adjustments			Pro Forma
Gross premiums written	$	70,717		$	66		$	70,783		$	22,154		$	2,217		$	95,154
Premiums ceded		(4,079	)		(6,610	)(x)		(10,689	)		(2,759	)		(758	)(y)		(14,206	)
Net premiums written	$	66,638		$	(6,544	)	$	60,094		$	19,395		$	1,459		$	80,948

x.	To eliminate premiums returned by LMC as part of our predecessor’s quota share treaties with LMC.
y.	Ceded portion of premiums written in the fourth quarter.

	Premium and expense amounts ceded to external reinsurers prior to October 1, 2003 were determined according to the reinsurance treaties that our predecessor had in place at that time. Amounts ceded to external reinsurers after September 30, 2003 were determined according to reinsurance treaties that we entered into on October 1, 2003. If the Acquisition had taken place on January 1, 2003 and we obtained reinsurance on that date, we believe that the terms and conditions of our reinsurance treaties would have been similar to the terms and conditions of our predecessor’s external reinsurance treaties in effect at the time. There are no material differences between our predecessor’s 2003 reinsurance treaties and our reinsurance treaties that became effective on October 1, 2003.
b.	To eliminate amortization of deferred gain under the loss portfolio transfer agreement, since we would not have been a party to that agreement with respect to 1999 and prior policy years.
c.	Since we acquired renewal rights and not the underlying policies in the Acquisition, this adjustment is made to eliminate actual losses incurred in 2003 related to policies issued prior to January 1, 2003

36

SEABRIGHT INSURANCE HOLDINGS, INC.

NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS — (Continued)

and to eliminate the effect on actual losses in 2003 related to our predecessor’s quota share treaties and loss portfolio treaties with LMC as follows:

Direct losses incurred less reinsurance recoveries from outside parties	$	(23,720	)
Ceded losses incurred under the quota share agreement with LMC		21,434
Impact of loss portfolio transfer recorded in 2003 relating to 1998 and prior policy years		1,500
Net reduction to loss and loss adjustment expenses	$	(786	)

	This adjustment was computed based on actual losses incurred for the period January 1, 2003 through September 30, 2003.
d.	To eliminate underwriting expenses for commissions and premium taxes that are directly identifiable with the related premiums earned in (c). Other underwriting expenses cannot be directly identifiable with any particular policy and therefore no adjustment for these expenses has been made.
e.	We used the federal statutory income tax rate of 34% on all predecessor adjustments.
f.	There was no activity for SeaBright from June 19, 2003, its date of inception, through September 30, 2003.
g.	Since premiums are earned in proportion to the amount of insurance protection provided over the life of the policy, this adjustment adds actual premiums earned in the fourth quarter of 2003, net of reinsurance premiums to third parties, for policies written with inception dates from January 1, 2003 through September 30, 2003. This adjustment is necessary because premiums earned in the fourth quarter on predecessor policies written in the first nine months of 2003 would have been included in the Company’s Net Premiums Earned for the fourth quarter of 2003 had the Acquisition occurred on January 1, 2003 and are not included elsewhere in the Pro Forma Consolidated Statement of Operations.
h.	To reflect loss and loss adjustment expenses, net of reinsurance recoverable from third party reinsurers, related to the premiums earned in (c) above. Since loss and loss adjustment expenses are measured as a percentage of premiums earned, this adjustment is made based on our predecessor’s loss ratio for policies written by our predecessor from January 1, 2003 through September 30, 2003.
i.	Certain expenses associated with acquiring premiums are expensed over the life of the policy as the related premiums are earned. This is to adjust underwriting expenses for commissions and taxes related to premiums written from January 1, 2003 through September 30, 2003 and earned in (c) above. Commissions and premium taxes are not included in the Company’s reinsurance agreements.
j.	To adjust for the amortization of intangible assets as if the intangibles were acquired on January 1, 2003.
k.	We used the federal statutory income tax rate of 34% on all Company adjustments. We also adjusted taxes to reflect an effective federal statutory tax rate of 34% for the entire twelve months of 2003.
l.	To reflect conversion of each outstanding share of preferred stock into 15.299664 common shares as of the beginning of the period.

37

SELECTED FINANCIAL INFORMATION

      The following table sets forth selected historical financial information for the Company and its predecessor for the periods ended and as of the dates indicated. The selected income statement data for the nine months ended September 30, 2003 and the years ended December 31, 2002 and 2001 and the balance sheet data as of December 31, 2002 are derived from our predecessor’s audited combined financial statements included elsewhere in this prospectus, which have been prepared in accordance with U.S. generally accepted accounting principles and have been audited by KPMG LLP, our independent registered public accounting firm whose report thereon is included elsewhere in this prospectus and refers to the predecessor’s adoption of Statement of Financial Accounting Standards No. 142 — Goodwill and Other Intangible Assets as of January 1, 2002. The selected income statement data for the three months ended December 31, 2003 and the balance sheet data as of December 31, 2003 are derived from our audited consolidated financial statements included elsewhere in this prospectus, which have been prepared in accordance with U.S. generally accepted accounting principles and have been audited by KPMG LLP, our independent registered public accounting firm, whose report thereon is included elsewhere in this prospectus. We derived the selected balance sheet and income statement data as of and for the nine months ended September 30, 2004 from our unaudited financial statements, which include all adjustments, consisting of normal recurring adjustments, that management considers necessary for a fair presentation of our financial position and results of operations for the period presented. We derived the selected income statement data for the years ended December 31, 2000 and 1999 and the balance sheet data as of December 31, 2001, 2000 and 1999 from our predecessor’s unaudited financial statements which are not included in this prospectus. These historical results are not necessarily indicative of results to be expected from any future period. You should read the following selected financial information along with the information contained in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined and consolidated financial statements and related notes and the reports of the independent registered public accounting firm included elsewhere in this prospectus.

		Company					Predecessor
		Nine Months		Three Months			Nine Months		Year Ended December 31,
		Ended		Ended			Ended
		September 30, 2004		December 31, 2003(1)			September 30, 2003		2002			2001			2000		1999
		(Unaudited)													(Unaudited)		(Unaudited)
		($ in thousands, except per share data)
Income Statement Data
Gross premiums written		$	86,096	$	22,154		$	70,717	$	106,051		$	73,194		$	62,878	$	36,541
Ceded premiums written			6,275		2,759			4,079		86,983			59,509			47,472		28,986
Net premiums written		$	79,821	$	19,395		$	66,638	$	19,068		$	13,685		$	15,406	$	7,556
Premiums earned		$	48,201	$	3,134		$	36,916	$	17,058		$	12,638		$	8,264	$	11,418
Net investment income			1,638		313			1,735		3,438			3,388			2,512		5,406
Net realized gains (loss) on investments			17		(4	)		14		(4,497	)		(484	)		7		(2,867	)
Claim service income			2,298		663			698		1,169			954			—
Other service income			727		561
Other revenue			1,800		655			1,514		1,152			3,773			6,035		11,698
	Total revenues		54,681		5,322			40,877		18,320			20,269			16,818		25,655
Loss and loss adjustment expenses			34,823		3,024			25,395		4,992			8,464			4,496		13,630
Underwriting, acquisition, and insurance expenses(2)			10,507		1,789			6,979		3,681			3,409			2,975		6,420
Other expenses			3,567		812			1,791		3,339			2,123			5,522		5,283
	Total expenses		48,897		5,625			34,165		12,012			13,996			12,993		25,333
Income (loss) before federal income taxes			5,784		(303	)		6,712		6,308			6,273			3,825		322
Provision (benefit) for federal income taxes			1,768		(101	)		1,996		3,018			2,676			1,384		1,082
Net income (loss)		$	4,016	$	(202	)	$	4,716	$	3,290	(7)	$	3,597		$	2,441	$	(760	)
Fully diluted earnings per common share equivalents		$	0.55
Diluted weighted average of common share equivalents outstanding			7,256,156

38

	Company						Predecessor
	Nine Months			Three Months			Nine Months			Year Ended December 31,
	Ended			Ended			Ended
	September 30, 2004			December 31, 2003(1)			September 30, 2003			2002			2001			2000			1999
	(Unaudited)															(Unaudited)			(Unaudited)
	($ in thousands, except per share data)
Selected Insurance Ratios
Current accident year loss ratio(3)		67.5	%		75.3	%		71.0	%		71.3	%		68.9	%		103.9	%		119.4	%
Prior accident year loss ratio(4)								(4.1	%)		(48.8	%)		(9.4	%)		(49.5	%)
Net loss ratio		67.5	%		75.3	%		66.9	%		22.5	%		59.5	%		54.4	%		119.4	%
Net underwriting expense ratio(5)		20.3	%		39.2	%		18.9	%		21.6	%		27.0	%		36.0	%		56.2	%
Net combined ratio(6)		87.8	%		114.5	%		85.8	%		44.1	%		86.5	%		90.4	%		175.6	%

	Company				Predecessor
							As of December 31,
	As of		As of		As of
	September 30, 2004		December 31, 2003(1)		September 30, 2003		2002		2001		2000		1999
	(Unaudited)								(Unaudited)		(Unaudited)		(Unaudited)
	($ in thousands)
Selected Balance Sheet Data
Investment securities available-for-sale, at fair market value	$	95,450	$	51,881	$	46,338	$	55,891	$	65,730	$	31,079	$	29,813
Cash and cash equivalents		9,591		5,008		52,271		30,015		10,367		36,221		12,937
Reinsurance recoverables		10,116		12,050		39,676		36,617		38,145		53,961		56,988
Reinsurance recoverables from parent		—		—		117,942		102,107		126,584		139,934		170,656
Prepaid reinsurance		4,491		2,340		5,037		34,672		26,680		21,438		11,685
Total assets		185,200		106,080		321,537		316,821		314,082		332,540		357,906
Unpaid loss and loss adjustment expense		51,395		29,733		161,538		153,469		166,342		186,343		207,817
Unearned premium		49,591		18,602		40,657		47,604		34,918		34,460		21,869
Total stockholders’ equity		55,319		45,605		92,856		87,772		86,825		84,271		96,747

(1)	There was no activity for SeaBright from June 19, 2003, its date of inception, through September 30, 2003.
(2)	Includes acquisition expenses such as commissions, premium taxes and other general administrative expenses related to underwriting operations in our insurance subsidiary and are included in the amortization of deferred policy acquisition costs.
(3)	The current accident year loss ratio is calculated by dividing loss and loss adjustment expenses for the current accident year less claims service income by the current year’s net premiums earned.
(4)	The prior accident year loss ratio is calculated by dividing the change in the loss and loss adjustment expenses for the prior accident years by the current year’s net premiums earned.
(5)	The underwriting expense ratio is calculated by dividing the net underwriting expenses less other service income by the current year’s net premiums earned.
(6)	The net combined ratio is the sum of the net loss ratio and the net underwriting expense ratio.
(7)	Net income before change in accounting principle. Our predecessor adopted Statement of Financial Accounting Standards (SFAS) No. 142 on January 1, 2002. Upon adoption of SFAS No. 142 our predecessor recognized an impairment loss of $4,731,000 related to goodwill.

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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 financial statements and those of our predecessor, and the notes to those statements included elsewhere in this prospectus. The discussion and analysis below includes forward-looking statements that are subject to risks, uncertainties and other factors described in “Risk Factors” that could cause our actual results of operations, performance and business prospects and opportunities in 2004 and beyond to differ materially from those expressed in, or implied by those forward-looking statements. See “Note on Forward-Looking Statements.”

Overview

      We provide workers’ compensation insurance coverage for prescribed benefits that employers are required to provide to their employees who may be injured in the course of their employment. We currently provide workers’ compensation insurance to customers in the maritime, alternative dispute resolution and state act markets.

      On September 30, 2003, SeaBright acquired PointSure and the renewal rights and substantially all of the operating assets, systems and employees of, the Eagle entities from LMC, their ultimate parent. We refer to Eagle Pacific, Pacific Eagle and PointSure collectively as our predecessor. In connection with the Acquisition, SeaBright also purchased KEIC, a shell company in run off that was acquired from LMC for its workers’ compensation licenses in 43 states and the District of Columbia. The Acquisition was accounted for using the purchase method of accounting. The Acquisition will prospectively affect our results of operations in certain respects. The aggregate acquisition costs, including the transaction costs, of approximately $15.7 million have been allocated to the tangible and intangible assets acquired based upon estimates of their respective fair values as of the Acquisition date and will result in increased depreciation and amortization expense.

      In connection with the Acquisition, to minimize our exposure to any past business underwritten by KEIC, we entered into the adverse development cover. See “The Acquisition.” 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 amount on deposit in the trust account was increased to $4.8 million on December 23, 2004. If LMC is placed in 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.

      For periods ended on or before September 30, 2003, the financial information of our predecessor discussed below represents the combined financial results of Eagle Pacific, Pacific Eagle and PointSure. For periods ended after September 30, 2003, the financial information presented below represents the consolidated financial results of SeaBright and its subsidiaries, SeaBright Insurance Company and PointSure.

      Our premiums before the Acquisition are generally not comparable to our premiums after the Acquisition because we acquired renewal rights and not the underlying policies as of the date of the Acquisition. Aspects of our business that are comparable with the business of our predecessor include the loss ratio and expense ratio. We believe that our loss ratio is comparable to that of our predecessor because we are insuring accounts with the same type of risk exposure in essentially the same jurisdictions as our predecessor, and we are using the same risk selection rules, underwriting guidelines and pricing models that our predecessor used. We believe that our expense ratio is comparable to that of our predecessor because we acquired the work force and substantially all of the operating assets of our predecessor, and we are following the same business model as our predecessor, which was developed by our current management. Aspects of our business that are not comparable with the business of our predecessor include: premiums earned, investment income and service income. For example, our net premiums earned for the periods immediately following the Acquisition were lower than the net premiums

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earned for the periods immediately prior to the Acquisition because we did not earn any premium on any of our predecessor’s policies that were in force at September 30, 2003. Our investment income is not comparable to the investment income of our predecessor because our predecessor had a significant portion of investments in cash and cash equivalents for the years presented in the selected financial information table. In contrast, our investment portfolio consists mostly of investment grade fixed income securities, which have higher yields than cash and cash equivalents. Our service income is not comparable to the service income of our predecessor because our predecessor provided only limited claims handling services for certain affiliates of LMC. In contrast, we are providing claims handling as well as policy administration and accounting services for our predecessor.

Principal Revenue and Expense Items

      We derive our revenue from premiums earned, service fee income, net investment income and net realized gains (losses) from investments.

      Premiums earned. Gross premiums written include all premiums billed by an insurance company during a specified policy period. Premiums are earned over the term of the related policies. At the end of each accounting period, the portion of the premiums that are not yet earned are included in unearned premiums and are realized as revenue in subsequent periods over the remaining term of the policy. Our policies typically have a term of 12 months. Thus, for example, for a policy that is written on July 1, 2004, one-half of the premiums would be earned in 2004 and the other half would be earned in 2005.

      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 another company under a reinsurance agreement or from an authorized state mandated pool.

      We earn our direct premiums written from our maritime, ADR and state act customers. We also earn a small portion of our direct premiums written from employers who participate in the Washington Maritime Assigned Risk Plan. We immediately cede 100% of those premiums, net of our expenses, and 100% of the losses in connection with that business to the plan. In this prospectus, we do not include premiums from the Washington Maritime Assigned Risk Plan in our direct premiums written because it is not indicative of our core business or material to our results of operation.

      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 expenses) 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 approximate 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 approximate our costs and will substantially decrease over the next several years as transactions related to the Eagle entities diminish.

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      Our expenses consist primarily of:

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

      Underwriting, acquisition and insurance expenses. In our insurance subsidiary, 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 in our insurance subsidiary to our brokers for the premiums that they produce for us.

      Premium taxes and fees. We pay state and local taxes based on premiums, licenses and 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. The interest expense is paid quarterly in arrears. The interest expense for each interest payment period is based on the three-month LIBOR rate two London banking days prior to the interest payment period plus 400 basis points.

Outlook

      We expect to allocate most of the proceeds from this offering to our insurance company subsidiary based on our assessment of the level of capital that is prudent to support our expected levels of business, applicable regulatory requirements and discussions with insurance regulatory authorities and rating agencies.

      Based on our business model and anticipated capital, we currently have the following expectations for our business:

•  Reinsurance. We intend to cede approximately 10% of our gross premiums written to reinsurers under our excess of loss and catastrophe reinsurance treaties.

•  Operating leverage. We plan to target a net leverage ratio, as measured by net premiums written to statutory capital and surplus, of approximately 1.0 to 1.5. The actual net leverage ratio may vary from the target leverage ratio depending upon many factors that affect our rating with various organizations and capital adequacy requirements imposed by insurance regulatory authorities. These factors include but are not limited to the amount of statutory surplus, premium growth, quality and terms of reinsurance.

•  Investment portfolio leverage. When we have fully deployed our capital, we plan to target an invested assets to equity ratio of approximately 1.5 to 1 to 2.5 to 1.

Key Financial Measures

      We evaluate our insurance operations by monitoring certain key measures of growth and profitability. We measure our growth by examining our gross premiums written, ceded premiums written and net premiums written. We measure our underwriting profitability by examining our loss, underwriting expense and combined ratios. On a consolidated basis, we measure our operating results by examining net income and return on equity. In determining our return on equity for a given year, we divide our net income by the average of the beginning and ending shareholders’ equity for that year.

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      The items that influence the incurred loss and loss adjustment expenses for a given period include, but are not limited to, the following:

•  the number of exposures covered in the current year;

•  trends in the frequency and severity of claims;

•  changes in the cost of adjusting claims;

•  changes in the legal environment relating to coverage interpretation, theories of liability and jury determinations; and

•  the re-estimation of prior years’ unpaid loss and loss adjustment expenses in the current period.

      We review our estimates of ultimate loss and loss adjustment expenses quarterly, and changes in estimates are reflected in the period the additional information becomes known. We perform an actuarial analysis to determine the adequacy of our unpaid loss and loss adjustment expenses at each year end.

      Our reinsurance program significantly influences the level of net retained losses as our reinsurers, under excess of loss reinsurance agreements, assume a portion of the loss and loss adjustment expenses incurred in excess of certain loss thresholds. We remain obligated for amounts ceded in the event that the reinsurers do not meet their obligations under the agreements.

      We use independent actuaries to evaluate the adequacy of our unpaid loss and loss adjustment expenses. Because of the relative immaturity of our unpaid loss and loss adjustment expenses, 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. These techniques recognize, among other factors:

•  our claims experience and that of our 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.

      Our independent actuaries provide us with a point estimate for our ultimate unpaid loss and loss adjustment expense liabilities. We do not rely on a range of estimates from our actuaries, which eliminates the need for our management to select a value within the range.

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

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      Our total unpaid loss and loss adjustment expenses as of September 30, 2004 is $51.4 million. This amount is expected to cover all future loss and loss adjustment expense payments for all claims that are known by us as of September 30, 2004, as well as claims where the injury has occurred but the claim has not been reported to us. As of September 30, 2004, we have 1,087 open claims. Accordingly, we have an average of $47,286 in unpaid loss and loss adjustment expenses per open claim as of September 30, 2004. To the extent that this average proves to be inadequate, we will experience unexpected increases in the unpaid loss and loss adjustment expenses and a reduction to income in future periods. To the extent this average is overstated, we will have redundant unpaid loss and loss adjustment expense amounts resulting in additional income in future periods. There are a number of variables that can impact the average unpaid loss and loss adjustment expense per claim and, subsequently, the adequacy of our loss and loss adjustment expense liabilities. These include, but are not limited to:

• trends in the frequency and severity of claims,

• changes in the legal environment,

• claim inflation,

• the cost of claim settlements and

• legislative reforms.

      These items can influence the adequacy of our loss and loss adjustment expense liabilities individually or in combination. While the actuarial methods employed factor in amounts for these circumstances, they may prove to be inadequate. For example, there may be a number of claims where the unpaid loss and loss adjustment expense associated with future medical treatment proves to be inadequate because the injured worker does not respond to medical treatment as expected by the claims examiner. If we assume this affects 10% of the open claims and, on average, the unpaid loss and loss adjustment expenses on these claims is 20% inadequate, this would result in our unpaid loss and loss adjustment expense liability being inadequate by 2% or $1.0 million as of September 30, 2004. Another example is claim inflation. Claim inflation can result from medical cost inflation or wage inflation. As discussed above, the actuarial methods employed include an amount for claim inflation based on historical experience. We assume that the historical effect of this factor, which is embedded in our experience or industry experience, is representative of future effects for claim inflation. To the extent that the historical factors, and the actuarial methods utilized, are inadequate to recognize future inflationary trends, our unpaid loss and loss adjustment expense liabilities may be inadequate. If our estimate of future medical trend is two percentage points inadequate (i.e., if we estimate a 9% annual trend and the actual trend is 11%), our unpaid loss and loss adjustment expense liability could be inadequate. The amount of the inadequacy would depend on the mix of medical and indemnity payments and the length of time until the claims are paid. If we assume that 50% of the unpaid loss and loss adjustment expense is associated with medical payments and an average payout period of 5 years, our unpaid loss and loss adjustment expense liabilities would be inadequate by 5% or $2.57 million as of September 30, 2004. The impact of any reserve deficiencies, or redundancies, on our reported results and future earnings is discussed below.

      Our total unpaid loss and loss adjustment expense as of December 31, 2003 was $29.7 million. The increase in total unpaid loss and loss adjustment expenses from December 31, 2003 to September 30, 2004 is due to our premium growth during this time period. In general, a growing company should expect to see an increase in its unpaid loss and loss adjustment expense commensurate with the growth in its premium. There were 422 open claims at December 31, 2003. Accordingly, on that date, we had an average of $70,379 in unpaid loss and loss adjustment expenses per open claim. This amount is higher than the value at September 30, 2004 because we had a much smaller number of open claims on December 31, 2003. With a smaller number of open claims, one large claim can have a significant effect on the average. In addition, at December 31, 2003, more weight was given to the IBNR component of the unpaid loss and loss adjustment expenses due to the short period of time that we had been in operation. This can also lead to a higher average unpaid loss and loss adjustment expense per open claim. Our management strives to ensure that the actuarial work completed each quarter for unpaid loss and loss adjustment expenses

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enables us to adequately establish our unpaid loss and loss adjustment expense amounts so that the impact on future earnings is minimized.

      In the event our estimates of ultimate unpaid loss and loss adjustment expense liabilities prove to be greater than or less than the ultimate liability, our future earnings and financial position could be positively or negatively impacted. Future earnings would be reduced by the amount of any deficiencies in the year(s) that the claims are paid or the unpaid loss and loss adjustment expense liabilities are increased. For example, if we determined our current unpaid loss and loss adjustment expense liability of $51.4 million (as of September 30, 2004) to be 5% inadequate, we would experience a reduction in future earnings up to $2.57 million, depending on a number of other factors including federal income taxes. This reduction could be realized in one year or multiple years, depending on when the deficiency is identified. The deficiency would also impact our financial position in that our surplus would be reduced by an amount equivalent to the reduction in net income. Any deficiency is typically recognized in the unpaid loss and loss adjustment expense liability and, accordingly, it typically does not have a material effect on our liquidity because the claims have not been paid. Since the claims will typically be paid out over a multi-year period, we have generally been able to adjust our investments to match the anticipated future claim payments. Conversely, if our estimates of ultimate unpaid loss and loss adjustment expense liabilities prove to be redundant, our future earnings and financial position would be improved.

      Underwriting, Acquisition and Insurance Expenses. Underwriting, acquisition and insurance expenses include the costs to acquire and maintain a policy, and are included in amortization of deferred policy acquisition costs. Underwriting expenses include, but are not limited to, commissions we pay to brokers, state premium taxes and expenses of our underwriting department.

      Other Expenses. Other expenses include corporate expenses as well as interest expense on our surplus notes.

      Loss Ratio. Loss ratio is the sum of the current accident year ratio (expressed as a percentage) of loss and loss adjustment expenses incurred, less claims service income, to premiums earned, plus the prior accident year ratio (expressed as a percentage) of loss and loss adjustment expenses incurred to premiums earned. The premiums earned used in this calculation are determined on a financial reporting or calendar year basis and are the same for the current and prior accident year ratios. The current accident year ratio includes the loss and loss adjustment expense for all claims that occurred, or have a date of loss, in the current financial reporting period. The prior accident year ratio represents the change in loss and loss adjustment expense for all claims that occurred, or have a date of loss, in any year prior to the current financial reporting period. The prior accident year ratio demonstrates how prior accident year losses developed in the current financial reporting period. Claims service income is subtracted from these ratios because the loss adjustment expense component of the ratio includes all of our expenses associated with handling our own claims as well as the claims handled under contracts with LMC and other entities. We believe that subtracting the claims service income provides a better understanding of the loss ratio for our own claims.

      The following examples illustrate how these loss ratios are calculated for our predecessor for the nine months ended September 30, 2003, referring to figures in the tables shown below under “— Results of Operations” and “Business — Loss Reserves — Reconciliation of Loss Reserves.” Our predecessor’s current accident year ratio of 71.0% in the Results of Operations table is calculated by (1) starting with the “incurred related to current year” losses of $26,895 found in the Reconciliation of Loss Reserves table, (2) subtracting the claims service income of $698 from the Results of Operations table and (3) dividing the result by the premiums earned of $36,916 from the Results of Operations table. The full claims service income is subtracted from the current year losses in this example because there was no claims service fee income for prior years. Our predecessor’s prior accident year ratio of (4.1)% in the Results of Operations table is calculated by (1) starting with the “incurred related to prior years” losses of $(1,500) found in the Reconciliation of Loss Reserves table and (2) dividing this number by the premiums earned of $36,916 from the Results of Operations table. The negative values in the prior accident year loss ratio demonstrate that the

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prior accident year loss and loss adjustment expense developed favorably in the current financial reporting period.

      Underwriting Expense Ratio. Underwriting expense ratio is the ratio (expressed as a percentage) of net underwriting expenses, less other service income, to premiums earned, and measures a company’s operational efficiency in producing, underwriting and administering its insurance business.

      Combined Ratio. Combined ratio is the sum of the loss ratio and the underwriting expense ratio and measures a company’s overall underwriting profit. If the combined ratio is at or above 100%, an insurance company cannot be profitable without investment income and may not be profitable if investment income is insufficient.

      Net Premiums Written to Statutory Surplus Ratio. The net premiums written to statutory surplus ratio represents the ratio of our insurance subsidiary’s net premiums written, after reinsurance assumed and ceded, to statutory surplus. This ratio measures our exposure to pricing errors in our current book of business. The higher the ratio the greater the impact on surplus should our prices prove inadequate.

Critical Accounting Policies

      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 the company 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, intangibles, retrospective premiums and the impairment of investments. 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 claims, including estimates of future developments on these claims, and claims incurred but not yet reported to us, second injury fund, 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 from the original estimate. 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 expenses, 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

46

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 reserves 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 income statement.

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

      In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. If necessary, we would establish a valuation allowance to reduce the deferred tax assets to the amounts more likely than not to be realized.

      Goodwill and Intangible Assets. Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and 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 Financial Accounting Standards Board Statement 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. As of September 30, 2004, approximately 35% of premiums written relates to retrospectively rated policies.

      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 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

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sufficient to allow for an anticipated recovery in value and specific credit issues related to the issuer and current economic conditions. In general, we focus on those securities whose fair value was less than 80% of their amortized cost or cost, as appropriate, for six or more consecutive months. 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.

Results of Operations

      The table below summarizes certain operating results and key measures we use in monitoring and evaluating operations, including those of our predecessor. The information is intended to assist the reader in gaining a better understanding of our results of operations, including those of our predecessor, and to summarize and supplement information contained in our financial statements.

		Company			Predecessor			Company			Predecessor
		Nine Months			Nine Months			Three Months			Year Ended
		Ended			Ended			Ended			December 31,
		September 30,			September 30,			December 31,
		2004			2003			2003(1)			2002			2001
		(unaudited)						($ in thousands)
Income Statement Data
Gross premiums written		$	86,096		$	70,717		$	22,154		$	106,051		$	73,194
Ceded premiums written			6,275			4,079			2,759			86,983			59,509
Net premiums written		$	79,821		$	66,638		$	19,395		$	19,068		$	13,685
Premiums earned			48,201		$	36,916		$	3,134		$	17,058		$	12,638
Net investment income			1,638			1,735			313			3,438			3,388
Net realized gains (loss) on investments			17			14			(4	)		(4,497	)		(484	)
Claims service income			2,298			698			663			1,169			954
Other service income			727			—			561			—			—
Other revenue			1,800			1,514			655			1,152			3,773
	Total revenues		54,681			40,877			5,322			18,320			20,269
Loss and loss adjustment expenses			34,823			25,395			3,024			4,992			8,464
Underwriting, acquisition and insurance expenses(2)			10,507			6,979			1,789			3,681			3,409
Other expenses			3,567			1,791			812			3,339			2,123
	Total expenses		48,897			34,165			5,625			12,012			13,996
Income (loss) before federal income taxes			5,784			6,712			(303	)		6,308			6,273
Provision (benefit) for federal income taxes			1,768			1,996			(101	)		3,018			2,676
Net income (loss)			4,016		$	4,716		$	(202	)	$	3,290	(7)	$	3,597
Selected Insurance Ratios
Current accident year(3)			67.5	%		71.0	%		75.3	%		71.3	%		68.9	%
Prior accident years(4)			—			(4.1	%)		—			(48.8	%)		(9.4	%)
Net loss ratio			67.5	%		66.9	%		75.3	%		22.5	%		59.5	%
Net underwriting expense ratio(5)			20.3	%		18.9	%		39.2	%		21.6	%		27.0	%
Net combined ratio(6)			87.8	%		85.8	%		114.5	%		44.1	%		86.5	%

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	Company		Predecessor		Company		Predecessor
							As of
	As of		As of		As of		December 31,
	September 30,		September 30,		December 31,
	2004		2003		2003(1)		2002		2001
	($ in thousands)
	(unaudited)		(unaudited)						(unaudited)
Selected Balance Sheet Data
Investment securities available-for-sale, at fair market value	$	95,450	$	46,338	$	51,881	$	55,891	$	65,730
Cash and cash equivalents		9,591		52,271		5,008		30,015		10,367
Reinsurance recoverables		10,116		39,676		12,050		36,617		38,145
Reinsurance recoverables from parent		—		117,942		—		102,107		126,564
Prepaid reinsurance		4,491		5,037		2,340		34,672		26,680
Total assets		185,200		321,537		106,080		316,821		314,082
Unpaid loss and loss adjustment expense		51,395		161,538		29,733		153,469		166,342
Unearned premium		49,591		40,657		18,602		47,604		34,918
Total stockholders’ equity		55,319		92,856		45,605		87,772		86,825

(1)	There was no activity for SeaBright from June 19, 2003, its date of inception, through September 30, 2003.
(2)	Includes acquisition expenses such as commissions, premium taxes and other general administrative expenses related to underwriting operations in our insurance subsidiary and are included in the amortization of deferred policy acquisition costs.
(3)	The current accident year loss ratio is calculated by dividing loss and loss adjustment expenses for the current accident year less claims service income by the current year’s net premiums earned.
(4)	The prior accident year loss ratio is calculated by dividing the change in the loss and loss adjustment expenses for the prior accident years by the current year’s net premiums earned.
(5)	The underwriting expense ratio is calculated by dividing the net underwriting expenses less other service income by the current year’s net premiums earned.
(6)	The net combined ratio is the sum of the net loss ratio and the net underwriting expense ratio.
(7)	Net income before change in accounting principle. Our predecessor adopted Statement of Financial Accounting Standards (SFAS) No. 142 on January 1, 2002. Upon adoption of SFAS No. 142 our predecessor recognized and impairment loss of $4,731,000 related to goodwill.

      Under reinsurance agreements, we have ceded, and our predecessor did cede, various amounts of risk to other insurance companies for the purpose of limiting the maximum potential loss arising from the underlying insurance risk. In addition to traditional third party reinsurance agreements, our predecessor entered into the agreements described below. While these agreements do not affect our results of operations subsequent to the Acquisition, they did affect our predecessor’s results.

      Our predecessor entered into quota share reinsurance agreements with LMC, whereby our predecessor ceded to LMC 80% of the net premiums written after external reinsurance, 80% of the net retained liabilities, after application of all external reinsurance, and 80% of underwriting expenses for all policies written by our predecessor from January 1, 1999 through December 31, 2002. Quota share reinsurance is a form of pro rata (proportional) reinsurance in which the reinsurer assumes an agreed percentage of each risk being insured and shares all premiums and losses accordingly with the company seeking reinsurance, called the ceding company. The unearned premium on policies in force at December 31, 2002 was still subject, subsequent to December 31, 2002, to the terms of the quota share reinsurance treaties and was subsequently earned in 2003.

      Our predecessor also entered into excess of loss reinsurance agreements with LMC whereby LMC reinsured the excess liability that may have accrued to our predecessor by reason of the net retained

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liability of our predecessor under the quota share reinsurance agreements. Excess of loss reinsurance is reinsurance that indemnifies the reinsured against all or a specified portion of losses on underlying insurance policies in excess of a specified amount, which is call an “attachment level” or “retention.” The agreements applied to all policies written by our predecessor from January 1, 1999 through December 31, 2002. Our predecessor was not entitled to make a claim under these agreements unless the combined ratio (loss ratio plus underwriting expense ratio) with respect to the net retained liability under the quota share reinsurance agreements exceeded 115% on a paid basis.

      Effective January 1, 1999, our predecessor entered into retroactive loss portfolio transfer reinsurance agreements with LMC. The agreements called for our predecessor to cede to LMC the net retained liability for losses for the policies and losses with dates of accident on or before December 31, 1998 and for LMC to assume from our predecessor 100% of the net retained liability relating to those losses. Simultaneous with this cession, our predecessor transferred assets representing 100% of the unpaid loss and loss adjustment expenses. Subsequent to January 1, 1999, there has been adverse development of approximately $24.4 million through December 31, 2002 on the transferred unpaid loss and loss expenses. The deferred gains are amortized using the recovery method, which considers the actual recoveries at a particular calculation date in relation to the total estimated recoveries as of that date. The amortization (accretion) related to deferred gains of $131,000, ($1,537,000) and $2,668,000 was considered other income (expense) for the nine months ended September 30, 2003 and the years ended December 31, 2002 and 2001.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

      The results for the nine months ended September 30, 2004 are the results of operations for the Company, while the results for the nine months ended September 30, 2003 are the results of operations for our predecessor. In certain respects our predecessor’s results of operations before the Acquisition are not comparable to our results after the Acquisition, because we acquired renewal rights and not the underlying policies as of the date of the Acquisition. See “Overview.” From January 1, 2004 through September 30, 2004, we had 90 customers renew under the renewal rights that we acquired in the Acquisition. The customers who exercised their renewal rights represent 83% of those that were offered renewal terms, and accounted for $49.7 million in direct written premium for the nine months ended September 30, 2004. Policies are generally written for a twelve-month period with policy premium included in revenue in proportion to the amount of insurance protection provided. Our predecessor’s 2003 results include premiums in 2003 on the policies written prior to 2003.

      Gross Premiums Written. Gross premiums written were $86.1 million for the nine months ended September 30, 2004 compared to our predecessor’s $70.7 million for the nine months ended September 30, 2003. 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. Our gross premiums written of $86.1 million for the nine months ended September 30, 2004 represents an increase of $15.4 million when compared to our predecessor’s gross premiums written of $70.7 million for the nine months ended September 30, 2003, primarily as a result of our “A-” (Excellent) rating from A.M. Best in 2004, in comparison to our predecessor’s rating of “B++” (Very Good) in the prior period.

      Net Premiums Written. Net premiums written were $79.8 million for the nine months ended September 30, 2004 and $66.6 million for the nine months ended September 30, 2003. 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. Our net premiums written of $79.8 million for the nine months ended September 30, 2004 was $13.2 million above our predecessor’s net premiums written of $66.6 million for the nine months ended September 30, 2003. Net premiums written is affected by premiums ceded under reinsurance agreements. Our reinsurance premiums were $6.3 million, or 7.3% of gross premiums written for the nine months ended September 30, 2004. Our reinsurance contracts provide for the ceding of premium on either a gross premiums written or a gross premiums earned basis. Our predecessor’s premiums ceded were impacted by the quota share reinsurance agreement with LMC.

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      Net Premiums Earned. Net premiums earned were $48.2 million for the nine months ended September 30, 2004 and $36.9 million for the nine months ended September 30, 2003. 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. Our net premiums earned of $48.2 million for the nine months ended September 30, 2004 was $11.3 million greater than our predecessor’s $36.9 million in net premiums earned for the nine months ended September 30, 2003, primarily as a result of our “A-” (Excellent) rating from A.M. Best in 2004, in comparison to our predecessor’s rating of “B++” (Very Good) in the prior period.

      We record the entire annual policy premium as unearned premium when written, but 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 nine months ended September 30, 2004 do not reflect any premiums earned on any policies written prior to September 30, 2003, the date of the Acquisition.

      Net Investment Income. Net investment income was $1.6 million for the nine months ended September 30, 2004 compared to our predecessor’s $1.7 million for the nine months ended September 30, 2003. Our predecessor had $11.3 million more in average invested assets for the nine months ended September 30, 2003 than we had for the nine months ended September 30, 2004. However, as a result of our predecessor’s realignment of its portfolio in 2003 from fixed income securities to more short term investments, our predecessor’s yield was approximately 1.9% on average invested assets compared to our yield of approximately 2.0% on average invested assets.

      Service Income. Service income was $3.0 million for the nine months ended September 30, 2004 compared to our predecessor’s $0.7 million for the nine months ended September 30, 2003. Our service income results from service arrangements we have with LMC for claims processing services, policy administration and administrative services we perform for the Eagle entities’ insurance policies. Average monthly fees are declining as the volume of work required for policy administration decreases as a result of the run off of our predecessor’s business. Our predecessor’s service income resulted from claim service fees for handling policyholder claims for certain LMC subsidiaries in Alaska and Hawaii where those subsidiaries did not have claims offices.

      Other Revenue. Other revenue was $1.8 million for the nine months ended September 30, 2004 compared to our predecessor’s $1.5 million for the nine months ended September 30, 2003. Our other revenue as well as our predecessor’s other revenue result primarily from the operations of our non-insurance subsidiary.

      Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses were $34.8 million for the nine months ended September 30, 2004 compared to our predecessor’s loss and loss adjustment expenses of $25.4 million for the nine months ended September 30, 2003. The higher loss and loss adjustment expenses for the nine months ended September 30, 2004 were attributable to the increased premium for the period. Our loss ratio is 67.5% for the nine months ended September 30, 2004, compared to our predecessor’s loss ratio of 66.9% for the nine months ended September 30, 2003. We have recorded a receivable of approximately $2.5 million for adverse loss development under the adverse development cover since the date of the Acquisition. We do not expect this receivable to have any material effect on our future cash flows if LMC fails to perform its obligations under the adverse development cover. We currently have access to approximately $4.8 million under the collateralized reinsurance trust in the event that LMC fails to satisfy its obligations under the adverse development cover. See “The Acquisition.”

      Underwriting Expenses. Underwriting expenses increased to $10.5 million for the nine months ended September 30, 2004 from $7.0 million for the nine months ended September 30, 2003 as a result of the increase in premium for the later period. Our underwriting expense ratio for the nine months ended September 30, 2004 was 20.3%, compared to our predecessor’s underwriting expense ratio of 18.9% for the nine months ended September 30, 2003. The increase in the underwriting expense ratio resulted primarily from the fact that we have increased our staffing levels and related expenses in preparation for anticipated growth of our business. Our predecessor’s operations during the nine months ended September 30, 2003 were not expanding, as the future of the company at that time was uncertain.

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      Other Expenses. Our other expenses were $3.6 million for the nine months ended September 30, 2004, compared to our predecessor’s other expenses of $1.8 million for the nine months ended September 30, 2003. The increase resulted primarily from the amortization of intangible assets acquired in connection with the Acquisition, higher expenses associated with the operations of PointSure, our non-insurance company subsidiary, and interest expense on $12 million in surplus notes issued by our insurance subsidiary in May 2004. Our predecessor’s other expenses consist primarily of operating expenses for PointSure.

      Provision for Federal Income Taxes. The effective tax rate was 30.6% for the nine months ended September 30, 2004, compared to 29.7% for the nine months ended September 30, 2003. Our effective tax rate of 30.6% for the nine months ended September 30, 2004 was primarily lower than the statutory tax rate of 34% primarily as a result of tax exempt interest income. Our predecessor’s tax rate of 29.4% was lower than the statutory tax rate of 34% primarily as a result of a decrease in the deferred tax valuation allowance.

      Net Income. Net income was $4.0 million for the nine months ended September 30, 2004, compared to $4.7 million for the nine months ended September 30, 2003. Our net income for the nine months ended September 30, 2004 was lower primarily as a result of increased amortization expense for intangibles.

Predecessor Nine Months Ended September 30, 2003 Compared to Predecessor Year Ended December 31, 2002

      Gross Premiums Written. Our predecessor’s gross premiums written was $70.7 million for the nine months ended September 30, 2003, compared to $106.1 million in gross premiums written for the year ended December 31, 2002. Our predecessor’s average monthly gross premiums decreased 11.1% in the nine months ended September 30, 2003 compared to 2002. The decrease represents the net of the positive impact of our predecessor’s price increases averaging 16.5% for the nine months ended September 30, 2003, offset by the negative impact of our predecessor’s A.M. Best financial strength rating downgrade to “B++” in December 2002.

      Net Premiums Written. Our predecessor had $66.6 million in net premiums written for the nine months ended September 30, 2003, compared to $19.1 million for the year ended December 31, 2002. Our predecessor’s average monthly net premiums written of $7.4 million for the nine months ended September 30, 2003 compared to $1.6 million in average monthly net premiums written for the year ended December 31, 2002. This increase was attributable to the termination on January 1, 2003 of our predecessor’s inter-company quota share reinsurance agreements with LMC, which required our predecessor to cede to LMC 80% of the premiums written after external reinsurance, 80% of the net retained liabilities, after application of all external reinsurance, and 80% of underwriting expenses for all policies written by our predecessor from January 1, 1999 through December 31, 2002.

      Net Premiums Earned. Our predecessor had net premiums earned of $36.9 million for the nine months ended September 30, 2003 compared to $17.1 million for the year ended December 31, 2002. Our predecessor’s average monthly net premiums earned of $4.1 million for the nine months ended September 30, 2003 compared to $1.4 million in average monthly net premiums earned for the year ended December 31, 2002. The increase was attributable to the termination on January 1, 2003 of our predecessor’s inter-company quota share reinsurance agreements with LMC. For policies incepting January 1, 2003 and thereafter, since our predecessor was no longer ceding 80% of premium to LMC, our predecessor recorded the entire annual policy premium when the premium was written, but earned the premium over the life of the policy, generally twelve months. Since net premiums earned are relatively low until a company has been writing policies for a full policy cycle, the difference between written and earned is significant in the early stages.

      Net Investment Income. Our predecessor’s net investment income was $1.7 million for the nine months ended September 30, 2003 compared to $3.4 million for the year ended December 31, 2002. The average net yield declined from 4.2% in 2002 to 1.9% for the nine months ended September 30, 2003. This decline in yield was due primarily to the realignment of our predecessor’s portfolio in 2003 from fixed

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income securities to more short term investments, which carry lower interest rates than fixed income securities. Cash and short-term investments made up approximately 53.0% of our predecessor’s portfolio at September 30, 2003, compared to 34.9% at December 31, 2002.

      Net Realized Gains (Losses) on Investments. Our predecessor’s realized gain on investments was $14,000 for the nine months ended September 30, 2003, compared to $4.5 million in realized losses for the year ended December 31, 2002. In 2002 our predecessor realigned its portfolio with a greater emphasis on cash and short-term investments, which resulted in approximately $0.8 million in realized losses from the sale of securities with values that had declined substantially below their cost. In addition, our predecessor adjusted the carrying value of investments in equity securities by $3.6 million for other than temporary impairments.

      Claims Service Income. Our predecessor’s claims service income was $698,000 for the nine months ended September 30, 2003, compared to approximately $1.2 million for the year ended December 31, 2002. The approximate 20% decline in average monthly service fee income resulted from a decline in claims serviced for LMC, as LMC stopped writing new business in 2003 and the existing claims inventory declined as claims were settled and closed.

      Other Revenue. For the nine months ended September 30, 2003, our predecessor’s other revenue was $1.5 million compared to $1.2 million for the year ended December 31, 2002. The $1.5 and $1.2 million result primarily from the operations of our predecessor’s non-insurance subsidiary, which acted as a managing general underwriter for our predecessor. In 2003 our predecessor’s gross premiums were affected by the A.M. Best financial strength rating downgrade to B++ and as a result fees to its non-insurance subsidiary declined.

      Loss and Loss Adjustment Expenses. For the nine months ended September 30, 2003, the loss and loss adjustment expenses of our predecessor were $25.4 million, compared to $5.0 million for the twelve months ended December 31, 2002. The loss ratio increased from 22.5% in 2002 to 66.9% for the nine months ended September 30, 2003. During 2003, our predecessor reported favorable development of $1.5 million on prior years’ incurred losses, which was substantially below the favorable development of $8.3 million recorded in 2002.

      Underwriting, Acquisition and Insurance Expenses. For the nine months ended September 30, 2003, our predecessor’s underwriting, acquisition and insurance expenses were $7.0 million, compared to $3.7 million for the year ended December 31, 2002. The underwriting expense ratio decreased from 21.6% in 2002 to 18.9% in the 2003 period. The expenses and ratios are not comparable because of the 80% quota share reinsurance treaties with LMC, which were cancelled effective January 1, 2003 for all policies incepting after December 31, 2002. On a direct basis the expenses were $10.5 million for the nine months ended September 30, 2003 or, $1.1 million per month, compared to $17.1 million for the year ended December 31, 2002, or $1.4 million per month. The decline in average monthly expenses is due to expense control initiatives instituted in 2002 plus reduced acquisition expenses in 2003 associated with declining monthly premium volume in 2003 compared to 2002.

      Other Expenses. For the nine months ended September 30, 2003, our predecessor’s other expenses were $1.8 million compared to $3.3 million for the year ended December 31, 2002. In 2003 our predecessor’s other expenses consisted primarily of operating expenses for its non-insurance company subsidiary. For the twelve months ended December 31, 2002, our predecessor’s other expenses were primarily attributable to the operating expenses of its non-insurance subsidiary and to the method of recording the amortization of the deferred gain under our predecessor’s loss portfolio transfer agreements with LMC.

      Provision for Federal Income Taxes. Our predecessor’s effective tax rate was 29.4% for the nine months ended September 30, 2003, compared to 47.9% for the year ended December 31, 2002. Our predecessor’s 2003 tax rate was affected by the dividends received deduction and a decrease in the valuation allowance established for deferred tax assets. The 2002 tax rate was affected by the dividends received deduction and an increase in the valuation allowance established for deferred tax assets.

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      Net Income Before Cumulative Effect of Change in Accounting Principle. Our predecessor’s net income before cumulative effect of change in accounting principle for the nine months ended September 30, 2003 was $4.7 million, compared to $3.3 million for the year ended December 31, 2002.

      Net Income (Loss). Our predecessor’s net income for the nine months ended September 30, 2003 was $4.7 million, compared to a loss of $1.4 million for the year ended December 31, 2002, due primarily to the impact of the impairment charge of $4.7 million recorded in conjunction with the adoption of SFAS No. 142, Goodwill and Other Intangibles.

Predecessor Year Ended December 31, 2002 Compared to Predecessor Year Ended December 31, 2001

      Gross Premiums Written. Gross premiums written increased $32.9 million, or 44.9%, to $106.1 million for the year ended December 31, 2002, compared to $73.2 million for the year ended December 31, 2001. This increase was due primarily to increased market penetration and price increases of 13.8%. Favorable market conditions beginning in 2001 and continuing throughout 2002 resulted in an influx of new business and enabled our predecessor to increase prices.

      Net Premiums Written. Net premiums written for the twelve months ended December 31, 2002 were $19.1 million, representing an increase of $5.4 million, or 39.3%, from the $13.7 million in net premiums written for the same period in 2001. The increase resulted from price increases and market penetration, which generated greater gross premiums written.

      Premiums Earned. Premiums earned were $17.1 million for the twelve months ended December 31, 2002, compared to $12.6 million for the same period in 2001. The increase in net premiums earned in 2002 was attributable to market penetration and price increases in 2002, which generated greater gross premiums written.

      Net Investment Income. Our predecessor’s net investment income was $3.4 million for the years ended December 31, 2002 and 2001. The yield was 4.2% in 2002 compared to 4.7% in 2001. This decline was due primarily to the realignment of our predecessor’s portfolio in 2002 from fixed income securities to cash and short-term investments, which made up 34.9% of the portfolio in 2002 compared to 13.6% in 2001.

      Net Realized Gains (Losses) on Investments. Our predecessor realized net losses of $4.5 million for the year ended December 31, 2002, compared to net losses of $484,000 for the comparable period in 2001. In 2002, our predecessor realigned its portfolio with a greater emphasis on cash and short-term investments, which resulted in approximately $0.8 million in realized losses from the sale of securities with values that had declined substantially below their cost. In addition, our predecessor adjusted the carrying value of investments in equity securities by $3.6 million for other than temporary impairments.

      Claims Service Income. Our predecessor’s claims service income was $1.2 million for the year ended December 31, 2002, compared to $1.0 million for the year ended December 31, 2001 as the volume of claims serviced by our predecessor for LMC increased.

      Other Revenue. For the year ended December 31, 2002, other revenue was $1.2 million compared to $3.8 million for the year ended December 31, 2001. In 2002, the $1.2 million is primarily from the operations of our predecessor’s non-insurance subsidiary, which acted as a managing general underwriter for our predecessor. Our predecessor’s other revenue for the year ended December 31, 2001 consisted primarily from the operations of our predecessor’s non-insurance subsidiary and from the amortization of the deferred gain under the loss portfolio transfer agreements. Under the loss portfolio transfer agreements, our predecessor utilized the recovery method for recording the deferred gain, which considers the amounts received in relation to the ultimate incurred loss and loss adjustment expenses under the agreements and applies that ratio to the total deferred gain. The amortized portion of the deferred gain is adjusted accordingly in the current period. In 2002, there was an accretion to the deferred gain, which was recorded in other expense. Our predecessor’s other revenue for the year ended December 31, 2001 was $3.8 million as a result of the amortization of the deferred gain under the loss portfolio transfer agreements.

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      Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses were $5.0 million for the year ended December 31, 2002, compared to $8.5 million for the year ended December 31, 2001. Net loss and loss adjustment expense ratios for 2002 and 2001 were 22.5% and 59.5%, respectively. In 2002, our predecessor reduced 2001 and prior accident year unpaid loss and loss adjustment expense levels by $8.3 million. In prior policy periods, Eagle Pacific Insurance Company wrote a large number of accounts with smaller average premiums than our core book of business. Due to the nature of these accounts there was an expectation that they were subject to a greater volatility of risk than our core book of business and initial unpaid loss and loss adjustment amounts were established reflecting this higher level of risk. An actuarial evaluation was performed for the 2002 and prior accident years, which concluded that the actual loss development on this business was not as great as expected. This, coupled with the more recent emphasis of writing larger, less volatile accounts using stricter underwriting standards, led management to decrease the unpaid loss and loss adjustment expenses for the prior accident years. Included in the $8.3 million reduction was $7.0 million relating to the loss portfolio transfer, which reduced our predecessor’s unpaid loss and loss adjustment expenses dollar for dollar because it was not part of the quota share reinsurance treaties. As a result of the $7.0 million reduction to the unpaid loss and loss adjustment expenses under the loss portfolio treaties, our predecessor recorded an accretion to the deferred gain under the recovery method for recording the deferred gain, which considers the amounts received in relation to the ultimate incurred loss and loss adjustment expenses under the agreement and applies that ratio to the total deferred gain.

      Underwriting, Acquisition and Insurance Expenses. Our predecessor’s underwriting, acquisition and insurance expenses were $3.7 million for the year ended December 31, 2002, compared to $3.4 million for the year ended December 31, 2001. The increase in underwriting expenses in 2002 was primarily attributable to increased expenses, as our predecessor’s gross premiums written grew from $73.2 million in 2001 to $106.1 million in 2002. However, the underwriting expense ratio dropped to 21.6% in 2002 compared to 27% in 2001, as our predecessor reduced staffing and contained expense spending levels.

      Other Expenses. For the year ended December 31, 2002, our predecessor’s other expenses were $3.3 million, compared to $2.1 million in other expenses for the year ended December 31, 2001. The increase was primarily attributable to the operating expenses of our predecessor’s non-insurance company subsidiary and to the amortization of the deferred gain under our predecessor’s loss portfolio transfer agreements with LMC. The amortized portion of the deferred gain is adjusted accordingly in the current period. In 2002 there was an accretion to the deferred gain, which was recorded as other expenses.

      Provision for Federal Income Taxes. Our predecessor’s effective tax rate was 47.9% for the year ended December 31, 2002, compared to 42.7% for the year ended December 31, 2001. The 2002 tax rate was affected by the dividends received deduction and an increase in the valuation allowance established for deferred tax assets. The 2001 tax rate was affected by the dividends received deduction and the amortization of goodwill, which was not tax deductible.

      Change in Accounting Principle. Our predecessor adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Under SFAS No. 142, goodwill and 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 in accordance with the provisions for SFAS No. 142. An impairment loss of $4,731,000 related to goodwill was recognized upon adoption of SFAS No. 142. Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over 10 years. The recorded goodwill was periodically assessed for recoverability by determining whether the amortization of the goodwill balance over its remaining life could be recovered through undiscounted future operating cash flows of the acquired operation as compared to the fair valve method required under SFAS No. 142.

      Net Income Before Cumulative Effect of Change in Accounting Principle. Net income before the cumulative effect of a change in accounting principle was $3.3 million for the year ended December 31, 2002, compared to $3.6 million for the same period in 2001.

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Liquidity and Capital Resources

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

      Our investment portfolio is structured so that investments mature periodically over time in reasonable relation to current expectations of future claim payments. Since we do not have any actual 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, 2004 has an effective duration of 5.3 years with individual maturities extending out to 15 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 with appropriate durations to match against expected future claim payments.

      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, 2004, our reinsurance program provides us with 100% reinsurance protection for each loss occurrence in excess $500,000, up to $100 million. See “Business — Reinsurance.” Given industry and predecessor trends, we believe we are sufficiently capitalized to retain the first $500,000 of each loss occurrence.

      Our 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 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, 2003, 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 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 months ended September 30, 2004 was $28.0 million, compared to our cash flow from operations of $501,000 for the three months ended December 31, 2003. The increase is mainly attributable to increases in unearned premiums and unpaid loss and loss adjustment expense as a result of our growth.

      We used net cash of $39.9 million for investing activities for the nine months ended September 30, 2004, compared to $41.2 million for the three months ended December 31, 2003. The difference is primarily attributable to the fact that we invested the net proceeds from our initial capital infusion of $30 million immediately after the Acquisition.

      For the nine months ended September 30, 2004, financing activities provided cash of $5.2 million from the sale of additional convertible preferred stock on June 30, 2004.

      On May 26, 2004, our insurance subsidiary issued an aggregate principal amount of $12 million in floating rate surplus notes due 2034 to ICONS, LTD in a transaction in which Morgan Stanley & Co. Incorporated and Cochran Caronia Securities LLC acted as placement agents. Quarterly interest payments are expected to be made from cash flow from operations.

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Investment Portfolio

      Our investment strategy is designed to capitalize on our strategy of generating positive cash flow from our underwriting activities. Our first priority is preservation of capital, with a secondary focus on maximizing appropriate risk adjusted return. We seek to maintain sufficient liquidity from operations, investing and financing activities to meet our anticipated insurance obligations and operating and capital expenditure needs. Our fixed-income portfolio is rated investment grade to protect invested assets. We believe that our investment portfolio is highly liquid and consists of readily marketable, investment grade fixed-income securities. Our investment portfolio is managed by an independent investment advisor that operates under investment guidelines approved by our board of directors. In addition, we employ diversification rules and balance the investment credit risk and related underwriting risks to minimize total potential exposure to any one security or business sector. Our cash and investment portfolio had a market value of $105.0 million as of September 30, 2004, and is summarized by type of investment as follows:

			Amount		Percent of Portfolio
			(Dollars in thousands)
Fixed-income:
	Short-term investments		$	3,000		2.9	%
	U.S. Treasury securities and obligations of U.S. governmental agencies		$	14,730		14.0	%
	Corporate securities			17,968		17.1
	Mortgage pass-through securities			9,921		9.4
	Asset-backed securities			2,910		2.8
	Collateralized mortgage obligations			1,293		1.2
	Tax-exempt municipal securities			45,628		43.4
		Total fixed-income	$	95,450		90.9	%
Cash and cash equivalents				9,591		9.1
	Total		$	105,041		100.0	%

      As of September 30, 2004, our fixed-income portfolio of $95.5 million represented 90.9% of the carrying value of our total of cash and investments as of September 30, 2004. Standard & Poor’s Rating Services (“Standard & Poor’s”) or Moody’s Investors Service, Inc. (“Moody’s”) rated 100% of these securities “A” or better. As of September 30, 2004, we did not own any equity securities. The following is a summary of the credit quality of our fixed-income portfolio as of September 30, 2004.

Credit Rating		Percentage
“AAA”			71	%
“AA”			12
“A”			17
	Total		100	%

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      As of September 30, 2004, our investment portfolio contained corporate fixed-income and corporate equity securities with a fair value of $21.0 million. The following is a summary of these securities by industry segment as of September 30, 2004:

Industry Segment		Percentage
Financial			52	%
Consumer, non-cyclical			21
Utilities			9
Consumer, cyclical			6
Communications			6
Technology			6
	Total		100	%

      As of September 30, 2004, our investment portfolio contained $14.1 million of mortgage-backed, asset-backed and collateralized mortgage obligations. Of these securities, all were rated “AAA” by Standard & Poor’s or the equivalent rating by Moody’s. These securities are publicly traded and had fair values obtained from an independent pricing service. Changes in estimated cash flows due to changes in prepayment assumptions from the original purchase assumptions are revised based on current interest rates and the economic environment. We had no derivative financial instruments, real estate or mortgages in the investment portfolio as of September 30, 2004.

      We regularly evaluate the investment portfolio to identify other-than-temporary impairments of individual securities. We consider many factors in determining if an other-than-temporary impairment exists, including:

•  the length of time and extent to which the fair value of the security has been less than cost;

•  the financial condition and near-term prospects of the issuer of the security; and

•  the ability and willingness to hold the security until the fair value is expected to recover.

      Accordingly, when a decline in the value of a specific investment is considered to be “other than temporary,” a provision for impairment is charged to earnings (accounted for as realized loss) and the cost basis of that investment is reduced. While it is not possible to accurately predict if or when a specific security will become impaired, charges for other-than-temporary impairment could be material to results of operations in a future period.

      The gross unrealized losses of our investments as of September 30, 2004 are as follows:

			Aggregate		Aggregate			Fair Value as % of
			Fair Value		Unrealized Loss			Cost Basis
Fixed maturity securities with unrealized losses:
	Exceeding $50,000 at September 30, 2004 and for:
		Less than one year (0 issue)		—		—			—
		Longer than one year (0 issues)		—		—			—
	Less than $50,000 at September 30, 2004 (70 issues)		$	24,261,923	$	(163,956	)		99.3%

      As of September 30, 2004, we did not hold any securities with unrealized losses that were in excess of 20% of the security’s September 30, 2004 book value.

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Contractual Obligations and Commitments

      The following table identifies our contractual obligations by payment due period as of September 30, 2004:

		Payments Due by Period
				Less than						More than
		Total		1 Year		1-3 Years		4-5 Years		5 Years
		(Dollars in thousands)
Long term debt obligations
	Surplus notes	$	12,000							$	12,000
	Loss and loss adjustment expenses		51,395		7,350		24,772		7,401		11,872
Operating and lease obligations			2,179		138		1,305		713		23
	Total	$	65,574	$	7,488	$	26,077	$	8,114	$	23,895

      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, 2004 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 policy. As a result, our calculation of loss and loss adjustment expense payments due by period is subject to the same uncertainties associated with determining the level of unpaid loss and loss adjustment expenses generally and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our unpaid loss and loss adjustment expense process, see “Business — Loss Reserves.” 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. See “Risk Factors — Loss reserves are based on estimates and may be inadequate to cover our actual losses” for a discussion of the uncertainties associated with estimating unpaid loss and loss adjustment expenses.

Off-Balance Sheet Arrangements

      We have 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.

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 in fixed-income securities which are rated “A” or higher by Standard & Poor’s. We also independently, and through our outside investment manager, 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 $95.5 million at September 30, 2004 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.

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      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, 2004. As of this date, the estimated fair value of our fixed-income portfolio was $95,450,058. 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
						Percentage
						Increase
						(Decrease) in
	Estimated Change					Shareholders’
Hypothetical Change in Interest Rates	in Fair Value			Fair Value		Equity
	(Dollars in thousands)
200 basis point increase	$	(9,490,432	)	$	85,959,626		(9.9	)%
100 basis point increase		(5,005,070	)		90,444,988		(5.2	)%
No change		—			95,450,058		—
100 basis point decrease		5,091,277			100,541,335		5.3	%
200 basis point decrease		10,373,388			105,823,446		10.9	%

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BUSINESS

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.

Competitive Strengths

      We believe we enjoy the following competitive strengths:

•  Niche Product Offering. Our specialized workers’ compensation insurance products in maritime, alternative dispute resolution and selected state act markets enable us to address the needs of an underserved market. Our management team and staff have extensive experience serving the specific and complex needs of these customers.

•  Specialized Underwriting Expertise. We identify individual risks with complex workers’ compensation needs, such as multi-jurisdictional coverage, and negotiate customized coverage plans to meet those needs. Our underwriters average over 16 years of experience underwriting workers’ compensation coverage. Our specialized underwriting expertise enables us to align our interests with those of our insureds by encouraging the insured to bear a portion of the losses sustained under the policy. Approximately 35% of our gross premiums written for the nine months ended September 30, 2004 came from such arrangements. We have achieved a loss ratio of 67.5% for the nine months ended September 30, 2004.

•  Focus on Larger Accounts. We target a relatively small number of larger, more safety-conscious employers (businesses with 50 to 400 employees) within our niche markets. We have approximately 225 customers, with an average estimated annual premium size of approximately $436,000 at September 30, 2004. We believe this focus, together with our specialized underwriting expertise, increases the profitability of our book of business primarily because the more extensive loss history of larger customers enables us to better predict future losses, allowing us to price our policies more accurately. In addition, larger customers tend to purchase policies whose premium varies based on loss experience, and therefore have aligned interests with us. Our focus on larger accounts also enables us to provide individualized attention to our customers, which we believe leads to higher satisfaction and long-term loyalty.

•  Proactive Loss Control and Claims Management. We consult with employers on workplace safety, accident and illness prevention and safety awareness training. We also offer employers medical and disability management tools that help injured employees return to work more quickly. These tools include access to a national network of physicians, case management nurses and a national discounted pharmacy benefit program. Our chief medical officer, Marc B. Miller, M.D., assists our policyholders and our claims staff in achieving the best possible medical outcome while strategically managing our medical costs. Our strong focus on proven claims management practices helps to minimize attorney involvement and to expedite the settlement of valid claims. In addition, our

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	branch office network affords us extensive local knowledge of claims and legal environments, further enhancing our ability to achieve favorable results on claims. Our claims managers and claims examiners are highly experienced, with an average of over 17 years in the workers’ compensation insurance industry.
•	Established Book of Business without Associated Liabilities. In the Acquisition, we acquired renewal rights with respect to policies written by the Eagle entities; we did not acquire any in-force Eagle policies or historical liabilities associated with those policies. Although we did not write our first policy until October 2003, we have been able to create an established book of business comprised primarily of policies with customers with whom we have long-standing relationships and with operations and claims histories that we know well. We believe this knowledge has allowed us to more appropriately price our policies.
•	Experienced Management Team. The members of our senior management team, consisting of John G. Pasqualetto, Richard J. Gergasko, Joseph S. De Vita, Richard W. Seelinger, Marc B. Miller, M.D. and Jeffrey C. Wanamaker, average over 25 years of insurance industry experience, and over 20 years of workers’ compensation insurance experience.
•	Strong Distribution Network. We market our products through independent brokers and through PointSure, our in-house wholesale broker and third party administrator. This two-tiered distribution system provides us with flexibility in originating premiums and managing our commission expense. PointSure produced approximately 24% of our direct premiums written and 20% of our customers in the nine months ended September 30, 2004. We are highly selective in establishing relationships with independent brokers. There were approximately 80 independent brokers appointed by Eagle at September 30, 2003, but only 67 independent brokers were appointed by us at September 30, 2004. In addition, we negotiate commissions for the placement of all risks that we underwrite, either through independent brokers or through PointSure. For the nine months ended September 30, 2004, our ratio of commissions to net premiums earned was 6.0%.

Strategy

      We plan to pursue profitable growth and favorable returns on equity through the following strategies:

•  Expand Business in Core Markets. We wrote approximately 57% of our direct premiums in California, 29% in Hawaii, Washington and Alaska and 10% in Pennsylvania, Texas and Louisiana for the nine months ended September 30, 2004. We believe that the proceeds from this offering will provide us with the additional capital that we need to increase the amount of insurance business that we are able to write in these and other markets. We believe that our product offerings, together with our specialized underwriting expertise and niche market focus, will position us to increase our market share of the business that we write in our core and other target markets.

•  Expand Territorially. We wrote approximately 86% of our direct premiums for the first nine months of 2004 in the top four states where we do business. We believe that our insurance products and services offer the potential for strong demand beyond these states. We believe our experience with maritime coverage issues in the states in which we now operate can be readily applied to other areas of the country that we do not now serve, and ten other states in addition to California have enabling legislation for collectively bargained alternative dispute resolution that is similar to the ADR legislation in California. We plan to expand our business by writing premiums in several of the 43 states where we are licensed but do not currently write business, particularly in the Great Lakes and the East Coast regions.

•  Generate Fee and Commission Income. We intend to expand our ability to generate non-risk bearing fee and commission income by utilizing the expertise of our in-house wholesale broker and third party administrator, PointSure, to serve additional insurance companies.

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•  Focus on Profitability. We intend to continue our focus on underwriting discipline and profitability. We plan to do so by selecting risks prudently, by pricing our products appropriately and by focusing on larger accounts in our target markets.

•  Continue Making Technological Improvements. Our in-house technology department has developed effective, customized analytical tools that we believe significantly enhance our ability to write profitable business and cost-effectively administer claims. In addition, these tools also allow for seamless connectivity with our branch offices. We intend to continue making investments in advanced and reliable technological infrastructure. Our technology is scalable and can be modified at minimal cost to accommodate our growth.

Industry Background

Overview

      Workers’ compensation is a statutory system under which an employer is required to pay for its employees’ medical, disability, vocational rehabilitation, and death benefits costs for work-related injuries or illnesses. Most employers comply with this requirement by purchasing workers’ compensation insurance. The principal concept underlying workers’ compensation laws is that an employee injured in the course of his or her employment has only the legal remedies available under workers’ compensation law and does not have any other recourse against his or her employer. Generally, workers are covered for injuries that occur in the course and within the scope of their employment. An employer’s obligation to pay workers’ compensation does not depend on any negligence or wrongdoing on the part of the employer and exists even for injuries that result from the negligence or wrongdoings of another person, including the employee.

      Workers’ compensation insurance policies generally provide that the carrier will pay all benefits that the insured employer may become obligated to pay under applicable workers’ compensation laws. Each state has a regulatory and adjudicatory system that quantifies the level of wage replacement to be paid, determines the level of medical care required to be provided and the cost of permanent impairment and specifies the options in selecting healthcare providers available to the injured employee or the employer. Coverage under the USL&H Act is similar to the state statutory system, but is administered on a federal level by the U.S. Department of Labor. This coverage is required for maritime employers with employees working on or near the waterfront in coastal areas of the United States and its inland waterways. As benefits under the USL&H Act are generally more generous than in the individual state systems, the rates charged for this coverage are higher than those charged for comparable land-based employment. These state and federal laws generally require two types of benefits for injured employees: (1) medical benefits, which include expenses related to diagnosis and treatment of the injury, as well as any required rehabilitation and (2) indemnity payments, which consist of temporary wage replacement, permanent disability payments and death benefits to surviving family members. To fulfill these mandated financial obligations, virtually all employers are required to purchase workers’ compensation insurance or, if permitted by state law or approved by the U.S. Department of Labor, to self-insure. The employers may purchase workers’ compensation insurance from a private insurance carrier, a state-sanctioned assigned risk pool or a self-insurance fund (an entity that allows employers to obtain workers’ compensation coverage on a pooled basis, typically subjecting each employer to joint and several liability for the entire fund).

      Workers’ compensation was the fifth-largest property and casualty insurance line in the U.S. in 2003, according to A.M. Best. The workers’ compensation industry is estimated to have written over $42 billion in premium for 2003, which accounted for approximately 10% of the estimated $406 billion in net premiums written for the property and casualty industry in 2003, according to NCCI. According to A.M. Best, direct premiums written in 2003 for the workers’ compensation industry was approximately $50 billion, and direct premiums written for the property and casualty industry as a whole was approximately $450 billion. Premium volume in the workers’ compensation industry was up 13% in 2003 from 2002 while the entire property and casualty industry experienced a 10% increase in net premiums written in 2003 compared to 2002, according to NCCI.

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      We provide workers’ compensation coverage to employees who work on land, on shore and on navigable waters. As a specialty workers’ compensation insurer, we focus primarily on three distinct types of policy coverages: maritime, state act, and alternative dispute resolution. Based on our internal calculations using data collected from NCCI, independent state rating bureaus, The Bureau of National Affairs, Inc., the Workers’ Compensation Insurance Rating Bureau, the California Department of Insurance, historical averages and information compiled internally by our staff, we believe the niches in which we operate account for approximately $8.4 billion in net premiums written in 2003. We estimate based on these internal calculations that $1.3 billion of these premiums come from the maritime market, $3.9 billion from the ADR market and $3.2 billion from our targeted states in the state act workers’ compensation market. We believe that the basis of competition in the maritime and ADR lines is focused more on service and availability than price. These lines require highly specific coverage terms and claims management.

Industry Developments

      We believe the workers’ compensation sector is currently recovering from a period characterized by deteriorating operating profitability caused primarily by rising medical claim costs, rising indemnity claim costs, and poor investment performance. We believe that these challenges to the workers’ compensation sector have resulted in considerable increases in pricing and conditions that are significantly more favorable for us.

      During the period from 1994 to 2001, we believe that rising loss costs, despite declines in the frequency of losses, severely eroded underwriting profitability in the workers’ compensation insurance industry. According to Fitch, the workers’ compensation industry’s accident year combined ratios rose from 95% in 1993 to a high of 137% in 1999. In addition, NCCI estimated that workers’ compensation loss reserves for private carriers were deficient by $15 billion at year-end 2003, which are significantly up from just $1 billion in 1994, yet down from a high of $21 billion in 2001.

      Rising Medical Claim Costs. Workers’ compensation medical claims costs have risen approximately 128% over the ten years ending 2003, according to NCCI, driven in part by increased utilization and prescription drug costs.

      Rising Indemnity Claim Costs. Indemnity claim costs, which include wage replacement, have followed a similar trend, according to NCCI, which estimates that such costs have risen 85% for the ten years ending 2003.

      Poor Investment Performance. Unfavorable investment conditions have also adversely affected workers’ compensation industry returns. Due to the “long tail” nature of workers’ compensation claims, which refers to the length of time required to resolve claims, workers’ compensation insurers carry substantial loss reserves. Therefore, the investment performance of the investments funded with these amounts is a critical part of a carrier’s business model. The ratio of investment gain on insurance transactions (including investment income, realized capital gains and other income) to premium for private carriers has declined from a high of 21.3% in 1998 to 10.8% in 2002, according to NCCI. However, workers’ compensation investment returns are estimated to increase to 13.0% for 2003, which is the same rate of return experienced in 1990, according to NCCI.

      Reduction in Market Capacity. We believe that rising loss costs and low investment returns in recent years have led to poor operating results and have caused some workers’ compensation insurers to suffer severe capital impairment. These conditions have forced some insurers to withdraw from the marketplace and enter insolvency proceedings, precipitating a reduction in market capacity. Notwithstanding this reduction in market capacity, workers’ compensation premium volume has shown steady growth, increasing from $25.0 billion in 1999 to an estimated $42.1 billion in 2003, a 59% increase, driven mainly by rate increases.

      California Market. We believe the California workers’ compensation market has faced even greater challenges than the United States workers’ compensation market. California is the largest workers’

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compensation insurance market in the United States. In 2003, California accounted for an estimated $15 billion written premium (net of deductible) according to the Workers’ Compensation Insurance Rating Bureau of California (“WCIRB”), or approximately 30% of the entire U.S. workers’ compensation market.

      Since 1995, when California imposed an open rating system where carriers set their own rates, California’s workers’ compensation market has been characterized by severe price competition. Carriers began reducing rates in order to increase their market share. Workers’ compensation rates in California declined approximately 59% from 1993 to 1998, but rose 32% from 1998 to 2001, according to the WCIRB. Lower rates together with increases in medical and indemnity claim costs severely eroded underwriting profitability as accident year combined ratios increased from 84% in 1993 to 182% in 1999, when the ratios began to steadily decrease to 86% in 2003, according to the WCIRB.

      We believe the deterioration in underwriting profitability triggered a reduction in market capacity. Carriers responsible for 30% of the California market in 1995 are under Department of Insurance supervision or have ceased writing business in California. As market capacity has declined, the State Compensation Insurance Fund (“SCIF”), traditionally practicing an “insurer of last resort” operating approach in California, has become the dominant provider in the workers’ compensation market. By 2003, SCIF’s market share had climbed to more than 50%, up from its average of approximately 20% from 1994 through 1999. As SCIF has grown in market share, its net premium written to surplus ratio has risen to levels that have prompted the California Department of Insurance to question SCIF’s stability, from a low 0.6x in 1996 to nearly 3.7x in 2003.

Industry Outlook

      We believe the challenges faced by the workers’ compensation industry over the past decade have created significant opportunity for workers’ compensation insurers to increase the amount of business that they write. 2002 marked the first year in five years that private carriers in the property and casualty industry experienced an increase in annual after-tax returns on surplus, including capital gains, according to NCCI. Workers’ compensation industry calendar year combined ratios declined for the first time in seven years, falling from 122% in 2001 (with 1.9% attributable to the September 11, 2001 terrorist attacks) to 111% in 2002 and an estimated 108% in 2003 as the rate of increase in medical and indemnity claim costs slowed. Medical claim costs increased 9% in 2003 from 2002, compared to increases of 12% and 11% in 2001 and 2002, respectively; indemnity claim costs increased 4.5% in 2003 from 2002, compared to 7.3% and 6.0% in 2001 and 2002, respectively. We believe that opportunities remain for us to provide needed underwriting capacity at attractive rates and upon terms and conditions more favorable to insurers than in the past.

Customers

      We currently provide workers’ compensation insurance to the following types of customers:

•  Maritime employers with complex coverage needs over land, shore and navigable waters. This involves underwriting liability exposures subject to various state and federal statutes and applicable maritime common law. Our customers in this market are engaged primarily in ship building and repair, pier and marine construction and stevedoring.

•  Employers, particularly in the construction industry in California, who are party to collectively bargained workers’ compensation agreements that provide for settlement of claims out of court in a negotiated process.

•  Employers who are obligated to pay insurance benefits specifically under state workers’ compensation laws. We primarily target employers in states that we believe are underserved, such as California, Hawaii and Alaska.

      Maritime Customers. Providing workers’ compensation insurance to maritime customers with multi-jurisdictional liability exposures was the core of the business of Eagle Pacific Insurance Company, which

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began writing specialty workers’ compensation insurance almost 20 years ago, and remains a key component of our business today. We are authorized by the U.S. Department of Labor to write maritime coverage under the USL&H Act in all federal districts, and believe we are one of the most capable underwriters in this niche in the United States. The USL&H Act is a federal law that allows for compensation to “longshoremen” employees if an injury or death occurs upon navigable waters in the United States, including any adjoining pier, wharf, dry dock, terminal, building-way, marine railway or other adjoining area customarily used by an employer in loading, unloading, repairing, dismantling or building a vessel. We also write maritime employers’ liability coverage under the Jones Act. The Jones Act is a federal law, the maritime employer provisions of which provide injured offshore workers, or seamen, with a remedy against their employer for injuries arising from negligent acts of the employer or co-workers during the course of employment on a ship or vessel.

      The availability of maritime coverage has declined in recent years due to several factors, including market tightening and insolvency of insurers providing this type of insurance. Offshore mutual organizations have increasingly become the default mechanism for insuring exposures for maritime employers due to the withdrawal of several traditional insurance carriers from this market segment. Maritime employers that obtain coverage through offshore mutual organizations are not able to rely on the financial security of a rated domestic insurance carrier. Accordingly, these employers are exposed to joint-and-several liability along with other members of the mutual organization. We offer maritime employers cost-competitive insurance coverage (usually under one policy) for liabilities under various state and federal statutes and applicable maritime common law without the uncertain financial exposure associated with joint-and-several liability. We believe we have very few competitors who focus on maritime employers with multi-jurisdictional liability exposures.

      We also provide coverage for exposures under The Outer Continental Shelf Lands Act (the “OCSLA”). The OCSLA is a federal workers’ compensation act that also provides access to the benefits defined in the USL&H Act for maritime employers with employees working on an off-shore drilling platform on the Outer Continental Shelf.

      In the first nine months of 2004, we received approximately 34% of our direct premiums written from our maritime customers. We define a maritime customer as a customer whose total workers’ compensation exposure consists of at least 10% of maritime exposure. When we use the term maritime exposure in this prospectus, we refer to exposure under the USL&H Act, the Jones Act or both. Not all of the gross premiums written from our maritime customers are for maritime exposures. For the nine months ended September 30, 2004, approximately 68% of our direct premiums written for maritime customers were for maritime exposures. Our experience writing maritime coverage attracts maritime customers for whom we can also write state act and ADR coverage.

      Employers Party to Collectively Bargained Workers’ Compensation Agreements. We also provide workers’ compensation coverage for employers, particularly in the construction industry in California, that are party to collectively bargained workers’ compensation agreements with trade unions, also known as alternative dispute resolution, or ADR, programs. These programs use arbitration instead of litigation to resolve disputes out of court in a negotiated process. Alternative dispute resolution insurance programs in California were made possible by legislation passed in 1993 and expanded by legislation passed in 2003. In 2003, these alternative dispute resolution programs became available to all unionized employees in California, where previously they were available only to unionized employees in the construction industry. We are recognized by twelve union programs as authorized to provide coverage for employers that are party to collectively bargained workers’ compensation agreements with trade unions. Ten states in addition to California have enabling legislation allowing for the creation of alternative dispute resolution insurance programs.

      The primary objectives of an alternative dispute resolution program are to reduce litigation costs, improve the quality of medical care, improve the delivery of benefits, promote safety and increase the productivity of union workers by reducing workers’ compensation costs. The ADR process is generally handled by an ombudsman, who is typically experienced in the workers’ compensation system. The ombudsman gathers the facts and evidence in a dispute and attempts to use his or her experience to

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resolve the dispute among the employer, employee and insurance carrier. If the ombudsman is unable to resolve the dispute, the case goes to mediation or arbitration.

      Alternative dispute resolution programs have had many positive effects on the California workers’ compensation process. For example, a 2004 study conducted by the California Workers’ Compensation Institute revealed that attorney involvement decreased by 72% for claims handled under ADR programs as opposed to claims handled under California’s statutory workers’ compensation system. In addition, our own studies have revealed that the average lifespan of a non-ADR time loss claim with class codes matching ADR claims in California is reduced by 53% for claims handled under an ADR program. The average lifespan of a claim is a key measure of the likely cost of the claim. We are one of the few insurance companies that offers this product in the markets that we serve.

      In the first nine months of 2004, we received approximately 39% of our direct premiums written from customers who participate in alternative dispute resolution programs. We define an ADR customer as any customer who pays us a premium for providing the customer with insurance coverage in connection with an ADR program. Not all of the gross premiums written from our ADR customers are for ADR exposures. For the nine months ended September 30, 2004, approximately 72% of our direct premiums written for ADR customers were for ADR exposures. Our experience writing ADR coverage attracts ADR customers for whom we can also write state act and maritime coverage.

      State Act Customers. We also provide workers’ compensation insurance to other employers who are obligated to pay benefits to employees under state workers’ compensation laws. We provide this coverage primarily for customers in the states of California, Hawaii and Alaska. We provide coverage under state statutes that prescribe the benefits that employers are required to provide to their employees who may be injured in the course of their employment. Our policies are issued to employers. The policies provide payments to covered, injured employees of the policyholder for, among other things, temporary or permanent disability benefits, death benefits, medical benefits and hospital expenses. The benefits payable and the duration of these benefits are set by statute and vary by state and with the nature and severity of the injury or disease and the wages, occupation and age of the employee. We are one of a few insurance carriers that have a local claim office in Alaska and Hawaii and, as such, we do not need to rely on third party administrators in these two markets.

      In the first nine months of 2004, we received approximately 27% of our direct premiums written from state act customers. We define a state act customer as a customer whose state act exposure arises only under state workers’ compensation laws and who is not a maritime customer or an ADR customer.

      Customer Concentration. As of September 30, 2004, our largest customer had annual direct premiums written of approximately $4.5 million, or 5.3% of our total gross premiums written. We are not dependent on any single customer which would have a material adverse effect on our business if we lost the customer. As of September 30, 2004, we had in-force premiums of $98.1 million. In-force premiums refers to our current annual gross premiums written for all customers that have active or unexpired policies, and represents premiums from our total customer base. Our three largest customers have annual gross premiums written of $12.6 million, or 12.9% of our total in-force premiums as of September 30, 2004. We do not expect the size of our largest customers to increase significantly over time. Accordingly, as we grow in the future, we believe our largest customers will account for a decreasing percentage of our total gross premiums written.

Distribution

      We distribute our products primarily by identifying independent brokers with well-established maritime or construction expertise. We currently have a network of approximately 67 insurance brokers. We do not employ sales representatives or use third-party managing general agents. The licensed insurance brokers with whom we contract are compensated by a commission set as a percentage of premiums. As of September 30, 2004, we have 16 brokers that participate in our broker bonus program. This profit sharing program was initially developed in early 2001 by our predecessor to further relationships with brokers and to compete with other carriers with similar programs. Following the Acquisition, we continued the program

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to maintain those broker relationships. In all cases, we initiate the program arrangement with the broker. The program is offered on a selective basis to only those brokers that qualify based on the amount of the brokers’ business in our specialized market niches, the professional reputation and product knowledge enjoyed by the broker in the local insurance community and the broker’s demonstrated interest in working with our underwriters over the long term. The agreements we have with these brokers provide for the payment of additional commissions in the event that the broker produces profitable business achieving a calendar year loss ratio less than targets set forth in the applicable agreement. In addition to achieving the loss ratio target, the broker must also achieve certain volume targets in order to qualify for the additional commissions. The terms of the agreements with different brokers are the same, with only the target levels varying. Our standard broker agreement does not contain a commission schedule because all commissions are specifically negotiated as part of our underwriting process. Our average commission rate for the nine months ended September 30, 2004 was 5.71%. For the nine months ended September 30, 2004, the accounts for 18 of our customers were written with no commissions, constituting 17.7% of our direct premiums written for that period. The brokers do not have authority to underwrite or bind coverage on our behalf, and they are contractually bound by our broker agreement.

      We also distribute our products through PointSure, our licensed in-house underwriting agency, wholesale broker and third-party administrator. PointSure is a wholly-owned subsidiary of SeaBright. PointSure has approximately 320 sub-producer agreements as of September 1, 2004 and is authorized to act as an agent under firm licenses or licenses held by one of its officers in 47 states. In addition to enhancing our distribution process by providing us with the flexibility to avoid the costly and time consuming process of appointing brokers, PointSure serves as a cost-effective source of business production for us and conducts product research and development for us.

      PointSure acts in a variety of capacities for us and for third parties. PointSure provides marketing, sales, underwriting, distribution and policy administration services for SeaBright Insurance Company to non-appointed brokers. PointSure also serves as the program administrator for SeaBright Insurance Company in its capacity as the current servicing carrier for the maritime assigned risk plan for the State of Washington. For the nine months ended September 30, 2004, approximately 38% of PointSure’s total revenue after intercompany eliminations was derived from fees associated with the operation and administration of this plan. In addition, PointSure performs services for third parties unaffiliated with us. For example, PointSure acts as a third party claims administrator for self-insured employers and as a wholesale insurance broker for non-affiliated companies. For services provided to us, PointSure receives flat fees as opposed to commissions, and these fees are dependent on the type of business produced. For services provided to certain other carriers, PointSure may receive incentive commissions based on the achievement of certain premium growth, retention and profitability objectives. As a matter of policy, PointSure discloses to its sub-producers that it may earn incentive commissions and offers to provide further information upon request. PointSure produced approximately 24% of our direct premiums written and approximately 20% of our customers for the nine months ended September 30, 2004.

      SeaBright Insurance Company and PointSure have entered into a five year agency services agreement pursuant to which PointSure provides insurance services with respect to the servicing of insurance policies written by SeaBright Insurance Company, including underwriting services, collection of premium services, endorsement services, cancellation services and marketing services. All services provided by PointSure under the agreement are subject to the ultimate review and control of the board of directors of SeaBright Insurance Company. In exchange for the services it provides through May 31, 2005, under the Agreement, PointSure is entitled to receive fees equal to (1) 7.5% of direct premiums produced for business written and serviced by PointSure, (2) 2.5% of the estimated annual premium for underwriting support for business written by SeaBright Insurance Company and (3) 1.75% of the estimated annual premium for the marketing and management of alternative dispute resolution programs. However, with respect to services rendered through May 31, 2005 in connection with the Washington USL&H Act assigned risk plan, PointSure is entitled to receive 15% of direct premiums written. Under the Agreement, this compensation arrangement changes to compensation on a cost incurred basis for all services PointSure provides SeaBright Insurance Company from June 1, 2005 through the remaining term of the Agreement. We have

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received regulatory approvals for the agency services agreement by the Illinois Department of Financial and Professional Regulation, Division of Insurance and the California Department of Insurance, effective retroactively to October 1, 2003.

      The following table provides the geographic distribution of our risks insured as represented by direct premiums written by product for the nine months ended September 30, 2004.

	Direct Premiums Written
				Alternative
				Dispute								Percent of
State	Maritime			Resolution			State Act			Total		Total
Alaska	$	1,685,682		$	—		$	8,864,335		$	10,550,017		12.9	%
Alabama		2,538			—			109,839			112,377		*
Arizona		1,407			—			162,308			163,715		*
California		4,754,840			22,786,929			18,807,905			46,349,674		56.9
Colorado		—			—			94,236			94,236		*
Florida		183,485			—			412,142			595,627		1.0
Hawaii		2,025,163			—			5,949,234			7,974,397		9.8
Illinois		—			—			125,195			125,195		*
Louisiana		1,316,006			—			605,960			1,921,966		2.3
Mississippi		250			—			—			250		*
New Jersey		242,115			—			489,625			731,740		1.0
Nevada		—			—			936,532			936,532		1.1
Oregon		339,403			—			97,488			436,891		1.0
Pennsylvania		3,140,799			—			533,467			3,674,266		4.5
South Carolina		—			—			34,265			34,265		*
Texas		518,865			—			2,278,622			2,797,487		3.4
Utah		—			—			9,391			9,391		*
Washington		4,963,486			—			—			4,963,486		6.1
Total Direct Premiums Written	$	19,174,039		$	22,786,929		$	39,510,544		$	81,471,512
Percent of Total		23.5	%		28.0	%		48.5	%

* Represents less than 1% of total.

Underwriting

      We underwrite business on a guaranteed-cost basis and we also underwrite loss sensitive plans that make use of retrospective-rating plans and deductible plans. Guaranteed cost plans allow for fixed premium rates for the term of the insurance policy. Although the premium rates are fixed, the final premium on a guaranteed cost plan will vary based on the difference between the estimated annual payroll at the time the policy is issued and the final audited payroll of the customer after the policy expires. Loss sensitive plans, on the other hand, provide for a variable premium rate for the policy term. The variable rate is based on the customer’s actual loss experience during the policy period, subject to a minimum and maximum rate. The final premium for the policy may not be known for five to seven years after the expiration of the policy, because the premium is re-calculated in 12-month intervals following the expiration of the policy to reflect development on reported claims. Our loss sensitive plans allow our customers to choose to actively manage their insurance premium costs by sharing risk with us. For the nine months ending September 30, 2004, approximately 65% of our direct premiums written come from customers on guaranteed cost plans, with the remaining 35% of our direct premiums written coming from customers on loss sensitive plans.

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      As opposed to using a class underwriting approach, which targets specific classes of business or industries and where the acceptability of a risk is determined by the entire class or industry, our underwriting strategy is to identify and target individual risks and specialized workers’ compensation needs. We negotiate individual coverage plans to meet those needs with competitive pricing and supportive underwriting, risk management and service. Our underwriting is tailored to each individual risk, and involves a financial evaluation, loss exposure analysis and review of management control and involvement. Each account that we underwrite is evaluated for its acceptability, coverage, pricing and program design. We do not underwrite books or blocks of business. We make significant use of risk sharing (or loss sensitive) plans to align our interests with those of the insured. Our underwriting department monitors the performance of each account throughout the coverage period, and upon renewal, the profitability of each account is reviewed and integrated into the terms and conditions of coverage going forward.

      The underwriting of each piece of business begins with the selection process. All of our underwriting submissions are initially sent to the local underwriting office based on the location of the producer. A submission is an application for insurance coverage by a prospective policyholder, or by a broker on behalf of a prospective policyholder. Our underwriting professionals screen each submission to ensure that the potential customer is a maritime employer, an employer involved in a alternative dispute resolution program, or another employer governed by a state workers’ compensation act with a record of successfully controlling higher hazard workers’ compensation exposures. The submission must generate a minimum premium size and must not involve prohibited operations. We deem diving, ship breaking, employee leasing and asbestos and lead abatement to be prohibited operations that we generally do not insure. Once a submission passes the initial clearance hurdle, members of our loss control and underwriting departments jointly determine whether to ultimately accept the account. If our underwriting department preliminarily determines to accept the account, our loss control department conducts a prospect survey. We require a positive loss control survey before any piece of new business is bound, unless otherwise approved by our underwriting department management. Our loss control consultants independently verify the evaluations of the underwriting department and meet with our underwriting department management to confirm the decision to accept the account.

      To determine the premium on a particular account, we use a customized loss-rating model developed by our actuaries. We compare the loss history of each customer to the expected losses underlying the rates in each state and jurisdiction. Our loss projections are based on comparing actual losses to expected losses. We estimate the annual premium by adding our expenses and profit to the loss projection selected by our underwriters. This process helps to ensure that the premiums we charge are adequate for the risk insured.

      Our underwriting department is managed by experienced underwriters who specialize in maritime and construction exposures. We have underwriting offices in Seattle, Washington; Orange, California; Anchorage, Alaska; and Houston, Texas. We also maintain a resident underwriting professional in San Francisco, California to better serve our client base. As of September 30, 2004, we had a total of 25 employees in our underwriting department, consisting of 15 underwriting professionals and 10 support-level staff members. The average length of underwriting experience of our current underwriting professionals exceeds 15 years. We use audits and “authority letters” to help ensure the quality of our underwriting decisions. Our authority letters set forth the underwriting authority for each individual underwriting staff member based on their level of experience and demonstrated knowledge of the product and market. We also maintain a table of underwriting authority controls in our custom-built quote and issue system that is designed to prevent the release of quotes that are outside an underwriter’s authority. These controls compare the underwriter’s authority for premium size, commission level, pricing deviation, plan design and coverage jurisdiction to the terms that are being proposed for the specific policyholder. This system prevents the release of final insurance proposals that are outside an underwriter’s authority without appropriate review and confirmation from our senior underwriting personnel, allowing our senior underwriting personnel to mentor and manage the individual performance of our underwriters and to monitor the selection of new accounts.

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Loss Control

      We place a strong emphasis on our loss control function as an integral part of the underwriting process as well as a competitive differentiator. Our loss control department delivers risk level evaluations to our underwriters with respect to the degree of an employer’s management commitment to safety and acts as a resource for our customers to effectively support the promotion of a safe workplace. Our loss control staff has extensive experience developed from years of servicing the maritime and construction industries. Our loss control staff consists of 6 employees as of September 30, 2004, each averaging over 19 years of experience in the industry and 9 years of experience with us. We believe that this experience benefits us by allowing us to serve our customers more efficiently and effectively. Specifically, our loss control staff grades each prospective customer’s safety program elements and key loss control measures, supported with explanations in an internal report to the appropriate underwriter. Our loss control staff prepares risk improvement recommendations as applicable and provides a loss control opinion of risk with supporting comments. Our loss control staff also prepares a customized loss control service plan for each policyholder based upon identified servicing needs.

      Our loss control staff works closely with Marc B. Miller, M.D., our chief medical officer who joined us in August 2004, to assist our customers in developing tailored medical cost management strategies. We believe that by analyzing our loss data, our medical management needs and the current legal and regulatory environment, our chief medical officer helps us reduce our payments for medical costs and improve the delivery of medical care to our policyholders’ employees.

      Our loss control staff conducts large loss investigation visits on site for traumatic or fatal incidents whenever possible. Our loss control staff also conducts a comprehensive re-evaluation visit prior to the expiration of a policy term to assist the underwriter in making decisions on coverage renewal.

      We have loss control staff located in Seattle, Washington; Orange, California; Houston, Texas; and Baton Rouge, Louisiana. A network of independent consultants provides supplemental loss control service support in Alaska, Hawaii, California, Washington, Pennsylvania and Florida.

Pricing

      We use a loss-rating approach when pricing our products. Our underwriting department determines expected ultimate losses for each of our prospective accounts and renewals using a customized loss-rating model developed by actuaries. This loss-rating model projects expected losses for future policy periods by weighing expected losses underlying specific workers’ compensation class codes against our customer’s historical payroll and loss information. Our underwriting department uses these projections to produce an expected loss amount for each account. This loss amount provides the foundation for developing overall pricing terms for the account. After the ultimate expected losses are calculated, our underwriting department determines the appropriate premium for the risk after adding specific expense elements to the expected loss amount, including loss control expenses, commissions, reinsurance cost, taxes and underwriting margins.

      We also own a customized pricing model developed completely in-house that we use to calculate insurance terms for our loss sensitive plans. This program uses industry-published excess loss factors and tables of insurance charges, as well as company-specific expenses, to calculate the appropriate pricing terms. As discussed above in “— Underwriting,” our loss sensitive plans align our interests with our customers’ interests by providing our customers with the opportunity to earn a premium that would otherwise be higher than under a guaranteed cost plan if they are able to keep their losses below an expected level. The premiums for our retrospective rating loss sensitive plans are reflective of the customer’s loss experience because, beginning six months after the expiration of the relevant insurance policy, and annually thereafter, we recalculate the premium payable during the policy term based on the current value of the known losses that occurred during the policy term. Because of the long duration of our loss sensitive plans, there is a risk that the customer will fail to pay the additional premium. Accordingly, we obtain collateral in the form of letters of credit to mitigate credit risk associated with our loss sensitive plans.

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      We monitor the overall price adequacy of all new and renewal policies using a weekly price monitoring report. For 2001, 2002 and the nine months ended September 30, 2003, the Eagle entities achieved renewal rate increases of 12.6%, 13.8% and 16.5%, respectively. For the three months ended December 31, 2003, SeaBright achieved renewal rate increases of 12%. For the nine months ended September 30, 2004, SeaBright’s rates upon renewal were virtually flat.

Claims

      We believe we are particularly well qualified to handle multi-jurisdictional workers’ compensation claims. Our claims operation is organized around our unique product mix and customer needs. We believe that we can achieve quality claims outcomes because of our niche market focus, our local market knowledge and our superior claims handling practices. We have claims staff located in Seattle, Washington; Orange, California; Anchorage, Alaska; Honolulu, Hawaii; and Houston, Texas. We also maintain resident claim examiners in San Diego, California, South Carolina and Western Washington to better serve our client base.

      Our maritime claims are handled in our Seattle office. Upon completion of a thorough investigation, our maritime claims staff is able to promptly determine the appropriate jurisdiction for the claim and initiate benefit payments to the injured worker. We believe our ability to handle both USL&H Act and Jones Act claims in one integrated process results in reduced legal costs for our customers and improved benefit delivery to injured workers.

      Claims for our alternative dispute resolution product are handled in our Orange, California office. By centralizing these claims in one location, we have developed tailored claim handling processes, systems and procedures. We believe this claims centralization also results in enhanced focus and improved claims execution.

      Claims for our state act products are handled in our regional claims offices located in Anchorage, Alaska; Honolulu, Hawaii; Orange, California; and Houston, Texas. We believe in maintaining a local market presence for our claims handling process. Our regional claims staff has developed a thorough knowledge of the local medical and legal community, enabling them to make more informed claims handling decisions.

      We seek to maintain an effective claims management strategy through the application of sound claims handling practices. We are devoted to maintaining a quality, professional staff with a high level of technical proficiency. We practice a team approach to claims management, seeking to distribute each claim to the most appropriate level of technical expertise in order to obtain the best possible outcome. Our claims examiners are supported by claims assistants, at a ratio of approximately one claims assistant for every two claims examiners. Claims assistants perform a variety of routine tasks to assist our claims examiners. This support enables our claims examiners to focus on the more complex tasks associated with our unique products, including analyzing jurisdictional issues; investigating, negotiating and settling claims; considering causal connection issues; and managing the medical, disability, litigation and benefit delivery aspects of the claims process. We believe that it is critical for our claims professionals to have regular customer contact, to develop relationships with owners and risk management personnel of the maritime employer and to be familiar with the activities of the employer.

      Having a highly experienced claims staff with manageable work loads is an integral part of our business model. Our claims staff is experienced in the markets in which we compete. As of September 30, 2004, we had a total of 36 employees in our claims department, including 25 claims managers, examiners and representatives and 11 support-level staff members. Our claims managers and examiners average 20 years of experience in the insurance industry and over 17 years of experience with workers’ compensation coverage. In addition, our in-house claims examiners maintain manageable work loads so they can more fully investigate individual claims, with each claims examiner handling, on average, 112 cases at one time, as of September 30, 2004.

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      Our claims examiners are focused on early return to work, timely and effective medical treatment and prompt claim resolution. Newly-hired examiners are assigned to experienced supervisors who monitor all activity and decision-making to verify skill levels. Like our underwriting department, we use audits and “authority letters” in our claims department to help ensure the quality of our claims decisions. The authority letters set forth the claims handling authority for each individual claims professional based on their level of experience and demonstrated knowledge of the product and market. We believe that our audits are a valuable tool in measuring execution against performance standards and the resulting impact on our business. Our home office audit function conducts an annual review of each claims office for compliance with our best claims handling practices, policies and procedures.

      Our claims staff also works closely with Marc B. Miller, M.D., our new chief medical officer, to better manage medical costs. Our chief medical officer performs a variety of functions for us, including providing counsel and direction on cases involving complex medical issues and assisting with the development and implementation of innovative medical cost management strategies tailored to the unique challenges of our market niches.

      We have a modern electronic claims management system that we believe enables us to provide prompt, responsive service to our customers. We offer a variety of claim reporting options, including telephone, facsimile, e-mail and online reporting from our website. This information flows into Compass, our automated claims management system. See “— Technology.”

      In those states where we do not have claims staff, we have made arrangements with local third party administrators to handle state act claims only. As of September 30, 2004, approximately 95% of our total claims were being handled in-house as opposed to being handled by third party administrators. To help ensure the appropriate level of claims expertise, we allow only our own claims personnel to handle maritime claims, regardless of where the claim occurs.

      Broadspire Services, a third party claims administrator, services a small book of claims for us which we acquired in the Acquisition. As of September 30, 2004, there were 291 open claims in the book of claims being serviced by Broadspire.

Loss Reserves

      We maintain amounts for the payment of claims and expenses related to adjusting those claims. Unpaid losses are estimates at a given point in time of amounts that an insurer expects to pay for claims which have been reported and which have occurred but are unreported. We take into consideration the facts and circumstances for each claim file as then known by our claims department, as well as actuarial estimates of aggregate unpaid losses and loss expense.

      Our unpaid losses consist of case amounts, which are for reported claims, and amounts for claims that have been incurred but have not yet been reported (sometimes referred to as IBNR). The amount of unpaid loss for reported claims is based primarily upon a claim by claim evaluation of coverage, liability or injury severity, and any other information considered pertinent to estimating the exposure presented by the claim. The amounts for the unreported claims and unpaid loss adjustment expenses are determined using historical information as adjusted to current conditions. Unpaid loss adjustment expense is intended to cover the ultimate cost of settling claims, including investigation and defense of lawsuits resulting from such claims. The amount of loss reserves is determined by us on the basis of industry information, historical loss information and anticipated future conditions. Because loss reserves are an estimate of the ultimate cost of settling claims, they are closely monitored by us on a quarterly basis. We have engaged an independent actuary for these quarterly reviews as well as to prepare a complete actuarial opinion at the end of each year concerning the adequacy of loss reserves.

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Reconciliation of Loss Reserves

      The table below shows the reconciliation of loss reserves of our predecessor on a gross and net basis for 2001, 2002 and the nine months ended September 30, 2003, reflecting changes in losses incurred and paid losses.

			Predecessor
			Nine Months
			Ended			Year Ended
			September 30,
			2003			2002			2001
			(In thousands)
Balance, beginning of year			$	153,469		$	166,342		$	186,343
Less reinsurance recoverables:
	From LMC			100,670			114,247			122,218
	From unaffiliated reinsurers			34,233			36,294			50,519
		Total recoverables		134,903			150,541			172,737
Net balance, beginning of year				18,566			15,801			13,606
Incurred related to:
	Current year			26,895			13,324			9,656
	Prior years			(1,500	)		(8,332	)		(1,192	)
		Total incurred		25,395			4,992			8,464
Paid related to:
	Current year			4,283			3,398			2,586
	Prior years			3,706			(1,171	)		3,683
		Total paid		7,989			2,227			6,269
Net balance, end of year				35,972			18,566			15,801
Plus reinsurance recoverables:
	From LMC			87,677			100,670			114,247
	From unaffiliated reinsurers			37,889			34,233			36,294
		Total recoverables		125,566			134,903			150,541
Balance, end of year			$	161,538		$	153,469		$	166,342

      Our practices for determining loss reserves are designed to set amounts that in the aggregate are adequate to pay all claims at their ultimate settlement value. Our loss reserves are not discounted for inflation or other factors.

      The above table does not reflect the loss reserves of KEIC because we acquired KEIC, a shell company with no in-force policies or employees, solely for the purpose of acquiring its workers’ compensation licenses. See “The Acquisition.” Prior to the Acquisition, KEIC had a limited operating history in California writing small business workers’ compensation policies and had established loss reserves in the amount of approximately $16 million for these policies at September 30, 2003. In an effort to minimize our exposure to this past business underwritten by KEIC and any adverse developments to KEIC’s loss reserves as they existed at the date of the Acquisition, we entered into various protective arrangements in connection with the Acquisition, including the adverse development cover and the collateralized reinsurance trust. See “The Acquisition — Arrangements to Minimize Exposure.” For a discussion of the loss reserve development of KEIC’s loss reserves and related matters, see “— KEIC Loss Reserves.”

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Loss Development

      Shown below is the loss development for business written each year from 1993 through September 30, 2003 by our predecessor. Because SeaBright was only recently formed, as described in “The Acquisition,” and because the table below shows the loss development only for business written by our predecessor, the primary significance of the table is to show how our senior management handled the loss reserves of our predecessor from the time that it took control of our predecessor’s book of business at the end of 1998. The table portrays the changes in our predecessor’s loss reserves in subsequent years from the prior loss estimates based on experience as of the end of each succeeding year on a GAAP basis. The loss development table does not reflect the loss development for business written by KEIC prior to the Acquisition. For a discussion of the loss reserve development of KEIC’s loss reserves and related matters, see “— KEIC Loss Reserves.”

      The first line of the table shows, for the years indicated, our predecessor’s gross liability including the incurred but not reported losses as originally estimated. For example, as of December 31, 1996 it was estimated that $117.0 million would be sufficient to settle all claims not already settled that had occurred prior to December 31, 1996, whether reported or unreported. The next section of the table shows, by year, the cumulative amounts of loss reserves paid as of the end of each succeeding year. For example, with respect to the gross loss reserves of $117.0 million as of December 31, 1996, by September 30, 2003 (almost seven years later) $114.7 million had actually been paid in settlement of the claims which pertain to liabilities as of December 31, 1996. The next section of the table sets forth the re-estimates in later years of incurred losses, including payments, for the years indicated.

      The “cumulative redundancy/(deficiency)” represents, as of September 30, 2003, the difference between the latest re-estimated liability and the amounts as originally estimated. A redundancy means the original estimate was higher than the current estimate; a deficiency means that the current estimate is higher than the original estimate.

Analysis of Loss Reserve Development

	Year Ended December 31,
	1993			1994			1995			1996			1997			1998			1999			2000			2001			2002			2003
	($ in thousands)
Gross Liability as originally estimated:		123,092			119,691			112,807			117,003			114,152			145,047			207,817			186,343			166,342			153,469			161,538	*
Gross cumulative payments as of:
One year later		35,986			34,888			33,840			37,467			39,512			50,515			50,709			40,648			44,519			34,939	*
Two years later		59,056			58,286			55,451			61,950			69,571			84,365			76,690			69,669			67,064	*
Three years later		74,399			72,649			69,410			82,333			90,525			99,472			96,059			83,654	*
Four years later		83,236			82,235			82,921			97,998			99,040			112,292			106,814	*
Five years later		90,395			92,832			89,725			103,677			107,732			119,476	*
Six years later		97,700			98,052			93,948			110,821			112,248	*
Seven years later		101,463			101,036			98,178			114,740	*
Eight years later		104,142			103,938			101,470	*
Nine years later		106,745			106,485	*
Ten years later		108,979	*
Gross liability re-estimated as of:
One year later		126,076			121,746			115,477			118,750			133,688			190,595			194,563			168,320			146,898			152,178	*
Two years later		126,740			122,909			113,360			129,091			158,966			186,101			173,470			145,451			145,808	*
Three years later		125,052			118,947			119,234			151,412			161,078			171,872			155,115			142,226	*
Four years later		120,263			123,969			131,861			151,814			154,907			159,383			152,180	*

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	Year Ended December 31,
	1993			1994			1995			1996			1997			1998			1999		2000		2001		2002		2003
	($ in thousands)
Five years later		124,929			132,899			132,133			149,471			146,790			156,395	*
Six years later		131,560			134,222			131,072			147,749			143,744	*
Seven years later		134,369			133,195			128,946			145,273	*
Eight years later		133,444			129,843			126,912	*
Nine years later		131,118			128,431	*
Ten years later		130,242	*
Cumulative redundancy/(deficiency)*:		(7,150)			(8,740)			(14,105)			(28,270)			(29,592)			(11,348)			55,637		44,117		20,534		1,291
% redundancy/(deficiency) reported as of:
One year later		(2)			(2)			(2)			(1)			(17)			(31)			6		10		12		1
Two years later		(3)			(3)			(0)			(10)			(39)			(28)			17		22		12
Three years later		(2)			1			(6)			(29)			(41)			(18)			25		24
Four years later		2			(4)			(17)			(30)			(36)			(10)			27
Five years later		(1)			(11)			(17)			(28)			(29)			(8)
Six years later		(7)			(12)			(16)			(26)			(26)
Seven years later		(9)			(11)			(14)			(24)
Eight years later		(8)			(8)			(13)
Nine years later		(7)			(7)
Ten years later		(6)

*  As of September 30, 2003

    On a gross basis, our predecessor’s records reflect significant increases in IBNR on December 31, 1998 and December 31, 1999. Gross loss reserves at December 31, 1999 were increased by $62.8 million to reflect management’s best estimates of the ultimate losses. As demonstrated in the above table, as of September 30, 2003, the December 31, 1997 re-estimated loss reserves were inadequate by $29.6 million. While the inadequacy was reduced by December 31, 1998, the re-estimated amounts were still inadequate by $11.3 million. By December 31, 1999 the re-estimated amounts were redundant by $55.6 million. The re-estimated redundancy declined to $44.1 million by December 31, 2000, and to $20.5 million by December 31, 2001. This fluctuation resulted primarily from the actions taken by our management team on the book of business that it took over in 1999. Our management team aggressively re-underwrote the book of business during the year and increased loss reserves by the end of 1999 to reflect its best estimate of the ultimate losses at that time. The decision to re-underwrite the book of business was based on findings by our management team that Eagle Pacific Insurance Company had written large amounts of new business by expanding into smaller premium size, severity-prone risks in Louisiana. This was not a class of business that had been traditionally underwritten by our predecessor in prior years and it caused a substantial and fundamental change in the portfolio of insured employers. Due to the nature of these new accounts, our management team believed that the accounts were subject to a greater volatility of risk than the core book of business of our predecessor, and initial loss reserve amounts were established reflecting this higher level of risk by the end of 1999. At December 31, 2002, an actuarial evaluation was performed for the 2002 and prior accident years, which concluded that the actual loss development on this business was not as great as had been expected. This, coupled with the more recent emphasis on writing larger, less volatile accounts using stricter underwriting standards, led our management to decrease the loss reserves for the prior accident years. Although the loss reserves have proven to be redundant, we believe the actions of management were prudent at the time and demonstrate management’s commitment to achieving adequate loss reserve levels as quickly as possible.

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KEIC Loss Reserves

      Prior to the Acquisition, KEIC had a limited operating history in California writing small business workers’ compensation policies. KEIC had established net loss reserves in the amount of approximately $16 million for these policies at September 30, 2003. See “The Acquisition — Arrangements to Minimize Exposure.” Shown below is the loss development for this KEIC business written each year from 2000 through 2002. The last direct policy written by KEIC was effective in May 2002 and expired in May 2003. KEIC has claim activity in accident years 2000, 2001, 2002 and 2003. The table portrays the changes on KEIC’s loss reserves in subsequent years from the prior loss estimates based on experience as of the end of each succeeding year on a gross loss basis.

      The first line of the table shows, for the years indicated, the gross liability including the incurred but not reported losses as originally estimated. For example, as of December 31, 2001 it was estimated that $14.5 million would be sufficient to settle all claims not already settled that had occurred prior to December 31, 2001, whether reported or unreported. The next section of the table shows, by year, the cumulative amounts of loss reserves paid as of the end of each succeeding year. For example, with respect to the gross loss reserves of $14.5 million as of December 31, 2001, by September 30, 2003 (nearly two years later) $11.2 million had actually been paid in settlement of the claims which pertain to the liabilities as of December 31, 2001. The next section of the table sets forth the re-estimates in later years of incurred losses, including payments, for the years indicated.

      The “cumulative redundancy/ (deficiency)” represents, as of September 30, 2003, the difference between the latest re-estimated liability and the amounts as originally estimated. A redundancy means the original estimate was higher than the current estimate; a deficiency means that the current estimate is higher than the original estimate. The data is presented through September 30, 2003 to coincide with the date of the Acquisition.

KEIC Loss Reserves Prior to the Acquisition

Analysis of Loss Reserve Development

	Year Ended December 31,
	2000			2001			2002			2003
	($ in thousands)
Gross liability as originally estimated:		3,258			14,458			30,748			25,890	*
Gross cumulative payments as of:
One year later		723			7,525			6,638	*
Two years later		2,070			11,172	*
Three years later		2,546	*
Gross liability re-estimated as of:
One year later		3,013			19,562			32,126	*
Two years later		3,426			23,116	*
Three years later		4,400	*
Cumulative redundancy/(deficiency):		(1,142	)*		(8,658	)*		(1,378	)*

*  As of September 30, 2003.

      As of September 30, 2003, KEIC had gross reserves of $25.9 million and net reserves of $16.0 million. The gross and net liabilities re-estimated as of September 30, 2004 are $30.2 million and $18.4 million, respectively. The adverse development on gross reserves of $4.3 million and net reserves of $2.5 million was recorded in the fourth quarter of 2003. The adverse development on the net reserves is subject to the adverse development cover. See “The Acquisition — Arrangements to Minimize Exposure.”

      As of September 30, 2004, KEIC has gross reserves of $21.5 million. These reserves represent a potential liability to us if the protective arrangements that we have established prove to be inadequate. Our

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initial source of protection is our external reinsurance, which is described under “— Reinsurance.” The total reserves net of external reinsurance at September 30, 2004 are $13.3 million. The ceded reserves of $8.2 million are subject to collection from our external reinsurers. To the extent we are not able to collect on our reinsurance recoverables, these liabilities become our responsibility. See “Risk Factors — Our loss reserves are based on estimates and may be inadequate to cover our actual losses.”

      The net reserves as of September 30, 2004 of $13.3 million are subject to the various protective arrangements that we entered into in connection with the Acquisition. These protective arrangements were established specifically for the purpose of minimizing our exposure to past business underwritten by KEIC and any adverse developments to KEIC’s loss reserves as they existed at the date of the Acquisition. One of our primary objectives in establishing these arrangements was to create security at the time of the Acquisition with respect to LMC’s potential obligations to us as opposed to having a mere future contractual right against LMC with respect to these obligations in the event that LMC was subsequently placed into receivership or was otherwise unwilling or unable to satisfy its obligations to us. The protective arrangements we established include a commutation agreement, an adverse development cover, a collateralized reinsurance trust and a $4 million escrow. These protective arrangements, which are described in detail under “The Acquisition — Arrangements to Minimize Exposure,” are summarized as follows:

•  Under the commutation agreement, in order to help insulate us from the possibility that LMC may not continue to have the ability to make reinsurance payments to KEIC in the future, KEIC released LMC from reinsurance obligations to KEIC of approximately $13 million in exchange for an equivalent amount of cash and investments. Although LMC would have paid its obligations to KEIC over a period of several years if the reinsurance agreement between LMC and KEIC had remained in effect, the payment received by KEIC under the commutation agreement was on a dollar for dollar basis with no present value discount. This $13 million represented net reserves to KEIC and was added to the net reserves of approximately $3 million already carried by KEIC to arrive at the total net reserves of $16 million as of September 30, 2003.

•  Under the adverse development cover, we and LMC are required to indemnify each other with respect to developments in KEIC’s loss reserves as they existed at the date of the Acquisition. Accordingly, if KEIC’s loss reserves 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. 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. As of September 30, 2004, we have recorded a receivable of approximately $2.5 million for adverse loss development under the adverse development cover since the date of the Acquisition. In September 2004, we and LMC retained an independent actuary to determine the appropriate amount of loss reserves that are subject to the adverse development cover as of September 30, 2004. In accordance with the terms of the adverse development cover and the collateralized reinsurance trust, on December 23, 2004, LMC deposited into the trust account an additional approximately $3.2 million, resulting in a total balance in the trust account of approximately $4.8 million. We are waiting to receive a final report from the independent actuary as to the final amount required to be held in the trust account.

•  We also established an escrow account to hold $4 million of the purchase price for a period of two years following the Acquisition. These funds are available to us as security for the obligations of LMC and its affiliates under the commutation agreement, the adverse development cover, the collateralized reinsurance trust and the indemnification provisions of the purchase agreement.

      Due to the distressed financial condition of LMC and its affiliates, LMC is no longer writing new business and is now operating under a three-year run off plan which has been approved by the Illinois

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Department of Financial and Professional Regulation, Division of Insurance. If LMC is placed into receivership, various of the protective arrangements described above, including the adverse development cover, the collateralized reinsurance trust and the commutation agreement, could be adversely affected. If LMC is placed into receivership and the amount held in the collateralized reinsurance trust is inadequate to satisfy the obligations of LMC to us under the adverse development cover, it is unlikely that we would recover any future amounts owed by LMC to us under the adverse development cover in excess of the amounts currently held in trust because the director of the Illinois Department of Financial and Professional Regulation, Division of Insurance would have control of the assets of LMC. In addition, it is possible that a receiver or creditor could assert a claim seeking to unwind or recover the $13 million payment made by LMC to us under the commutation agreement or the funds deposited by LMC into the collateralized reinsurance trust under applicable voidable preference or fraudulent transfer laws. See “Risk Factors — In the event LMC is placed into receivership, we could lose our rights to fee income and protective arrangements that were established in connection with the Acquisition, our reputation and credibility could be adversely affected and we could be subject to claims under applicable voidable preference and fraudulent transfer laws.”

      If LMC is placed into receivership in the near future, we will be responsible for the amount of any adverse development of KEIC’s loss reserves in excess of the collateral that is currently available to us, including the $4.8 million on deposit under the collateralized reinsurance trust and the $4 million escrow. For example, if LMC is placed into receivership at a time when the amount on deposit in the collateralized reinsurance trust is deficient by $1 million, then the amount of adverse development that is not absorbed by the $4.8 million currently on deposit under the collateralized reinsurance trust will have to be taken from our $4 million escrow. If there is adverse development on KEIC’s loss reserves subsequent to the expiration of the $4 million escrow on October 1, 2005 and LMC is placed into receivership before addressing a deficiency in the collateralized reinsurance trust in accordance with the terms of the adverse development cover, we would have to absorb the amount of adverse development which exceeds the amount on deposit in the collateralized reinsurance trust. Because the $13 million that we received under the commutation agreement was not discounted for present value at the time of payment, the earnings on these funds, if any, will help us to absorb any adverse development on KEIC’s loss reserves in excess of amounts on deposit under the collateralized reinsurance trust and under the $4 million escrow. We believe that there are several factors that would mitigate the risk to us resulting from a potential voidable preference or fraudulent conveyance action brought by a receiver, but if a receiver is successful under applicable voidable preference and fraudulent transfer laws in recovering from us the collateral that we received in connection with the Acquisition, those funds would not be available to us to offset any adverse development in KEIC’s loss reserves. See “The Acquisition — Issues Relating to a Potential LMC Receivership.”

Investments

      We derive investment income from our invested assets. We invest our statutory surplus and funds to support our loss reserves and our unearned premiums. As of September 30, 2004, the amortized cost of our investment portfolio was $94.4 million, the fair market value of the portfolio was $95.5 million.

      The following table shows the market values of various categories of invested assets, the percentage of the total market value of our invested assets represented by each category and the tax equivalent book yield based on market value of each category of invested assets as of September 30, 2004.

			Percent of
	Market Value		Total			Yield
	($ in thousands)
CATEGORY
U.S. Treasury securities	$	8,750		9.2	%		2.97	%
U.S. agency securities		5,980		6.3			3.04
Corporate securities		20,968		21.9			3.76
Tax-exempt municipal securities		45,628		47.8			5.47

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			Percent of
	Market Value		Total			Yield
	($ in thousands)
Mortgage pass-through securities		9,921		10.4			4.92
Collateralized mortgage obligations		1,293		1.4			3.81
Asset-backed securities		2,910		3.0			2.11
Total	$	95,450		100.0	%		4.53	%

      The average credit rating for our fixed maturity portfolio, using ratings assigned by Standard and Poor’s, was AA+ at September 30, 2004. The following table shows the ratings distribution of our fixed income portfolio as of September 30, 2004, as a percentage of total market value.

	Percentage of Total
Rating	Market Value
“AAA”		71	%
“AA”		12
“A”		17
Total		100	%

      The following table shows the composition of our investment portfolio by remaining time to maturity at September 30, 2004. For securities that are redeemable at the option of the issuer and have a market price that is greater than par value, the maturity used for the table below is the earliest redemption date. For securities that are redeemable at the option of the issuer and have a market price that is less than par value, the maturity used for the table below is the final maturity date. For mortgage-backed securities, mortgage prepayment assumptions are utilized to project the expected principal redemptions for each security, and the maturity used in the table below is the average life based on those projected redemptions.

		As of September 30, 2004
				Percentage of Total
Remaining Time to Maturity		Market Value		Market Value
		($ in thousands)
Less than one year		$	7,283		7.63	%
One to three years			11,960		12.53
Three to five years			13,184		13.81
Five to ten years			50,972		53.40
More than ten years			12,051		12.63
	Total	$	95,450		100.00	%

      Our investment strategy is to conservatively manage our investment portfolio by investing in readily marketable, investment grade fixed income securities. We currently do not invest in common equity securities and we have no exposure to foreign currency risk. Our investment portfolio is managed by Prime Advisors, Inc., a registered investment advisory firm focused exclusively on managing investment grade bond portfolios for insurance companies. We pay Prime Advisors a variable fee based on assets under management. Our investment committee has established investment guidelines and periodically reviews portfolio performance for compliance with our guidelines.

      We regularly review our portfolio for declines in value. If a decline in value is deemed temporary, we record the decline as an unrealized loss in other comprehensive net income on our consolidated statement of income and accumulated other comprehensive net income on our consolidated balance sheet. If the decline is deemed “other than temporary,” we write down the carrying value of the investment and record a realized loss in our consolidated statements of income. As of September 30, 2004, we had an unrealized gain of $1.0 million on our invested assets. There were no other than temporary declines in the fair value of our securities at September 30, 2004.

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Reinsurance

      We purchase reinsurance to reduce our net liability on individual risks and to protect against possible catastrophes. Reinsurance involves an insurance company transferring, or “ceding,” a portion of its exposure on a risk to another insurer, the reinsurer. The reinsurer assumes the exposure in return for a portion of the premium. The cost and limits of reinsurance we purchase can vary from year to year based upon the availability of quality reinsurance at an acceptable price and our desired level of retention. Retention refers to the amount of risk that we retain for our own account. In excess of loss reinsurance, losses in excess of the retention level up to the outer limit of the program, if any, are paid by the reinsurer.

      Regardless of type, reinsurance does not legally discharge the ceding insurer from primary liability for the full amount due under the reinsured policies. However, the assuming reinsurer is obligated to indemnify the ceding company to the extent of the coverage ceded. To protect us from the possibility of a reinsurer becoming unable to fulfill its obligations under the reinsurance contracts, we attempt to select financially strong reinsurers with an A.M. Best rating of “A-” (Excellent) or better and continue to evaluate their financial condition and monitor various credit risks to minimize our exposure to losses from reinsurer insolvencies.

      Our Excess of Loss Reinsurance Treaty Program. Excess of loss reinsurance is reinsurance that indemnifies the reinsured against all or a specified portion of losses on underlying insurance policies in excess of a specified amount, which is called an “attachment level” or “retention.” Excess of loss reinsurance may be written in layers, in which a reinsurer or group of reinsurers accepts a band of coverage up to a specified amount. Any liability exceeding the outer limit of the program reverts to the ceding company, or the company seeking reinsurance. The ceding company also bears the credit risk of a reinsurer’s insolvency. We entered into a new workers’ compensation and employers’ liability excess of loss reinsurance treaty program effective October 1, 2004, whereby our reinsurers are liable for 100% of the ultimate net losses in excess of $500,000 for the business we write, up to a $100 million limit. The agreements for the current reinsurance program expire on October 1, 2005, at which time we expect to renew the program. We have the right to terminate the reinsurers’ shares in the program under various circumstances including a downgrade in a reinsurer’s AM Best rating below A-. The program provides coverage in several layers.

      The first layer affords coverage up to $500,000 for each loss occurrence in excess of $500,000 for each loss occurrence and applies to policies classified by us as workers’ compensation and employers’ liability business (including USL&H Act and Jones Act business) and maritime employers’ liability written or renewed through us. We retain losses of $500,000 for each loss occurrence. Under the first layer, our reinsurers will not be liable for losses with respect to intentional nuclear detonation, reaction, radiation or radioactive contamination or any intentional chemical or biological release or exposure in excess of $1.5 million in the aggregate. Under the first layer, we are required to pay our reinsurers a deposit premium of $5,700,000 for the term of the agreement, to be paid in the amount of $1,425,000 on the first day of each calendar quarter. Our reinsurers’ liability under the first layer will never exceed $500,000 in respect of any one loss occurrence and is further limited to $10,000,000 during the term of the agreement by reason of any and all claims arising under the agreement. In order for coverage to attach under the first layer, we must report all losses to our reinsurers before October 1, 2015.

      The second layer affords coverage up to $4 million for each loss occurrence in excess of $1 million for each loss occurrence and applies to policies classified by us as workers’ compensation and employers’ liability business (including USL&H Act and Jones Act business) and maritime employers’ liability written or renewed through us. The aggregate limit for all claims under the second layer is $16 million. In addition, under the second layer of reinsurance, there is a sub-limit of $8 million for losses caused by terrorism and a sub-limit of $4 million for losses caused by occupational disease or other disease or cumulative trauma. Under the second layer, we are required to pay our reinsurers a deposit premium of $4,320,232 for the term of the agreement, to be paid in the amount of $1,080,058 on the first day of each calendar quarter. In order for coverage to attach under the second layer, we must report all losses to our reinsurers before October 1, 2012.

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      The third layer affords coverage up to $5 million for each loss occurrence in excess of $5 million for each loss occurrence and applies to policies classified by us as workers’ compensation and employers’ liability business (including USL&H Act and Jones Act business) and maritime employers’ liability in force, written or renewed through us. The third layer does not cover losses caused by any act of terrorism, as defined in the Terrorism Risk Act. Under the third layer, we are required to pay our reinsurers a deposit premium of $1,542,940 for the term of the agreement, to be paid in the amount of $385,735 on the first day of each calendar quarter. Our reinsurers’ liability under the third layer will never exceed $5,000,000 in respect of any one loss occurrence and is further limited to $15,000,000 during the term of the agreement by reason of any and all claims arising under the agreement. In order for coverage to attach under the third layer, we must report all losses to our reinsurers before October 1, 2012.

      The fourth layer in our excess of loss reinsurance treaty program affords coverage up to $90 million for each loss occurrence in excess of $10 million for each loss occurrence and applies to policies classified by us as workers’ compensation business, including USL&H Act business, in force, written or renewed through us. The fourth layer is divided into three sub-layers. The first sub-layer affords coverage up to $10 million for each loss occurrence in excess of $10 million for each loss occurrence, subject to an aggregate limit of $20 million. Under the first sub-layer, we are required to pay our reinsurers a deposit premium of $1,012,168 for the term of the agreement, to be paid in the amount of $253,042 on the first day of each calendar quarter. The second sub-layer affords coverage up to $30 million for each loss occurrence in excess of $20 million for each loss occurrence, subject to an aggregate limit of $60 million. Under the second sub-layer, we are required to pay our reinsurers a deposit premium of $1,234,352 for the term of the agreement, to be paid in the amount of $308,588 on the first day of each calendar quarter. The third sub-layer affords coverage up to $50 million for each loss occurrence in excess of $50 million for each loss occurrence, subject to an aggregate limit of $100 million. Under the third sub-layer, we are required to pay our reinsurers a deposit premium of $1,234,352 for the term of the agreement, to be paid in the amount of $308,588 on the first day of each calendar quarter. The fourth layer does not cover losses caused by any act of terrorism, as defined in the Terrorism Risk Act. In addition, the fourth layer does not cover loss sustained by commercial airline personnel on board the aircraft and arising while the aircraft is in flight or loss arising from professional sports teams. In order for coverage to attach under the fourth layer, we must report all losses to our reinsurers before October 1, 2012.

      Under each layer of our reinsurance treaty program, we may terminate any reinsurer’s share under the applicable agreement at any time by giving written notice to the reinsurer in the event certain specified circumstances occur, including (1) if the reinsurer’s policyholders’ surplus at the inception of the agreement has been reduced by more than 25% of the amount of surplus 12 months prior to that date, (2) if the reinsurer’s A.M. Best rating is downgraded below “A-” and/or its Standard & Poor’s rating is downgraded below “A-” or (3) if the reinsurer voluntarily ceases assuming new and renewal property and casualty treaty reinsurance business. Each layer of our reinsurance treaty program includes various exclusions in addition to the specific exclusions described above, including an exclusion for war in specified circumstances and an exclusion for reinsurance assumed. Under the first three layers of our reinsurance treaty program, we are required to pay to our reinsurers the pro rata share of the amount, if any, by which any financial assistance paid to us under the Terrorism Risk Act for acts of terrorism occurring during any one program year, combined with our total private-sector reinsurance recoveries for those acts of terrorism, exceeds the amount of insured losses paid by us for those acts of terrorism.

      Our current excess of loss reinsurance treaties are placed with Arch Reinsurance Company, rated “A-” (Excellent) by A.M. Best, Aspen Insurance UK Limited, rated “A” (Excellent) by A.M. Best, AXIS Specialty Ltd., rated “A” (Excellent) by A.M. Best, Endurance Specialty Insurance Ltd., rated “A” (Excellent) by A.M. Best, Hannover Rueckversicherung AG, rated “A” (Excellent) by A.M. Best, Hannover Re (Bermuda) Ltd, rated “A” (Excellent) by A.M. Best, syndicates from Lloyd’s of London, rated “A” (Excellent) by A.M. Best, Max Re Ltd., rated “A-” (Excellent) by A.M. Best, Odyssey America Reinsurance Corporation, rated “A” (Excellent) by A.M. Best and Platinum Underwriters Reinsurance, Inc., rated “A” (Excellent) by A.M. Best.

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      The following is a summary of our top ten reinsurers, based on net amount recoverable, as of September 30, 2004.

				Net Amount
				Recoverable as of
		A.M. Best		September 30,
Reinsurer		Rating		2004
Argonaut Insurance Company			A	$	3,732,195
Swiss Reinsurance Company			A+		2,377,291
General Reinsurance Corporation*			A++		1,010,248
Hannover Rueckversicherung AG*			A		932,366
Max Re Ltd.*			A-		523,400
Scor Reinsurance Company			B++		500,055
American Re-insurance Company			A+		459,563
Alea Europe Limited			A-		306,375
ACE Property & Casualty Insurance Company			A		283,442
Berkley Regional Insurance Company			A		90,392
	Total			$	10,215,325

*  Participant in current excess of loss reinsurance treaty program or individual risk reinsurance placements.

      Reinsurance Arrangements Established in Connection with Past Transactions. In addition to the reinsurance program described above, we have existing reinsurance arrangements which were established in connection with past transactions into which we have entered. In March 2002, KEIC sold the assets and business of its commercial compensation specialty operation to Argonaut Insurance Company. In connection with the sale, KEIC entered into a reinsurance agreement effective March 31, 2002 with Argonaut pursuant to which KEIC ceded and Argonaut assumed a 100% quota share participation in the transferred insurance policies. Certain reinsurance-type arrangements, including the commutation agreement and the adverse development cover, were also established with LMC in connection with the Acquisition. See “The Acquisition.”

      Terrorism Reinsurance. The Terrorism Risk Act is effective for the period from November 26, 2002 until December 31, 2005. The Terrorism Risk Act may provide us with reinsurance protection under certain circumstances and subject to certain limitations. The Secretary of the Treasury must certify an act for it to constitute an act of terrorism. The definition of terrorism excludes domestic acts of terrorism or acts of terrorism committed in the course of a war declared by Congress. Losses arising from an act of terrorism must exceed $5 billion to qualify for reimbursement. If an event is certified, the federal government will reimburse losses not to exceed $100 billion in any year. Each insurance company is responsible for a deductible based on a percentage of direct earned premiums in the previous calendar year. For losses in excess of the deductible, the federal government will reimburse 90% of the insurer’s loss, up to the insurer’s proportionate share of the $100 billion. See “— Regulation.” We did not pay a deductible for this program in 2003 because we did not experience losses arising from an act of terrorism. As stated above, the second layer of our reinsurance program contains an $8 million sublimit for terrorism coverage.

Technology

Operating Systems

      We use Microsoft Windows NT services to provide application access, domain authentication and network services. Our server hardware is predominately HP/ Compaq, but includes a mix of IBM and Dell servers as well. All of our production servers are under warranty and extended service contracts are in place for each. We are in the process of migrating to a Windows 2003/ Active Directory domain model, and we expect to complete this effort by the end of the first quarter of 2005.

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Business Continuity/ Disaster Recovery

      We maintain a business continuity plan as well as a fully tested disaster recovery plan. Currently, we are under contract with IBM Business Continuity and Recovery Services to provide us with a “hot” recovery site in Boulder, Colorado. Our off-site tape storage is located in Bellevue, Washington and we have agreements in place to assure prompt delivery of off-site tapes to Colorado.

Core Systems

      CAPS. CAPS is our vendor-supplied, highly customized policy financial system. CAPS performs policy earnings routines, retro calculations, endorsement premium processing and coverage verification. We expect to replace CAPS by the end of the first quarter of 2005 with the Triton application currently under development, described below.

      Compass. Compass is our electronic claims management system. Compass is a customized client/server application which was developed completely in-house and introduced in 1998. The system was designed, and has since been enhanced, to support our multi-jurisdictional workers’ compensation claims handling. Detailed claims reserving screens have been constructed to accommodate our unique reserving practices for our maritime and state act workers’ compensation claims. A litigation module enables us to track the success of the dispute resolution process for our alternative dispute resolution claims. We believe Compass is a flexible claims handling platform that will continue to meet our needs for the foreseeable future.

      E-Quips. E-Quips is our policy quote, rate and issue system. E-Quips provides comprehensive multi-jurisdictional rating capabilities, automated quote and policy (including customized forms) issuance and post-issuance endorsement capabilities. E-Quips contains integrated modules for new business application tracking and broker management processing. We expect to replace E-Quips by the end of the first quarter of 2005 with the Triton application currently under development, described below.

      BrightView. BrightView is our online customer loss reporting system. BrightView allows our customers to perform online requests for loss data in numerous formats and also provides for downloading of pre-formatted monthly loss runs.

      Loss Control System. We have a customized loss control service task and recommendation letter management system which was developed by us in-house. The system provides our loss control department with the ability to schedule and manage service tasks for prospects and customers. The system provides budgeting information, and allows our underwriting department to monitor risk management activities.

      Vision. Vision is PointSure’s agency management system. PointSure uses Vision for virtually all aspects of its operations, including payables, receivables, account clearance, contact management and management reporting. Vision is scalable to accommodate significant growth with little additional software expense.

      Triton. In order to reduce costs and improve efficiency, we have decided to migrate from CAPS and E-Quips to Triton, a customized policy financial system and policy quote, rate and issue system developed in-house. We expect Triton to be fully implemented early in the first quarter of 2005. There will be a period while the old and new systems run in tandem, mainly to accommodate our January underwriting renewal cycle. We expect to be completely off the old systems by the end of the first quarter of 2005. Migrating to Triton will help us to eliminate duplicate data entry, thereby increasing efficiency and reducing user error. We believe this migration will provide us with future flexibility and better position us for growth. A centralized data storage will also allow for more comprehensive data analyses and reporting and will decrease maintenance costs.

Competition

      We operate in niche markets where we believe we have few competitors with a similar focus. The insurance industry in general is highly competitive and there is significant competition in the national workers’ compensation industry. Competition in the insurance business is based on many factors, including perceived market strength of the insurer, pricing and other terms and conditions, services provided, the

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speed of claims payment, the reputation and experience of the insurer and ratings assigned by independent rating organizations such as A.M. Best. Most of the insurers with which we compete have significantly greater financial, marketing and management resources and experience than we do. We may also compete with new market entrants in the future.

      While more than 300 insurance companies participate in the national workers’ compensation market, our competitors are relatively few in number because we operate in niche markets, and two of our primary competitors are non-domestic entities. Our primary competitors vary slightly depending on the type of product. For our maritime product, our primary competitors are AIG, Alaska National Insurance Company, American Longshore Mutual Association, Liberty Northwest, Majestic Insurance Company, Signal Mutual Indemnity Association Ltd. (based in Bermuda), Zurich and WFT, Inc. (based in London). For our ADR product, our primary competitors are AIG, Majestic Insurance Company, Zurich and the State Compensation Insurance Fund of California.

      We believe our competitive advantages to be our strong reputation in our niche markets, our local knowledge in the markets where we operate, our specialized underwriting expertise, our client-driven claims and loss control service capabilities, our focus on niche markets, our loyal brokerage distribution, our low operating expense ratio and our customized systems described under “— Technology.” In addition to these competitive advantages, as discussed above, we offer our maritime customers regulated insurance coverage without the joint-and-several liability associated with coverage provided by offshore mutual organizations.

Ratings

      Many insurance buyers, agents and brokers use the ratings assigned by A.M. Best and other rating agencies to assist them in assessing the financial strength and overall quality of the companies from which they are considering purchasing insurance. We were assigned a letter rating of “A-” (Excellent) by A.M. Best following the completion of the Acquisition. An “A-” rating is the fourth highest of 15 rating categories used by A.M. Best. In evaluating a company’s financial and operating performance, A.M. Best reviews the company’s profitability, indebtedness and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence. This rating is intended to provide an independent opinion of an insurer’s ability to meet its obligations to policyholders and is not an evaluation directed at investors.

Properties

      Our principal executive offices are located in approximately 17,200 square feet of leased office space in Seattle, Washington. We also lease branch offices consisting of approximately 3,200 square feet in Honolulu, Hawaii; 1,700 square feet in Anchorage, Alaska; 5,000 square feet in Orange, California; and 3,400 square feet in Houston, Texas. We conduct claims and underwriting operations in our branch offices, with the exception of our Honolulu office where we conduct only claims operations. We do not own any real property. We consider our leased facilities to be adequate for our current operations.

Employees

      As of September 30, 2004, we had 108 full-time equivalent employees. We have employment agreements with some of our executive officers, which are described under “Management — Employment Agreements.” We believe that our employee relations are good.

Legal Proceedings

      We are, from time to time, involved in various legal proceedings in the ordinary course of business. We believe we have sufficient loss reserves and reinsurance to cover claims under policies issued by us. Accordingly, we do not believe that the resolution of any currently pending legal proceedings, either

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individually or taken as a whole, will have a material adverse effect on our business, results of operations or financial condition.

Regulation

Holding Company Regulation

      As an insurance holding company, we, as well as SeaBright Insurance Company, our insurance company subsidiary, are subject to regulation by the states in which our insurance company subsidiary is domiciled or transacts business. SeaBright Insurance Company is domiciled in Illinois and is considered to be commercially domiciled in California. An insurer is deemed “commercially domiciled” in California if, during the three preceding fiscal years, or a lesser period of time if the insurer has not been licensed in California for three years, the insurer has written an average of more gross premiums in California than it has written in its state of domicile, and such gross premiums written constitute 33 percent or more of its total gross premiums written in the United States for such period. Pursuant to the insurance holding company laws of Illinois and California, SeaBright is required to register with the Illinois Department of Financial and Professional Regulation, Division of Insurance and the California Department of Insurance. In addition, SeaBright Insurance Company is required to periodically report certain financial, operational and management data to the Illinois Department of Financial and Professional Regulation, Division of Insurance and the California Department of Insurance. All transactions within a holding company system affecting insurer must have fair and reasonable terms, charges or fees for services performed must be reasonable, and the insurer’s policyholder surplus following any transaction must be both reasonable in relation to its outstanding liabilities and adequate for its needs. Notice to regulators is required prior to the consummation of certain affiliated and other transactions involving SeaBright Insurance Company.

Changes of Control

      In addition, the insurance holding company laws of Illinois and California require advance approval by the Illinois Department of Financial and Professional Regulation, Division of Insurance and the California Department of Insurance of any change in control of SeaBright Insurance Company. “Control” is generally presumed to exist through the direct or indirect ownership of 10% or more of the voting securities of a domestic insurance company or of any entity that controls a domestic insurance company. In addition, insurance laws in many states contain provisions that require prenotification to the insurance commissioners of a change in control of a non-domestic insurance company licensed in those states. Any future transactions that would constitute a change in control of SeaBright Insurance Company, including a change of control of us, would generally require the party acquiring control to obtain the prior approval by the Illinois Department of Financial and Professional Regulation, Division of Insurance and the California Department of Insurance and may require pre-acquisition notification in applicable states that have adopted pre-acquisition notification provisions. Obtaining these approvals may result in a material delay of, or deter, any such transaction.

      These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of SeaBright, including through transactions, and in particular unsolicited transactions, that some or all of the stockholders of SeaBright might consider to be desirable.

State Insurance Regulation

      Insurance companies are subject to regulation and supervision by the department of insurance in the state in which they are domiciled and, to a lesser extent, other states in which they conduct business. SeaBright Insurance Company is primarily subject to regulation and supervision by the Illinois Department of Financial and Professional Regulation, Division of Insurance and the California Department of Insurance. These state agencies have broad regulatory, supervisory and administrative powers, including, among other things, the power to grant and revoke licenses to transact business; license agents; set the standards of solvency to be met and maintained; determine the nature of, and limitations on, investments

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and dividends; approve policy forms and rates in some states; periodically examine financial statements; determine the form and content of required financial statements; and periodically examine market conduct.

      Detailed annual and quarterly financial statements and other reports are required to be filed with the departments of insurance of the states in which we are licensed to transact business. The financial statements of SeaBright Insurance Company are subject to periodic examination by the Illinois Department of Financial and Professional Regulation, Division of Insurance and the California Department of Insurance.

      In addition, many states have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For example, states may limit an insurer’s ability to cancel or not renew policies. Furthermore, certain states prohibit an insurer from withdrawing one or more lines of business from the state, except pursuant to a plan that is approved by the state insurance department. The state insurance department may disapprove a plan that may lead to market disruption. Laws and regulations that limit cancellation and non-renewal and that subject program withdrawals to prior approval requirements may restrict our ability to exit unprofitable markets.

Federal Laws and Regulations

      As a provider of maritime workers’ compensation insurance, we are subject to the USL&H Act, which generally covers exposures on the navigable waters of the United States and in adjoining waterfront areas, including exposures resulting from loading and unloading vessels, and the Jones Act, which covers exposures at sea. We are also subject to regulations related to the USL&H Act and the Jones Act.

      The USL&H Act, which is administered by the U.S. Department of Labor, provides medical benefits, compensation for lost wages and rehabilitation services to longshoremen, harbor workers and other maritime workers who are injured during the course of employment or suffer from diseases caused or worsened by conditions of employment. The Department of Labor has the authority to require us to make deposits to serve as collateral for losses incurred under the USL&H Act. Several other statutes extend the provisions of the USL&H Act to cover other classes of private-industry workers. These include workers engaged in the extraction of natural resources from the outer continental shelf, employees on American defense bases, and those working under contracts with the U.S. government for defense or public-works projects, outside of the Continental United States. Our authorizations to issue workers’ compensation insurance from the various state departments of insurance regulating SeaBright Insurance Company are augmented by our U.S. Department of Labor certificates of authority to ensure payment of compensation under the USL&H Act and extensions of the USL&H Act, including the OCSLA and the Nonappropriated Fund Instrumentalities Act. This coverage, which we write as an endorsement to workers’ compensation and employers liability insurance policies, provides employment-injury and occupational disease protection to workers who are injured or contract occupational diseases occurring on the navigable waters of the United States, or in adjoining areas, and for certain other classes of workers covered by the extensions of the USL&H Act.

      The Jones Act is a federal law, the maritime employer provisions of which provide injured offshore workers, or seamen, with the right to seek compensation for injuries resulting from the negligence of their employers or co-workers during the course of their employment on a ship or vessel. In addition, an injured offshore worker may make a claim against a vessel owner on the basis that the vessel was not seaworthy. Our authorizations to issue workers’ compensation insurance from the various state departments of insurance regulating SeaBright Insurance Company allow us to write Jones Act coverage for our maritime customers. We are not required to have a certificate from the U.S. Department of Labor to write Jones Act coverage.

      We also offer extensions of coverage under the OCSLA, a federal workers’ compensation act that provides workers’ compensation coverage for the death or disability of an employee resulting from any injury occurring as a result of working on an off-shore drilling platform on the Outer Continental Shelf, where required by a prospective policyholder.

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Privacy Regulations

      In 1999, the United States Congress enacted the Gramm-Leach-Bliley Act, which, among other things, protects consumers from the unauthorized dissemination of certain personal information. Subsequently, a majority of states have implemented additional regulations to address privacy issues. These laws and regulations apply to all financial institutions, including insurance and finance companies, and require us to maintain appropriate procedures for managing and protecting certain personal information of our customers and to fully disclose our privacy practices to our customers. We may also be exposed to future privacy laws and regulations, which could impose additional costs and impact our results of operations or financial condition. A recent NAIC initiative that impacted the insurance industry in 2001 was the adoption in 2000 of the Privacy of Consumer Financial and Health Information Model Regulation, which assisted states in promulgating regulations to comply with the Gramm-Leach-Bliley Act. In 2002, to further facilitate the implementation of the Gramm-Leach-Bliley Act, the NAIC adopted the Standards for Safeguarding Customer Information Model Regulation. Several states have now adopted similar provisions regarding the safeguarding of customer information. Our insurance subsidiary has established procedures to comply with the Gramm-Leach-Bliley related privacy requirements.

Federal and State Legislative and Regulatory Changes

      From time to time, various regulatory and legislative changes have been proposed in the insurance industry. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. We are unable to predict whether any of these laws and regulations will be adopted, the form in which any such laws and regulations would be adopted, or the effect, if any, these developments would have on our operations and financial condition.

      On November 26, 2002, in response to the tightening of supply in certain insurance and reinsurance markets resulting from, among other things, the September 11, 2001 terrorist attacks, the Terrorism Risk Act was enacted. The Terrorism Risk Act is designed to ensure the availability of insurance coverage for losses resulting from acts of terror in the United States of America. This law established a federal assistance program through the end of 2005 to help the property and casualty insurance industry cover claims related to future terrorism-related losses and requires such companies to offer coverage for certain acts of terrorism. As a result, any terrorism exclusions in policies in force prior to the enactment of the Terrorism Risk Act are void and, absent authorization or failure of the insured to pay increased premiums resulting from the terrorism coverage, we are prohibited from adding certain terrorism exclusions to the policies written by SeaBright Insurance Company. Although SeaBright Insurance Company is protected by federally funded terrorism reinsurance as provided for in the Terrorism Risk Act, there is a substantial deductible that must be met, the payment of which could have an adverse effect on our results of operations. Potential future changes to the Terrorism Risk Act could also adversely affect us by causing our reinsurers to increase prices or withdraw from certain markets where terrorism coverage is required.

      Collectively bargained workers’ compensation insurance programs in California were enabled by S.B. 983, the workers’ compensation reform bill passed in 1993, and greatly expanded by the passage of S.B. 228 in 2003. Among other things, this legislation amended the California Labor Code to include the specific requirements for the creation of an alternative dispute resolution program for the delivery of workers’ compensation benefits. The passage of S.B. 228 made these programs available to all unionized employees, where previously they were available only to unionized employees in the construction industry.

      Our workers’ compensation operations are subject to legislative and regulatory actions. In California, where we have our largest concentration of business, significant workers’ compensation legislation was enacted twice in recent years. Effective January 1, 2003, legislation became effective which provides for increases in indemnity benefits to injured workers. Benefits were increased by an average of approximately 6% in 2003, followed by further increases of approximately 7% in 2004 and will be increased by a further

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2% in 2005. In September 2003 and April 2004, workers’ compensation legislation was enacted in California with the principal objective of reducing costs. The legislation contains provisions which primarily seek to reduce medical costs and does not directly impact indemnity payments to injured workers. The principal changes in the legislation that impact medical costs are as follows: 1) a reduction in the reimbursable amount for certain physician fees, outpatient surgeries, pharmaceutical products and certain durable medical equipment; 2) a limitation on the number of chiropractor or physical therapy office visits; 3) the introduction of medical utilization guidelines; 4) a requirement for second opinions on certain spinal surgeries; and 5) a repeal of the presumption of correctness afforded to the treating physician, except where the employee has pre-designated a treating physician. The major risk factor associated with these recent legislative changes is whether the current rates we are using for our workers’ compensation policies are justified by the estimated savings in the legislation.

The National Association of Insurance Commissioners

      The NAIC is a group formed by state Insurance Commissioners to discuss issues and formulate policy with respect to regulation, reporting and accounting of insurance companies. Although the NAIC has no legislative authority and insurance companies are at all times subject to the laws of their respective domiciliary states and, to a lesser extent, other states in which they conduct business, the NAIC is influential in determining the form in which such laws are enacted. Model Insurance Laws, Regulations and Guidelines (the “Model Laws”) have been promulgated by the NAIC as a minimum standard by which state regulatory systems and regulations are measured. Adoption of state laws which provide for substantially similar regulations to those described in the Model Laws is a requirement for accreditation by the NAIC. The NAIC provides authoritative guidance to insurance regulators on current statutory accounting issues by promulgating and updating a codified set of statutory accounting practices in its Accounting Practices and Procedures Manual. The Illinois Department of Financial and Professional Regulation, Division of Insurance and the California Department of Insurance have adopted these codified statutory accounting practices.

      Illinois and California have also adopted laws substantially similar to the NAIC’s “risk based capital” (“RBC”) laws, which require insurers to maintain minimum levels of capital based on their investments and operations. These RBC requirements provide a standard by which regulators can assess the adequacy of an insurance company’s capital and surplus relative to its operations. Among other requirements, an insurance company must maintain capital and surplus of at least 200% of the RBC computed by the NAIC’s RBC model (known as the “Authorized Control Level” of RBC). At December 31, 2003, the capital and surplus of SeaBright Insurance Company exceeded the minimum Authorized Control Level of RBC.

      The NAIC’s Insurance Regulatory Information System (“IRIS”) key financial ratios, developed to assist insurance departments in overseeing the financial condition of insurance companies, are reviewed by experienced financial examiners of the NAIC and state insurance departments to select those companies that merit highest priority in the allocation of the regulators’ resources. IRIS identifies twelve industry ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer’s business. The 2003 IRIS results for SeaBright Insurance Company showed five results outside the “usual” range for such ratios, as such range is determined by the NAIC. These results were attributable to various factors resulting primarily from the Acquisition. For example, one IRIS ratio measures a company’s “change in net writings.” This IRIS ratio is not considered “usual” if a company’s net premiums written fluctuates upward or downward by 33% or more in any given year compared to the prior year. Following the contribution of approximately $30 million to SeaBright Insurance Company’s surplus at the time of the Acquisition and the new business plan of our management team in connection with the Acquisition, our net premiums written for 2003 increased by more than 33% compared to the net premiums written of KEIC for the prior year. This increase in net premiums written caused our “change in net writings” IRIS ratio for 2003 to fall outside of the “usual” range. Another IRIS ratio measures a company’s “change in policyholders’ surplus.” This IRIS ratio is not considered “usual” if a company’s

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surplus is reduced by more than 10% or increased by more than 50% in any given year. Due to the contribution of approximately $30 million to SeaBright Insurance Company’s surplus at the time of the Acquisition, our “change in policyholders’ surplus” IRIS ratio for 2003 fell outside of the “usual” range. SeaBright Insurance Company’s 2003 IRIS results for “Investment Yield,” “One-Year Reserve Development to Policyholders’ Surplus” and “Two-Year Overall Operating Ratio” also were outside the “usual” range.

Dividend Limitations

      SeaBright Insurance Company’s ability to pay dividends is subject to restrictions contained in the insurance laws and related regulations of Illinois and California. The insurance holding company laws in these states require that ordinary dividends be reported to the Illinois Department of Financial and Professional Regulation, Division of Insurance and the California Department of Insurance prior to payment of the dividend and that extraordinary dividends be submitted for prior approval. An extraordinary dividend is generally defined as a dividend that, together with all other dividends made within the past 12 months, exceeds the greater of 10% of its statutory policyholders’ surplus as of the preceding year end or the net income of the company for the preceding year. Statutory policyholders’ surplus, as determined under SAP, is the amount remaining after all liabilities, including loss and loss adjustment expenses, are subtracted from all admitted assets. Admitted assets are assets of an insurer prescribed or permitted by a state insurance regulator to be recognized on the statutory balance sheet. Insurance regulators have broad powers to prevent the reduction of statutory surplus to inadequate levels, and there is no assurance that extraordinary dividend payments will be permitted.

Statutory Accounting Practices

      Statutory accounting practices (“SAP”) are a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s surplus to policyholders. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.

      Generally accepted accounting principles (“GAAP”) are concerned with a company’s solvency, but it is also concerned with other financial measurements, such as income and cash flows. Accordingly, GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP as opposed to SAP.

      Statutory accounting practices established by the NAIC and adopted, in part, by the Illinois and California regulators, determine, among other things, the amount of statutory surplus and statutory net income of SeaBright Insurance Company and thus determine, in part, the amount of funds it has available to pay dividends to us.

Guaranty Fund Assessments

      In Illinois, California and in most of the states where SeaBright Insurance Company is licensed to transact business, there is a requirement that property and casualty insurers doing business within each such state participate in a guaranty association, which is organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premium written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets.

      Property and casualty insurance company insolvencies or failures may result in additional security fund assessments to SeaBright Insurance Company at some future date. At this time we are unable to

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determine the impact, if any, such assessments may have on the financial position or results of operations of SeaBright Insurance Company. We have established liabilities for guaranty fund assessments with respect to insurers that are currently subject to insolvency proceedings.

PointSure

      The brokerage and third party administrator activities of PointSure are subject to licensing requirements and regulation under the laws of each of the jurisdictions in which it operates. PointSure is authorized to act as an agent under firm licenses or licenses held by one of its officers in 47 states and the District of Columbia. PointSure’s business depends on the validity of, and continued good standing under, the licenses and approvals pursuant to which it operates, as well as compliance with pertinent regulations. PointSure therefore devotes significant effort toward maintaining its licenses to ensure compliance with a diverse and complex regulatory structure.

      Licensing laws and regulations vary from state to state. In all states, the applicable licensing laws and regulations are subject to amendment or interpretation by regulatory authorities. Generally such authorities are vested with relatively broad and general discretion as to the granting, renewing and revoking of licenses and approvals. Licenses may be denied or revoked for various reasons, including the violation of such regulations, conviction of crimes and the like. Possible sanctions which may be imposed include the suspension of individual employees, limitations on engaging in a particular business for specified periods of time, revocation of licenses, censures, redress to clients and fines. In some instances, PointSure follows practices based on interpretations of laws and regulations generally followed by the industry, which may prove to be different from the interpretations of regulatory authorities.

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MANAGEMENT

Directors, Executive Officers and Key Employees

      In connection with this offering, we intend to amend and restate our certificate of incorporation and bylaws. The following summary of our management and directors contains references to provisions of the amended and restated certificate of incorporation and bylaws and the election and term of service of directors that will be in effect upon the completion of this offering. The following summary also contains references to provisions of the amended and restated certificate of incorporation and bylaws, including the composition of the board of directors and its committees and compensation committee interlocks, that will be in effect upon the completion of this offering or within the time period prescribed by the listing rules of the Nasdaq Stock Market.

      The following table sets forth information concerning our directors, executive officers and key employees. All our directors hold office for the remainder of the full term in which the new directorship was created or the vacancy occurred and until their successors are duly elected and qualified. Executive officers serve at the request of the board of directors.

Name	Age		Positions
John G. Pasqualetto		61	Chairman, President and Chief Executive Officer
Richard J. Gergasko		46	Executive Vice President — Operations
Joseph S. De Vita		63	Senior Vice President, Chief Financial Officer and Secretary
Richard W. Seelinger		45	Senior Vice President — Claims
Marc B. Miller, M.D.		48	Senior Vice President and Chief Medical Officer
Jeffrey C. Wanamaker		38	Vice President — Underwriting
James L. Borland, III		43	Vice President and Chief Information Officer
M. Philip Romney		50	Vice President — Finance
Chris A. Engstrom		44	President — PointSure Insurance Services, Inc.
J. Scott Carter		35	Director
Peter Y. Chung		37	Director
William M. Feldman		51	Director
Mural R. Josephson		56	Director
George M. Morvis		64	Director

      Set forth below is information concerning our executive officers.

      John G. Pasqualetto has served as the chairman of our board of directors since September 2004 and as our president and chief executive officer and one of our directors since July 2003. He was formerly president and chief executive officer of the Eagle entities, president of Kemper Employers Group and senior vice president of the Kemper insurance companies, holding these positions concurrently since joining Kemper in 1998. Mr. Pasqualetto’s prior experience includes serving as president of AIG’s workers’ compensation specialty group, co-founding Great States Insurance Company, a California-based specialty workers’ compensation company, and holding executive positions with Argonaut Insurance Company and the State Compensation Insurance Fund of California. Mr. Pasqualetto has a B.A. from California State University at Northridge.

      Richard J. Gergasko has served as our executive vice president since July 2003. He also served in this capacity and as the head of underwriting and research and development at the Eagle entities from May 1999 until September 2003. Prior to joining the Eagle entities, Mr. Gergasko held a variety of positions in the insurance industry, including underwriting vice president of AIG’s workers’ compensation specialty group, as well as various actuarial positions at Crum and Forster, William M. Mercer, Inc. and MBA, Inc.

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Mr. Gergasko holds a B.A. in Statistics from Rutgers College, is a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries.

      Joseph S. De Vita has served as our senior vice president, chief financial officer and secretary since July 2003. From January 2003 until June 2003, Mr. De Vita served as a consultant to the Eagle entities. From November 2000 until December 2002, Mr. De Vita served as the vice president and chief financial officer of Lifeguard, Inc., a health plan provider based in California. Prior to November of 2000, Mr. De Vita served as an independent consultant. Mr. De Vita started his career in the insurance industry in 1972 with INA Corporation (Cigna). In 1978, he joined Fremont General Corporation as vice president of finance. In 1987, Mr. De Vita co-founded Great States Insurance Company, a specialty workers’ compensation insurer, with Mr. Pasqualetto. Mr. De Vita has held executive positions with managed care organizations, and began his financial career with PricewaterhouseCoopers. Mr. De Vita holds a B.A. in Accounting from St. Joseph’s University, an M.B.A. in Finance from Drexel University, and is a member of the American Institute of Certified Public Accountants.

      Richard W. Seelinger has served as our senior vice president — claims since July 2003. He served in the same capacity with the Eagle entities, which he joined in 2000. From 1985 through 1999, Mr. Seelinger held a series of executive positions of increasing responsibility at Kemper insurance companies, including workers’ compensation claims officer. Mr. Seelinger holds a B.A. in History from Western Illinois University.

      Marc B. Miller, M.D. has served as our senior vice president and chief medical officer since August 2004. Since 1998, Dr. Miller has been an independent consultant serving in various capacities for several businesses, including: acting as vice president of customer relations for ExactCost, Inc., a healthcare cost analysis technology company; representing various foreign healthcare services, biotech, medical device, and pharmaceutical companies in connection with partnerships, investment and business development; acting as medical director charged with revamping Orange County’s Medical Services Indigents Program; and acting as medical director advising on quality assurance and credentialing for MedLink HealthCare Networks, Inc., a diagnostic managed care organization. Dr. Miller also co-founded ConflictSolvers, LLC, a start-up venture which develops dispute resolution products, and held various positions with ConflictSolvers from 1998 until 2001, most recently serving as its chief executive officer. Dr. Miller is Board certified in preventive medicine, public health and medical management. Dr. Miller holds a B.A. from Stanford University, an M.B.A. from Golden Gate University, an M.P.H. from the University of California, Los Angeles and an M.D. from Rush University.

      Jeffrey C. Wanamaker has served as our vice president — underwriting and regional manager for the northwest region since July 2003. He served in the same capacity at the Eagle entities, which he joined in 1999. From 1989 to 1999, Mr. Wanamaker was employed by Alaska National Insurance Company, where he underwrote most commercial lines and ultimately specialized in accounts with a combination of state act workers’ compensation, longshore and maritime employment exposures. Mr. Wanamaker holds Bachelor of Business Administration degrees in Finance and Economics from the University of Alaska and has earned the Chartered Property Casualty Underwriters and Associate in Reinsurance professional designations.

      Set forth below is information concerning our key employees.

      James L. Borland, III has served as our vice president and chief information officer since November 2003. He served in the same capacity with the Eagle entities, which he joined in 2000. From January 1998 until the time he joined the Eagle entities, Mr. Borland served as the principal network analyst for PacifiCare Health Systems. From March 1993 until January 1998, Mr. Borland held several positions with Great States Insurance Company. Mr. Borland holds a B.S. in Business Management from Pepperdine University.

      M. Philip Romney has served as our vice president — finance and principal accounting officer since November 2004. From February 2000 until October 2004, Mr. Romney served as director of finance, controller and assistant secretary for Eden Bioscience Corporation, a biotechnology company in

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Washington. Prior to that, Mr. Romney served in various positions (most recently as deputy treasurer and senior manager, risk management and treasury services) at Public Utility District No. 1 of Snohomish County, Washington, a public water and electric utility. Mr. Romney began his financial career with the Seattle office of KPMG LLP. Mr. Romney holds B.S. and MAcc. degrees from Brigham Young University and is a member of the Washington Society of Certified Public Accountants.

      Chris A. Engstrom has served as the president of PointSure Insurance Services, Inc., one of our wholly-owned subsidiaries, since February 2004. From May 2003 until joining PointSure, Mr. Engstrom served as the Northwest regional executive officer for Willis Group Holdings, a global insurance broker, and from January 2001 until May 2003, Mr. Engstrom served as the president and chief executive officer of Willis Seattle. Prior to his tenure at Willis, Mr. Engstrom spent 15 years with the Eagle entities, most recently as senior vice president. Mr. Engstrom holds a B.A. from City University.

      Set forth below is information concerning our directors, in addition to Mr. Pasqualetto.

      J. Scott Carter has served as a director since June 2003. Mr. Carter is a vice president at Summit Partners, a private equity and venture capital firm, where he has been employed since July 2002. From 1999 to 2002, prior to joining Summit, Mr. Carter was an investment banker with J.P. Morgan. Mr. Carter received a B.A. from Texas A&M University and an M.B.A. from the Darden School of Business at the University of Virginia.

      Peter Y. Chung has served as a director since June 2003. Mr. Chung is a general partner and member of various entities affiliated with Summit Partners, a private equity and venture capital firm, where he has been employed since August of 1994. Mr. Chung also serves as a director of Sirenza Microdevices, Inc., a designer and supplier of radio frequency components, iPayment, Inc., a provider of credit and debit card-based payment processing services to small merchants, and a number of privately held companies. Mr. Chung received an A.B. from Harvard University and an M.B.A. from Stanford University.

      William M. Feldman has served as a director since November 2004. Mr. Feldman is the co-owner, chairman and chief executive officer of Feldman, Ingardona & Co., a registered investment advisor and securities broker/dealer that provides asset management and investment advisory services to high net worth families and institutions. He has held these positions since organizing the company in 1997.

      Mural R. Josephson has served as a director since July 2004. Following his retirement as senior vice president and chief financial officer of Lumbermens Mutual Casualty Company and as an officer and director of certain affiliated entities including the Eagle entities, KEIC and PointSure in October 2002, where he served for approximately four years, Mr. Josephson has served as a consultant to various financial institutions. Prior to his role at Lumbermens, Mr. Josephson retired as a partner at KPMG LLP after 28 years at the firm. Mr. Josephson also serves as a director of UICI, a provider of health, life and related insurance products to the self-employed, individual and student insurance markets, and PXRE Group Ltd., which specializes in property reinsurance. In addition, he has served as a director of our insurance company subsidiary, SeaBright Insurance Company, since February of 2004. Mr. Josephson is a licensed Certified Public Accountant in the State of Illinois, and is a member of the American Institute of Certified Public Accountants.

      George M. Morvis has served as a director since July 2004. Mr. Morvis is the founder, president and chief executive officer of Financial Shares Corporation, a Chicago-based consulting firm specializing in strategic marketing, financial communications, and human resources consulting. Prior to founding Financial Shares Corporation in 1974, Mr. Morvis was a director of public relations and executive secretary for the Illinois Bankers Association. Mr. Morvis serves on the board of directors of numerous privately held companies. In addition, he has served as a director of our insurance company subsidiary, SeaBright Insurance Company, since February of 2004. Mr. Morvis holds a degree in Journalism from the University of Illinois, Urbana, an M.B.A. from The George Washington University, and is a graduate of the Harvard Business School executive management program.

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Family Relationships

      There are no family relationships between any of our executive officers or directors.

Board Composition

      Our amended and restated certificate of incorporation provides that our board of directors shall consist of such number of directors as determined from time to time by resolution adopted by a majority of the total number of directors then in office. Initially, our board of directors will consist of six members. Any additional directorships resulting from an increase in the number of directors may only be filled by the directors then in office. The term of office for each director will be until his successor is elected and qualified or until his earlier death, resignation or removal. Elections for directors will be held annually.

      A majority of our board of directors is “independent” as defined under the rules of the Nasdaq Stock Market.

Board Committees

      We currently have an audit committee, a compensation committee and a nominating and corporate governance committee. Each committee consists of three persons. All of the members of our audit committee, nominating and corporate governance committee and compensation committee are “independent” as defined by the rules of the Nasdaq Stock Market and, in the case of the audit committee, by the rules of the Securities and Exchange Commission (“SEC”).

      Audit Committee. The audit committee is comprised of three directors. The audit committee will oversee our accounting, financial reporting and control processes and the audits of our financial statements, including: the preparation, presentation and integrity of our financial statements; our compliance with legal and regulatory requirements; our independent auditor’s qualifications and independence; and the performance of our independent auditor. Our audit committee will, among other things:

•  have sole responsibility to retain and terminate our independent auditor;

•  pre-approve all audit and non-audit services performed by our independent auditor and the fees and terms of each engagement;

•  appoint and oversee our internal auditor, and review the scope and results of each annual internal audit; and

•  review our quarterly and annual audited financial statements and related public disclosures, earnings press releases and other financial information and earnings guidance provided to analysts or rating agencies.

      Each member of the audit committee has the ability to read and understand fundamental financial statements. The audit committee also has at least one member that qualifies as an “audit committee financial expert” as defined by the rules of the SEC.

      Compensation Committee. The compensation committee is comprised of three directors. The compensation committee will oversee the administration of our benefit plans, review and administer all compensation arrangements for executive officers and establish and review general policies relating to the compensation and benefits of our officers and employees.

      Nominating and Corporate Governance Committee. The nominating and corporate governance committee is comprised of three directors. The nominating and corporate governance committee’s responsibilities include identifying and recommending to the board appropriate director nominee candidates and providing oversight with respect to corporate governance matters.

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Compensation Committee Interlocks and Insider Participation

      We anticipate that no member of our compensation committee will serve as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

Director Compensation

      It is anticipated that upon the closing of this offering, directors who are also our employees will receive no compensation for serving as directors. Non-employee directors will receive an annual retainer in the amount of $10,000, and audit committee members will receive an additional annual retainer in the amount of $3,000. Non-employee directors will receive $1,500 for each in-person board or committee meeting attended and $750 for each telephonic board or committee meeting. In addition, the chair of the audit committee will receive an annual fee in the amount of $10,000, and the chairs of the compensation committee and the nominating and corporate governance committee will receive an annual fee in the amount of $5,000. We also expect to reimburse all directors for reasonable out-of-pocket expenses they incur in connection with their service as directors. Our directors will also be eligible to receive stock options and other equity-based awards when, as and if determined by the compensation committee pursuant to the terms of the SeaBright Insurance Holdings, Inc. 2005 Long-Term Equity Incentive Plan. See “— 2005 Long-Term Equity Incentive Plan.”

Management Compensation and Incentive Plans

      Our compensation policies are designed to maximize stockholder value over the long-term. Our policies provide management with incentives to strive for excellence and link the financial interests of management with those of our stockholders. The level of incentive awards granted to members of our management is based initially upon the performance of SeaBright Insurance Holdings, Inc., which performance is tied to its calendar year pre-tax operating profit, as approved by our board of directors for the current budget. If those performance objectives are achieved, the business performance of our operating subsidiaries and the performance of the departments supervised by members of our management are considered.

      The following table sets forth the compensation for our President and Chief Executive Officer and our other four most highly compensated officers during the year ended December 31, 2003. These individuals are referred to as the “named executive officers.”

				Annual Compensation						Long Term Compensation
										Restricted		Securities
								Other Annual		Stock		Underlying		All Other
Name and Principal Position		Year		Salary(1)		Bonus		Compensation(1)		Awards		Options(2)		Compensation
John G. Pasqualetto			2003	$	79,655		—	$	2,250		—		155,292		—
	Chairman, President and
	Chief Executive Officer
Richard J. Gergasko			2003		64,708		—		—		—		77,646		—
	Executive Vice President
Joseph S. De Vita			2003		54,000		—		—		—		58,234		—
	Senior Vice President,
	Chief Financial Officer
	and Secretary
Richard W. Seelinger			2003		47,727		—		—		—		38,823		—
	Senior Vice President — Claims
Jeffrey C. Wanamaker			2003		41,331		—		—		—		58,234		—
	Vice President —
	Underwriting

(1)	Includes compensation paid to the named executive officers from September 30, 2003, the date of the Acquisition, through December 31, 2003.
(2)	Includes stock options granted to executive officers in connection with the Acquisition, as adjusted by stock splits which occurred in February 2004 and in December 2004.

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Option Grants in Last Fiscal Year

      The following table sets forth information regarding stock options granted in 2003 under our 2003 Stock Option Plan to each of our named executive officers. The potential realizable value is calculated assuming the fair market value of the common stock appreciates at the indicated rate for the entire term of the option and that the option is exercised and sold on the last day of its term at the appreciated price. These gains are based on assumed rates of appreciation compounded annually from the dates the respective options were granted to their expiration date based on an assumed initial public offering price of $10.00, minus the per share exercise price of $6.54. Annual rates of stock price appreciation of 5% and 10% from the initial offering price is assumed pursuant to rules of the SEC. The actual stock price will appreciate over the term of the options at the assumed 5% and 10% levels or any other defined level. Actual gains, if any, on exercised stock options will depend on the future performance of our common stock.

	Number			Percentage						Potential Realizable Value
	of			of Total						at Assumed Annual Rates of
	Securities			Options		Per				Stock Price Appreciation for
	Underlying			Granted to		Share				Options Term
	Options			Employees		Exercise
Name	Granted			in 2003		Price		Expiration Date		5%		10%
John G. Pasqualetto		155,292	(1)		40	$	6.54		September 30, 2013	$	1,513,933	$	3,012,665
Richard J. Gergasko		77,646	(1)		20	$	6.54		September 30, 2013		756,967		1,506,332
Joseph S. De Vita		58,234	(1)		15	$	6.54		September 30, 2013		567,782		1,129,740
Richard W. Seelinger		38,823	(1)		10	$	6.54		September 30, 2013		378,524		753,166
Jeffrey C. Wanamaker		58,234	(1)		15	$	6.54		September 30, 2013		567,782		1,129,740

(1)  The options reported vest in four equal annual installments beginning September 30, 2004.

Aggregate Options Exercised in the Last Fiscal Year and Year-End Values

      There were no options exercised in fiscal year 2003.

2003 Stock Option Plan

      In 2003, our board of directors adopted the SeaBright Insurance Holdings Inc. 2003 Stock Option Plan. The plan was amended and restated in February 2004. The purpose of this plan is to create an incentive for directors, consultants, advisors, officers and other employees to remain in our employ and to contribute to our success by granting to them a favorable opportunity to acquire our common stock. The plan is also intended to help us attract and retain individuals of exceptional managerial talent upon whom, in large measure, our sustained growth and profitability depends.

      Types of awards and eligibility. The plan provides for the grant of either “incentive stock options,” within the meaning of Section 422 of the Internal Revenue Code, or nonqualified stock options to our directors, consultants, advisors, executive officers or other key employees selected by our board of directors to participate in the plan.

      Share reserve/limitation. The number of shares of common stock with respect to which options may be granted under the plan and which may be issued upon exercise thereof may not exceed 776,458, subject to the board’s authority to adjust this amount in the event of a reorganization, recapitalization, merger, consolidation, share exchange, stock dividend, stock split or similar transactions affecting our common stock. As of August 31, 2004, we have granted options to purchase 480,027 shares of common stock under the plan. We anticipate that all future option grants will be made under our 2005 Long-Term Equity Incentive Plan, discussed below, and we do not intend to issue any further options under this plan.

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      Administration. Our board of directors, or committee designated by the board, administers the plan. Under the plan, the board or the committee has sole and complete authority to: select participants; grant options to participants in forms and amounts it determines; impose limitations, restrictions and conditions upon options as it deems appropriate; interpret the plan and adopt, amend and rescind administrative guidelines and other rules relating to the plan; correct any defect or omission or reconcile any inconsistency in the plan or an option granted under the plan; and make all other determinations on and take all other actions necessary or advisable for the implementation and administration of the plan.

      Terms of Awards. The exercise price of an option granted under the plan may not be less than 100% of the fair market value of our common stock on the date the option is granted. Our board of directors determines, in connection with each option grant under the plan, when options become exercisable and when they expire, provided that the expiration may not exceed ten years from the date of grant.

      Change of Control. In the event of a change of control of SeaBright, the board may provide, in its discretion, that options granted under the plan become immediately exercisable by any participants who are employed by us at the time of such change of control.

2005 Long-Term Equity Incentive Plan

      Prior to the closing of this offering, we intend to adopt the SeaBright Insurance Holdings, Inc. 2005 Long-Term Equity Incentive Plan. The equity incentive plan provides for grants of stock options, restricted stock, restricted stock units, deferred stock units and other equity-based awards. Directors, officers and other employees of SeaBright and its subsidiaries, as well as others performing services for us, will be eligible for grants under the plan. The purpose of the equity incentive plan is to provide these individuals with incentives to maximize stockholder value and otherwise contribute to our success and to enable us to attract, retain and reward the best available persons for positions of responsibility.

      A total of 1,047,755 shares of our common stock, representing, together with all outstanding options under the 2003 plan, approximately 10% of our outstanding common stock after the offering, will be available for issuance under the equity incentive plan. This amount will automatically increase on the first day of each fiscal year beginning in 2006 and ending in 2015 by the lesser of: (i) 2% of the shares of common stock outstanding on the last day of the immediately preceding fiscal year or (ii) such lesser number of shares as determined by the compensation committee of our board of directors. The number of shares available for issuance under the equity incentive plan is subject to adjustment in the event of a reorganization, stock split, merger or similar change in the corporate structure or the outstanding shares of common stock. In the event of any of these occurrences, we may make any adjustments we consider appropriate to, among other things, the number and kind of shares, options or other property available for issuance under the plan or covered by grants previously made under the plan. The shares available for issuance under the plan may be, in whole or in part, authorized and unissued or held as treasury shares.

      The compensation committee of our board of directors will administer the equity incentive plan. Our board also has the authority to administer the plan and to take all actions that the compensation committee is otherwise authorized to take under the plan. We anticipate that in connection with the offering, we will grant options to purchase an aggregate of approximately 309,818 shares of our common stock to approximately 24 employees and one director. All of these options will have an exercise price equal to the initial public offering price of the common stock in the offering, and will be subject to pro rata vesting over a four-year period.

      The following is a summary of the material terms of the equity incentive plan, but does not include all of the provisions of the plan. For further information about the plan, we refer you to the equity incentive plan, which we have filed as an exhibit to the registration statement of which this prospectus is a part.

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Terms of the Equity Incentive Plan

      Eligibility. Directors, officers and employees of SeaBright and its subsidiaries, as well as other individuals performing services for us, or to whom we have extended an offer of employment, will be eligible to receive grants under the equity incentive plan. However, only employees may receive grants of incentive stock options. In each case, the compensation committee will select the actual grantees.

      Stock Options. Under the equity incentive plan, the compensation committee or the board may award grants of incentive stock options conforming to the provisions of Section 422 of the Internal Revenue Code, and other, non-qualified stock options. The compensation committee may not, however, award to any one person in any calendar year options to purchase common stock equal to more than 300,000 shares, and it may not award incentive options first exercisable in any calendar year whose underlying shares have a fair market value greater than $100,000, determined at the time of grant.

      The exercise price of an option granted under the plan may not be less than 100% of the fair market value of a share of common stock on the date of grant, and the exercise price of an incentive option awarded to a person who owns stock constituting more than 10% of SeaBright’s voting power may not be less than 110% of such fair market value on such date.

      Unless the compensation committee determines otherwise, the exercise price of any option may be paid in any of the following ways:

•  in cash,

•  by delivery of shares of common stock with a fair market value equal to the exercise price, and/or

•  by simultaneous sale through a broker of shares of common stock acquired upon exercise.

      If a participant elects to deliver shares of common stock in payment of any part of an option’s exercise price, the compensation committee may in its discretion grant the participant a “reload option.” The reload option entitles its holder to purchase a number of shares of common stock equal to the number so delivered. The reload option may also include, if the compensation committee chooses, the right to purchase a number of shares of common stock equal to the number delivered or withheld in satisfaction of any of the Company’s tax withholding requirements in connection with the exercise of the original option. The terms of each reload option will be the same as those of the original exercised option, except that the grant date will be the date of exercise of the original option, and the exercise price will be the fair market value of the common stock on the date of exercise.

      The compensation committee will determine the term of each option in its discretion. However, no term may exceed ten years from the date of grant or, in the case of an incentive option granted to a person who owns stock constituting more than 10% of the voting power of SeaBright or any of its subsidiaries, five years from the date of grant. In addition, all options under the equity incentive plan, whether or not then exercisable, generally cease vesting when a grantee ceases to be a director, officer or employee of, or to otherwise perform services for, the Company or its subsidiaries. Options generally expire 30 days after the date of cessation of service, so long as the grantee does not compete with the Company during the 30-day period.

      There are, however, exceptions depending upon the circumstances of cessation. In the case of a grantee’s death or disability, all options will become fully vested and exercisable and remain so for up to 180 days after the date of death or disability. In the event of retirement, a grantee’s vested options will remain exercisable for up to 90 days after the date of retirement, while his or her unvested options may become fully vested and exercisable in the discretion of the compensation committee. In each of the foregoing circumstances, the board or compensation committee may elect to further extend the applicable exercise period in its discretion. Upon termination for cause, all options will terminate immediately. And if we undergo a change in control and a grantee is terminated from service within one year thereafter, all options will become fully vested and exercisable and remain so for up to one year after the date of termination. In addition, the compensation committee has the authority to grant options that will become

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fully vested and exercisable automatically upon a change in control of SeaBright, whether or not the grantee is subsequently terminated.

      Restricted Stock. Under the equity incentive plan, the compensation committee may award restricted stock subject to the conditions and restrictions, and for the duration, which will generally be at least six months, that it determines in its discretion. Unless the compensation committee determines otherwise, all restrictions on a grantee’s restricted stock will lapse when the grantee ceases to be a director, officer or employee of, or to otherwise perform services for, SeaBright and its subsidiaries, if the cessation occurs due to a termination within one year after a change in control of the Company or due to death, disability or, in the discretion of the compensation committee, retirement. In addition, the compensation committee has the authority to award shares of restricted stock with respect to which all restrictions shall lapse automatically upon a change in control of SeaBright, whether or not the grantee is subsequently terminated. If termination of employment or service occurs for any other reason, all of a grantee’s restricted stock as to which the applicable restrictions have not lapsed will be forfeited immediately.

      Restricted Stock Units; Deferred Stock Units. Under the equity incentive plan, the compensation committee may award restricted stock units subject to the conditions and restrictions, and for the duration, which will generally be at least six months, that it determines in its discretion. Each restricted stock unit is equivalent in value to one share of common stock and entitles the grantee to receive one share of common stock for each restricted stock unit at the end of the vesting period applicable to such restricted stock unit. Unless the compensation committee determines otherwise, all restrictions on a grantee’s restricted stock units will lapse when the grantee ceases to be a director, officer or employee of, or to otherwise perform services for, SeaBright and its subsidiaries, if the cessation occurs due to a termination within one year after a change in control of the Company or due to death, disability or, in the discretion of the compensation committee, retirement. In addition, the compensation committee has the authority to award restricted stock units with respect to which all restrictions shall lapse automatically upon a change in control of SeaBright, whether or not the grantee is subsequently terminated. If termination of employment or service occurs for any other reason, all of a grantee’s restricted stock units as to which the applicable restrictions have not lapsed will be forfeited immediately. Prior to the later of (i) the close of the tax year preceding the year in which restricted stock units are granted or (ii) 30 days of first becoming eligible to participate in the plan (or, if earlier, the last day of the tax year in which the participant first becomes eligible to participate in the plan) and on or prior to the date the restricted stock units are granted, a grantee may elect to defer the receipt of all or a portion of the shares due with respect to the restricted stock units and convert such restricted stock units into deferred stock units. Subject to specified exceptions, the grantee will receive shares in respect of such deferred stock units at the end of the deferral period.

      Performance Awards. Under the equity incentive plan, the compensation committee may grant performance awards contingent upon achievement by the grantee, SeaBright and/or its subsidiaries or divisions of set goals and objectives regarding specified performance criteria, such as, for example, return on equity, over a specified performance cycle, as designated by the compensation committee. Performance awards may include specific dollar-value target awards, performance units, the value of which is established by the compensation committee at the time of grant, and/or performance shares, the value of which is equal to the fair market value of a share of common stock on the date of grant. The value of a performance award may be fixed or fluctuate on the basis of specified performance criteria. A performance award may be paid out in cash and/or shares of our common stock or other securities.

      Unless the compensation committee determines otherwise, if a grantee ceases to be a director, officer or employee of, or to otherwise perform services for, SeaBright and its subsidiaries prior to completion of a performance cycle, due to death, disability or retirement, the grantee will receive the portion of the performance award payable to him or her based on achievement of the applicable performance criteria over the elapsed portion of the performance cycle. If termination of employment or service occurs for any other reason prior to completion of a performance cycle, the grantee will become ineligible to receive any portion of a performance award. If we undergo a change in control, a grantee will earn no less than the portion of the performance award that he or she would have earned if the applicable performance cycle had terminated as of the date of the change of control.

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      Vesting, Withholding Taxes and Transferability of All Awards. The terms and conditions of each award made under the equity incentive plan, including vesting requirements, will be set forth consistent with the plan in a written agreement with the grantee. Except in limited circumstances, no award under the equity incentive plan may vest and become exercisable within six months of the date of grant, unless the compensation committee determines otherwise.

      Unless the compensation committee determines otherwise, a participant may elect to deliver shares of common stock, or to have us withhold shares of common stock otherwise issuable upon exercise of an option or upon grant or vesting of restricted stock or a restricted stock unit, in order to satisfy our withholding obligations in connection with any such exercise, grant or vesting.

      Unless the compensation committee determines otherwise, no award made under the equity incentive plan will be transferable other than by will or the laws of descent and distribution or to a grantee’s family member by gift or a qualified domestic relations order, and each award may be exercised only by the grantee, his or her qualified family member transferee, or any of their respective executors, administrators, guardians, or legal representatives.

      Amendment and Termination of the Equity Incentive Plan. The board may amend or terminate the equity incentive plan in its discretion, except that no amendment will become effective without prior approval of our stockholders if such approval is necessary for continued compliance with applicable stock exchange listing requirements. Furthermore, any termination may not materially and adversely affect any outstanding rights or obligations under the equity incentive plan without the affected participant’s consent. If not previously terminated by the board, the equity incentive plan will terminate on the tenth anniversary of its adoption.

Employment Agreements

      The following information summarizes the employment agreements for our chief executive officer and each of our other named executive officers who were the most highly compensated for the year ended December 31, 2003.

      John G. Pasqualetto. Mr. Pasqualetto’s employment agreement, as amended, provides for an annual base salary of $313,793 and an annual incentive bonus in a target amount of 65% of his base salary. Mr. Pasqualetto’s salary and target bonus amount are subject to review by the board for market and performance adjustments at the beginning of each calendar year and may be adjusted after such review in the board’s sole discretion. Mr. Pasqualetto may participate in present and future benefit plans that are generally made available to employees from time to time. If we terminate Mr. Pasqualetto’s employment without cause or if Mr. Pasqualetto terminates his employment for good reason, each as defined in his employment agreement, he will be entitled to receive his base salary and bonus (prorated to the date of termination) payable in regular installments from the date of termination for a period of 18 months thereafter. Mr. Pasqualetto’s employment agreement provides that he will be restricted from engaging in specified competitive activities and soliciting SeaBright’s employees, customers, suppliers or other business relations for 18 months following the date of his termination.

      Richard J. Gergasko. Mr. Gergasko’s employment agreement provides for an annual base salary of $258,832 and an annual incentive bonus in a target amount of 50% of his base salary. Mr. Gergasko’s salary and target bonus amount are subject to review by the board for market and performance adjustments at the beginning of each calendar year and may be adjusted after such review in the board’s sole discretion. Mr. Gergasko may participate in present and future benefit plans that are generally made available to employees from time to time. If we terminate Mr. Gergasko’s employment without cause, as defined in his employment agreement, he will be entitled to receive his base salary (prorated to the date of termination) payable in regular installments from the date of termination for a period of 12 months thereafter. Mr. Gergasko’s employment agreement provides that he will be restricted from engaging in specified competitive activities and soliciting our employees, customers, suppliers or other business relations for 12 months following the date of his termination.

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      Joseph S. De Vita. Mr. De Vita’s employment agreement provides for an annual base salary of $216,000 and an annual incentive bonus in a target amount of 50% of his base salary. Mr. De Vita’s salary and target bonus amount are subject to review by the board for market and performance adjustments at the beginning of each calendar year and may be adjusted after such review in the board’s sole discretion. Mr. De Vita may participate in present and future benefit plans that are generally made available to employees from time to time. If we terminate Mr. De Vita’s employment without cause, as defined in his employment agreement, he will be entitled to receive his base salary (prorated to the date of termination) payable in regular installments from the date of termination for a period of 12 months thereafter. Mr. De Vita’s employment agreement provides that he will be restricted from engaging in specified competitive activities and soliciting our employees, customers, suppliers or other business relations for 12 months following the date of his termination.

      Richard W. Seelinger. Mr. Seelinger’s employment agreement provides for an annual base salary of $187,113 and an annual incentive bonus in a target amount of 40% of his base salary. Mr. Seelinger’s salary and target bonus amount are subject to review by the board for market and performance adjustments at the beginning of each calendar year and may be adjusted after such review in the board’s sole discretion. Mr. Seelinger may participate in present and future benefit plans that are generally made available to employees from time to time. If we terminate Mr. Seelinger’s employment without cause, as defined in his employment agreement, he will be entitled to receive his base salary (prorated to the date of termination) payable in regular installments from the date of termination for a period of 12 months thereafter. Mr. Seelinger’s employment agreement provides that he will be restricted from engaging in specified competitive activities and soliciting our employees, customers, suppliers or other business relations for 12 months following the date of his termination.

      Jeffrey C. Wanamaker. Mr. Wanamaker’s employment agreement provides for an annual base salary of $164,966 and an annual incentive bonus in a target amount of 40% of his base salary. Mr. Wanamaker’s salary and target bonus amount are subject to review for market and performance adjustments at the beginning of each calendar year and may be adjusted after such review in the board’s sole discretion. Mr. Wanamaker may participate in present and future benefit plans that are generally made available to employees from time to time. If we terminate Mr. Wanamaker’s employment without cause, as defined in his employment agreement, he will be entitled to receive his base salary (prorated to the date of termination) payable in regular installments from the date of termination for a period of 12 months thereafter. Mr. Wanamaker’s employment agreement provides that he will be restricted from engaging in specified competitive activities and soliciting our employees, customers, suppliers or other business relations for 12 months following the date of his termination.

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PRINCIPAL STOCKHOLDERS

      The following table provides information concerning beneficial ownership of our common stock as of December 31, 2004, by:

•  each of our directors;

•  each of our named executive officers as of December 31, 2004;

•  each person known by us to beneficially own 5% or more of our outstanding common stock; and

•  all of our directors and executive officers as a group.

      The following table lists the number of shares and percentage of shares beneficially owned based on 7,777,818 shares of common stock outstanding as of December 31, 2004 (on an as-converted basis) and 97,059 common stock options currently exercisable or exercisable within 60 days of December 31, 2004. The figures in the table assume the conversion of each of our outstanding shares of preferred stock into 15.299664 shares of common stock upon completion of this offering and the exercise of all stock options currently exercisable or exercisable within 60 days of December 31, 2004. The table also lists the applicable percentage of shares beneficially owned based on 15,277,818 shares of common stock outstanding upon completion of this offering, assuming no exercise of the underwriters’ over-allotment option.

      Beneficial ownership is determined in accordance with the rules of the SEC, and generally includes voting power and/or investment power with respect to the securities held. Shares of common stock subject to options currently exercisable or exercisable within 60 days of December 31, 2004, are deemed outstanding and beneficially owned by the person holding such options for purposes of computing the number of shares and percentage beneficially owned by such person, but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as indicated in the footnotes to this table, and subject to applicable community property laws, the persons or entities named have sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by them.

	Beneficial Ownership					Beneficial Ownership
	Prior to the Offering					After the Offering
Name and Address of Beneficial Owner	Number		Percentage			Number		Percentage
Summit Partners(1)		7,649,832		98.4	%		7,649,832		50.1%
Peter Y. Chung(2)		7,649,832		98.4	%		7,649,832		50.1%
J. Scott Carter		—		—
John G. Pasqualetto(3)		62,537		*			62,537		*
Richard J. Gergasko(4)		37,771		*			37,771		*
Joseph S. De Vita(5)		33,684		*			33,684		*
Richard W. Seelinger(6)		21,181		*			21,181		*
Jeffrey C. Wanamaker(7)		23,054		*			23,054		*
William M. Feldman		—		—
Mural R. Josephson		—		—
George M. Morvis		—		—
All directors and executive officers as a group (11 persons)		7,828,059		99.4	%		7,828,059		50.9%

* Less than 1%.

(1)  Represents (a) 2,032,560 shares of common stock held by Summit Ventures V, L.P.; (b) 339,867 shares of common stock held by Summit V Companion Fund, L.P.; (c) 135,953 shares of common stock held by Summit V Advisors Fund (QP), L.P.; (d) 41,554 shares of common stock held by Summit V Advisors Fund, L.P.; (e) 3,449,447 shares of common stock held by Summit

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	Ventures VI-A, L.P.; (f) 1,438,566 shares of common stock held by Summit Ventures VI-B, L.P.; (g) 71,740 shares of common stock held by Summit VI Advisors Fund, L.P.; (h) 110,142 shares of common stock held by Summit VI Entrepreneurs Fund, L.P.; and (i) 30,003 shares of common stock held by Summit Investors VI, L.P. (such entities collectively referred to as “Summit Partners”). Summit Partners, LLC is the general partner of Summit Partners V, L.P., which is the general partner of each of Summit Ventures V, L.P., Summit V Companion Fund, L.P., Summit V Advisors Fund (QP), L.P. and Summit V Advisors Fund, L.P. Summit Partners, LLC, through a five-person investment committee composed of certain of its members, has voting and dispositive authority over the shares held by each of these entities and therefore beneficially owns such shares. Decisions of the investment committee are made by a majority vote of its members and, as a result, no single member of the investment committee has voting or dispositive authority over the shares. E. Roe Stamps, Stephen G. Woodsum, Gregory M. Avis, Walter G. Kortschak, Martin J. Mannion, Thomas S. Roberts, Bruce R. Evans, Joseph F. Trustey, Kevin P. Mohan, Peter Y. Chung, Scott C. Collins and Robert V. Walsh are the members of Summit Partners, LLC and each disclaims beneficial ownership of the shares held by Summit Partners. Summit Partners, L.P. is the managing member of Summit Partners VI (GP), LLC, which is the general partner of Summit Partners VI (GP), L.P., which is the general partner of each of Summit Ventures VI-A, L.P., Summit Ventures VI-B, L.P., Summit VI Advisors Fund, L.P., Summit VI Entrepreneurs Fund, L.P. and Summit Investors VI, L.P. Summit Partners, L.P., through a three-person investment committee composed of certain of the members of Summit Master Company, LLC, has voting and dispositive authority over the shares held by each of these entities and therefore beneficially owns such shares. Decisions of the investment committee are made by a majority vote of its members and, as a result, no single member of the investment committee has voting or dispositive authority over the shares. E. Roe Stamps, Stephen G. Woodsum, Gregory M. Avis, Walter G. Kortschak, Martin, J. Mannion, Thomas S. Roberts, Bruce R. Evans, Joseph F. Trustey, Kevin P. Mohan, Peter Y. Chung, Scott C. Collins and Robert V. Walsh are the members of Summit Master Company, LLC, which is the general partner of Summit Partners, L.P., and each disclaims beneficial ownership of the shares held by Summit Partners. The address for each of these entities is 499 Hamilton Avenue, Palo Alto, CA 94301.
(2)	Consists of shares held by Summit Partners. Mr. Chung does not have voting or dispositive authority over these shares and disclaims beneficial ownership of these shares.
(3)	Includes options to purchase 38,823 shares of common stock exercisable within 60 days of December 31, 2004.
(4)	Includes options to purchase 19,411 shares of common stock exercisable within 60 days of December 31, 2004.
(5)	Includes options to purchase 14,559 shares of common stock exercisable within 60 days of December 31, 2004.
(6)	Includes options to purchase 9,706 shares of common stock exercisable within 60 days of December 31, 2004.
(7)	Includes options to purchase 14,559 shares of common stock exercisable within 60 days of December 31, 2004.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      We have entered into certain transactions and contractual arrangements with some of our stockholders and members of management, including the following:

Stockholders Agreement

      In connection with the Acquisition on September 30, 2003, we entered into a stockholders agreement with each of our stockholders. The operative provisions of the stockholders agreement direct the voting of shares for our board of directors, impose transfer restrictions on our shares and require the stockholders to consent to our sale to a third party if such sale is approved by the Summit Partners investors. These provisions of the agreement terminate automatically upon the completion of this offering.

Registration Agreement

      In connection with the Acquisition on September 30, 2003, we entered into a registration agreement with the Summit Partners investors and a minority investor. Under the registration agreement, the holders of a majority of Registrable Securities (as defined in the registration agreement) have the right to require us to register any or all of their common stock in SeaBright (including any common stock issued or issuable upon conversion of shares of SeaBright’s convertible preferred stock) under the Securities Act at our expense. In addition, all holders of Registrable Securities are entitled to request the inclusion of any of their common stock in any registration statement at our expense whenever we propose to register shares of our common stock under the Securities Act. In connection with these registrations, we have agreed to indemnify all holders of Registrable Securities against certain liabilities, including liabilities under the Securities Act.

Management Rights Agreement

      In connection with the Acquisition on September 30, 2003, we entered into a management rights agreement with the Summit Partners investors. Pursuant to this agreement, the Summit Partners investors are entitled to: (1) consult with and advise our management with respect to significant business issues, including, among other things, management’s proposed annual operating plan, (2) examine our books and records and inspect our facilities and (3) attend any board meetings to the extent that they do not have a representative on our board of directors. This agreement terminates automatically upon the completion of this offering.

Summit Partners Investors Stock Purchases

      We entered into a stock purchase agreement with the Summit Partners investors in connection with the Acquisition on September 30, 2003. Pursuant to this agreement, the Summit Partners investors purchased an aggregate of 450,000 shares of our convertible preferred stock for an aggregate purchase price of $45 million. We entered into a second stock purchase agreement with the Summit Partners investors, as well as certain members of our management, in June 2004 pursuant to which the Summit Partners investors purchased an aggregate of 50,000 shares of our convertible preferred stock for an aggregate purchase price of $5 million. Each share of convertible preferred stock purchased under the stock purchase agreements will be converted into 15.299664 shares of common stock upon the closing of this offering.

Executive Stock Purchase Agreements

      We entered into executive stock purchase agreements with each of John G. Pasqualetto, Richard J. Gergasko, Joseph S. De Vita, Richard W. Seelinger and Jeffrey C. Wanamaker in September 2003 pursuant to which the executives purchased an aggregate of 4,250 shares of our convertible preferred stock for an aggregate purchase price of $425,000. In June 2004, we entered into (i) a stock purchase agreement with Messrs. Pasqualetto, Gergasko, De Vita and Wanamaker, as well as the Summit Partners investors, pursuant to which the executives purchased an aggregate of 1,055.25 shares of our convertible preferred

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stock for an aggregate purchase price of $105,525, and (ii) separate executive stock agreements with each of Chris A. Engstrom and James L. Borland III, pursuant to which these key employees purchased an additional 560 shares of our convertible preferred stock for an aggregate purchase price of $56,000. Each share of convertible preferred stock purchased under the stock purchase agreements will be converted into 15.299664 shares of common stock upon the closing of this offering. The purchase agreements provide us with a repurchase option upon the termination of an executive’s employment. In the event that we do not elect to exercise the repurchase option, the Summit Partners investors may exercise the repurchase option. Pursuant to the repurchase option, we or the Summit Partners investors, as the case may be, may repurchase a terminated executive’s securities at fair market value. The repurchase option terminates automatically upon the completion of this offering.

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DESCRIPTION OF CAPITAL STOCK

      In connection with this offering, we intend to amend and restate our certificate of incorporation and bylaws. The following summary of our capital stock does not relate to our current certificate of incorporation or bylaws, but rather is a description of our capital stock pursuant to the amended and restated certificate of incorporation and bylaws that will be in effect upon the completion of this offering.

      Our authorized capital stock will consist of 75,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share. Upon completion of this offering, 15,277,818 shares of common stock will be issued and outstanding and no shares of preferred stock will be issued and outstanding.

      The following summary of certain provisions of the common stock and preferred stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of our amended and restated certificate of incorporation which is included as an exhibit to the registration statement of which this prospectus is a part, and by the provisions of applicable law. See “Where You Can Find Additional Information.”

Common Stock

      Each holder of our common stock is entitled to one vote for each share on all matters to be voted upon by the stockholders and there are no cumulative voting rights. Subject to preferences to which holders of preferred stock may be entitled, holders of common stock are entitled to receive ratably the dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor. See “Dividend Policy.” If there is a liquidation, dissolution or winding up of SeaBright, holders of common stock would be entitled to share in our assets remaining after the payment of liabilities, and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock. Holders of our common stock have no preemptive or conversion rights or other subscription rights and there are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of our common stock are fully paid and non-assessable. The rights, preferences and privileges of the holders of our common stock are subject to, and may be adversely affected by the rights of the holders of shares of any series of preferred stock which we may designate in the future.

Preferred Stock

      Our amended and restated certificate of incorporation authorizes our board of directors, subject to any limitations prescribed by law, to issue shares of preferred stock in one or more series without stockholder approval. Each series of preferred stock will have the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as will be determined by the board of directors. The purpose of authorizing the board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays and uncertainties associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisition and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or discourage a third party from acquiring, a majority of our outstanding voting stock. Our board of directors may issue preferred stock with voting and conversion rights that could adversely affect the voting power of the holders of our common stock. There are no current agreements or understandings for the issuance of preferred stock and our board of directors has no present intention to issue any shares of preferred stock.

Registration Rights

      See “Certain Relationships and Related Transactions” for a description of the registration agreement we have entered into with certain of our stockholders.

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Effect of Amended and Restated Certificate of Incorporation and Bylaws

      Our amended and restated certificate of incorporation and bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us.

      Our amended and restated certificate of incorporation provides that stockholder action can be taken only at an annual or special meeting of stockholders and cannot be taken by written consent in lieu of a meeting. In addition, our amended and restated certificate of incorporation and bylaws provide that, except as otherwise required by law, special meetings of the stockholders can only be called by a resolution adopted by a majority of our board of directors or by our chief executive officer. Stockholders are not permitted to call a special meeting or require our board of directors to call a special meeting. Our amended and restated certificate of incorporation also provides that directors may be removed from office only for cause, at a meeting called for that purpose, and only by the affirmative vote of the holders of at least 66 2/3% of the voting power of all outstanding shares of common stock entitled to vote generally for the election of directors, voting together as a single class.

      Our bylaws establish an advance notice procedure for stockholder proposals to be brought before our annual meeting of stockholders, including proposed nominations of persons for election to our board of directors. Stockholders at an annual meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of our board of directors or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given to our secretary timely written notice, in proper form, of the stockholder’s intention to bring that business before the meeting. Although the bylaws do not give our board of directors the power to approve or disapprove stockholder nominations of director candidates or proposals regarding other business to come before a special or annual meeting, the bylaws may have the effect of precluding the conduct of proposed business at a meeting if the proper procedures are not followed or may discourage or defer a potential acquiror from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of us.

      The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or bylaws, unless either a corporation’s certificate of incorporation or bylaws require a greater percentage. Our amended and restated certificate of incorporation and by-laws provide that the affirmative vote of holders of at least 66 2/3% of the total votes eligible to be cast in the election of directors will be required to amend, alter, change or repeal specified provisions. This requirement of a super-majority vote to approve amendments to our amended and restated certificate of incorporation and bylaws could enable a minority of our stockholders to exercise veto power over any such amendments.

Delaware Law

      We will be subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. In general, these provisions prohibit a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless:

•  prior to that date, the board approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;

•  upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or

•  on or after the date the business combination is approved by the board and authorized at a meeting of stockholders by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.

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      Section 203 defines “business combination” to include the following:

•  any merger or consolidation involving the corporation and the interested stockholder;

•  any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;

•  subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;

•  any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or

•  the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

      In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any of these entities or persons.

Limitation of Liability and Indemnification of Directors and Officers

      As permitted by the Delaware General Corporation Law, we have adopted provisions in our amended and restated certificate of incorporation that limit or eliminate the personal liability of our directors for a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director will not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for:

•  any breach of the director’s duty of loyalty to us or our stockholders;

•  any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

•  any act related to unlawful stock repurchases, redemptions or other distributions or payment of dividends; or

•  any transaction from which the director derived an improper personal benefit.

      Our amended and restated certificate of incorporation also authorizes us to indemnify our officers, directors and other agents to the fullest extent permitted under Delaware law and we may advance expenses to our directors, officers and employees in connection with a legal proceeding, subject to limited exceptions. As permitted by the Delaware General Corporation Law, our amended and restated certificate of incorporation provides that:

•  we shall indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and

•  we may purchase and maintain insurance on behalf of our current or former directors, officers, employees or agents against any liability asserted against them and incurred by them in any such capacity, or arising out of their status as such.

Corporate Opportunities and Transactions with Summit Partners

      In recognition that directors, officers, stockholders, members, managers and/or employees of Summit Partners and its affiliates and investment funds (collectively, the “Summit Entities”) may serve as our directors and/or officers, and that the Summit Entities may engage in similar activities or lines of business that we do, our amended and restated certificate of incorporation provides for the allocation of certain corporate opportunities between us and the Summit Entities. Specifically, none of the Summit Entities or

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any director, officer, stockholder, member, manager or employee of the Summit Entities has any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business that we do. In the event that any Summit Entity acquires knowledge of a potential transaction or matter which may be a corporate opportunity for itself and us, we will not have any expectancy in such corporate opportunity, and the Summit Entity will not have any duty to communicate or offer such corporate opportunity to us and may pursue or acquire such corporate opportunity for itself or direct such opportunity to another person. In addition, if a director or officer of our company who is also a director, officer, member, manager or employee of any Summit Entity acquires knowledge of a potential transaction or matter which may be a corporate opportunity for us and a Summit Entity, we will not have any expectancy in such corporate opportunity unless such corporate opportunity is expressly offered to such person solely in his or her capacity as a director or officer of our company.

      In recognition that we may engage in material business transactions with the Summit Entities, from which we are expected to benefit, our amended and restated certificate of incorporation provides that any of our directors or officers who are also directors, officers, stockholders, members, managers and/or employees of any Summit Entity will have fully satisfied and fulfilled his or her fiduciary duty to us and our stockholders with respect to such transaction, if:

•  the transaction was approved, after being made aware of the material facts of the relationship between each of SeaBright or a subsidiary thereof and the Summit Entity and the material terms and facts of the transaction, by (i) an affirmative vote of a majority of the members of our board of directors who do not have a material financial interest in the transaction (“Interested Persons”) or (ii) an affirmative vote of a majority of the members of a committee of our board of directors consisting of members who are not Interested Person; or

•  the transaction was fair to us at the time we entered into the transaction; or

•  the transaction was approved by an affirmative vote of the holders of a majority of shares of our common stock entitled to vote, excluding the Summit Entities and any Interested Person.

      By becoming a stockholder in our company, you will be deemed to have notice of and consented to these provisions of our amended and restated certificate of incorporation. Any amendment to the foregoing provisions of our amended and restated certificate of incorporation requires the affirmative vote of at least 80% of the voting power of all shares of our common stock then outstanding.

Listing

      We have applied to list our common stock on the Nasdaq National Market under the symbol “SEAB.”

Transfer Agent and Registrar

      The transfer agent and registrar for the common stock will be EquiServe Trust Company, N.A. The address of the transfer agent and registrar is 250 Royall Street, Canton, MA 02021 and its telephone number is (816) 843-4299.

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SHARES ELIGIBLE FOR FUTURE SALE

      Upon completion of the offering we will have a total of 15,277,818 shares of common stock outstanding (16,402,818 shares if the underwriters exercise the over-allotment option in full). All of the shares sold in the offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the “Securities Act”) by persons other than our “affiliates.” Under the Securities Act, an “affiliate” of a company is a person that directly or indirectly controls, is controlled by or is under common control with that company.

      The remaining shares of common stock outstanding will be “restricted securities” within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemptions contained in Rule 144.

Rule 144

      In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person or persons whose shares are aggregated, who has beneficially owned restricted shares for at least one year, including persons who may be deemed to be our “affiliates,” would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:

•  1.0% of the number of shares of common stock then outstanding, which will equal approximately 152,778 shares immediately after this offering; or

•  the average weekly trading volume of our common stock during the four calendar weeks before a notice of the sale on Form 144 is filed.

      Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of certain public information about us.

Rule 144(k)

      Under Rule 144(k), a person who is not deemed to have been one of our “affiliates” at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an “affiliate,” is entitled to sell these shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

      Following the completion of this offering, we intend to file one or more registration statements on Form S-8 under the Securities Act to register common stock issued or reserved for issuance under our 2003 Stock Option Plan and our 2005 Long-term Equity Incentive Plan. Any such Form S-8 registration statement will automatically become effective upon filing. Accordingly, shares registered under such registration statement will be available for sale in the open market, unless such shares are subject to vesting restrictions with us or the lock-up restrictions described below. We expect that the registration statements on Form S-8 will cover 1,047,755 shares, subject to annual increase of up to 2% of the shares of common stock outstanding on the last day of the preceding fiscal year, under the 2005 Long-Term Equity Incentive Plan and 480,027 shares under the 2003 Stock Option Plan.

      No prediction can be made as to the effect, if any, future sales of shares, or the availability of shares for future sales, will have on the market price of our common stock prevailing from time to time. The sale of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of our common stock.

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Lock-up Agreements

      We and all of our current officers, directors and stockholders have agreed that, without the prior written consent of the Representatives, we will not, during the period ending 180 days after the date of this prospectus:

•  offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer to dispose of, directly or indirectly, any shares of our common stock, or any securities convertible into or exercisable or exchangeable for any shares of our common stock or any right to acquire shares of our common stock; or

•  enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise.

      These restrictions do not apply to any transfers (i) as a bona fide gift or gifts, so long as the donee or donees agree in writing to be bound by the restrictions in the lock-up agreement, (ii) to any trust, partnership, corporation or other entity formed for the direct or indirect benefit of the transferor or the immediate family of the transferor, so long as a duly authorized officer, representative or trustee of the transferee agrees in writing to be bound by the restrictions in the lock-up agreement, and so long as the transfer does not involve a disposition for value, (iii) if the transfer occurs by operation of law, such as rules of descent and distribution, statutes governing the effects of a merger or a qualified domestic order, so long as the transferee executes an agreement acknowledging that the transferee is receiving and holding the shares subject to the provisions of the lock-up agreement or (iv) to an affiliate (as that term is defined in Rule 405 under the Securities Act) of the transferor, so long as such affiliate agrees to be bound in writing by the restrictions in the lock-up agreement. In addition, these restrictions do not apply to grants of options to purchase common stock or issuances of shares of restricted stock or other equity-based awards pursuant to our equity incentive and benefit plans described in this prospectus.

      The Representatives do not intend to release any portion of the common stock subject to the foregoing lock-up agreements; however the Representatives, in their sole discretion, may release any of the common stock from the lock-up agreements prior to expiration of the 180-day period without notice. In considering a request to release shares from a lock-up agreement, the Representatives will consider a number of factors, including the impact that such a release would have on this offering and the market for our common stock and the equitable considerations underlying the request for releases.

Registration Rights

      See “Certain Relationships and Related Transactions” for a description of the registration agreement we have entered into with certain of our stockholders.

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UNDERWRITING

      Subject to the terms and conditions set forth in the underwriting agreement between us and the underwriters named below, for whom Friedman, Billings, Ramsey & Co., Inc. (“FBR”), Piper Jaffray & Co. and Cochran, Caronia & Co. are acting as Representatives, we have agreed to sell to the underwriters, and the underwriters have agreed to purchase, the following respective number of shares of common stock:

Underwriter	Number of Shares
Friedman, Billings, Ramsey & Co., Inc.
Piper Jaffray & Co.
Cochran, Caronia & Co.
Total		7,500,000

      We have granted the underwriters an option exercisable during the 30-day period after the date of this prospectus to purchase on a pro rata basis, at the public offering price less underwriting discounts and commissions, up to an additional 1,125,000 shares of common stock for the sole purpose of covering over-allotments, if any. To the extent that the underwriters exercise the option, the underwriters will be committed, subject to conditions specified in the underwriting agreement, to purchase that number of additional shares.

      Under the terms and conditions of the underwriting agreement, the underwriters are committed to purchase all of the shares offered by this prospectus other than the shares subject to the over-allotment option, if any shares are purchased. We have agreed to indemnify the underwriters against certain civil liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of such liabilities.

      The underwriters initially propose to offer the common stock directly to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at such offering price less a concession not to exceed $           per share. The underwriters may allow, and such dealers may re-allow, a discount not to exceed $           per share to certain other dealers.

      The following table provides information regarding the per share and total underwriting discounts and commissions we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters’ over-allotment option to purchase up to 1,125,000 additional shares.

	No Exercise of	Full Exercise of
Paid by Us	Over-Allotment Option	Over-Allotment Option
Per Share	$	$
Total	$	$

      We have agreed to reimburse FBR for its expenses incurred in connection with this offering up to $250,000. We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $2,800,000.

      In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price our common stock. Specifically, the underwriters may over-allot this offering by selling more than the number of shares of common stock offered by this prospectus, creating a syndicate short position. In addition, the underwriters may bid for and purchase common stock in the open market to cover syndicate short positions or to stabilize the price of the common stock. Finally, the underwriters may reclaim selling concessions from dealers if shares of our common stock sold by such dealers are repurchased in syndicate covering transactions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. These transactions may be effected in the over-the-counter market or otherwise. The underwriters are not required to engage in these activities and may end any of these activities at any time.

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      We and all of our current officers, directors and stockholders have agreed that, without the prior written consent of the Representatives, we will not, during the period ending 180 days after the date of this prospectus:

•  offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer to dispose of, directly or indirectly, any shares of our common stock, or any securities convertible into or exercisable or exchangeable for any shares of our common stock or any right to acquire shares of our common stock; or

•  enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise.

      These restrictions do not apply to any transfers (i) as a bona fide gift or gifts, so long as the donee or donees agree in writing to be bound by the restrictions in the lock-up agreement, (ii) to any trust, partnership, corporation or other entity formed for the direct or indirect benefit of the transferor or the immediate family of the transferor, so long as a duly authorized officer, representative or trustee of the transferee agrees in writing to be bound by the restrictions in the lock-up agreement, and so long as the transfer does not involve a disposition for value, (iii) if the transfer occurs by operation of law, such as rules of descent and distribution, statutes governing the effects of a merger or a qualified domestic order, so long as the transferee executes an agreement acknowledging that the transferee is receiving and holding the shares subject to the provisions of the lock-up agreement or (iv) to an affiliate (as that term is defined in Rule 405 under the Securities Act) of the transferor, so long as such affiliate agrees to be bound in writing by the restrictions in the lock-up agreement. In addition, these restrictions do not apply to grants of options to purchase common stock or issuances of shares of restricted stock or other equity-based awards pursuant to our equity incentive and benefit plans described in this prospectus.

      The Representatives do not intend to release any portion of the common stock subject to the foregoing lock-up agreements; however the Representatives, in their sole discretion, may release any of the common stock from the lock-up agreements prior to expiration of the 180-day period without notice. In considering a request to release shares from a lock-up agreement, the Representatives will consider a number of factors, including the impact that such a release would have on this offering and the market for our common stock and the equitable considerations underlying the request for releases.

      The underwriters have reserved for sale, at the initial offering price, 375,000 shares of common stock for certain of our officers, employees and brokers and agents who have expressed an interest in purchasing common stock in the offering. The number of shares of common stock available to the general public in the offering will be reduced to the extent these persons purchase these reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares.

      The underwriters have informed us that they do not intend to make sales of our common stock offered by this prospectus to accounts over which they exercise discretionary authority.

      Prior to the completion of this offering, there has been no public market for the shares. The initial public offering price will be negotiated by us and the Representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be our historical performance, estimates of the business potential and our earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses.

      FBR will be facilitating Internet distribution for this offering to certain of its Internet subscription customers. FBR intends to allocate a limited number of shares for sale to its online brokerage customers. An electronic prospectus is available on the Internet website maintained by FBR. Other than the prospectus in electronic format, the information on the FBR website is not part of this prospectus.

114

LEGAL MATTERS

      We are being represented by Kirkland & Ellis LLP, a limited liability partnership that includes professional corporations, Chicago, Illinois, in connection with this offering. Certain partners of Kirkland & Ellis LLP, through investment partnerships, beneficially own equity interests in SeaBright representing less than 1% of the common stock outstanding immediately prior to this offering. Kirkland & Ellis LLP represents entities affiliated with Summit Partners in connection with certain legal matters. The underwriters are represented by Lord, Bissell & Brook LLP, Chicago, Illinois.

EXPERTS

      The combined financial statements and schedules of the Company’s predecessor as of December 31, 2002 and for the nine months ended September 30, 2003 and the years ended December 31, 2002 and 2001 and the audited consolidated financial statements and schedules of the Company as of December 31, 2003 and for the period from June 19, 2003 (inception) through December 31, 2003, have been included herein in reliance upon the reports of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon authority of said firm as experts in auditing and accounting. The audit report covering the Predecessor’s combined financial statements refers to the Predecessor’s adoption of Statement of Financial Accounting Standards No. 142 — Goodwill and Other Intangible Assets.

WHERE YOU CAN FIND MORE INFORMATION

      We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock offered in this prospectus. This prospectus, filed as part of the registration statement, does not contain all of the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about us and our common stock, we refer you to the registration statement and to its exhibits and schedules. Statements in this prospectus about the contents of any contract, agreement or other document are not necessarily complete and, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the registration statement, with each such statement being qualified in all respects by reference to the document to which it refers. Anyone may inspect the registration statement and its exhibits and schedules without charge at the public reference facilities the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain copies of all or any part of these materials from the SEC upon the payment of certain fees prescribed by the SEC. You may obtain further information about the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also inspect these reports and other information without charge at a web site maintained by the SEC. The address of this site is http://www.sec.gov.

      Upon completion of this offering, we will become subject to the informational requirements of the Exchange Act and will be required to file reports, proxy statements and other information with the SEC. You will be able to inspect and copy these reports, proxy statements and other information at the public reference facilities maintained by the SEC at the address noted above. You also will be able to obtain copies of this material from the Public Reference Room of the SEC as described above, or inspect them without charge at the SEC’s web site. We intend to furnish our stockholders with annual reports containing consolidated financial statements audited by, reported on, and with an opinion expressed by an independent accounting firm.

115

INDEX TO FINANCIAL STATEMENTS

	Page
SeaBright Insurance Holdings, Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firm		F-3
Consolidated Balance Sheet		F-4
Consolidated Statement of Operations		F-5
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Loss		F-6
Consolidated Statement of Cash Flows		F-7
Notes to Consolidated Financial Statements		F-8
SeaBright Insurance Holdings, Inc. and Subsidiaries — Nine Months Ended September 30, 2004 (Unaudited)
Consolidated Balance Sheet		F-25
Consolidated and Combined Statements of Operations		F-26
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income		F-27
Condensed, Consolidated and Combined Statement of Cash Flows		F-28
Notes to Interim Consolidated Financial Statements		F-29
Predecessor Combined Financial Statements
Report of Independent Registered Public Accounting Firm		F-33
Combined Balance Sheet		F-34
Combined Statement of Operations		F-35
Combined Statements of Changes in Stockholder’s Equity and Comprehensive Income		F-36
Combined Statements of Cash Flows		F-37
Notes to Combined Financial Statements		F-38

F-1

SEABRIGHT INSURANCE HOLDINGS, INC.

CONSOLIDATED FINANCIAL STATEMENTS

Period from June 19, 2003 (Inception)

through December 31, 2003

(With Report of Independent

Registered Public Accounting

Firm Thereon)

F-2

Report of Independent Registered Public Accounting Firm

The Board of Directors

SeaBright Insurance Holdings, Inc.:

      We have audited the accompanying consolidated balance sheet of SeaBright Insurance Holdings, Inc. and subsidiaries as of December 31, 2003 and the related consolidated statement of operations, changes in stockholders’ equity and comprehensive loss, and cash flows for the period from June 19, 2003 (inception) through December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SeaBright Insurance Holdings, Inc. and subsidiaries as of December 31, 2003 and the results of their operations and their cash flows for the period from June 19, 2003 (inception) through December 31, 2003 in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Seattle, WA

April 7, 2004, except as to notes 13(c) and 18(b), (c)

  which are as of September 14, 2004, note 18(d)

  which is as of December 29, 2004 and note 18(e)

  which is as of December 6, 2004

F-3

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

December 31, 2003

(In thousands)

ASSETS
Investment securities available-for-sale, at fair value			$	51,881
Cash and cash equivalents				5,008
Accrued investment income				486
Premiums receivable, net of allowance				5,263
Deferred premiums				14,555
Service income receivable				1,224
Reinsurance recoverables				12,050
Receivable under adverse development cover				2,468
Prepaid reinsurance				2,340
Property and equipment, net				340
Deferred federal income taxes, net				991
Deferred policy acquisition costs, net				1,936
Intangible assets, net				2,824
Goodwill				2,062
Other assets				2,652
		Total assets	$	106,080
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Unpaid loss and loss adjustment expenses		$	29,733
	Unearned premiums			18,602
	Reinsurance funds withheld and balances payable			2,807
	Premiums payable			3,976
	Accrued expenses and other liabilities			5,196
	Federal income tax payable			161
		Total liabilities		60,475
Stockholders’ equity:
	Common stock $.01 par value. Authorized 1,100,000 shares; no shares issued and outstanding			—
	Preferred stock $.01 par value. Authorized 750,000 shares; issued and outstanding 456,750 shares			5
	Paid-in capital			45,670
	Accumulated deficit			(202	)
	Accumulated other comprehensive income			132
		Total stockholders’ equity		45,605
Commitments and contingencies
		Total liabilities and stockholders’ equity	$	106,080

See accompanying notes to consolidated financial statements.

F-4

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

Period from June 19, 2003 (Inception) through December 31, 2003

(In thousands)

Revenue:
	Premiums earned		$	3,134
	Net investment income			313
	Net realized loss			(4	)
	Claims service income			663
	Other service income			561
	Other income			655
				5,322
Losses and expenses:
	Loss and loss adjustment expenses			3,024
	Underwriting, acquisition, and insurance expenses			1,789
	Other expenses			812
				5,625
		Loss before federal income taxes		(303	)
Provision (benefit) for federal income taxes:
	Current			123
	Deferred			(224	)
				(101	)
		Net loss	$	(202	)

See accompanying notes to consolidated financial statements.

F-5

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’

EQUITY AND COMPREHENSIVE LOSS

Period from June 19, 2003 (Inception) through December 31, 2003

(In thousands)

									Accumulated
									Other
		Preferred		Paid-in		Accumulated			Comprehensive
		Stock		Capital		Deficit			Income			Total
Balance at June 19, 2003 (inception)		$	—	$	—	$	—		$	—		$	—
Issuance of preferred stock			5		45,670		—			—			45,675
Comprehensive loss:
	Net loss		—		—		(202	)		—			(202	)
	Other comprehensive income (loss):
	Reclassification adjustment for realized losses recorded into income, net of tax of ($1)									(3	)		(3	)
	Increase in unrealized gain on investment securities available-for-sale, net of tax of $69									135			135
Comprehensive loss													(70	)
Balance at December 31, 2003		$	5	$	45,670	$	(202	)	$	132		$	45,605

See accompanying notes to consolidated financial statements.

F-6

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

Period from June 19, 2003 (inception) through December 31, 2003

(In thousands)

Cash flows from operating activities, net of effect of acquisition:
	Net loss				$	(202	)
	Adjustments to reconcile net loss to net cash provided by operating activities, net of effect of acquisition:
		Amortization of deferred policy acquisition costs				322
		Policy acquisition costs deferred				(2,258	)
		Provision for depreciation and amortization				320
		Net realized loss on investments				4
		Benefit for deferred federal income taxes				(262	)
		Changes in certain assets and liabilities:
			Federal income taxes payable			161
			Unpaid loss and loss adjustment expense			1,374
			Reinsurance recoverables, net of reinsurance withheld			(1,426	)
			Unearned premiums, net of premiums receivable			2,170
			Accrued investment income			(372	)
			Other assets and other liabilities			670
				Net cash provided by operating activities		501
Cash flows from investing activities, net of effect of acquisition:
	Purchases of investments					(41,901	)
	Sales of investments					6,022
	Purchases of property and equipment					(267	)
	Cash paid for acquisition, net of cash acquired					(5,022	)
				Net cash used in investing activities		(41,168	)
Cash provided by financing activities:
	Proceeds from the issuance of preferred stock					45,675
				Net increase in cash and cash equivalents		5,008
Cash and cash equivalents at beginning of the period						—
Cash and cash equivalents at end of the period					$	5,008
Supplemental disclosure of noncash activities:
	Increase in accrued liabilities incurred due to acquisition of assets				$	476

See accompanying notes to consolidated financial statements.

F-7

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003

(1) Organization

      SeaBright Insurance Holdings, Inc. (SIH), a Delaware corporation, was formed in June 2003. On July 14, 2003, SIH entered into a purchase agreement, effective September 30, 2003, with Kemper Employers Group, Inc. (KEG), Eagle Insurance Companies (Eagle), and Lumbermens Mutual Casualty Company (LMC), affiliates, all ultimately owned by Kemper Insurance Companies (KIC) (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 as further discussed in note 15.

      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, it writes both state act workers’ compensation insurance and United States Longshore and Harborworkers’ Compensation insurance (USL&H). 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. As further discussed in note 15, in connection with the Acquisition, KEIC and LMC entered into an agreement to indemnify each other with respect to developments in KEIC’s unpaid loss and loss adjustment expenses over a period of approximately eight years. December 31, 2011 is the date that the parties will look to see whether the loss and loss adjustment expenses with respect to KEIC’s insurance policies in effect at the date of the Acquisition have increased or decreased from the amount existing at the date of the Acquisition.

      PointSure is engaged primarily in administrative and brokerage activities. Eagle consists of Eagle Pacific Insurance Company, Inc. and Pacific Eagle Insurance Company, Inc., both writers of state act workers’ compensation insurance and USL&H that are in run-off as of September 30, 2003.

      KEIC resumed writing business effective October 1, 2003, primarily targeting policy renewals for former Eagle business in the States of California, Hawaii, and Alaska. In November 2003, permission was granted by the Illinois Department of Insurance for KEIC to change its name to SeaBright Insurance Company (SBIC).

(2) Summary of Significant Accounting Policies

     (a) Basis of Presentation

      The accompanying 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 consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include amounts based on the best estimates and judgment of management. Such estimates and judgments could change in the future, as more information becomes known which could impact the amounts reported and disclosed herein.

      In accordance with Statement of Financial Accountant Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company considers an operating segment to be any component of its business whose operating results are regularly reviewed by the Company’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. Currently, the Company has one operating segment, workers’ compensation insurance and related services.

F-8

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     (b) Investment Securities

      Investment securities are classified as available-for-sale and carried at fair value, adjusted for other than temporary declines in fair value, with changes in unrealized gains and losses recorded directly in other comprehensive income, net of applicable income taxes. The estimated fair value of investments in available-for-sale securities is generally based on quoted market value prices for securities traded in the public marketplace. A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in the carrying amount of the security to fair value. The impairment is charged to earnings and a new cost basis for the security is established.

      Mortgage-backed securities represent participating interests in pools of first mortgage loans originated and serviced by the issuers of securities. These securities are carried at the unpaid principal balances, adjusted for unamortized premiums and unearned discounts. Premiums and discounts are amortized using a method that approximates the level yield method over the remaining period to contractual maturity, adjusted for anticipated prepayments. To the extent the estimated lives of such securities change as a result of changes in prepayment rates, the adjustment is also included in net investment income. Prepayment assumptions used for mortgage-backed and asset-backed securities were obtained from an external securities information service and are consistent with the current interest rate and economic environment.

      Realized gains and losses, which arise principally from the sale of investments, are determined on a specific-identification basis.

(c)                     Cash and Cash Equivalents

      Cash and cash equivalents, which consist primarily of amounts deposited in banks and financial institutions, and all highly liquid investments with maturity of 90 days or less when purchased, are stated at cost.

(d)                     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 the unpaid loss and loss adjustment expenses, goodwill, intangibles, earned premiums on retrospectively rated policies, and amounts related to reinsurance.

(e)                     Premiums Receivable

      Premiums receivable are recorded at the invoiced amount. The allowance for doubtful accounts is the Company’s best estimate of the amount of uncollected premium in the Company’s existing premiums receivable. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

(f)                     Deferred Policy Acquisition Costs

      Acquisition costs related to premiums written are deferred and amortized over the periods in which the premiums are earned. Such acquisition costs include commissions, premium taxes, and certain underwriting and policy issuance costs. Deferred policy acquisition costs are limited to amounts recoverable from unearned premiums and anticipated investment income.

F-9

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(g)                     Property and Equipment

      Furniture and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, which are five and three years, respectively. Depreciation expense from inception through December 31, 2003 was approximately $20,000.

(h)                     Goodwill and Intangible Assets

      Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and 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 Financial Accounting Standards Board Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

(i)                     Revenue Recognition

      Premiums for primary and reinsured risks are included in revenue over the period 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 and 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 using actuarial loss development factors and is consistent with how the Company projects losses in general. For retrospectively rated policies, the governing contractual minimum and maximum rates are established at policy inception and are made a part of the insurance contract. While the typical retrospectively rated policy has five yearly adjustment or measurement periods, premium adjustments continue until mutual agreement to cease future adjustments is reached with the policyholder. As of December 31, 2003, approximately 43.8% of premiums written relates to retrospectively rated policies.

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

(j)                     Unpaid Loss and Loss Adjustment Expenses

      Unpaid loss and loss adjustment expenses represent estimates of the ultimate net cost of all unpaid losses incurred through the specified period. Loss adjustment expenses are estimates of unpaid expenses to be incurred in settlement of the claims provided in 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 the frequency and severity of claims and other factors that could vary as the losses are ultimately settled. In connection with the Acquisition, KEIC and LMC entered into an adverse development cover agreement to indemnify each other with respect to developments in KEIC’s unpaid loss and loss adjustment expenses over a period of approximately eight years. December 31, 2011 is the date that the parties will look to see whether the loss and loss adjustment expenses with respect to KEIC’s insurance policies in effect at the date of the Acquisition have increased or decreased from the amount existing at the date of the Acquisition.

F-10

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      We use independent actuaries to evaluate the adequacy of our unpaid loss and loss adjustment expense. In light of the Company’s short operating history, and uncertainties concerning the effects of legislative reform specifically as it relates to the Company’s California Workers Compensation class of business, actuarial techniques are applied that use the historical experience of the Company’s predecessor as well as industry information in the unpaid loss and loss adjustment expenses.

      Although it is not possible to measure the degree of variability inherent in such estimates, management believes that the unpaid loss and loss adjustment expenses are adequate. The estimates are continually reviewed and necessary adjustments are included in current operations.

(k)                     Reinsurance

      The Company protects itself from excessive losses by reinsuring certain levels of risk in various areas of exposure with nonaffiliated reinsurers. Reinsurance premiums, commissions, expense reimbursements, and unpaid loss and loss adjustment expenses related to ceded business are accounted for on a basis consistent with those 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 for estimating unpaid loss and loss adjustment expense liabilities, including an incurred loss development method and a paid loss development method. Amounts recoverable in excess of acquired reserves 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 income statement. 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.

(l)                     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.

     (m) Preferred Stock

      In September 2003, the Board of Directors authorized 750,000 shares of preferred stock, all of which were designated as Series A preferred stock. In September 2003, the Company issued 456,750 shares of the Series A preferred stock for cash proceeds, net of issuance costs, of $45,675,000. At December 31, 2003, 456,750 shares of Series A preferred stock were issued and outstanding.

      Each share of Series A preferred stock is convertible into 15.3 shares of common stock at the option of the holder, subject to certain customary antidilution provisions. Series A shareholders are entitled to dividends, when and if declared, on an as-if-converted basis. All preferred shareholders have preference in liquidation above the common shareholders and were granted certain registration rights. The outstanding Series A preferred stock was owned by 15 entities or individuals at December 31, 2003.

     (n) Earnings Per Share

      Earnings per share is not presented as there are no issued and outstanding shares of common stock and, since the Company had a net loss for the period ended December 31, 2003, any common stock equivalents would be anti-dilutive.

F-11

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     (o) 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 have 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 loss for the period ended December 31, 2003 if the Company had applied the fair value recognition provisions of SFAS No. 123 to its stock option plan:

		(In thousands)
Net loss:
	As reported	$	(202	)
	Less SFAS No. 123 compensation costs, net of taxes		(17	)
	Pro forma net loss	$	(219	)

      The compensation expense included in the pro forma net loss 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.

      The fair value of options granted during the period from inception through December 31, 2003, is estimated on the date of grant using the Black-Scholes option pricing model. The following assumptions were used to calculate the fair value of the options granted:

Risk Free

Expected

Weighted

Interest

Expected Life

Expected

Dividend

Average

Rate

(In Years)

Volatility

Yield

Fair Value

Grant period ended:

December 31, 2003

2.54

%

7

0.00%

0.00%

$

6.54

(p)                         Recently Adopted Accounting Standards

      All recently issued accounting standards with adoption dates of October 1 and prior were adopted by the Company upon incepting business on October 1, 2003.

F-12

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO 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 December 31, 2003 are as follows:

		Cost or		Gross		Gross
		Amortized		Unrealized		Unrealized			Estimated
		Cost		Gains		Losses			Fair Value
		(In thousands)
US treasuries and government obligations		$	17,641	$	16	$	(107	)	$	17,550
Industrial and miscellaneous			11,367		58		(6	)		11,419
Political subdivisions of states			3,494		74		—			3,568
Special revenue and special assessment			4,826		117		(3	)		4,940
Mortgage-backed securities			14,352		58		(6	)		14,404
	Total investment securities available-for-sale	$	51,680	$	323	$	(122	)	$	51,881

      At December 31, 2003, the unrealized loss on temporarily impaired investments totaled $122,567 for investment securities available-for-sale with a fair value of $17,617,037. All were impaired for less than one year. The majority of the impairment on investment securities available-for-sale was in US treasury notes and government obligations, which accounted for 81% of the total impairment. Temporarily impaired securities are a result of market value changes and are expected to regain the lost value with market shifts; other than temporarily impaired securities are a result of contractual failure by the issuer and are not expected to rebound and are considered not collectable.

      The Company evaluated investment securities with 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 Company anticipates full recovery of amortized costs with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment.

      The amortized cost and estimated fair value of investment securities available-for-sale at December 31, 2003, 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.

		Cost or		Estimated
Maturity		Amortized Cost		Fair Value
		(In thousands)
Due in one year or less		$	767	$	767
Due after one year through five years			12,320		12,307
Due after five years through ten years			23,724		23,891
Due after ten years			517		513
Securities not due at a single maturity date			14,352		14,403
	Total investment securities available-for-sale	$	51,680	$	51,881

      The consolidated amortized cost of investment securities available-for-sale deposited with various regulatory authorities was $12,960,780 at December 31, 2003.

F-13

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Major categories of the consolidated net investment income are summarized as follows for the period ended December 31, 2003:

		(In thousands)
Investment securities available-for-sale		$	333
Cash and short-term investments			21
	Total gross investment income		354
Less investment expenses			(41	)
	Net investment income	$	313

      The consolidated proceeds and related gross realized gains and losses received from sales on investments are as follows for the period ended December 31, 2003:

				Gross		Gross
		Proceeds		Realized Gains		Realized Losses
		(In thousands)
Investment securities available-for-sale:
	Sales	$	5,840	$	—	$	(4	)
	Maturities and other		182		—		—
		$	6,022	$	—	$	(4	)

(4) Fair Value of Financial Instruments

      Estimated fair value amounts, defined as the quoted market price of a financial instrument, 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 financial statements and notes:

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

•  Investment securities: The estimated fair values for available-for-sale securities generally represent quoted market value prices for securities traded in the public marketplace or analytically determined values for securities not traded in the public marketplace. Additional data with respect to fair values of the Company’s investment securities are disclosed in note 3.

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

F-14

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(5) Premiums

      Direct premiums written for the period ended December 31, 2003 was $22,154,316.

      Premiums receivable consist of the following at December 31, 2003:

	(In thousands)
Premiums receivable	$	5,285
Allowance for doubtful accounts		(22	)
	$	5,263

      The activity in the allowance for doubtful accounts for the period ended December 31, 2003 is as follows:

	(In thousands)
Balance at June 19, 2003	$	—
Additions charged to bad debt expense		(64	)
Write offs charged against allowance		42
Balance at December 31, 2003	$	(22	)

(6) Property and Equipment

      Property and equipment are summarized as follows at December 31, 2003:

		(In thousands)
Furniture and equipment		$	360
Less accumulated depreciation and amortization			(20	)
	Property and equipment, net	$	340

(7) Reinsurance

(a)             Reinsurance Ceded

      Under reinsurance agreements, the Company cedes various amounts of risk to non-affiliated insurance companies for the purpose of limiting the maximum potential loss arising from the underlying insurance risks.

      Effective October 1, 2003, the Company entered into reinsurance agreements wherein it retains the first $500,000 of each loss occurrence; the next $500,000 of such loss occurrence is 50% retained by SBIC after meeting a $1,500,000 aggregate deductible. Losses in excess of $1,000,000 up to $100,000,000 are 100% reinsured with non-affiliated reinsurers.

      SBIC has in place a series of reinsurance agreements that were entered into prior to its acquisition by SIH which are as follows: Effective from January 1, 1999 through January 1, 2001, SBIC retains the first $250,000 of each loss occurrence; the next $750,000 of such loss occurrence is 100% reinsured with non-affiliated reinsurers. Losses in excess of $1,000,000 up to $4,000,000 for this time period are 100% reinsured with non-affiliated reinsurers. Effective July 1, 2000 through July 1, 2002, SBIC retains the first $500,000 of each loss occurrence; the next $500,000 of such loss occurrence is 100% reinsured with non-affiliated reinsurers. Effective January 1, 2001 through January 1, 2002, SBIC retains the first $1,000,000 of each loss occurrence; losses up to $5,000,000 are 100% reinsured with non-affiliated reinsurers. Effective October 1, 2000 through October 1, 2001 SBIC has a quota-share agreement whereby 10% of the first

F-15

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$250,000 loss plus a pro-rata of expense are 100% reinsured with Swiss Reinsurance Company. Effective January 1, 2002 through May 31, 2002, 100% of all losses are 100% quota-shared to Argonaut Insurance Company.

      As part of the purchase of SBIC, SIH and LMC entered into an adverse development excess of loss reinsurance agreement (Agreement). The Agreement, after taking into account any recoveries from third party reinsurers, calls for LMC to reimburse SBIC 100% of the excess of the actual loss at December 31, 2011 over the initial unpaid loss and loss adjustment expenses at September 30, 2003. The Agreement also calls for SBIC to reimburse LMC 100% of the excess of the initial unpaid loss and loss adjustment expenses at September 30, 2003 over the actual loss results at December 31, 2011. As of December 31, 2003 the amount of adverse loss development under the Agreement was $2,467,917. The amount receivable from LMC is netted against loss and loss adjustment expense in the accompanying Consolidated Statement of Operations. As part of the Agreement, LMC placed into Trust an amount equal to 10% of the balance sheet unpaid loss and loss adjustment expenses of SBIC at the date of sale. Thereafter, the Trust shall be adjusted each quarter, if warranted, to an amount equal to 102% of LMC’s obligations under the Agreement. Initial unpaid loss and loss adjustment expenses were $15,952,773.

      As of December 31, 2003, the balance in the Trust is $1,628,067.

     (b) Reinsurance Recoverables and Income Statement Effects

      Balances affected by reinsurance transactions are reported gross of reinsurance in the balance sheet. Reinsurance recoverables are comprised of the following amounts at December 31, 2003:

		(In thousands)
Reinsurance recoverables on unpaid loss and loss adjustment expenses		$	11,238
Reinsurance recoverables on paid losses			812
	Total reinsurance recoverables	$	12,050

      The effects of reinsurance on income statement amounts are as follows for the period ended December 31, 2003:

		(In thousands)
Reinsurance ceded:
	Written premiums	$	2,759
	Earned premiums		419
	Loss and loss adjustment expenses incurred		2,117

      The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from activities or economic characteristics of the reinsurers to minimize its exposure to losses from reinsurer insolvencies. In the event a reinsurer is unable to meet its obligations, the Company would be liable for the losses under the agreement.

F-16

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(8) Unpaid Loss and Loss Adjustment Expenses

      The following table summarizes the activity in unpaid loss and loss adjustment expense for the period ended December 31, 2003:

			(In thousands)
Balance as of June 19, 2003 (inception)			$	—
Balance acquired at October 1, 2003, net of reinsurance recoverables of $9,938				15,953
Incurred related to:
	Current period			3,024
	Prior periods			2,468
	Receivable under adverse development cover			(2,468	)
		Total incurred		3,024
Paid related to:
	Current period			(1,061	)
	Prior periods			(1,889	)
		Total paid		(2,950	)
	Receivable under adverse development cover			2,468
Balance as of December 31, net of reinsurance recoverables of $11,238			$	18,495

      As a result of changes in estimates of insured events in prior periods, the unpaid loss and loss adjustment expenses increased by $2,467,917 in the period due to development on previously reported claims. LMC is obligated to reimburse us for this amount. In connection with the Acquisition, KEIC and LMC entered into an agreement to indemnify each other with respect to developments in KEIC’s unpaid loss and loss adjustment expenses over a period of approximately eight years. December 31, 2011 is the date that the parties will look to see whether the loss and loss adjustment expenses with respect to KEIC’s insurance policies in effect at the date of the Acquisition have increased or decreased from the amount existing at the date of the Acquisition.

(9) Income Taxes

      For the period from inception through December 31, 2003 as well as for succeeding years, the operations of SIH and its subsidiaries will be included in a consolidated federal income tax return.

      The following is a reconciliation of the difference between the “expected” income tax computed by applying the federal statutory income tax rate to income before income taxes and the total federal income taxes reflected on the books for the initial period ended December 31, 2003:

		(In thousands)
Computed “expected” tax at 34%		$	(103	)
Meals and entertainment			2
	Total federal income taxes	$	(101	)

      SIH made no federal income tax payments during 2003 because estimated payments are not required for a short-period return of less than six months.

F-17

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Deferred federal income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and those amounts used for federal income tax reporting purposes. The significant components of the deferred tax assets and liabilities at December 31, 2003 are as follows:

			(In thousands)
Deferred tax assets:
	Unpaid loss and loss adjustment expenses		$	995
	Unearned premium			1,106
	Net operating loss carryforward			117
	Other			57
		Total gross deferred tax assets		2,275
Deferred tax liabilities:
	Fixed assets			(67	)
	State insurance licenses			(408	)
	Deferred acquisition costs			(658	)
	Unrealized net gain on investment securities			(151	)
		Total deferred tax liabilities		(1,284	)
		Net deferred tax asset	$	991

      In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the projections of future taxable income over the periods in which the deferred taxes are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.

      At December 31, 2003, the Company has a net operating loss carryforward of $343,332, which management expects will be fully utilizable to offset against the Company’s Federal taxable income for its first full year of operations during calendar year 2004.

(10) Statutory Net Income and Stockholder’s Equity

      SBIC is required to file annually with state regulatory insurance authorities financial statements prepared on an accounting basis as prescribed or permitted by such authorities (statutory basis accounting, “SAP”). Statutory net income and capital and surplus (stockholder’s equity) differ from amounts reported in accordance with Standards of the Public Company Accounting Oversight Board (United States), primarily because policy acquisition costs are expensed when incurred, certain assets designated as “nonadmitted” for statutory purposes are charged to surplus, fixed-income securities are reported primarily at amortized cost or fair value based on their rating by the National Association of Insurance Commissioners (NAIC), policyholders’ dividends are expensed as declared rather than accrued as incurred, income tax expense reflects only taxes paid or currently payable, and any change in the admitted

F-18

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

net deferred tax asset is offset to equity. Following is a summary of the Company’s statutory net income and capital and surplus as of and for the year ended December 31, 2003:

	(In thousands)
Statutory net loss	$	(2,955	)
Statutory capital and surplus		35,858

      The maximum amount of dividends which can be paid by insurance companies domiciled in the State of Illinois to shareholders without prior approval of regulatory authorities is restricted, if such dividend together with other distributions during the 12 preceding months would exceed the greater of ten percent of the insurer’s statutory surplus as regards policyholders as of the preceding December 31, or the statutorily adjusted net income for the preceding calendar year. If the limitation is exceeded, then such proposed dividend must be reported to the Director of the Illinois Department of Professional and Financial Regulation — Division of Insurance at least 30 days prior to the proposed payment date and may be paid only if not disapproved. The Illinois insurance laws also permit payment of dividends only out of earned surplus, exclusive of most unrealized gains. In 2004, the SBIC would not be able to pay any shareholder dividends without the prior approval of the regulators. KEIC was last examined by the Illinois Department of Professional and Financial Regulation — Division of Insurance as of December 31, 2000. The State of Illinois imposes minimum risk-based capital requirements that were developed by the NAIC. The formulas for determining the amount of risk-based capital specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of the enterprise’s regulatory total adjusted capital to certain minimum capital amounts as defined by the NAIC. Enterprises below specified trigger points or ratios are classified within certain levels, each of which requires specified corrective action. At December 31, 2003, the Company exceeded the minimum risk-based capital requirements.

(11) Commitments

      The Company leases certain office space for its regional offices under agreements that are accounted for as operating leases. Lease expense for the period ended December 31, 2003 totaled $158,496. Future minimum payments required under the agreements are as follows:

	Operating
	leases
	(In thousands)
2004	$	478
2005		505
2006		480
2007		456
2008		456
Thereafter		329
	$	2,704

(12) Retirement Plan

      The Company maintains a defined contribution retirement plan covering substantially all of its employees. The amount of annual contribution is at the discretion of management. Contribution expense for the period ended December 31, 2003 was $60,007.

F-19

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(13) Contingencies

      (a) SBIC is subject to guaranty fund and other assessments by the states in which it writes business. Guaranty fund assessments should be accrued at the time premiums are written. Other assessments should be accrued either at the time of assessments or in the case of premium based assessments, at the time the premiums were 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 $330,526 and a related receivable from states and insureds in the amount of $238,575. These amounts represent management’s best estimates 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.

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

      (c) In May 2004, the Company was notified of a claim for damages brought by an individual against PointSure for breach of contract. The Company believes PointSure has valid defenses to this claim and has not established any liability in connection with this claim. No litigation has been commenced.

(14) Retrospectively Rated Contracts

      On October 1, 2003, the Company began selling workers compensation for which the premiums vary based on loss experience. Accrued retrospective premiums are determined based upon loss experience on business subject to such experience rating adjustment. Accrued retrospective rated premiums are determined by or allocated to individual policyholder accounts. Accrued retrospective premiums and return retrospective premiums are recorded as additions to and reductions from written premium respectively. Approximately, 43.8% of the Company’s direct premiums written related to retrospectively rated contracts for the period ended December 31, 2003. The Company had no amounts accrued for retrospective premiums or return retrospective premiums at December 31, 2003.

(15) Acquisition

      On July 14, 2003, SIH entered into a purchase agreement, effective September 30, 2003, with KEG, Eagle and LMC, affiliates, all ultimately owned by KIC. In the Acquisition, the SIH acquired PointSure, KEIC, and the renewal rights and substantially all of the operating assets and employees of Eagle Pacific Insurance Company and Pacific Eagle Insurance Company. Eagle Pacific Insurance Company began writing specialty workers’ compensation insurance almost 20 years ago. The Acquisition gave SIH renewal rights to an existing portfolio of business, representing a valuable asset given the renewal nature of the Company’s business, and a fully-operational infrastructure that would have taken many years to develop. These renewal rights gave the Company access to customer lists and the right to seek to renew its continuing in-force reinsurance contracts. In addition, KEIC provided the requisite insurance licenses needed to write business.

      The aggregate purchase price including acquisition costs of $1,298,099 was $16,008,020. The acquired assets and liabilities have been recorded on the books of the Company at their respective fair values as of the date of acquisition. Goodwill, the excess of the purchase price over the net fair value of the assets and liabilities acquired, was $2,061,711. The financial statements for the period ended December 31, 2003 include the operations of KEIC and PointSure since October 1, 2003.

F-20

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition:

		(In thousands)
ASSETS
Investment securities available-for-sale, at fair value		$	15,923
Cash and cash equivalents			10,511
Accrued investment income			113
Premiums receivable, net of allowance			3,386
Reinsurance recoverables			10,962
Deferred federal income taxes			797
Intangible assets			3,007
Goodwill			2,062
Other assets			1,353
	Total assets		48,114
LIABILITIES
Unpaid loss and loss adjustment expenses			25,891
Reinsurance funds withheld and balances payable			805
Accrued expenses and other liabilities			5,410
	Total liabilities		32,106
	Net assets acquired	$	16,008

      As part of the Acquisition, LMC agreed to reimburse SBIC 100% for the excess of the actual loss and loss adjustment expenses result at December 31, 2011 over the initial unpaid loss and loss adjustment expenses at September 30, 2003. The Agreement also calls for SBIC to reimburse LMC 100% of the excess of the initial unpaid loss and loss adjustment expenses at September 30, 2003 over the actual loss and loss adjustment expenses result at December 31, 2011.

      As part of the Agreement, LMC placed into Trust an amount equal to 10% of the balance sheet unpaid loss and loss adjustment expenses of SBIC at the date of sale. Thereafter, the Trust shall be adjusted each quarter, if warranted, to an amount equal to 102% of LMC’s obligations under the Agreement. Initial unpaid loss and loss adjustment expenses were approximately $16,000,000.

      As of December 31, 2003, the balance in the Trust is $1,628,067.

      The following pro forma consolidated results of operations (unaudited) have been prepared as if the Acquisition had occurred on January 1, 2003:

	(In thousands)
Total revenue	$	58,959
Net income		4,774
Fully diluted earnings per common share equivalents outstanding		5.23

F-21

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(16) Intangible Assets

      Intangible assets consist of the following at December 31, 2003:

		Gross carrying		Amortization		Accumulated
		amount		period (years)		amortization
Intangible assets:
	State insurance licenses	$	1,200		—	$	—
	Renewal rights		783		2		98
	Internally developed software		944		3		78
	Trademark		50		5		3
	Customer relations		30		2		4
		$	3,007			$	183

      Aggregate amortization expense for amortizing intangible assets was $182,792 for the period ended December 31, 2003. Estimated amortization expense for the next five years is $731,167 in 2004, $629,542 in 2005, $246,000 in 2006, $10,000 in 2007, and $7,500 in 2008.

      The valuation of renewal rights was developed using the income approach, which focuses on the income-producing capability of the renewal rights asset by measuring the present value of the after tax cash flows over the life of the renewal rights.

(17) Stock Option and Award Plans

      In September 2003, the Company’s Board of Directors approved the adoption of the 2003 Stock Option Plan (the Plan), providing for the award of incentive stock options to Board members, executives, and other key employees of the Company.

      The exercise price of options granted under the Plan must at least equal the market value per share of the Company’s common stock. The Plan provides for the grant of options to purchase up to 776,458 shares. The type and aggregate number of shares may be subject to adjustment in the event of reorganization, recapitalization, stock dividend, or a stock split.

      The Company sold 456,750 shares of preferred stock at a price of $100 per share. Each share of preferred stock is convertible into 15.299664 shares of common stock.

      The Company has granted 388,229 options to employees and directors to purchase shares of common stock at an option price of $6.54.

      The fair value of options granted during the period from inception through December 31, 2003, is estimated on the date of grant using the Black-Scholes option pricing model.

      Stock options vest annually over four years and expire ten years from date of grant.

F-22

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table summarizes stock option activity for the period ended December 31, 2003:

		Outstanding options				Exercisable options
		Shares		Average price		Shares		Average price
Balance at June 19, 2003 (inception)			—	$	—		—	$	—
	Granted		388,229		6.54		—		—
	Exercised
	Expired or canceled		—		—		—		—
	Balance at December 31, 2003		388,229	$	6.54		—	$	—

(18) Subsequent Events

(a)                     Equity

      In February 2004, the Company’s Board of Directors declared a two-for-one stock split of the Company’s common stock and amended the par value of the common stock and preferred stock to $.001 per share. Accordingly, all references to numbers of shares in the consolidated financial statements and accompanying notes have been adjusted to reflect the stock split and par value amendments on a retroactive basis. See also note 18(e).

      In February and April 2004, 15,300 and 80,323 stock options, respectively, were granted under the Company’s stock option plan at a price of $6.54 per share.

     (b) Surplus Notes

      On May 26, 2004 SBIC issued $12 million in subordinated floating rate Surplus Notes due 2034 in a private placement. 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. The quarterly interest rate cannot exceed the initial interest rate by more than 10% per year, cannot exceed the corporate base (prime) rate by more than 2% and cannot exceed the highest rate permitted by New York law. Interest may only be paid upon the prior approval of the Illinois Department of Professional and Financial Regulation, Division of Insurance. In the event of default, as defined, or failure to pay interest due to lack of department of insurance approval, the Company cannot pay dividends on its capital stock, is limited in its ability to redeem, purchase or acquire any of its capital stock and cannot make payments of interest or principal on any debt issued by the Company which rank equal with or junior to the Surplus Notes. If an event of default occurs and is continuing, the principal and accrued interest can become immediately due and payable. Any payment of interest or principal must have prior approval by the Illinois Department of Professional and Financial Regulation, Division of Insurance.

      The notes are redeemable prior to 2034 by the Company, on or after May 24, 2009 and may be redeemed prior to May 24, 2009 upon the occurrence of certain tax related events.

     (c) Issuance of preferred stock

      In June 2004, SIH sold 51,615.25 shares of its preferred stock to current preferred stockholders and certain members of SIH management for an aggregate purchase price of $5,161,525. Each share of preferred stock is convertible into 15.299664 shares of common stock.

F-23

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     (d) Settlement of Purchase Price

      The Company and LMC negotiated a final purchase price adjustment settlement on September 28, 2004. Included in the original purchase price allocation is an estimated purchase price settlement amount of $1,118,710. The final purchase price adjustment settlement of $771,116 reduced reinsurance recoverables by $154,881 and unpaid loss and loss adjustment expenses by $222,371 on October 31, 2003. In addition, the Company was required to pay $29,658 interest expense related to the settlement period.

      In addition to final purchase price adjustment settlement, the Company and LMC agreed to hire an outside actuary to determine the unpaid loss and loss adjustment expenses at September 30, 2004 related to the adverse development cover agreement with LMC agreeing, if necessary, to place additional funds into the Trust account to increase the amount to 102% of any determined obligation. In accordance with the terms of adverse development cover agreement and the agreement governing the Trust account, on December 23, 2004, LMC deposited into the Trust account an additional $3,179,264, resulting in a total balance in the Trust account of $4,820,264. We are waiting to receive a final report from the outside actuary as to the final amount required to be held in the trust account.

     (e) Change in Par Value and Subsequent Stock Split

      In December 2004, the Company’s Board of Directors approved a 7.649832-for-one stock split of the Company’s common stock. In addition, in August 2004, the Company amended the par value of its common stock from $.001 per share to $.01 per share. All par value, share and per share information in the consolidated financial statements and accompanying notes has been adjusted on a retroactive basis to give effect to these adjustments.

F-24

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

			September 30,		December 31,
			2004		2003
			(Unaudited)
ASSETS
Investment securities available-for-sale, at fair value			$	95,450	$	51,881
Cash and cash equivalents				9,591		5,008
Accrued investment income				1,023		486
Premiums receivable, net of allowance				4,644		5,263
Deferred premiums				39,296		14,555
Accrued retrospective premiums				935		—
Service income receivable				415		1,224
Reinsurance recoverables				10,116		12,050
Receivable under reserve guarantee				2,468		2,468
Prepaid reinsurance				4,491		2,340
Property and equipment, net				433		340
Deferred federal income taxes, net				2,242		991
Deferred policy acquisition costs, net				6,787		1,936
Intangible assets, net				2,276		2,824
Goodwill				1,821		2,062
Other assets				3,212		2,652
		Total assets	$	185,200	$	106,080
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Unpaid loss and loss adjustment expenses		$	51,395	$	29,733
	Unearned premiums			49,591		18,602
	Reinsurance funds withheld and balances payable			1,218		2,807
	Premiums payable			2,250		3,976
	Investments purchased but not settled			3,489		—
	Accrued expenses and other liabilities			9,796		5,196
	Federal income tax payable			142		161
	Surplus Notes			12,000		—
		Total liabilities		129,881		60,475
Stockholders’ equity:
	Common stock $.01 par value. Authorized 1,200,000 shares; no shares issued and outstanding			—		—
	Preferred stock $.01 par value. Authorized 750,000 shares; issued and outstanding shares of 508,365.25 and 456,750 at September 30, 2004 and December 31, 2003, respectively			5		5
	Paid-in capital			50,831		45,670
	Retained earnings			3,814		(202	)
	Accumulated other comprehensive income			669		132
		Total stockholders’ equity		55,319		45,605
Commitments and contingencies
		Total liabilities and stockholders’ equity	$	185,200	$	106,080

See accompanying notes to consolidated financial statements.

F-25

SEABRIGHT INSURANCE HOLDINGS, INC AND SUBSIDIARIES

AND PREDECESSOR

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF INCOME

For the Nine Months Ending September 30, 2004 and 2003

($ in thousands)

		SeaBright
		Insurance Holdings,
		Inc.
		and Subsidiaries		Predecessor
		September 30, 2004		September 30, 2003
		(Unaudited)
Revenue:
	Premiums earned	$	48,201	$	36,916
	Net investment income		1,638		1,735
	Net realized gain		17		14
	Claims service income		2,298		698
	Other service income		727
	Other income		1,800		1,514
			54,681		40,877
Losses and expenses:
	Unpaid loss and loss adjustment expenses		34,823		25,395
	Underwriting, acquisition, and insurance expense		10,507		6,979
	Other expenses		3,567		1,791
			48,897		34,165
	Income before Federal income taxes		5,784		6,712
Provision for federal income taxes			1,768		1,996
	Net income	$	4,016	$	4,716
	Fully diluted income per common share equivalents	$	0.55
	Diluted weighted average of common share equivalents outstanding		7,256,156

See accompanying notes to consolidated financial statements.

F-26

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

Nine Months Ending September 30, 2004

(Unaudited)

(In thousands)

										Accumulated
										Other
			Preferred		Paid-in		Accumulated			Comprehensive
			Stock		Capital		Deficit			Income		Total
Balance at December 31, 2003			$	5	$	45,670	$	(202	)	$	132	$	45,605
Comprehensive income
	Net income			—		—		4,016			—		4,016
	Reclassification adjustment for gains recognized into income, net of tax of $6										11		11
	Increase in unrealized gain on securities available-for-sale net of tax of $271			—		—		—			526		526
Comprehensive income:													4,553
		Issuance of preferred stock		—		5,161							5,161
Balance at September 30, 2004			$	5	$	50,831	$	3,814		$	669	$	55,319

F-27

SEABRIGHT INSURANCE HOLDINGS, INC AND SUBSIDIARIES

AND PREDECESSOR

CONDENSED CONSOLIDATED AND COMBINED STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2004 and 2003

(In thousands)

					SeaBright
					Insurance
					Holdings, Inc.
					and Subsidiaries			Predecessor
					September 30,			September 30,
					2004			2003
					(Unaudited)
Cash flows from operating activities:
	Net income				$	4,016		$	4,716
	Adjustments to reconcile net income to net cash provided by operating activities:
		Amortization of deferred policy acquisition costs				6,254			3,797
		Policy acquisition costs deferred				(11,106	)		(6,688	)
		Provision for depreciation and amortization				1,132			416
		Net realized gain (loss) on investments				17			(14	)
		Gain on sale of fixed assets				(5	)		—
		Benefit for deferred federal income taxes				(1,528	)		(1,545	)
		Changes in certain assets and liabilities:
			Accrued investment income			(537	)		104
			Reinsurance recoverables, net of reinsurance withheld			(1,804	)		11,326
			Unpaid loss and loss adjustment expenses			21,662			8,069
			Unearned premiums net of premiums receivable			5,933			(5,048	)
			Deferred gain on retroactive reinsurance transaction			—			(1,631	)
			Federal income taxes payable			(19	)		3,080
			Other assets and other liabilities			3,943			(4,079	)
				Net cash provided by operating activities		27,958			12,503
Cash flows from investing activities:
	Purchases of investment securities available for sale					(53,394	)		(5,794	)
	Sales, maturities and redemption of investment securities available for sale					13,653			15,603
	Purchases of property and equipment					(204	)		(56	)
				Net cash provided by (used in) investing activities		(39,945	)		9,753
Cash flows from financing activities:
	Proceeds from issuance of surplus notes					12,000			—
	Debt issuance costs					(591	)		—
	Issuance of preferred stock					5,161			—
				Net cash provided by financing activities		16,570			—
				Net increase (decrease) in cash and cash equivalents		4,583			22,256
Cash and cash equivalents at beginning of year						5,008			30,015
Cash and cash equivalents at end of year					$	9,591		$	52,271
Supplemental disclosure of cash flow information:
	Federal income taxes paid:				$	3,244		$	—

See accompanying notes to consolidated financial statements.

F-28

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2004

1.     Basis of Presentation

      SeaBright Insurance Holdings, Inc. (SIH), a Delaware corporation, was formed in June 2003. On July 14, 2003, SIH entered into a purchase agreement, effective September 30, 2003, with Kemper Employers Group, Inc., Eagle Insurance Companies, and Lumbermens Mutual Casualty Company, affiliates, all ultimately owned by Kemper Insurance Companies (the Acquisition). Under this agreement, SIH acquired the renewal rights of Eagle Pacific Insurance Company and Pacific Eagle Insurance Company (combined, Eagle), PointSure Insurance Services, Inc. (PointSure) and Kemper Employers Insurance Company, as a shell insurance company for its state licenses. Eagle and PointSure are collectively referred to as Predecessor. All significant intercompany transactions among these affiliated entities have been eliminated.

      SIH, through its wholly owned subsidiary, SeaBright Insurance Company, began writing business October 1, 2003. The accompanying financial statements include SeaBright and its subsidiaries at December 31, 2003 and as of and for the nine months ended September 30, 2004 and the Predecessor for the nine months ended September 30, 2003.

      The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP (United States) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the interim financial statements have been included. The results of operations for the interim periods reported are not necessarily indicative of results expected for the full year.

      The consolidated balance sheet at December 31, 2003 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.

      In reading these financial statements, reference should be made to the audited consolidated and combined financial statements contained in this prospectus for more detailed footnote information.

2.     Recently Adopted Accounting Standards

      FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued May 2003. The Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For the Company, the Statement was effective for instruments entered into or modified after May 31, 2003 and otherwise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, the Statement will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The Company does not have any financial instruments that are within the scope of this statement at September 30, 2004.

3.     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

F-29

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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 have 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 loss for the period ended September 30, 2004 if the Company had applied the fair value recognition provisions of SFAS No. 123 to its stock option plan:

	As reported	$	4,016
	Less SFAS No. 123 compensation costs, net of taxes		(63	)
	Pro forma	$	3,953
Diluted earnings per share:
	As reported	$	0.55
	Less SFAS No. 123 compensation costs, net of taxes		(0.01	)
	Pro forma	$	0.54

      The compensation expense included in the pro forma net loss 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.

      The fair value of options granted at September 30, 2004 is estimated on the date of grant using the Black-Scholes option pricing model. The following assumptions were used to calculate the fair value of the options granted:

										Weighted
		Risk Free		Expected Life		Expected		Expected		Average
		Interest Rate		(in Years)		Volatility		Dividend Yield		Fair Value
Grant period ended:
	December 31, 2003		2.54%		7		0.00%		0.00%	$	7.65

4.     Stockholders’ Equity

Earnings per Share

      The following table illustrates the reconciliation of weighted average shares used for earnings per share for the period ended September 30, 2004.

Diluted:
	Basic weighted average shares outstanding	—
	Weighted average shares issuable upon conversion of preferred stock	7,256,156
Weighted average common share equivalents outstanding		7,256,156

5.     Long Term Debt

      On May 26, 2004 SBIC issued $12 million in subordinated floating rate Surplus Notes due 2034 in a private placement. 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. The quarterly interest rate cannot exceed the initial interest rate by more than 10% per year, cannot exceed the corporate base (prime) rate by more than 2% and cannot exceed the highest rate permitted by New York law. Interest may only be paid upon

F-30

SEABRIGHT INSURANCE HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

the prior approval of the Illinois Department of Professional and Financial Regulation, Division of Insurance. In the event of default, as defined, or failure to pay interest due to lack of department of insurance approval, the Company cannot pay dividends on its capital stock, is limited in its ability to redeem, purchase or acquire any of its capital stock and cannot make payments of interest or principal on any debt issued by the Company which rank equal with or junior to the Surplus Notes. If an event of default occurs and is continuing, the principal and accrued interest can become immediately due and payable. Any payment of interest or principal must have prior approval by the Illinois Department of Professional and Financial Regulation, Division of Insurance.

      The notes are redeemable prior to 2034 by the Company on or after May 24, 2009 and may be redeemed prior to May 24, 2009 upon the occurrence of certain tax related events.

      Issuance costs of the Surplus Notes are being amortized over the life of the notes.

6.     Stockholders’ Equity

      In June 2004, SIH sold 51,615.25 shares of its preferred stock to current preferred stockholders and certain members of SIH management for an aggregate purchase price of $5,161,525. Each share of preferred stock is convertible into common stock.

      In December 2004, the Company’s Board of Directors approved a 7.649832-for-one stock split of the Company’s common stock. In addition, in August 2004, the Company amended the par value of its common stock from $.001 per share to $.01 per share. All par value, share and per share information in the consolidated financial statements and accompanying notes has been adjusted on a retroactive basis to give effect to these adjustments.

7.     Subsequent Events

      The Company and LMC negotiated a final purchase price adjustment settlement on September 28, 2004. Included in the original purchase price allocation is an estimated purchase price settlement amount of $1,118,710. The final purchase price adjustment settlement of $771,116 reduced reinsurance recoverables by $154,881 and unpaid loss and loss adjustment expenses by $222,371 on October 31, 2003. In addition, the Company was required to pay $29,658 interest expense related to the settlement period.

      In addition to final purchase price adjustment settlement, the Company and LMC agreed to hire an outside actuary to determine the unpaid loss and loss adjustment expenses at September 30, 2004 related to the adverse development cover agreement with LMC agreeing, if necessary, to place additional funds into the Trust account to increase the amount to 102% of any determined obligation. In accordance with the terms of adverse development cover agreement and the agreement governing the Trust account, on December 23, 2004, LMC deposited into the Trust account an additional $3,179,264, resulting in a total balance in the Trust account of $4,820,264. We are waiting to receive a final report from the outside actuary as to the final amount required to be held in the Trust account.

F-31

PREDECESSOR

COMBINED FINANCIAL STATEMENTS

Nine Months Ended September 30, 2003 and the Years Ended

December 31, 2002 and 2001

(With Report of Independent Registered Public Accounting Firm)

F-32

Report of Independent Registered Public Accounting Firm

The Board of Directors

SeaBright Insurance Holdings, Inc.:

      We have audited the combined balance sheet of Predecessor as of December 31, 2002, and the related combined statements of operations, changes in stockholder’s equity and comprehensive income, and cash flows for the nine months ended September 30, 2003 and for the years ended December 31, 2002 and 2001. These combined financial statements are the responsibility of the Predecessor’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Predecessor as of December 31, 2002, and the results of its operations and its cash flows for the nine months ended September 30, 2003 and for the years ended December 31, 2002 and 2001, in conformity with U.S. generally accepted accounting principles.

      As discussed in Notes 2 (i) and 17 to the combined financial statements, effective January 1, 2002 the Predecessor adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

/s/ KPMG LLP

Seattle, Washington

September 14, 2004

F-33

PREDECESSOR

COMBINED BALANCE SHEET

DECEMBER 31, 2002

(IN THOUSANDS)

ASSETS
Investment securities available for sale, at fair value			$	55,891
Cash and cash equivalents				30,015
Accrued investment income				498
Premiums receivable, net of allowance				8,694
Deferred premiums				35,228
Retrospective premiums accrued				5,668
Reinsurance recoverables				36,617
Reinsurance recoverables from parent				102,107
Prepaid reinsurance				34,672
Property and equipment, net				133
Deferred federal income taxes, net				4,416
Deferred policy acquisition costs, net				1,422
Intangible assets				921
Other assets				539
		Total assets	$	316,821
LIABILITIES AND STOCKHOLDER’S EQUITY
Liabilities:
	Unpaid loss and loss adjustment expense		$	153,469
	Unearned premiums			47,604
	Reinsurance funds withheld and balances payable			756
	Deferred retroactive reinsurance gain			6,682
	Accrued expenses and other liabilities			18,109
	Federal income tax payable to parent			2,429
		Total liabilities		229,049
Stockholder’s equity:
	Common stock			7,766
	Paid-in capital			103,259
	Accumulated deficit			(24,349	)
	Accumulated other comprehensive income			1,096
		Total stockholder’s equity		87,772
Commitments and contingencies
		Total liabilities and stockholder’s equity	$	316,821

See accompanying notes to combined financial statements.

F-34

PREDECESSOR

COMBINED STATEMENTS OF OPERATIONS

(In thousands)

			Nine Months			Year Ended
			Ended			December 31,
			September 30,
			2003			2002			2001
Revenue:
	Premiums earned		$	36,916		$	17,058		$	12,638
	Net investment income			1,735			3,438			3,388
	Net realized gains (losses)			14			(4,497	)		(484	)
	Service income			698			1,169			954
	Other income			1,514			1,152			3,773
				40,877			18,320			20,269
Losses and expenses:
	Loss and loss adjustment expenses			25,395			4,992			8,464
	Underwriting, acquisition, and insurance expenses			6,979			3,681			3,409
	Other expenses			1,791			3,339			2,123
				34,165			12,012			13,996
		Income before federal income taxes		6,712			6,308			6,273
Provision for federal income taxes:
	Current			3,541			2,429			1,934
	Deferred			(1,545	)		589			742
				1,996			3,018			2,676
		Net income before cumulative effect of change in accounting principle		4,716			3,290			3,597
Cumulative effect of change in accounting principle, net of tax				—			(4,731	)		—
		Net income (loss)	$	4,716		$	(1,441	)	$	3,597

See accompanying notes to combined financial statements.

F-35

PREDECESSOR

STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY AND

COMPREHENSIVE INCOME

Nine Months Ended September 30, 2003 and the Years Ended

December 31, 2002 and 2001

(In thousands)

						Retained			Accumulated
						Earnings			Other
		Common		Paid-In		(Accumulated			Comprehensive
		Stock		Capital		Deficit)			Income (Loss)			Total
Balance at December 31, 2000		$	7,766	$	100,259	$	(23,505	)	$	(249	)	$	84,271
Comprehensive income:
	Net income		—		—		3,597			—			3,597
	Other comprehensive income (loss):
	Reclassification adjustment for realized losses recorded into income, net of tax of $30		—		—		—			57			57
	Increase in unrealized loss on equity securities, net of tax of $(593)		—		—		—			(1,101	)		(1,101	)
Comprehensive income													2,553
	Contribution of capital		—		3,000		—			—			3,000
	Dividends declared and paid		—		—		(3,000	)		—			(3,000	)
Balance at December 31, 2001		$	7,766	$	103,259	$	(22,908	)	$	(1,293	)	$	86,824
Comprehensive income:
	Net loss	$	—	$	—	$	(1,441	)	$	—		$	(1,441	)
	Other comprehensive income (loss):
	Reclassification adjustment for realized losses recorded into income, net of tax of $1,299		—		—		—			2,415			2,415
	Increase in unrealized gains, net of tax of $(14)		—		—		—			(26	)		(26	)
Comprehensive income													948
Balance at December 31, 2002		$	7,776	$	103,259	$	(24,349	)	$	1,096		$	87,772
Comprehensive income:
	Net income	$	—	$	—	$	4,716		$	—		$	4,716
	Other comprehensive income (loss):
	Reclassification adjustment for realized gains recorded into income, net of tax of $(5)		—		—		—			(9	)		(9	)
	Increase in unrealized gains, net of tax of $203		—		—		—			377			377
Comprehensive income													5,084
Balance at September 30, 2003		$	7,766	$	103,259	$	(19,633	)	$	1,464		$	92,856

	2001				2002				2003
			Issued and				Issued and				Issued and
	Authorized		Outstanding		Authorized		Outstanding		Authorized		Outstanding
Eagle Pacific Insurance Company Common Stock, $810 par value		6,500		6,500		6,500		6,500		6,500		6,500
Pacific Eagle Insurance Company Common Stock, $50 par value		50,000		50,000		50,000		50,000		50,000		50,000
PointSure Insurance Services ,Inc. Common Stock, $1 par value		50,000		500		50,000		500		50,000		500

See accompanying notes to combined financial statements.

F-36

PREDECESSOR

COMBINED STATEMENTS OF CASH FLOWS

(In thousands)

					Nine Months
					Ended			Years Ended
					September 30,
					2003			2002			2001
Cash flows from operating activities:
	Net income (loss)				$	4,716		$	(1,441	)	$	3,597
	Adjustments to reconcile net income to net cash provided by operating activities:
		Amortization of deferred policy				3,797			1,574			1,845
		Policy acquisition costs deferred				(6,688	)		(2,093	)		(1,529	)
		Provision for depreciation and amortization				416			432			1,796
		Net realized loss on investments				(14	)		4,497			484
		Gain on sale of fixed assets				—			2			2
		Provision (benefit) for deferred federal income taxes				(1,545	)		589			742
		Cumulative effect on change in accounting principle				—			4,731			—
		Changes in certain assets and liabilities:
			Accrued investment income			104			233			(372	)
			Unpaid loss and loss adjustment expense			8,069			(12,873	)		(20,001	)
			Unearned premiums, net of premiums receivable			(5,048	)		(4,660	)		1,481
			Reinsurance recoverables, net of reinsurance funds withheld			11,326			18,463			24,215
			Deferred gain on retroactive reinsurance transaction			(1,631	)		(5,464	)		(3,957	)
			Federal income taxes payable			3,080			863			1,156
			Other assets and other liabilities			(4,079	)		6,280			410
				Net cash provided by operating activities		12,503			11,133			9,869
Cash flows from investing activities:
	Purchases of investments					(5,794	)		(29,943	)		(49,859	)
	Sales, maturities and redemption of investments					15,603			38,488			13,696
	Purchases of property and equipment					(56	)		(42	)		(50	)
	Sales of property and equipment					—			12			490
				Net cash provided by (used in) investing activities		9,753			8,515			(35,723	)
				Net increase (decrease) in cash and cash equivalents		22,256			19,648			(25,854	)
Cash and cash equivalents at beginning of year						30,015			10,367			36,221
Cash and cash equivalents at end of year					$	52,271		$	30,015		$	10,367
Supplemental disclosure of cash flow information:
	Federal income taxes paid				$	—		$	1,571		$	448

See accompanying notes to combined financial statements.

F-37

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

Nine Months Ended September 30, 2003 and the Years Ended

December 31, 2002 and 2001

(1)     Organization

      Eagle Pacific Insurance Company (EPIC), Pacific Eagle Insurance Company (PEIC), and PointSure Insurance Services, Inc. (PSIS), which are collectively referred to as Predecessor, were purchased by Lumbermens Mutual Casualty Company (LMC) on July 31, 1998 from Services Group of America, Inc. in a transaction accounted for as a purchase business combination.

      EPIC and PEIC write both state act workers’ compensation insurance and United States Longshore and Harborworkers’ Compensation insurance in 20 Western and Gulf Coast states. EPIC is domiciled in the State of Washington and PEIC is domiciled in the State of California. The three states with the largest percentage of the Predecessor’s direct written premiums for the nine months ended September 30, 2003, and the years ended 2002 and 2001 were California, Texas, and Alaska. The majority of its business is written in California. PSIS is engaged primarily in administrative and brokerage activities on behalf of EPIC and PEIC.

      On September 30, 2003, LMC sold PSIS and the renewal rights and substantially all of the operating assets, systems and employees of EPIC and PEIC to SeaBright Insurance Holdings, Inc. (SIH). Since SIH acquired renewal rights and not the in-force insurance contracts, the in-force insurance contracts will remain with EPIC and PEIC until policy expiration or the date of cancellation. Premium and loss obligations for the policies remain with EPIC and PEIC. SIH has entered into services agreements with LMC to handle claims and policy administration for these policies.

(2) Summary of Significant Accounting Policies

     (a) Basis of Presentation

      The accompanying combined financial statements include the accounts of EPIC, PEIC, and PSIS, wholly owned subsidiaries of LMC. All significant inter-company transactions among these affiliated entities have been eliminated in the combined financial statements.

     (b) Use of Estimates

      The preparation of combined financial statements requires management of the Predecessor to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Predecessor has used significant estimates in determining the unpaid loss and loss adjustment expenses, earned premiums on retrospectively rated policies, and amounts related to reinsurance.

     (c) Investment Securities

      Investment securities are classified as available for sale and carried at fair value, adjusted for other than temporary declines in fair value, with changes in unrealized gains and losses recorded directly in other comprehensive income, net of applicable income taxes. The estimated fair value for investments in available for sale securities is generally based on quoted market value prices for securities traded in the public marketplace. A decline in the market value of any available for sale security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other than temporary, management considers whether it has the ability and intent to hold

F-38

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, and forecasted performance of the investment.

      Mortgage-backed securities represent participating interests in pools of first mortgage loans originated and serviced by the issuers of securities. Premiums and discounts are amortized using a method that approximates the level yield method over the remaining period to contractual maturity, adjusted for the anticipated prepayments. To the extent the estimated lives of such securities change as a result of changes in prepayment rates, the adjustment is also included in net investment income. Prepayment assumptions used for mortgage-backed and asset-backed securities are obtained from an external securities information service and are consistent with the current interest rate and economic environment.

      Realized gains and losses, which arise principally from the sale of investments, are determined on a specific-identification basis.

      Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the call date of the security. Dividend and interest income are recognized when earned.

     (d) Derivative Instruments and Hedging Activities

      The Predecessor accounts for derivatives and hedging activities in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Certain Hedging Activities, as amended, which requires that all derivative instruments be recorded on the balance sheet at their respective fair values.

      The Predecessor held derivative instruments during the years ended December 31, 2002 and 2001 that were not designated as hedges and as such, changes in fair value of those instruments were recognized in current period earnings and are included as a component of net realized gains (losses). The Predecessor held no derivative instruments at December 31, 2002.

     (e) Cash and Cash Equivalents

      Cash and cash equivalents, which consist primarily of amounts deposited in banks and financial institutions and all highly liquid investments with maturity of 90 days or less when purchased, are stated at cost.

     (f) Premiums Receivable

      Premiums receivable are recorded at the invoiced amount. The allowance for doubtful accounts is the Predecessor’s best estimate of the amount of probable losses in the Predecessor’s existing premiums receivable. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

     (g) Deferred Policy Acquisition Costs

      Acquisition costs related to premiums written are deferred and amortized over the periods in which the premiums are earned. Such acquisition costs include commissions, premium taxes, and certain underwriting and policy issuance costs. Deferred policy acquisition costs are limited to amounts recoverable from unearned premiums and anticipated investment income. The amounts that are not considered realizable are charged as an expense through amortization of deferred policy acquisition costs.

F-39

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

     (h) Property and Equipment

      Computer equipment, software, furniture and equipment, and leasehold improvements are recorded at cost and depreciated under the straight line method over their estimated useful lives, which are three years for computer equipment and software, five years for furniture and equipment, and the remaining lease term for leasehold improvements. Depreciation expense for the nine months ended September 30, 2003, and for the years ended December 31, 2002 and 2001 was $19,181, $88,079, and $130,921, respectively.

     (i) Goodwill and Other Intangible Assets

      Goodwill on the accompanying balance sheets represents the excess of costs over fair value of assets associated with LMC’s acquisition of the Predecessor.

      As further described in note 17, the Predecessor adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Under SFAS No. 142, goodwill and 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 in accordance with the provisions for SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite lives be 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.

     (j) Impairment of Long-Lived Assets

      The Predecessor adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not affect the Predecessor’s financial statements.

      In accordance with SFAS No. 144, long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

     (k) Revenue Recognition

      Premiums for primary and reinsured risks are included in revenue over the period of the contract in proportion to the amount of insurance protection provided (i.e., ratably over the policy period). Premiums are shown net of reinsurance. The portion of the premium that is applicable to the unexpired period of the policies in-force is not included in revenue and 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 premium on retrospectively rated policies are based on our 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 using actuarial loss development factors and is consistent with how we project losses in general. For retrospectively rated policies, the governing contractual minimum and maximum rates are established at policy inception and are made a part of the insurance contract. While the typical retrospectively rated

F-40

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

policy has five yearly adjustment or measurement periods, premium adjustments continue until mutual agreement to cease future adjustments is reached with the policyholder.

      As of December 31, 2002, 42% of the Predecessor’s direct business was from retrospectively rated policies.

      Service income generated from various claims service agreements with the Predecessor’s parent and other third parties is recognized as income in the period in which services are performed.

     (l) Unpaid Loss and Loss Adjustment Expense

      Unpaid loss and loss adjustment expense represents estimates of the ultimate net cost of all unpaid losses incurred through the specified period. Unpaid loss adjustment expense are estimates of unpaid expenses to be incurred in settlement of the claims provided in unpaid loss. These liabilities, which anticipate salvage and subrogation recoveries and are presented gross of amounts recoverable from reinsurers, include estimates of future trends in the frequency and severity of claims and other factors that could vary as the losses are ultimately settled. Although it is not possible to measure the degree of variability inherent in such estimates, management believes that the unpaid loss and loss adjustment expenses are adequate. The estimates are continually reviewed and necessary adjustments are included in current operations.

     (m) Reinsurance

      The Predecessor protects itself from excessive losses by reinsuring certain levels of risk in various areas of exposure with affiliated and nonaffiliated reinsurers. Reinsurance premiums, commissions, expense reimbursements, and unpaid loss and loss adjustment expense related to assumed and ceded business are accounted for on a basis consistent with those used in accounting for original policies issued and the terms of the reinsurance contracts. Premiums assumed from an affiliate are reported as an addition to premiums written and earned. Premiums ceded to other companies have been reported as a reduction of premiums written and earned. Reinsurance recoverables are determined based on the terms and conditions of the reinsurance contracts.

      On January 1, 1999 EPIC and PEIC entered into quota share reinsurance agreements with LMC, their ultimate parent, whereby EPIC and PEIC ceded to LMC 80% of the net retained liabilities, after application of all external reinsurance, and 80% of underwriting expenses for all policies written by EPIC and PEIC from January 1, 1999 through December 31, 2002. The unearned premiums on policies in force at December 31, 2002 were still subject, subsequent to December 31, 2002, to the terms of the quota share reinsurance treaties.

      On January 1, 1999, EPIC and PEIC entered into excess stop loss reinsurance agreements with LMC, whereby LMC reinsured the excess liability which may accrue to EPIC and PEIC by reason of the net retained liability of EPIC and PEIC under the quota share reinsurance agreements. This agreement applied to all policies written by EPIC and PEIC from January 1, 1999 through December 31, 2002. The combined ratio needed to exceed 115% on a paid basis before EPIC and PEIC were entitled to any recovery under these agreements.

      On January 1, 1999, EPIC and PEIC entered into retroactive Loss Portfolio Transfer Reinsurance Agreements (LPT) with LMC. Under the LPT agreements, EPIC and PEIC would cede to LMC their net retained liability for losses for the policies and losses with dates of accident on or before December 31, 1998 and LMC would assume 100% of the net retained liability relating to those losses. Subsequent to January 1, 1999, there has been adverse development of approximately $24,359,000 through December 31, 2002 on the transferred unpaid loss and loss adjustment expense. At December 31, 2002, the Predecessor has recorded a deferred gain of approximately $6,682,000. The deferred gains are amortized using the

F-41

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

recovery method, which considers the actual recoveries at a particular calculation date in relation to the total estimated recoveries at that date. The amortization (accretion) related to deferred gains of $131,000, $(1,537,000), and $2,668,000 was considered other income (expense) for the nine months ending September 30, 2003 and the year ended December 31, 2002 and 2001.

     (n) 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.

     (o) Comprehensive Income

      Comprehensive income encompasses all changes in shareholder’s equity (except those arising from transactions with shareholder) and includes net income and changes in net unrealized investment gains and losses on investment securities available for sale, net of taxes.

(3) Investments

      The combined cost or amortized cost, gross unrealized gains and losses, and estimated fair value of investment securities available for sale at December 31, 2002 are as follows:

		December 31, 2002
		Cost or		Gross		Gross
		Amortized		Unrealized		Unrealized		Estimated
		Cost		Gains		Losses		Fair Value
		(In thousands)
US Treasuries and Government Obligations		$	20,410	$	1,573	$	—	$	21,983
Asset-backed securities			2,065		119		—		2,184
Mortgage-backed securities			23,212		548		—		23,760
	Total fixed income securities		45,687		2,240		—		47,927
Equity securities			8,518		—		554		7,964
	Total available for sale securities	$	54,205	$	2,240	$	554	$	55,891

      At December 31, 2002, the unrealized loss on temporarily impaired investments totaled $554,239 for equity securities with a fair value of $7,964,000. All equity securities were impaired for less than one year. Temporarily impaired equity securities are a result of market value changes and are expected to regain the lost value with market shifts.

      The Predecessor evaluated equity securities with market values less than cost and has determined that the decline in value is temporary. The Predecessor anticipates full recovery with respect to these securities.

      The combined cost or amortized cost and estimated fair value of fixed income securities at December 31, 2002 by contractual maturity, are set forth below. Actual maturities may differ from

F-42

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

		Cost or		Estimated
Maturity		Amortized Cost		Fair Value
Due in one year or less		$	2,224	$	2,238
Due after one year through five years			10,416		11,163
Due after five years through ten years			6,574		7,191
Due after ten years			1,196		1,391
Securities not due at a single maturity date			25,277		25,944
	Total fixed income securities	$	45,687	$	47,927

      The combined amortized cost of fixed income securities deposited with various regulatory authorities was $12,655,152 at December 31, 2002.

      Net investment income consisted of the following:

		Nine
		Months Ended			Year Ended			Year Ended
		September 30,			December 31,			December 31,
		2003			2002			2001
		(In thousands)
Fixed income securities		$	1,397		$	3,259		$	2,584
Equity securities			112			170			241
Cash & short term investments			323			136			651
	Total gross investment income		1,832			3,565			3,476
Less investment expense			(97	)		(127	)		(88	)
	Net investment income	$	1,735		$	3,438		$	3,388

      Net realized gains and losses were included in revenue as follows:

			Nine
			Months Ended		Year Ended			Year Ended
			September 30,		December 31,			December 31,
			2003		2002			2001
			(In thousands)
Fixed income:
	Gross gains		$	9	$	724		$	66
	Gross losses			—		(886	)		(486	)
		Total fixed income		9		(162	)		(420	)
Equity:
	Gross gains			5		—			—
	Gross losses			—		(753	)		(64	)
	Other-than-temporary declines in fair value					(3,582	)		—
		Total equity		5		(4,335	)		(64	)
		Net realized investment gains (losses)	$	14	$	(4,497	)	$	(484	)

F-43

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

(4) Fair Value of Financial Instruments

      Estimated fair value amounts, defined as the quoted market price of a financial instrument, 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 Predecessor in estimating the fair value disclosures for financial instruments in the accompanying financial statements and notes:

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

•  Investment securities: The estimated fair values for available for sale securities generally represent quoted market value prices for securities traded in the public marketplace. Additional data with respect to fair values of the Predecessor’s investment securities are disclosed in note 3.

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

(5) Premiums

      Direct premiums written for the nine months ended September 30, 2003 and the years ended December 31, 2002 and 2001 were $68,402,211, $94,407,482, and $65,634,354, respectively.

      Premiums receivable consists of the following as of December 31, 2002 (in thousands):

Premiums receivable	$	8,799
Allowance for doubtful accounts		(105	)
	$	8,694

      The activity in that allowance for doubtful accounts for the nine months ended September 30, 2003 and the years ended December 31, 2002 and 2001 are as follows:

		Nine Months
		Ended			Year Ended
		September 30,
		2003			2002			2001
		(In thousands)
Balance at beginning of year		$	(105	)	$	(253	)	$	(150	)
Additions charged to bad debt expense			—			(80	)		(186	)
Write offs (recoveries) charged against allowance			(118	)		228			83
	Balance at end of year	$	(223	)	$	(105	)	$	(253	)

F-44

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

(6) Property and Equipment

      Property and equipment are summarized as of December 31, 2002 as follows (in thousands):

Computer equipment		$	1,354
Software			857
Furniture and equipment			907
Leasehold improvements			12
	Total property and equipment		3,130
Less accumulated depreciation and amortization			(2,997	)
	Property and equipment, net	$	133

(7) Reinsurance

(a)                     Reinsurance Ceded

      Under reinsurance agreements, EPIC and PEIC cede various amounts of risk to nonaffiliated and affiliated insurance companies for the purpose of limiting the maximum potential loss arising from the underlying insurance risks.

      Effective October 1, 1998, the Predecessor retained the first $500,000 of each loss occurrence and losses in excess of $500,000 are 100% reinsured up to $20,000,000. Effective June 1, 1999, the Predecessor entered into a reinsurance agreement wherein the Predecessor retained the first $250,000 of each loss occurrence and losses in excess of $250,000 are reinsured up to $20,000,000. Effective October 1, 2000, the Predecessor entered into a reinsurance agreement, wherein losses in excess of $1,000,000 are 100% reinsured. Effective April 1, 2001, Predecessor entered into a reinsurance agreement, wherein the Predecessor retains the first $500,000 of each loss occurrence; the next $500,000 of such loss occurrence is 60% retained by the Predecessor after meeting a $1,500,000 aggregate deductible. Losses in excess of $1,000,000 are covered under treaties previously discussed. Effective October 1, 2001, losses in excess of $1,000,000 are 100% reinsured up to $20,000,000. All of these treaties are in run-off.

      Effective October 1, 2002, EPIC and PEIC entered into reinsurance agreements with nonaffiliated insurance companies wherein EPIC and PEIC retain the first $500,000 of each loss occurrence; the next $500,000 of such loss occurrence is 50% retained by EPIC or PEIC after meeting a $1,500,000 aggregate deductible. Losses in excess of $1,000,000 up to $5,000,000 are 100% reinsured with third party reinsurers. Losses in excess of $5,000,000 are 100% reinsured under LMC’s internal reinsurance treaties and Catastrophe Excess of Loss Treaty up to a $315,000,000 limit. The upper limit on losses ceded prior to October 1, 1998 is $49,500,000.

      EPIC and PEIC also have separate maximum any one life (MAOL) coverage through LMC with a $5,000,000 retention.

      EPIC and PEIC also have quota share agreements with LMC. The agreement calls for the net liability (liabilities retained by EPIC and PEIC after application of all external reinsuring) to be ceded to LMC with a 20% retention. Pursuant to the quota share agreement, 80% of operating expenses of EPIC and PEIC are also ceded to LMC.

      Additionally, EPIC and PEIC have an excess stop loss reinsurance agreement whereby LMC reinsured the excess liability which may accrue by reason of the net retained liability of EPIC and PEIC under the quota share agreement. The combined ratio must exceed 115% on a paid basis prior to any recovery under this contract.

F-45

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

      Effective January 1, 1999, EPIC and PEIC entered into retroactive Loss Portfolio Transfer Reinsurance Agreements (LPT) with its ultimate parent company, LMC. The agreements called for EPIC and PEIC to cede to LMC its net liability for the losses for the policies and the losses for the reinsurance assumed with dates of accident December 31, 1998 and prior and for LMC to assume 100% of the net liability relating to those losses. Simultaneous with the cession of the business reinsured and in consideration of the business reinsured, EPIC and PEIC transferred to LMC assets with an aggregate statutory book value of approximately $98,774,887 and $12,182,947, respectively. This payment represented 100% of unpaid loss and loss adjustment expenses for EPIC and PEIC on the effective date of the agreement. Although reinsurance makes the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded, it does not legally discharge an insurer from its primary liability for the full amount of the policy liability.

      Subsequent to the date of the transaction the net liability for losses reinsured increased. As a result, the net losses recoverable by EPIC and PEIC exceed the amount originally paid for the LPT. The amount by which the liabilities associated with the reinsured policies exceed the amount paid for the LPT is amortized into income over the estimated remaining settlement period of the underlying claims using the recovery method. At December 31, 2002, the deferred gains for the Predecessor was $24,359,000. The effects of subsequent changes in estimated or actual cash flows are accounted for by adjusting the previously deferred amount to the balance that would have existed had the revised estimate been available at the inception of the reinsurance transaction, with a corresponding charge or credit to income.

      Effective January 1, 2003, EPIC, PEIC, and LMC, canceled their quota share and stop loss reinsurance agreements for all policies written by EPIC and PEIC on or after January 1, 2003. Policies with inception dates on or before December 31, 2002 would continue under the terms of the quota share agreements as long as the policy remained in-force. Each of the companies received appropriate regulatory approval.

      In order to expand in states where it was not licensed, EPIC entered into reinsurance arrangements with LMC whereby LMC would write business on behalf of EPIC in those states and EPIC would assume that business from LMC.

     (b) Reinsurance Recoverables and Income Statement Effects

      Balances affected by reinsurance transactions are reported gross of reinsurance in the balance sheet. Reinsurance recoverables are comprised of the following amounts as of December 31, 2002 (in thousands):

Recoverable from LMC:
	Assumed reinsurance recoverables		$	5,744
	Reinsurance recoverables on unpaid loss and loss adjustment expenses			100,670
	Reinsurance recoverables on paid losses			—
	Premiums receivable and other			(4,307	)
		Total reinsurance recoverables from affiliate	$	102,107
Recoverable from external reinsurers:
	Reinsurance recoverables on unpaid loss and loss adjustment expenses		$	34,233
	Reinsurance recoverables on paid losses			2,384
		Total reinsurance recoverables from external reinsurers	$	36,617

F-46

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

      The effects of reinsurance on income statement amounts are as follows:

			Nine Months			Year Ended
			Ended
			September 30,			December 31,		December 31,
			2003			2002		2001
			(In thousands)
Reinsurance assumed:
	From LMC:
		Written premium	$	2,315		$	11,643	$	7,559
		Earned premium		5,795			10,375		4,941
		Loss and loss adjustment expenses incurred		1,924			3,936		1,716
	From external reinsurers
		Loss and loss adjustment expenses incurred		(1,343	)		133		(219	)
Reinsurance ceded:
	To LMC:
		Written (returned) premium		(6,924	)		77,536		51,734
		Earned premium		30,189			69,765		47,603
		Loss and loss adjustment expenses incurred		20,464			37,209		35,824
		Underwriting expenses and other income (expense)		1,736			7,459		7,330
	To external reinsurers:
		Written premium		11,002			9,447		7,775
		Earned premium		10,559			9,225		6,664
		Loss and loss adjustment expenses incurred		6,625			2,883		(12,061	)

      Management evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from activities or economic characteristics of the reinsurers to minimize its exposure to losses from reinsurer insolvencies. In the event a reinsurer is unable to meet its obligations, the Predecessor would be liable for the losses under the agreement.

F-47

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

(8) Unpaid Loss and Loss Adjustment Expense

      Activity in unpaid loss and loss adjustment expenses is as follows:

			Nine Months
			Ended			Year Ended
			September 30,
			2003			2002			2001
			(In thousands)
Balance, beginning of year			$	153,469		$	166,342		$	186,343
Less reinsurance recoverables:
	From LMC			100,670			114,247			122,218
	From unaffiliated reinsurers			34,233			36,294			50,519
		Total recoverables		134,903			150,541			172,737
Net balance, beginning of year				18,566			15,801			13,606
Incurred related to:
	Current year			26,895			13,324			9,656
	Prior years			(1,500	)		(8,332	)		(1,192	)
		Total incurred		25,395			4,992			8,464
Paid related to:
	Current year			4,283			3,398			2,586
	Prior years			3,706			(1,171	)		3,683
		Total paid		7,989			2,227			6,269
Net balance, end of year				35,972			18,566			15,801
Plus reinsurance recoverables:
	From LMC			87,677			100,670			114,247
	From unaffiliated reinsurers			37,889			34,233			36,294
		Total recoverables		125,566			134,903			150,541
Balance, end of year			$	161,538		$	153,469		$	166,342

      Unpaid loss and loss adjustment expense was reduced by management in 2002 for 2001 and prior accident years. In periods prior to 2002, the Predecessor wrote a large number of accounts with smaller average premiums than the Predecessor’s core book of business. There was an expectation that these accounts were subject to a greater volatility of risk than the core book of business and initial unpaid loss and loss adjustment amounts were established reflecting this higher level of risk. An actuarial evaluation was performed in 2002 for the 2002 and prior accident years, which concluded that the actual loss development on this business was not great as expected. This, coupled with the more recent emphasis of writing larger, less volatile accounts using stricter underwriting standards, led management to decrease the unpaid loss and loss adjustment expenses. Included in the reduction of unpaid loss and loss adjustment expenses was approximately $7,001,000 relating to the loss portfolio transfer, which resulted in a $7,001,000 decrease in the deferred retroactive gain and recoverable from LMC.

F-48

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

(9) Deferred Policy Acquisition Costs

      The following reflects the amounts of policy acquisition costs deferred and amortized:

	Nine Months			Year Ended
	Ended			December 31,
	September 30,
	2003			2002			2001
	(In thousands)
Balance at beginning of year	$	1,422		$	903		$	1,219
Policy acquisition costs deferred		6,688			2,093			1,529
Amortization of deferred policy acquisition costs		(3,797	)		(1,574	)		(1,845	)
Balance at end of year	$	4,313		$	1,422		$	903

(10) Income Taxes

      During the periods presented, the Predecessor is included in the consolidated Federal income tax return of LMC as the common parent corporation.

      LMC has a written tax allocation agreement, approved by the Companies’ that provides for Federal income taxes to be paid to or recovered from LMC based on each subsidiary company’s taxable income or taxable loss as if the subsidiary were filing a separate Federal income tax return. The following is a reconciliation of the difference between the expected income tax computed by applying the federal statutory income tax rate of 35% to income before income taxes and the total federal income taxes reflected on the books for the nine months ending September 30, 2003 and the years ending December 31, 2002 and 2001:

		Nine Months			Years Ending
		Ending			December 31,
		September 30,
		2003			2002			2001
		(In thousands)
Computed expected tax at 35%		$	2,349		$	2,207		$	2,197
Increase (decrease) in valuation allowance			(198	)		949			—
Amortization of goodwill			—			—			252
Other			(155	)		(138	)		227
	Total federal income taxes	$	1,996		$	3,018		$	2,676

F-49

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

      The tax effects of temporary differences that give rise to significant portions of the net deferred federal income tax asset/liability as of December 31, 2002 were as follows (in thousands):

Deferred tax assets:
	Deferred gain		$	2,338
	Unpaid loss and loss adjustment expense discount			1,235
	Unearned premium recognition			906
	Capital loss carryforward			273
	Other-than-temporary impairment			1,266
	Other			756
		Total gross deferred tax assets		6,774
Less valuation allowance				949
		Net deferred tax assets		5,825
Deferred tax liabilities:
	Intangible assets			322
	Unrealized gains on marketable securities			590
	Deferred policy acquisition costs			497
		Total deferred tax liabilities		1,409
		Net deferred tax assets	$	4,416

      In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the projections of future taxable income over the periods in which the deferred taxes are deductible, management believes it is more likely than not that the Predecessor will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2002. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

      The Predecessor has established a valuation allowance to offset deferred tax assets related to capital losses net of unrealized gains on investment securities. The increase or decrease in the valuation for the nine months ended September 30, 2003 and the years ended December 31, 2002 and 2001 amounts to $(198,000), $949,000, and $0, respectively.

(11) Statutory Net Income and Stockholder’s Equity

      EPIC and PEIC are required to file annual statements with state regulatory insurance authorities prepared on an accounting basis as prescribed or permitted by such authorities (statutory basis). Statutory net income and capital and surplus (stockholder’s equity) differ from amounts reported in accordance with Standards of the Public Company Accounting Oversight Board (United States), primarily because policy acquisition costs are expensed when incurred, certain assets designated as nonadmitted for statutory purposes are charged to surplus, fixed-income securities are reported at amortized cost or fair value based on their rating by the National Association of Insurance Commissioners, policyholders’ dividends are expensed as declared rather than accrued as incurred, income tax expense reflects only taxes paid or

F-50

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

currently payable, and any change in the admitted net deferred tax asset is offset to equity. Statutory net income and capital and surplus are as follows (in thousands):

		Nine Months			Years Ended
		Ended			December 31,
		September 30,
		2003			2002			2001
EPIC:
	Statutory net income (loss)	$	(2,279	)		351			1,242
	Statutory capital and surplus		33,329			36,832			34,799
PEIC:
	Statutory net income (loss)		(863	)		(913	)		461
	Statutory capital and surplus		14,779			15,688			15,941

      All stockholder dividends must be submitted for review to the Insurance Commissioner’s office prior to distribution. Dividends which exceed the greater of prior year net income or 10% of surplus or amounts in excess of earned surplus are considered to be extraordinary and require an extended period of review and approval by the Department of Insurance. During 2003 EPIC and PEIC could not pay more than $3.7 million and $1.6 million, respectively, in shareholder dividends without the prior approval of the regulators. Each insurance company’s state of domicile imposes minimum risk-based capital requirements that were developed by the NAIC. The formulas for determining the amount of risk-based capital specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of the enterprise’s regulatory total adjusted capital to certain minimum capital amounts as defined by the NAIC. Enterprises below specified trigger points or ratios are classified within certain levels, each of which requires specified corrective action. As of December 31, 2002, EPIC and PEIC exceeded the minimum risk-based capital requirements.

(12) Commitments

      EPIC leases certain office space for its regional offices under agreements that are accounted for as operating leases. Lease expense for the nine months ended September 30, 2003 and the years ended December 31, 2002 and 2001 totaled $131,190, $135,640, and $167,508 respectively. Future minimum payments required under the agreements are as follows:

	Minimum
	rentals
2003	$	576
2004		507
2005		488
2006		468
2007		439
Thereafter		1,318
	$	3,796

(13) Retrospectively Rated Contracts

      The Predecessor writes workers’ compensation for which the premiums vary based on loss experience. The percentage of premiums written on retrospectively rated contracts for the nine months ending September 30, 2003, and for the years ended December 31, 2002 and 2001 were 48.4%, 42.0%, and 45.8%, respectively. Accrued retrospective premiums are determined based upon loss experience on business

F-51

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

subject to such experience rating adjustment. Accrued retrospective rated premiums are determined by or allocated to individual policyholder accounts. Accrued retrospective premiums and return retrospective premiums are recorded as additions to and reductions from written premium, respectively. The Predecessor had $5,667,060 accrued for retrospective premiums and $2,715,913 for return retrospective premiums at December 31, 2002.

(14) Letters of Credit

      At December 31, 2002, standby letters of credit totaling $9,809,824 had been issued by EPIC for the benefit of several unaffiliated insurance companies under the terms of certain assumed reinsurance agreements. The letters of credit relate to several programs that existed prior to LMC’s purchase of EPIC. These letters of credit are reviewed and maintained annually and serve as collateral for open claims under each program.

(15) Retirement Plan

      The Predecessor maintains a defined contribution retirement plan covering substantially all of its associates. The amount of annual contribution is at the discretion of management. Contribution expense for the nine months ended September 30, 2003 and for the years ended December 31, 2002 and 2001 was $122,979, $100,231, and $85,359, respectively.

(16) Contingencies

      (a) EPIC and PEIC have purchased annuities in settlement of claims of which claimants are the payees. These annuities have been used to reduce unpaid losses by $3,769,876. Under a direct basis, EPIC and PEIC have a contingent liability of $3,769,876 should the issuers of these annuities fail to perform under the terms of the annuities. The contingent liability after the effect of reinsurance is $0.

      (b) EPIC and PEIC are subject to guaranty fund and other assessments by the states in which they write business. Guaranty fund and other assessments should be accrued either at the time of assessments or in the case of premium based assessments, at the time the premiums were written, or in the case of loss based assessments, at the time the losses are incurred. EPIC and PEIC have accrued a liability for guaranty fund and other assessments of $3,006,868. These amounts represent management’s best estimates based on information received from the states in which EPIC and PEIC write business and may change due to many factors including EPIC’s and PEIC’s share of the ultimate cost of current insolvencies.

      (c) Beginning December 20, 2002, EPIC and PEIC and their parent, LMC, received lower claims-paying ability ratings by all three major rating agencies. In 2003, LMC’s ability to write new business and retain existing business was substantially impacted because of its lower rating. This condition could ultimately affect LMC’s ability to pay losses ceded from EPIC and PEIC. As of June 10, 2003, EPIC and PEIC were rated B (fair) and LMC was rated C++ (marginal) by A.M. Best Company.

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

(17) Change in Accounting Principle

      In June 2001, the issued SFAS No. 142, Goodwill and Other Intangible Assets, SFAS No. 142 supersedes Accounting Principles Board Opinion No. 17, Intangible Assets, and requires goodwill and other intangible assets that have indefinite lives to no longer be amortized; however, these assets must be tested at least annually for impairment. SFAS No. 142 also requires an evaluation of existing acquired goodwill and other intangible assets for proper classification under the new requirements. In addition, intangible

F-52

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

assets (other than goodwill) that have finite useful lives will continue to be amortized over their useful lives; however, the amortization period of such intangible assets will no longer be limited to 40 years.

      The Predecessor adopted SFAS No. 142 effective January 1, 2002 and, accordingly ceased amortizing amounts related to goodwill starting January 1, 2002. The balance of goodwill relates to the acquisition of the Predecessor by its ultimate parent. In accordance with SFAS No. 142, management was required to perform an assessment of whether there was an indication that goodwill was impaired as of the date of the adoption. To accomplish this, management was required to identify its reporting units and determine the carrying value of its reporting units by assigning assets and liabilities, including the existing goodwill and intangible assets, to each reporting unit as of January 1, 2002. Management then determined the fair value of the Predecessor’s reporting units and compared it to the carrying amounts of the reporting units. To the extent the carrying amounts exceeded the fair value, management was required to perform the second step of the transitional impairment test, to determine the implied fair value of the reporting unit’s goodwill, as this would be an indication that the reporting unit’s goodwill may be impaired. As a result of this process, an impairment loss of $4,731,000 related to goodwill associated with the EPIC and PEIC reporting units was recognized upon adoption of SFAS No. 142. The state licenses and trademark were purchased on July 31, 1998 and were being amortized on a straight-line basis over 40 years and 5 years, respectively. Upon initial application of SFAS No. 142, the management reassessed the useful lives of these intangible assets and determined that the state licenses with a net book value at January 1, 2002 of $914,583 has an indefinite useful life because it is expected to generate cash flows indefinitely. Management ceased amortizing the trademark on January 1, 2002. The trademark is deemed to approximate the original useful life of 5 years and the remaining balance of $5,833 will be amortized during 2003.

      The following is a reconciliation of reported net income adjusted for adoption of SFAS No. 142:

			Nine Months		Year Ended
			Ended		December 31,
			September 30,
			2003		2002			2001
			(In thousands)
Reported net income			$	4,716	$	(1,441	)	$	3,597
Add back:
	Amortization of goodwill			—		—			719
	Goodwill impairment			—		4,731			—
	Amortization of state licenses			—		—			25
		Adjusted net income	$	4,716	$	3,290		$	4,341

      As of December 31, 2002, the Predecessor has the following amounts related to intangible assets:

		Gross Carrying		Accumulated
		Amount		Amortization
		(In thousands)
Amortized intangible assets:
	Trademark	$	50	$	44
Unamortized intangible assets:
	State licenses		915		—

      Aggregate amortization expense of intangible assets was $5,833, $10,000, and $753,662 for the period ending September 30, 2003 and the years ended December 31, 2002 and 2001, respectively.

F-53

PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

(18) Subsequent Events

      On October 1, 2003, as a result of the policy renewal rights and other assets being sold to SIH, EPIC and PEIC were placed in runoff by LMC.

      On December 31, 2003, EPIC was merged into another LMC subsidiary, American Protection Insurance Company.

      On August 31, 2004, PEIC was merged into another LMC subsidiary, American Motorists Insurance Company.

F-54

7,500,000 Shares

Common Stock

PROSPECTUS

       Until                     , 2005, which is the 25th day after the date of this prospectus, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Friedman Billings Ramsey

   Piper Jaffray

Cochran, Caronia & Co.

The date of this prospectus is                     , 2005

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

      Set forth below is an estimate (except in the case of the Securities and Exchange Commission registration fee, NASD filing fee and Nasdaq listing fee) of the amount of fees and expenses to be paid by SeaBright in connection in connection with the issuance and distribution of the common stock registered hereby.

Securities and Exchange Commission registration fee		$	10,928
NASD filing fee			9,125
Nasdaq listing fee			100,000
Blue Sky fees and expenses (including attorneys’ fees and expenses)			10,000
Printing expenses			100,000
Accounting fees and expenses			1,200,000
Transfer agent’s fees and expenses			12,000
Legal fees and expenses			1,000,000
Miscellaneous fees and expenses			357,947
	Total	$	2,800,000

Item 14. Indemnification of Directors and Officers.

      Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers, as well as other employees and individuals, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent to the Registrant. The Delaware General Corporation Law provides that Section 145 is not excluding other rights to which those seeking indemnification may be entitled under any certificate of incorporation, bylaws, agreement, vote of stockholders or disinterested directors or otherwise. The Registrant’s amended and restated certificate of incorporation and bylaws provide for indemnification by the Registrant of its directors, officers and employees to the fullest extent permitted by the Delaware General Corporation Law.

      Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions or (iv) for any transactions from which the director derived an improper personal benefit. The Registrant’s amended and restated certificate of incorporation provides for such limitations of liability.

      The Registrant maintains standard policies of insurance under which coverage is provided (i) to its directors and officers against loss arising from claims made by reason of breach of duty or other wrongful act and (ii) to the Registrant with respect to payments which may be made by the Registrant to such directors and officers pursuant to the above indemnification provision or otherwise as a matter of law.

II-1

Item 15. Recent Sales of Unregistered Securities.

      During the last three years, SeaBright has issued the following securities without registration under the Securities Act of 1933:

      (1) In September 2003, SeaBright issued an aggregate of 456,750 shares of convertible preferred stock for an aggregate purchase price of $45,675,000 in transactions exempt from registration under Regulation D under the Securities Act of 1933 to entities affiliated with Summit Partners, Randolph Street Partners V, John G. Pasqualetto, Richard J. Gergasko, Joseph S. De Vita, Richard W. Seelinger and Jeffrey C. Wanamaker.

      (2) In June 2004, SeaBright issued an aggregate of 51,615.25 shares of convertible preferred stock for an aggregate purchase price of $5,161,525 in transactions exempt from registration under Regulation D and Rule 701 under the Securities Act of 1933 to entities affiliated with Summit Partners, John G. Pasqualetto, Richard J. Gergasko, Joseph S. De Vita, Jeffrey C. Wanamaker, Chris A. Engstrom and James L. Borland III.

Item 16. Exhibits and Financial Statement Schedules.

      (a) Exhibits

      Reference is made to the attached Exhibit Index, which is incorporated by reference herein.

      (b) Financial Statement Schedules

Seabright Insurance Holdings, Inc. and Subsidiaries

      Schedule II — Condensed Financial Information of Registrant

      Schedule IV — Reinsurance

      Schedule VI — Supplemental Information Concerning Insurance Operations

Predecessor

      Schedule IV — Reinsurance

      Schedule VI — Supplemental Information Concerning Insurance Operations

Item 17. Undertakings.

      Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

      The undersigned Registrant hereby undertakes that:

      (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

II-2

      (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

      The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

II-3

SIGNATURES

      Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Amendment No. 4 to registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in The City of Seattle, State of Washington, on January 3, 2005.

SEABRIGHT INSURANCE HOLDINGS, INC.

By:  /s/ JOHN G. PASQUALETTO

Name: John G. Pasqualetto

Title: Chairman, President and Chief Executive Officer

      Pursuant to the requirements of the Securities Act, this Amendment No. 4 to Registration Statement on Form S-1 has been signed by the following persons in the capacities indicated on January 3, 2005.

Signature		Title
/s/ JOHN G. PASQUALETTO John G. Pasqualetto		Chairman, President and Chief Executive Officer (Principal Executive Officer)
* Joseph S. De Vita		Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
* Peter Y. Chung		Director
* J. Scott Carter		Director
* William M. Feldman		Director
* Mural R. Josephson		Director
* George M. Morvis		Director
*By:	/s/ JOHN G. PASQUALETTO John G. Pasqualetto Attorney-in-Fact

II-4

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

SeaBright Insurance Holdings, Inc.:

      Under date of April 7, 2004, except for notes 13 (c) and 18 (b), (c), which are as of September 14, 2004, note 18(d) which is as of December 29, 2004 and note 18(e) which is as of December 6, 2004, we reported on the consolidated balance sheet of SeaBright Insurance Holdings, Inc. and subsidiaries as of December 31, 2003 and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive loss, and cash flows for the period from June 19, 2003 (inception) through December 31, 2003, which are included in the prospectus. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules in the registration statement. These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.

      In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

Seattle, WA

September 14, 2004

S-1

SEABRIGHT INSURANCE HOLDINGS, INC.

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT

CONDENSED BALANCE SHEET

December 31, 2003

(In thousands)

ASSETS
Cash and cash equivalents			$	160
Receivable from subsidiaries				179
Investment in subsidiaries				45,771
		Total assets	$	46,110
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Federal income tax payable			161
	Accrued expenses and other liabilities			476
		Total liabilities		637
Stockholders’ equity:
	Common stock $.01 par value. Authorized 1,100,000 shares; no shares issued and outstanding			—
	Preferred stock $.01 par value. Authorized 750,000 shares; issued and outstanding 456,750 shares			5
	Paid-in capital			45,670
	Accumulated deficit			(202	)
	Accumulated other comprehensive income			—
		Total stockholders’ equity		45,473
Commitments and contingencies
		Total liabilities and stockholders’ equity	$	46,110

See Report of Independent Registered Public Accounting Firm.

S-2

SEABRIGHT INSURANCE HOLDINGS, INC.

CONDENSED STATEMENT OF OPERATIONS

Period from June 19, 2003 (inception) through December 31, 2003

(In thousands)

Revenue:
	Net investment income			—
				—
Losses and expenses:
	Loss from subsidiaries			211
	Other expenses			10
				221
		Loss before federal income taxes		(221	)
Benefit for federal income taxes:
	Current			(19	)
	Deferred			—
				(19	)
		Net loss	$	(202	)

See Report of Independent Registered Public Accounting Firm.

S-3

SEABRIGHT INSURANCE HOLDINGS, INC.

CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE LOSS

Period from June 19, 2003 (inception) through December 31, 2003

(In thousands)

									Accumulated
									other
		Preferred		Paid-in		Accumulated			comprehensive
		stock		capital		deficit			income		Total
Balance at June 19, 2003 (inception)		$	—		—		—			—		—
	Issuance of preferred stock		5		45,670		—			—		45,675
	Net loss		—		—		(202	)		—		(202	)
Balance at December 31, 2003			5		45,670		(202	)		—		45,473

See Report of Independent Registered Public Accounting Firm.

S-4

SEABRIGHT INSURANCE HOLDINGS, INC.

CONDENSED STATEMENT OF CASH FLOWS

Period from June 19, 2003 (inception) through December 31, 2003

(In thousands)

Cash flows from operating activities, net of effect of acquisition:
	Net loss				$	(202	)
	Adjustments to reconcile net loss to net cash provided by operating activities, net of effect of acquisition:
		Receivable from subsidiaries				(179	)
		Federal income taxes payable				161
				Net cash provided by operating activities		(220	)
Cash flows from investing activities, net of effect of acquisition:
	Investment in subsidiaries					(45,295	)
			Net cash used in investing activities			(45,295	)
Cash provided by financing activities:
	Proceeds from the issuance of preferred stock					45,675
			Net increase in cash and cash equivalents			160
Cash and cash equivalents at beginning of the period						—
Cash and cash equivalents at end of the period					$	160
Supplemental disclosure of noncash activities:
	Increase in accrued liabilities incurred due to acquisition of assets				$	476

See Report of Independent Registered Public Accounting Firm.

S-5

SEABRIGHT INSURANCE HOLDINGS, INC.

SCHEDULE IV — REINSURANCE

				Assumed from		Ceded to				Percentage of
				Other		Other				Amount
		Direct		Companies		Companies		Net		Assumed to Net
		(In thousands)
Year ended December 31, 2003
	Premiums	$	22,154		—	$	2,759	$	19,395		—

See Report of Independent Registered Public Accounting Firm

S-6

SEABRIGHT INSURANCE HOLDINGS, INC.

SCHEDULE VI — SUPPLEMENTAL INFORMATION CONCERNING

INSURANCE OPERATIONS

Loss and Loss

Unpaid Loss and

Adjustment

Amortization

Deferred

Loss Adjustment

Expenses

of Deferred

Paid Loss

Policy

Expense Loss

Policy

and Loss

Acquisition

Adjustment

Unearned

Premiums

Investment

Current

Prior

Acquisition

Adjustment

Premiums

Costs, Net

Expense

Premium

Earned

Income

Year

Year

Costs

Expenses

Written

(In thousands)

As of and for the period ended:

December 31, 2003

$

1,936

$

29,733

$

16,262

$

3,134

$

309

$

3,024

—

$

322

$

2,950

$

22,154

See Report of Independent Registered Public Accounting Firm

S-7

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

SeaBright Insurance Holdings, Inc.:

      Under date of September 14, 2004, we reported on the combined balance sheet of the Predecessor as of December 31, 2002, and the related combined statements of operations, changes in stockholder’s equity and comprehensive income, and cash flows for the nine months ended September 30, 2003 and for the years ended December 31, 2002 and 2001 which are included in the prospectus. In connection with our audits of the aforementioned combined financial statements, we also audited the related combined financial statement schedules in the registration statement. These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.

      In our opinion, such financial statement schedules, when considered in relation to the basic combined financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

      As discussed in Notes 2 (i) and 17 to the combined financial statements, effective January 1, 2002, the Predecessor adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

/s/ KPMG LLP

Seattle, WA

September 14, 2004

S-8

PREDECESSOR

SCHEDULE IV — REINSURANCE

						Assumed from				Percentage of
				Ceded to Other		Other				Amount
		Direct		Companies		Companies		Net		Assumed to Net
		(In thousands)
Nine Months Ended September 30, 2003
	Premiums	$	68,402	$	4,078	$	2,315	$	66,639		3%
Year Ended December 31, 2002
	Premiums		94,407		86,983		11,643		19,067		61%
Year Ended December 31, 2001
	Premiums		65,634		59,509		7,559		13,684		55%

See Report of Independent Registered Public Accounting Firm

S-9

PREDECESSOR

SCHEDULE VI — SUPPLEMENTAL INFORMATION CONCERNING

INSURANCE OPERATIONS

											Loss and Loss
			Unpaid Loss and								Adjustment					Amortization
	Deferred		Loss Adjustment								Expenses					of Deferred		Paid Loss
	Policy		Expense						Investment							Policy		and Loss
	Acquisition		Adjustment		Unearned		Premiums		Income,		Current		Prior			Acquisition		Adjustment		Premiums
	Costs, Net		Expense		Premiums		Earned		Net		Year		Year			Costs		Expenses		Written
	(In thousands)
As of and for the period ended:
Nine Months Ended September 30, 2003	$	4,313	$	161,538	$	40,657	$	36,916	$	1,735	$	26,895	$	(1,500	)	$	3,797	$	7,989	$	68,402
December 31, 2002		1,422		153,469		47,604		17,058		3,438		13,324		(8,332	)		1,574		2,227		94,407
December 31, 2001		903		166,342		34,918		12,638		3,388		9,656		(1,192	)		1,845		6,269		65,634

See Report of Independent Registered Public Accounting Firm

S-10

EXHIBIT INDEX

Exhibit
Number			Description of Document
	1	.1	Form of Underwriting Agreement
	3	.1	Form of Amended and Restated Certificate of Incorporation of SeaBright Insurance Holdings, Inc.
	3	.2	Form of Amended and Restated By-laws of SeaBright Insurance Holdings, Inc.
	4	.1	Specimen Common Stock Certificate**
	4	.2	Indenture dated as of May 26, 2004 by and between SeaBright Insurance Company and Wilmington Trust Company**
	5	.1	Opinion of Kirkland & Ellis LLP
	10	.1	Employment Agreement, dated as of September 30, 2003, by and between SeaBright Insurance Company and John G. Pasqualetto**
	10	.2	Employment Agreement, dated as of September 30, 2003, by and between SeaBright Insurance Company and Richard J. Gergasko**
	10	.3	Employment Agreement, dated as of September 30, 2003, by and between SeaBright Insurance Company and Joseph S. De Vita**
	10	.4	Employment Agreement, dated as of September 30, 2003, by and between SeaBright Insurance Company and Richard W. Seelinger**
	10	.5	Employment Agreement, dated as of September 30, 2003, by and between SeaBright Insurance Company and Jeffrey C. Wanamaker**
	10	.6	Amended and Restated 2003 Stock Option Plan**
	10	.7	2005 Long-Term Equity Incentive Plan
	10	.8	Purchase Agreement, dated as of July 14, 2003, by and among Insurance Holdings, Inc., Kemper Employers Group, Inc., Lumbermens Mutual Casualty Company and Pacific Eagle Insurance Company**
	10	.9	Amendment Letter to Purchase Agreement, dated as of July 30, 2003, by and among Insurance Holdings, Inc., Kemper Employers Group, Inc., Lumbermens Mutual Casualty Company, Eagle Pacific Insurance Company and Pacific Eagle Insurance Company**
	10	.10	Amendment Letter to Purchase Agreement, dated as of September 15, 2003, by and among SeaBright Insurance Holdings, Inc., Kemper Employers Group, Inc., Lumbermens Mutual Casualty Company, Eagle Pacific Insurance Company and Pacific Eagle Insurance Company**
	10	.11	Escrow Agreement, dated as of September 30, 2003, by and among Wells Fargo Bank Minnesota, National Association, SeaBright Insurance Holdings, Inc. and Kemper Employers Group, Inc.**
	10	.12	Adverse Development Excess of Loss Reinsurance Agreement, dated as of September 30, 2004, between Lumbermens Mutual Casualty Company and Kemper Employers Insurance Company**
	10	.13	Amended and Restated Reinsurance Trust Agreement dated as of February 29, 2004 by and among Lumbermens Mutual Casualty Company and SeaBright Insurance Company**
	10	.14	Commutation Agreement, dated as of September 30, 2003, by and between Kemper Employers Insurance Company and Lumbermens Mutual Casualty Company**
	10	.15	Administrative Services Agreement dated as of September 30, 2003 by and among Kemper Employers Insurance Company, Eagle Pacific Insurance Company and Pacific Eagle Insurance Company**
	10	.16	Administrative Services Agreement dated as of September 30, 2003 by and among Kemper Employers Insurance Company and Lumbermens Mutual Casualty Company**
	10	.17	Claims Administration Services Agreement dated as of September 30, 2003 by and among Kemper Employers Insurance Company, Eagle Pacific Insurance Company and Pacific Eagle Insurance Company**
	10	.18	Side Letter dated as of September 29, 2003 by and among SeaBright Insurance Holdings, Inc., Kemper Employers Group, Inc., Lumbermens Mutual Casualty Company, Eagle Pacific Insurance Company and Pacific Eagle Insurance Company**
	10	.19	Installment Promissory Note dated as of March 31, 2003 from PointSure Insurance Services, Inc. to Eagle Pacific Insurance Company, for $1,952,834.67**

Exhibit
Number			Description of Document
	10	.20	Amendment to Employment Agreement by and between SeaBright Insurance Company and John G. Pasqualetto**
	10	.21	Stock Purchase Agreement dated as of September 30, 2003 by and among SeaBright Insurance Holdings, Inc. and the persons listed on the schedule of purchases thereto**
	10	.22	Stockholders Agreement dated as of September 30, 2003, by and among SeaBright Insurance Holdings, Inc., the persons listed on schedule I attached thereto and the persons listed on schedule II attached thereto**
	10	.23	Registration Agreement dated as of September 30, 2003, by and among SeaBright Insurance Holdings, Inc. and the persons identified on the schedule of investors attached thereto**
	10	.24	Executive Stock Agreement dated as of September 30, 2003, by and between SeaBright Insurance Holdings, Inc. and John Pasqualetto**
	10	.25	Executive Stock Agreement dated as of September 30, 2003, by and between SeaBright Insurance Holdings, Inc. and Richard J. Gergasko**
	10	.26	Executive Stock Agreement dated as of September 30, 2003, by and between SeaBright Insurance Holdings, Inc. and Joseph De Vita**
	10	.27	Executive Stock Agreement dated as of September 30, 2003, by and between SeaBright Insurance Holdings, Inc. and Richard Seelinger**
	10	.28	Executive Stock Agreement dated as of September 30, 2003, by and between SeaBright Insurance Holdings, Inc. and Jeffrey C. Wanamaker**
	10	.29	Executive Stock Agreement dated as of June 30, 2004 by and between SeaBright Insurance Holdings, Inc. and Chris Engstrom**
	10	.30	Executive Stock Agreement dated as of June 30, 2004 by and between SeaBright Insurance Holdings, Inc. and James Louden Borland III**
	10	.31	Stock Purchase Agreement dated as of June 30, 2004 by and between SeaBright Insurance Holdings, Inc. and each of the purchasers named therein**
	10	.32	Form of Incentive Stock Option Agreement**
	10	.33	Management Rights Letter dated as of September 30, 2003 from SeaBright Insurance Holdings, Inc. to various entities affiliated with Summit Partners**
	10	.34	Tax and Expense Sharing Agreement dated as of March 12, 2004 by and among SeaBright Insurance Holdings, Inc., SeaBright Insurance Company and PointSure Insurance Services, Inc.**
	10	.35	Workers’ Compensation and Employers Liability $500,000 Excess of $500,000 Per Occurrence Excess of Loss Reinsurance Contract effective as of October 1, 2004 by and between SeaBright Insurance Company and the Reinsurers identified therein**
	10	.36	Workers’ Compensation and Employers Liability $4,000,000 Excess of $1,000,000 Per Occurrence Excess of Loss Reinsurance Contract effective as of October 1, 2004 by and between SeaBright Insurance Company and the Reinsurers identified therein**
	10	.37	Workers’ Compensation and Employers Liability $5,000,000 Excess of $5,000,000 Per Occurrence Excess of Loss Reinsurance Contract effective as of October 1, 2004 by and between SeaBright Insurance Company and the Reinsurers identified therein**
	10	.38	Workers’ Compensation $90,000,000 Excess of $10,000,000 Per Occurrence Excess of Loss Reinsurance Contract effective as of October 1, 2004 by and between SeaBright Insurance Company and the Reinsurers identified therein**
	10	.39	Agency Services Agreement effective as of October 1, 2003 by and between SeaBright Insurance Company and PointSure Insurance Services, Inc.**
	10	.40	Floating Rate Surplus Note dated May 26, 2004 from SeaBright Insurance Company to Wilmington Trust Company, as trustee, for $12,000,000**
	10	.41	Side Letter dated as of September 28, 2004 by and among SeaBright Insurance Holdings, Inc., SeaBright Insurance Company and Lumbermens Mutual Casualty Company**
	10	.42	Form of Stock Option Award Agreement for awards granted under 2005 Long-Term Equity Incentive Plan
	21	.1	Subsidiaries of the registrant**

Exhibit
Number			Description of Document
	23	.1	Consent of KPMG LLP
	23	.2	Consent of Kirkland & Ellis LLP (included in Exhibit 5.1)
	24	.1	Power of Attorney (included in signature page)**
	24	.2	Power of Attorney of George M. Morvis**
	24	.3	Power of Attorney of William M. Feldman**

**  Previously filed.

EX-1.1

                       SEABRIGHT INSURANCE HOLDINGS, INC.
                        7,500,000 SHARES OF COMMON STOCK

                             UNDERWRITING AGREEMENT


                                                                January __, 2005

         FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
         PIPER JAFFRAY & CO.
         COCHRAN, CARONIA & CO.
         as Representatives of the several Underwriters
         c/o Friedman, Billings, Ramsey & Co., Inc.
         1001 19th Street North
         Arlington, Virginia 22209

         Dear Sirs:

                  SeaBright Insurance Holdings, Inc., a Delaware corporation
         (the "Company"), confirms its agreement with each of the Underwriters
         listed on Schedule I hereto (collectively the "Underwriters"), for whom
         Friedman, Billings, Ramsey & Co., Inc., Piper Jaffray & Co. and
         Cochran, Caronia & Co. are acting as Representatives (in such capacity,
         the "Representatives"), with respect to (i) the sale by the Company of
         an aggregate 7,500,000 shares of Common Stock, par value $0.01 per
         share, of the Company ("Common Stock") (the "Initial Shares"), and the
         purchase by the Underwriters, acting severally and not jointly, of the
         respective number of shares of Common Stock set forth opposite the
         names of the Underwriters in Schedule I hereto, and (ii) the grant of
         the option described in Section 1(b) hereof to purchase all or any part
         of 1,125,000 additional shares of Common Stock to cover
         over-allotments, if any, from the Company (the "Option Shares"), to the
         Underwriters, acting severally and not jointly, in the respective
         numbers of shares of Common Stock set forth opposite the names of the
         Underwriters in Schedule I hereto. The Initial Shares and all or any
         part of the Option Shares of Common Stock subject to the option
         described in Section l(b) hereof are hereinafter called, collectively,
         the "Shares."

                  The Company understands that the Underwriters propose to make
         a public offering of the Shares as soon as the Underwriters deem
         advisable after this Agreement has been executed and delivered.

                  The Company has filed with the Securities and Exchange
         Commission (the "Commission"), a registration statement on Form S-1
         (No. 333-119111) and a related preliminary prospectus for the
         registration of the Shares under the Securities Act of 1933, as amended
         (the "Securities Act"), and the rules and regulations thereunder (the
         "Securities Act Regulations"). The Company has prepared and filed such
         amendments thereto, if any, and such amended preliminary prospectuses,
         if any, as may have been




         required to the date hereof, and will file such additional amendments
         thereto and such amended prospectuses as may hereafter be required. The
         registration statement has been declared effective under the Securities
         Act by the Commission. The registration statement as amended at the
         time it became effective (including all information deemed to be a part
         of the registration statement at the time it became effective pursuant
         to Rule 430A(b) of the Securities Act Regulations) is hereinafter
         called the "Registration Statement," except that, if the Company files
         a post-effective amendment to such registration statement which becomes
         effective prior to the Closing Time (as defined below), "Registration
         Statement" shall refer to such registration statement as so amended.
         Any registration statement filed pursuant to Rule 462(b) of the
         Securities Act Regulations is hereinafter called the "Rule 462(b)
         Registration Statement," and after such filing the term "Registration
         Statement" shall include the Rule 462(b) Registration Statement. The
         preliminary prospectus dated January 3, 2005 relating to the Shares, as
         filed with the Commission and as amended and supplemented prior to the
         date of the Prospectus, is hereinafter called the "Preliminary
         Prospectus." The term "Prospectus" means the final prospectus, as first
         filed with the Commission pursuant to Rule 424(b) of the Securities Act
         Regulations, and any amendments thereof or supplements thereto. The
         Commission has not issued any order preventing or suspending the use of
         the Preliminary Prospectus.

                  The Company and the Underwriters agree as follows:

1.       Sale and Purchase:

         (a) Initial Shares. Upon the basis of the warranties and
         representations and other terms and conditions herein set forth, at the
         purchase price per share of $________, the Company agrees to sell to
         the Underwriters the Initial Shares, and each Underwriter agrees,
         severally and not jointly, to purchase from the Company the number of
         Initial Shares set forth in Schedule I opposite such Underwriter's
         name, plus any additional number of Initial Shares which such
         Underwriter may become obligated to purchase pursuant to the provisions
         of Section 8 hereof, subject in each case, to such adjustments among
         the Underwriters as the Representatives in their sole discretion shall
         make to eliminate any sales or purchases of fractional shares.

         (b) Option Shares. In addition, upon the basis of the warranties and
         representations and other terms and conditions herein set forth, at the
         purchase price per share set forth in paragraph (a), the Company hereby
         grants an option to the Underwriters, acting severally and not jointly,
         to purchase all or any part of the Option Shares, plus any additional
         number of Option Shares which each such Underwriter may become
         obligated to purchase pursuant to the provisions of Section 8 hereof.
         The option hereby granted will expire 30 days after the date hereof and
         may be exercised in whole or in part from time to time only for the
         purpose of covering over-allotments which may be made in connection
         with the offering and distribution of the Initial Shares upon notice by
         the Representatives to the Company setting forth the number of Option
         Shares as to which the several Underwriters are then exercising the
         option and the time and date of payment and delivery for such Option
         Shares. Any such time and date of delivery (a "Date of


                                      -2-

         Delivery") shall be determined by the Representatives, but shall not be
         later than three full business days (or earlier than two full business
         days, without the consent of the Company) after the exercise of such
         option, nor in any event prior to the Closing Time, as hereinafter
         defined. If the option is exercised as to all or any portion of the
         Option Shares, the Company will sell the total number of Option Shares
         then being purchased and each of the Underwriters, acting severally and
         not jointly, will purchase that proportion of the total number of
         Option Shares then being purchased which the number of Initial Shares
         set forth in Schedule I opposite the name of such Underwriter bears to
         the total number of Initial Shares, subject in each case to such
         adjustments among the Underwriters as the Representatives in their sole
         discretion shall make to eliminate any sales or purchases of fractional
         shares.

2.       Payment and Delivery

         (a) Initial Shares. Delivery to the Underwriters of the Initial Shares
         shall be made in book-entry form through the facilities of the
         Depository Trust Company (the "DTC") for the account of such
         Underwriters against payment by or on behalf of such Underwriters of
         the purchase price therefor by wire transfer of federal (same-day)
         funds to the account specified to the Representatives by the Company
         upon at least 48 hours' prior notice. The time and date of such
         delivery and payment shall be 9:30 a.m. New York City time, on the
         third full business day (fourth, if pricing occurs after 4:30 p.m. New
         York City time) following the date hereof (unless another time and date
         shall be agreed to by the Representatives and the Company). The time at
         which such payment and delivery are actually made is hereinafter
         sometimes called the "Closing Time" and the date of delivery of both
         Initial Shares and Option Shares is hereinafter sometimes called the
         "Date of Delivery." The closing shall take place at the offices of
         Lord, Bissell & Brook LLP, 115 South LaSalle Street, Chicago, Illinois
         60603, or such other place as the Company and the Representatives may
         agree.

         (b) Option Shares. Delivery to the Underwriters of any Option Shares to
         be purchased by the several Underwriters shall be made in book-entry
         form through the facilities of DTC for the account of such Underwriters
         against payment by or on behalf of such Underwriters of the purchase
         price therefor by wire transfer of federal (same-day) funds to the
         account specified to the Representatives by the Company upon at least
         48 hours' prior notice. The time and date of such delivery and payment
         shall be 9:30 a.m., New York City time on the date specified by the
         Representatives in the notice given by the Representatives to the
         Company of the Underwriters' election to purchase such Option Shares or
         on such other time and date as the Company and the Representatives may
         agree upon in writing (the "Option Closing Time").

         (c) Manner of Delivery. Unless the Representatives request otherwise,
         the Initial Shares and the Option Shares shall be delivered in global
         form and shall be deposited with, or on behalf of, DTC and registered
         in the name of DTC's nominee. If, at the request of the
         Representatives, the Initial Shares or the Option Shares are delivered
         in definitive form, certificates for such Shares shall be registered in
         such names and in such

                                      -3-


         denominations as the Representatives shall request upon at least 48
         hours prior notice to the Company preceding the Closing Time or the
         Option Closing Time, as the case may be. Such certificates shall be
         made available to the Representatives for inspection and packaging not
         later than at least 24 hours prior to the Closing Time or the Option
         Closing Time, as the case may be.

         (d) Directed Shares. It is understood that approximately 375,000 shares
         of the Initial Shares ("Directed Shares") initially will be reserved by
         the Underwriters for offer and sale to employees and persons having
         business relationships with the Company ("Directed Share Participants")
         upon the terms and conditions set forth in the Prospectus and in
         accordance with the rules and regulations of the National Association
         of Securities Dealers, Inc. (the "Directed Share Program"). Under no
         circumstances will the Representatives or any Underwriter be liable to
         the Company for any action taken or omitted to be taken in good faith
         in connection with such Directed Share Program. To the extent that any
         Directed Shares are not affirmatively reconfirmed for purchase by any
         Directed Share Participant on or immediately after the date of this
         Agreement, such Directed Shares may be offered to the public as part of
         the public offering contemplated herein.

3.       Representations and Warranties of the Company:

                  The Company represents and warrants to the Underwriters that:

         (a) the Company has an authorized capitalization as set forth in the
         Prospectus; the outstanding shares of capital stock of the Company and
         each subsidiary of the Company (each, a "Subsidiary") have been duly
         and validly authorized and issued and are fully paid and
         non-assessable, and all of the outstanding shares of capital stock of
         the Subsidiaries are directly or indirectly owned of record and
         beneficially by the Company; except as disclosed in the Prospectus,
         there are no outstanding (i) securities or obligations of the Company
         or any of the Subsidiaries convertible into or exchangeable for any
         capital stock of the Company or any such Subsidiary, (ii) warrants,
         rights or options to subscribe for or purchase from the Company or any
         such Subsidiary any such capital stock or any such convertible or
         exchangeable securities or obligations, or (iii) obligations of the
         Company or any such Subsidiary to issue any shares of capital stock,
         any such convertible or exchangeable securities or obligations, or any
         such warrants, rights or options; the description of the Company's
         stock option and stock purchase plans and the options or other rights
         granted and exercised thereunder set forth in the Prospectus accurately
         and fairly presents in all material respects the information required
         by the Securities Act and the Securities Act Regulations to be shown
         with respect to such plans, options and rights;

         (b) each of the Company and the Subsidiaries (all of which are named in
         Exhibit 21 to the Registration Statement) has been duly incorporated
         and is validly existing as a corporation in good standing under the
         laws of its respective jurisdiction of incorporation with full
         corporate power and authority to own its respective properties and to
         conduct its respective businesses as described in the Registration
         Statement and Prospectus and, in

                                      -4-


         the case of the Company, to execute and deliver this Agreement and to
         consummate the transactions contemplated herein;

         (c) each of the Company and the Subsidiaries is duly qualified or
         licensed and is in good standing in each jurisdiction in which it
         conducts its respective business or in which it owns or leases real
         property or otherwise maintains an office and in which the failure,
         individually or in the aggregate, to be so qualified or licensed would
         not reasonably be expected to have a material adverse effect on the
         assets, business, operations, earnings or condition (financial or
         otherwise) of the Company and the Subsidiaries taken as a whole (any
         such effect or change, where the context so requires, is hereinafter
         called a "Material Adverse Effect" or "Material Adverse Change"); each
         Subsidiary holds such licenses, certificates, permits, consents,
         orders, approvals and other authorizations from governmental
         authorities (including, without limitation, from the insurance
         regulatory agencies of the various jurisdictions where it conducts
         business) ("Permits") and has made all necessary filings required under
         any federal, state or local law, regulation or rule and has obtained
         all necessary authorizations, consents and approvals from other persons
         required in order to conduct its respective business as described in
         the Prospectus, except where the failure to hold any such Permit or
         make such filings required under any federal, state or local law,
         regulation or rule or obtain such authorizations, consents and
         approvals from other persons would not reasonably be expected to result
         in a Material Adverse Effect; each such Permit is valid and in full
         force and effect, except where the failure of such Permit to be valid
         or in full force and effect would not reasonably be expected to have a
         Material Adverse Effect; neither the Company nor any of the
         Subsidiaries is in violation of, in default under, or has received any
         written notice regarding or alleging a violation of or default under or
         revocation of any Permit or a violation of any federal, state or local
         law, regulation or rule or any decree, order or judgment applicable to
         the Company or any of the Subsidiaries the effect of which, in each
         case, would reasonably be expected to result in a Material Adverse
         Effect; except as disclosed in the Prospectus, the authority of each
         Subsidiary to write or produce the classes and lines of insurance
         authorized by such Permit is unrestricted and no such Permit contains a
         materially burdensome restriction that is not adequately disclosed in
         the Prospectus; neither the Company nor any of the Subsidiaries is a
         party to any agreement, formal or informal, with any regulatory
         official or other person limiting the ability of the Company or any
         Subsidiary of the Company from making full use of the Permits issued to
         it; except as disclosed in the Prospectus, no Subsidiary is prohibited
         or restricted, directly or indirectly, from paying dividends to the
         Company, or from making any other distribution with respect to such
         Subsidiary's capital stock or from repaying to the Company or any other
         Subsidiary any amounts which may from time to time become due under any
         loans or advances to such Subsidiary from the Company or such other
         Subsidiary, or from transferring any such Subsidiary's property or
         assets to the Company or to any other Subsidiary; other than as
         disclosed in the Prospectus, the Company does not own, directly or
         indirectly, more than 5% of any capital stock or other equity
         securities of any other corporation or any ownership interest of more
         than 5% in any partnership, joint venture or other association;

                                      -5-



         (d) the Company and each Subsidiary is in compliance with all
         applicable laws, rules, regulations, orders, decrees and judgments,
         including those relating to transactions with affiliates, except where
         such non-compliance, individually or in the aggregate, would not
         reasonably be expected to have a Material Adverse Effect;

         (e) except as disclosed in the Prospectus, the Company and SeaBright
         Insurance Company ("SBIC") have made no material change in their
         insurance reserving practices since December 31, 2003;

         (f) all reinsurance treaties and arrangements to which the Company or
         any Subsidiary is a party are in full force and effect and neither the
         Company nor any Subsidiary is in violation of, or in default in the
         performance, observance or fulfillment of, any obligation, agreement,
         covenant or condition contained therein, except where the failure of
         such reinsurance treaties and arrangements to be in full force and
         effect or where such violation or default would not, individually or in
         the aggregate, reasonably be expected to have a Material Adverse
         Effect; neither the Company nor any Subsidiary has received any written
         notice from any of the other parties to such treaties, contracts or
         agreements, or otherwise has knowledge, that such other party will be
         unable to perform such treaty or arrangement except to the extent
         adequately and properly reserved for in the audited historical
         financial statements of the Company included in the Prospectus, except
         where such nonperformance would not reasonably be expected,
         individually or in the aggregate, to have a Material Adverse Effect;

         (g) the statutory financial statements of SBIC from which certain
         ratios and other statistical data filed as part of the Registration
         Statement have been derived have been prepared for each relevant period
         in conformity with statutory accounting principles or practices
         required or permitted by the National Association of Insurance
         Commissioners, the Illinois Department of Financial and Professional
         Regulation - Division of Insurance and the California Department of
         Insurance, and such statutory accounting practices have been applied on
         a consistent basis throughout the periods involved, except as may
         otherwise be indicated therein or in the notes thereto, and present
         fairly in all material respects the statutory financial position of
         SBIC as of the dates thereof, and the statutory basis results of
         operations of SBIC for the periods covered thereby;

         (h) neither the Company nor any Subsidiary is in breach of or in
         default under (nor has any event occurred which with notice, lapse of
         time, or both would constitute a breach of, or default under), its
         respective organizational documents, or in the performance or
         observance of any obligation, agreement, covenant or condition
         contained in any license, indenture, mortgage, deed of trust, loan or
         credit agreement or other agreement or instrument to which the Company
         or any Subsidiary is a party or by which any of them or their
         respective properties is bound, except for such breaches or defaults
         which would not have a Material Adverse Effect;

         (i) the execution, delivery and performance of this Agreement, and
         consummation of the transactions contemplated herein will not conflict
         with, or result in any breach of, or

                                      -6-


         constitute a default under (nor constitute any event which with notice,
         lapse of time, or both would constitute a breach of, or default under):
         (i) any provision of the organizational documents of the Company or any
         Subsidiary, (ii) any provision of any license, indenture, mortgage,
         deed of trust, loan or credit agreement or other agreement or
         instrument to which the Company or any Subsidiary is a party or by
         which any of them or their respective properties may be bound or
         affected, or under any federal, state, local or foreign law, regulation
         or rule or any decree, judgment or order applicable to the Company or
         any Subsidiary, or (iii) result in the creation or imposition of any
         lien, charge, claim or encumbrance upon any property or asset of the
         Company or the Subsidiaries; except in the case of this clause (ii) and
         (iii) for such breaches, defaults, liens, charges, claims or
         encumbrances that would not reasonably be expected to have a Material
         Adverse Effect;

         (j) this Agreement has been duly authorized, executed and delivered by
         the Company and is a legal, valid and binding agreement of the Company
         enforceable in accordance with its terms, except as may be limited by
         bankruptcy, insolvency, reorganization, moratorium or similar laws
         affecting creditors' rights generally, and by general equitable
         principles, and except to the extent that the indemnification and
         contribution provisions of Section 9 hereof may be limited by federal
         or state securities laws and public policy considerations in respect
         thereof;

         (k) no approval, authorization, consent or order of or filing with any
         federal, state or local governmental or regulatory commission, board,
         body, authority or agency is required to be obtained by the Company or
         any of its Subsidiaries in connection with the Company's execution,
         delivery and performance of this Agreement, its consummation of the
         transactions contemplated herein, and its sale and delivery of the
         Shares, other than (A) such as have been obtained, or will have been
         obtained at the Closing Time or the relevant Date of Delivery, as the
         case may be, under the Securities Act and the Securities Exchange Act
         of 1934, as amended (the "Exchange Act"), (B) such approvals as have
         been obtained in connection with the approval of the listing of the
         Shares on the Nasdaq National Market and (C) any necessary
         qualifications under the securities or blue sky laws of the various
         jurisdictions in which the Shares are being offered by the
         Underwriters;

         (l) the Registration Statement has become effective under the
         Securities Act and no stop order suspending the effectiveness of the
         Registration Statement or any Rule 462(b) Registration Statement has
         been issued under the Securities Act and no proceedings for that
         purpose have been instituted or are pending or, to the knowledge of the
         Company, are threatened by the Commission, and the Company has complied
         to the Commission's satisfaction with any request on the part of the
         Commission for additional information;

         (m) the Preliminary Prospectus and the Registration Statement complies,
         and the Prospectus and any further amendments or supplements thereto
         will comply, when they have become effective or are filed with the
         Commission, as the case may be, in all material respects with the
         requirements of the Securities Act and the Securities Act

                                      -7-



         Regulations; the Registration Statement did not, and any amendment
         thereto will not, in each case as of the applicable effective date,
         contain an untrue statement of a material fact or omit to state a
         material fact required to be stated therein or necessary to make the
         statements therein not misleading; and the Preliminary Prospectus does
         not, and the Prospectus or any amendment or supplement thereto will
         not, as of the applicable filing date and at the Closing Time and on
         each Date of Delivery, contain an untrue statement of a material fact
         or omit to state a material fact required to be stated therein or
         necessary to make the statements therein, in light of the circumstances
         under which they were made, not misleading; provided, however, that the
         Company makes no warranty or representation with respect to any
         statement contained in the Registration Statement or the Prospectus in
         reliance upon and in conformity with the information concerning the
         Underwriters and furnished in writing by or on behalf of the
         Underwriters through the Representatives to the Company expressly for
         use in the Registration Statement or the Prospectus (that information
         being limited to that described in the second to last sentence of the
         first paragraph of Section 9(b) hereof);

         (n) the Preliminary Prospectus was and the Prospectus delivered to the
         Underwriters for use in connection with this offering will be identical
         to the versions of the Preliminary Prospectus and Prospectus created to
         be transmitted to the Commission for filing via the Electronic Data
         Gathering Analysis and Retrieval System ("EDGAR"), except to the extent
         permitted by Regulation S-T or Rule 424 of the Securities Act
         Regulations;

         (o) except as disclosed in the prospectus, there are no actions, suits,
         proceedings, inquiries or investigations pending or, to the knowledge
         of the Company, threatened against the Company or any Subsidiary or any
         of their respective officers and directors or to which the properties,
         assets or rights of any such entity are subject, at law or in equity,
         before or by any federal, state, local or foreign governmental or
         regulatory commission, board, body, authority, arbitral panel or agency
         which would reasonably be expected to result in a judgment, decree,
         award or order having a Material Adverse Effect;

         (p) the consolidated financial statements of the Company and the
         combined financial statements of Eagle Pacific Insurance Company,
         Pacific Eagle Insurance Company and PointSure Insurance Services, Inc.
         (which are collectively referred to as "Predecessor"), in each case
         including the notes thereto, included in the Registration Statement and
         the Prospectus present fairly in all material respects the consolidated
         and combined financial position of the Company and the Predecessor,
         respectively, as of the dates indicated and the consolidated and
         combined results of operations and changes in financial position and
         cash flows of the Company and the Predecessor, respectively, for the
         periods specified; such financial statements have been prepared in
         conformity with generally accepted accounting principles as applied in
         the United States and on a consistent basis during the periods involved
         and in accordance with Regulation S-X promulgated by the Commission;
         the financial statement schedules included in the Registration
         Statement and the amounts in the Prospectus under the captions
         "Prospectus Summary - Summary Financial Information," "Unaudited Pro
         Forma Financial Information" and "Selected Financial Information"
         fairly present the information shown therein and have been

                                      -8-


         compiled on a basis consistent with the financial statements included
         in the Registration Statement and the Prospectus; the unaudited pro
         forma financial information (including the related notes) included in
         the Prospectus and the Preliminary Prospectus complies as to form in
         all material respects with the applicable accounting requirements of
         the Securities Act and the Securities Act Regulations, and management
         of the Company believes that the assumptions underlying the pro forma
         adjustments are reasonable; such pro forma adjustments have been
         properly applied to the historical amounts in the compilation of the
         information and such information fairly presents with respect to the
         Company and the Subsidiaries, the financial position, results of
         operations and other information purported to be shown therein at the
         respective dates and for the respective periods specified;

         (q) KPMG LLP, whose reports on the consolidated financial statements of
         the Company and the Subsidiaries are filed with the Commission as part
         of the Registration Statement and Prospectus, is and was during the
         periods covered by its reports, independent public accountants as
         required by the Securities Act and the Securities Act Regulations, and
         their appointment has been ratified by the Audit Committee of the
         Company's board of directors, which is comprised entirely of
         independent directors as defined under the applicable standards of the
         Nasdaq Stock Market and the applicable rules and regulations of the
         Commission;

         (r) subsequent to the respective dates as of which information is given
         in the Registration Statement and the Prospectus, and except as may be
         otherwise stated in the Registration Statement or Prospectus, there has
         not been (A) any Material Adverse Change or any development that would
         reasonably be expected to result in a Material Adverse Change, whether
         or not arising in the ordinary course of business, (B) any transaction
         or agreement in principle that is material to the Company and the
         Subsidiaries taken as a whole, entered into by the Company or any of
         the Subsidiaries, (C) any obligation, contingent or otherwise, directly
         or indirectly incurred by the Company or any Subsidiary that is
         material to the Company and Subsidiaries taken as a whole or (D) any
         dividend or distribution of any kind declared, paid or made by the
         Company on any class of its capital stock;

         (s) the Shares conform in all material respects to the description
         thereof contained in the Registration Statement and the Prospectus;

         (t) except as described in the Prospectus, there are no persons with
         registration or other similar rights to have any equity or debt
         securities, including securities which are convertible into or
         exchangeable for equity securities, registered pursuant to the
         Registration Statement or otherwise registered by the Company under the
         Securities Act;

         (u) the Shares have been duly authorized and, when issued and duly
         delivered against payment therefor as contemplated by this Agreement,
         will be validly issued, fully paid and non-assessable, free and clear
         of any pledge, lien, encumbrance, security interest or other claim, and
         the issuance and sale of the Shares by the Company is not subject to

                                      -9-


         preemptive or other similar rights arising by operation of law, under
         the organizational documents of the Company or under any agreement to
         which the Company or any Subsidiary is a party or otherwise that is not
         described in the Prospectus; and no further approval or authority of
         the stockholders or the board of directors of the Company will be
         required for the issuance and sale of the Shares to be sold by the
         Company as contemplated herein;

         (v) the Shares have been approved for listing on the Nasdaq National
         Market, subject only to official notice of issuance, and the Company is
         in compliance in all material respects with all applicable listing
         standards of the Nasdaq National Market;

         (w) the Company has not taken, and will not take, directly or
         indirectly, any action which is designed to or which has constituted or
         which might reasonably be expected to cause or result in stabilization
         or manipulation of the price of any security of the Company to
         facilitate the sale or resale of the Shares;

         (x) neither the Company nor any of its affiliates (i) is required to
         register as a "broker" or "dealer" in accordance with the provisions of
         the Exchange Act, or the rules and regulations thereunder (the
         "Exchange Act Regulations"), or (ii) directly, or indirectly through
         one or more intermediaries, controls or has any other association with
         (within the meaning of Article I of the By-Laws and the applicable
         rules of the National Association of Securities Dealers, Inc. (the
         "NASD")) any member firm of the NASD, other than certain affiliates of
         Summit Partners, which hold 2,443,519 shares of convertible preferred
         stock of optionsXpress, Inc., constituting an approximately 32%
         interest;

         (y) the Company has not relied upon the Representatives or legal
         counsel for the Representatives for any legal, tax or accounting advice
         in connection with the offering and sale of the Shares;

         (z) the form of certificate used to evidence the Common Stock complies
         in all material respects with all applicable statutory requirements,
         any applicable requirements of the organizational documents of the
         Company and the requirements of the Nasdaq National Market;

         (aa) neither the Company nor the Subsidiaries own any real property.
         The Company and the Subsidiaries have good title to all personal
         property owned by them, in each case free and clear of all liens,
         security interests, pledges, charges, encumbrances, mortgages and
         defects, except such as are disclosed in the Prospectus or such as
         would not reasonably be expected to have a Material Adverse Effect; and
         any real property and buildings held under lease by the Company or any
         Subsidiary are held under valid, existing and enforceable leases, with
         such exceptions as are disclosed in the Prospectus or would not
         reasonably be expected to have a Material Adverse Effect;

         (bb) the descriptions in the Registration Statement and the Prospectus
         of the legal or governmental proceedings, contracts, leases and other
         legal documents therein described

                                      -10-


         present fairly in all material respects the information required to be
         described by the Securities Act or by the Securities Act Regulations;
         all agreements between the Company or one or more of its Subsidiaries
         and third parties expressly referenced in the Prospectus have been duly
         authorized, executed and delivered by the Company or one or more of its
         Subsidiaries and are legal, valid and binding obligations of the
         Company or one or more of its Subsidiaries, enforceable in accordance
         with their respective terms, except where the failure of any such
         agreement to be duly authorized, executed and delivered would not,
         individually or in the aggregate, reasonably be expected to have a
         Material Adverse Effect or to the extent enforceability may be limited
         by bankruptcy, insolvency, reorganization, moratorium or similar laws
         affecting creditors' rights generally and by general equitable
         principles; such contracts are in full force and effect on the date
         hereof except where the failure of any such contracts to be in full
         force and effect would not, individually or in the aggregate,
         reasonably be expected to have a Material Adverse Effect; and neither
         the Company nor any of its Subsidiaries nor, to the Company's
         knowledge, any other party thereto, is in breach of or default under
         any of such contracts, except for such breaches or defaults that would
         not result in a Material Adverse Change;

         (cc) the Company and each Subsidiary owns or possesses adequate
         licenses or other rights to use all patents, trademarks, service marks,
         trade names, copyrights, software and design licenses, trade secrets,
         manufacturing processes, other intangible property rights and know-how
         (collectively "Intangibles") necessary to entitle the Company and each
         Subsidiary to conduct its business as described in the Prospectus, and
         neither the Company nor any Subsidiary has received notice of
         infringement of or conflict with (and the Company does not know of any
         such infringement of or conflict with) asserted rights of others with
         respect to any Intangibles which would have a Material Adverse Effect;
         (dd) the Company and each of the Subsidiaries maintains a system of
         internal accounting controls sufficient to provide reasonable assurance
         that (i) transactions are executed in accordance with management's
         general or specific authorizations; (ii) transactions are recorded as
         necessary to permit preparation of financial statements in conformity
         with generally accepted accounting principles as applied in the United
         States and to maintain asset accountability; (iii) access to assets is
         permitted only in accordance with management's general or specific
         authorization; and (iv) the recorded accountability for assets is
         compared with the existing assets at reasonable intervals and
         appropriate action is taken with respect to any differences; and the
         Company shall maintain a system of information disclosure controls and
         procedures designed to ensure that information required to be disclosed
         by the Company in its periodic filings with the Commission is recorded,
         processed, summarized and reported within the time periods specified by
         the Commission;

         (ee) each of the Company and the Subsidiaries has filed on a timely
         basis all necessary federal, state, local and foreign income and
         franchise tax returns required to be filed through the date hereof,
         each of which has been true and correct in all material respects, and
         has paid all taxes shown as due thereon; and no tax deficiency has been
         asserted against any such entity, nor does any such entity know of any
         tax deficiency which is

                                      -11-


         likely to be asserted against any such entity which, if determined
         adversely to any such entity, would reasonably be expected to have a
         Material Adverse Effect;

         (ff) each of the Company and the Subsidiaries maintains insurance
         (issued by insurers of recognized financial responsibility) of the
         types and in the amounts generally deemed adequate for their respective
         businesses and consistent with insurance coverage maintained by similar
         companies in similar businesses, including, but not limited to,
         insurance covering real and personal property owned or leased by the
         Company and the Subsidiaries against theft, damage, destruction, acts
         of vandalism and all other risks customarily insured against, all of
         which insurance is in full force and effect, it being understood that
         no representation is made in this subsection (ff) as to the reinsurance
         obtained by the Company or the Subsidiaries;

         (gg) neither the Company nor any of the Subsidiaries is in violation,
         or has received notice, of any violation with respect to any applicable
         environmental, safety or similar law applicable to the business of the
         Company or any of the Subsidiaries; the Company and the Subsidiaries
         have received all permits, licenses or other approvals required of them
         under applicable federal and state occupational safety and health and
         environmental laws and regulations to conduct their respective
         businesses, and the Company and the Subsidiaries are in compliance with
         all terms and conditions of any such permit, license or approval,
         except any such violation of law or regulation, failure to receive
         required permits, licenses or other approvals or failure to comply with
         the terms and conditions of such permits, licenses or approvals which
         would not, individually or in the aggregate, result in a Material
         Adverse Change;

         (hh) neither the Company nor any Subsidiary is in violation of or has
         received notice of any violation with respect to any federal or state
         law relating to discrimination in the hiring, promotion or pay of
         employees, nor any applicable federal or state wages and hours law, nor
         any applicable provisions of the Employee Retirement Income Security
         Act of 1974, as amended, including the regulations and published
         interpretations thereunder, the violation of any of which would
         reasonably be expected to have a Material Adverse Effect;

         (ii) neither the Company nor any of the Subsidiaries nor any officer or
         director purporting to act on behalf of the Company or any of the
         Subsidiaries has at any time (i) made any contributions to any
         candidate for political office, or failed to disclose fully any such
         contributions, in violation of law; (ii) made any payment to any state,
         federal or foreign governmental officer or official, or other person
         charged with similar public or quasi-public duties, other than payments
         required or allowed by applicable law; (iii) engaged in any
         transactions, maintained any bank account or used any corporate funds
         except for transactions, bank accounts and funds which have been and
         are reflected in the normally maintained books and records of the
         Company and the Subsidiaries;

         (jj) there are no outstanding loans or advances or material guarantees
         of indebtedness by the Company or any of the Subsidiaries to or for the
         benefit of any of the executive

                                      -12-


         officers or directors of the Company or any of the Subsidiaries or any
         of the members of the families of any of them;

         (kk) all securities issued by the Company, any of the Subsidiaries or
         any trusts established by the Company or any Subsidiary, have been
         issued and sold in compliance with (i) all applicable federal and state
         securities laws, (ii) the laws of the applicable jurisdiction of
         incorporation of the issuing entity and, (iii) to the extent applicable
         to the issuing entity, the requirements of the Nasdaq National Market;

         (ll) in connection with this offering, the Company has not offered and
         will not offer its Common Stock or any other securities convertible
         into or exchangeable or exercisable for Common Stock in a manner in
         violation of the Securities Act or the Securities Act Regulations. The
         Company has not distributed and will not distribute any offering
         material other than the Preliminary Prospectus and the Prospectus in
         connection with the offer and sale of the Shares;

         (mm) except as otherwise contemplated by this Agreement, the Company
         has not incurred any liability for any finder's fees or similar
         payments in connection with the transactions herein contemplated;

         (nn) no relationship, direct or indirect, exists and no transaction has
         occurred between or among the Company or any of the Subsidiaries on the
         one hand, and the directors, officers, stockholders, customers or
         suppliers of the Company or any of the Subsidiaries on the other hand,
         which is required by the Securities Act and the Securities Act
         Regulations to be described in the Registration Statement and the
         Prospectus and which is not so described;

         (oo) neither the Company nor any of the Subsidiaries is or, after
         giving effect to the offering and sale of the Shares, will be an
         "investment company" or an entity "controlled" by an "investment
         company," as such terms are defined in the Investment Company Act of
         1940, as amended (the "Investment Company Act");

         (pp) there are no existing or, to the knowledge of the Company,
         threatened labor disputes with the employees of the Company or any of
         the Subsidiaries which are likely to have individually or in the
         aggregate a Material Adverse Effect;

         (qq) no consent, approval, authorization or order of, or qualification
         with, any governmental body or agency, other than those obtained, is
         required in connection with the offering of the Directed Shares in any
         jurisdiction where the Directed Shares are being offered. The Company
         has not offered, or caused the Representatives to offer, Shares to any
         person pursuant to the Directed Share Program with the specific intent
         to unlawfully influence (i) a customer or supplier of the Company to
         alter the customer's or supplier's level or type of business with the
         Company or (ii) a trade journalist or publication to write or publish
         favorable information about the Company or its products; and



                                      -13-

         (rr)     the Company has taken all necessary actions to ensure that,
         upon and at all times after the effectiveness of the Registration
         Statement, it will be in compliance in all material respects with all
         applicable provisions of the Sarbanes-Oxley Act of 2002 (the
         "Sarbanes-Oxley Act") and the related rules and regulations of the
         Commission that are then in effect and is actively taking steps to
         ensure that it will be in compliance in all material respects with
         other applicable provisions of the Sarbanes-Oxley Act and the related
         rules and regulations of the Commission not currently in effect upon
         and at all times after the effectiveness of such provisions.

4.       Certain Covenants by the Company:

                  The Company hereby agrees with each Underwriter:

         (a)      to furnish such information as may be required and
         otherwise to cooperate in qualifying the Shares for offering and sale
         under the securities or blue sky laws of such jurisdictions (both
         domestic and foreign) as the Representatives may designate and to
         maintain such qualifications in effect as long as requested by the
         Representatives for the distribution of the Shares, provided that the
         Company shall not be required to qualify as a foreign corporation, to
         subject itself to taxation or to consent to the service of process
         under the laws of any such state (except service of process with
         respect to the offering and sale of the Shares);

         (b)      if, at the time this Agreement is executed and delivered,
         it is necessary for a post-effective amendment to the Registration
         Statement to be declared effective before the offering of the Shares
         may commence, the Company will endeavor to cause such post-effective
         amendment to become effective as soon as reasonably practicable and
         will advise the Representatives promptly and, if requested by the
         Representatives, will confirm such advice in writing, when such
         post-effective amendment has become effective;

         (c)      to prepare the Prospectus in a form approved by the
         Underwriters and file such Prospectus (or a term sheet as permitted by
         Rule 434) with the Commission pursuant to Rule 424(b) under the
         Securities Act not later than 12:00 noon (New York City time), on the
         business day following the execution and delivery of this Agreement or
         on such other day as the parties may mutually agree and to furnish
         promptly (and with respect to the initial delivery of such Prospectus,
         not later than 12:00 noon (New York City time) on the second business
         day following the execution and delivery of this Agreement, or on such
         other day as the parties may mutually agree, to the Underwriters copies
         of the Prospectus (or of the Prospectus as amended or supplemented if
         the Company shall have made any amendments or supplements thereto after
         the effective date of the Registration Statement) in such quantities
         and at such locations as the Underwriters may reasonably request for
         the purposes contemplated by the Securities Act Regulations, which
         Prospectus and any amendments or supplements thereto furnished to the
         Underwriters will be identical to the versions created to be
         transmitted to the Commission for filing via EDGAR, except to the
         extent permitted by Regulation S-T and Rule 424 of the Securities Act
         Regulations;

                                      -14-




         (d)      to advise the Representatives promptly and (if requested
         by the Representatives) to confirm such advice in writing, when the
         Registration Statement has become effective and when any post-effective
         amendment thereto becomes effective under the Securities Act
         Regulations;

         (e)      to advise the Representatives immediately, confirming such
         advice in writing, of (i) the receipt of any comments from, or any
         request by, the Commission for amendments or supplements to the
         Registration Statement or Prospectus or for additional information with
         respect thereto, or (ii) the issuance by the Commission of any stop
         order suspending the effectiveness of the Registration Statement or of
         any order preventing or suspending the use of the Preliminary
         Prospectus or the Prospectus, or of the suspension of the qualification
         of the Shares for offering or sale in any jurisdiction, or of the
         initiation or threatening of any proceedings for any of such purposes
         and, if the Commission or any other government agency or authority
         should issue any such order, to make every reasonable effort to obtain
         the lifting or removal of such order as soon as possible; to advise the
         Representatives promptly of any proposal to amend or supplement the
         Registration Statement or Prospectus and to file no such amendment or
         supplement to which the Representatives shall reasonably object;

         (f)      to furnish to the Underwriters for a period of five years
         from the date of this Agreement (i) as soon as available, copies of all
         annual, quarterly and current reports or other communications supplied
         to holders of shares of Common Stock, (ii) as soon as practicable after
         the filing thereof, copies of all reports filed by the Company with the
         Commission, the Nasdaq National Market or any securities exchange and
         (iii) such other non-confidential information concerning the business
         and financial condition of the Company as the Underwriters may
         reasonably request regarding the Company and the Subsidiaries; provided
         that the Company shall not be required to furnish reports,
         communications or information that are otherwise available on EDGAR or
         other publicly available electronic means;

         (g)      to advise the Underwriters promptly of the happening of any
         event known to the Company within the time during which a Prospectus
         relating to the Shares is required to be delivered under the Securities
         Act Regulations which, in the judgment of the Company or in the
         reasonable opinion of the Representatives or counsel for the
         Underwriters, would require the making of any change in the Prospectus
         then being used so that the Prospectus would not include an untrue
         statement of a material fact or omit to state a material fact required
         to be stated therein or necessary to make the statements therein, in
         light of the circumstances under which they were made, not misleading,
         or if it is necessary at any time to amend the Registration Statement
         or supplement the Prospectus to comply with the Securities Act and the
         Securities Act Regulations and, during such time, to promptly prepare
         and furnish to the Underwriters copies of the proposed amendment or
         supplement before filing any such amendment or supplement with the
         Commission and thereafter promptly furnish at the Company's own expense
         to the Underwriters and to dealers, copies in such quantities and at
         such locations as the Representatives may from time to time reasonably
         request of an appropriate amendment

                                      -15-



         to the Registration Statement or supplement to the Prospectus so that
         the Prospectus as so amended or supplemented will not include an untrue
         statement of a material fact or omit to state a material fact required
         to be stated therein or necessary to make the statements therein, in
         light of the circumstances under which they were made, not misleading,
         and so that the Prospectus will comply with the Securities Act and the
         Securities Act Regulations;

         (h)      to file promptly with the Commission any amendment to the
         Registration Statement or the Prospectus or any supplement to the
         Prospectus that may, in the judgment of the Company or in the
         reasonable opinion of the Representatives, be required by the
         Securities Act or requested by the Commission;

         (i)      prior to filing with the Commission any amendment to the
         Registration Statement or supplement to the Prospectus or any
         Prospectus pursuant to Rule 424 under the Securities Act, to furnish a
         copy thereof to the Representatives and counsel for the Underwriters,
         and not to file any amendment to the Registration Statement or the
         Prospectus or any supplement to the Prospectus to which the
         Representatives reasonably object in writing;

         (j)      to furnish promptly to each Representative a signed copy of
         the Registration Statement, as initially filed with the Commission, and
         of all amendments or supplements thereto (including all exhibits filed
         therewith or incorporated by reference therein);

         (k)      to apply the net proceeds of the sale of the Shares in
         accordance with its statements under the caption "Use of Proceeds" in
         the Prospectus and in a manner such that the Company will not become an
         "investment company" as that term is defined in the Investment Company
         Act;

         (l)      to make generally available to its security holders and to the
         Representatives as soon as practicable, but in any event not later than
         the end of the fiscal quarter first occurring after the first
         anniversary of the effective date of the Registration Statement an
         earnings statement complying with the provisions of Section 11(a) of
         the Securities Act (in form, at the option of the Company, complying
         with the provisions of Rule 158 of the Securities Act Regulations)
         covering a period of 12 months beginning after the effective date of
         the Registration Statement;

         (m)      to use its best efforts to maintain the listing of the Shares
         on the Nasdaq National Market and to file with the Nasdaq National
         Market all documents and notices required thereby of companies that
         have securities for which quotations are reported by the Nasdaq
         National Market;

         (n)      to engage and maintain, at its expense, a registrar and
         transfer agent for the Shares;



                                      -16-




         (o)      except with respect to the Shares to be sold hereunder,
         during the period commencing on the date hereof and ending on the
         180-day anniversary of the date of the Prospectus, (1) not to offer,
         pledge, sell, contract to sell, sell any option or contract to
         purchase, not to purchase any option or contract to sell, grant any
         option, right or warrant to purchase, or otherwise transfer or dispose
         of, directly or indirectly, any shares of Common Stock or any
         securities convertible into or exercisable or exchangeable for any
         shares of Common Stock (whether such shares or any such securities are
         now owned by the undersigned or are hereafter acquired), or (2) enter
         into any swap or other arrangement that transfers to another, in whole
         or in part, any of the economic consequences of ownership of the Common
         Stock, whether any such transaction described in clause (1) or (2)
         above is to be settled by delivery of Common Stock or such other
         securities, in cash or otherwise; provided, however, that
         notwithstanding the foregoing, the Company shall be permitted to grant
         options to purchase Common Stock or issue shares of restricted stock or
         other equity-based awards pursuant to the Company's benefit and equity
         incentive plans described in the Registration Statement, and may issue
         shares of Common Stock upon the exercise of outstanding options,
         provided that in the event any holder of such shares would become a 1%
         or greater stockholder as a result of such issuance, the Company shall
         cause such holder to furnish the Representatives a letter substantially
         similar to Exhibit A hereto;

         (o)      not to, and to use its best efforts to cause its officers,
         directors and affiliates not to, (i) take, directly or indirectly prior
         to termination of the underwriting syndicate contemplated by this
         Agreement, any action designed to stabilize or manipulate the price of
         any security of the Company, or which may cause or result in, or which
         might in the future reasonably be expected to cause or result in, the
         stabilization or manipulation of the price of any security of the
         Company, to facilitate the sale or resale of any of the Shares, (ii)
         sell, bid for, purchase or pay anyone any compensation for soliciting
         purchases of the Shares or (iii) pay or agree to pay to any person any
         compensation for soliciting any order to purchase any other securities
         of the Company;

         (p)      to cause each 1% or greater stockholder, officer and director
         of the Company to furnish to the Representatives, prior to the first
         Date of Delivery, a letter or letters, substantially in the form of
         Exhibit A hereto;

         (q)      during the 30-day period after the Registration Statement
         becomes effective, subject to the Company's obligations under
         applicable law and listing requirements, the Company will provide the
         Representatives the opportunity to review any press release or other
         public statement within a reasonable time prior to its release;

         (r)      that the Company (i) shall comply with all applicable
         securities and other applicable laws, rules and regulations, including
         without limitation, the rules and regulations of the NASD, in each
         jurisdiction in which the Directed Shares are offered in connection
         with the Directed Share Program and (ii) shall pay all reasonable fees
         and disbursements of counsel incurred by the Underwriters in connection
         with the Directed

                                      -17-




         Share Program and any stamp duties, similar taxes or duties or other
         taxes, if any, incurred by the Underwriters in connection with the
         Directed Share Program.

5.       Payment of Expenses:

         (a)      The Company agrees to pay all costs and expenses incident to
         the performance of its obligations under this Agreement, whether or not
         the transactions contemplated hereunder are consummated or this
         Agreement is terminated, including expenses, fees and taxes in
         connection with (i) the preparation and filing of the Registration
         Statement, each Preliminary Prospectus, the Prospectus, and any
         amendments or supplements thereto, and the printing and furnishing of
         copies of each thereof to the Underwriters and to dealers (including
         costs of mailing and shipment), (ii) the preparation, issuance and
         delivery of the certificates for the Shares to the Underwriters,
         including any stock or other transfer taxes or duties payable upon the
         sale of the Shares to the Underwriters, (iii) the printing of this
         Agreement and any dealer agreements and furnishing of copies of each to
         the Underwriters and to dealers (including costs of mailing and
         shipment), (iv) the qualification of the Shares for offering and sale
         under state and foreign laws that the Company and the Representatives
         have mutually agreed are appropriate and the determination of their
         eligibility for investment under such laws as aforesaid, including the
         legal fees and filing fees and other disbursements of counsel for the
         Underwriters assuming that the Common Stock is approved for listing on
         the Nasdaq National Market, and the printing and furnishing of copies
         of any blue sky or foreign securities law surveys or legal investment
         surveys to the Underwriters and to dealers; (v) filing for review of
         the public offering of the Shares by the NASD (including the filing
         fees and other disbursements of counsel for the Underwriters relating
         thereto), (vi) the fees and expenses of any transfer agent or registrar
         for the Shares and miscellaneous expenses referred to in the
         Registration Statement, (vii) the fees and expenses incurred in
         connection with the inclusion of the Shares for listing on the Nasdaq
         National Market, (viii) the cost and expenses of making road show
         presentations with respect to the offering of the Shares (but excluding
         the costs and expenses of travel and accommodations for the
         Underwriters); and (ix) the performance of the Company's other
         obligations hereunder. Upon the request of the Representatives, the
         Company will provide funds in advance for filing fees.

         (b)      In addition to the expenses to be paid by the Company
         pursuant to subsection (a) above, upon consummation of the sale of the
         Initial Shares pursuant to this Agreement, the Company agrees to
         reimburse the Representatives for their reasonable out-of-pocket
         expenses in connection with the performance of its activities under
         this Agreement, including, but not limited to, the fees and expenses of
         the Underwriters' outside legal counsel and any other advisors,
         accountants, appraisers, etc., up to $250,000 (two hundred fifty
         thousand dollars).

         (c)      If this Agreement shall be terminated by the Underwriters, or
         any of them, because of any failure or refusal on the part of the
         Company to comply with the terms or to fulfill any of the conditions of
         this Agreement to be fulfilled by it, or if for any reason

                                      -18-




         the Company shall be unable to perform its obligations under this
         Agreement, the Company also shall reimburse the Underwriters or such
         Underwriters as have so terminated this Agreement with respect to
         themselves, severally, for all out-of-pocket expenses (such as
         printing, facsimile, courier service, direct computer expenses,
         accommodations, travel and the fees and disbursements of Underwriters'
         counsel and any other advisors, accountants, appraisers, etc.)
         reasonably incurred by such Underwriters in connection with this
         Agreement or the transactions contemplated herein.

6.       Conditions of the Underwriters' Obligations:

         (a)      The obligations of the Underwriters hereunder to purchase
         Shares at the Closing Time or on each Date of Delivery, as applicable,
         are subject to the accuracy of the representations and warranties on
         the part of the Company hereunder on the date hereof and at the Closing
         Time and on each Date of Delivery, as applicable, the performance by
         the Company of its obligations hereunder and the satisfaction of the
         following further conditions at the Closing Time or on each Date of
         Delivery, as applicable:

         (b)      The Company shall furnish to the Underwriters at the Closing
         Time and on each Date of Delivery an opinion of Drue Wax, Counsel for
         the Company and the Subsidiaries, addressed to the Underwriters and
         dated the Closing Time and each Date of Delivery and in form and
         substance reasonably satisfactory to Lord, Bissell & Brook LLP, counsel
         for the Underwriters, in substantially the form attached.

         (c)      The Company shall furnish to the Underwriters at the Closing
         Time and on each Date of Delivery an opinion of Kirkland & Ellis LLP,
         counsel for the Company and the Subsidiaries, addressed to the
         Underwriters and dated the Closing Time and each Date of Delivery and
         in form and substance reasonably satisfactory to Lord, Bissell & Brook
         LLP, counsel for the Underwriters, in substantially the form attached.

         (d)      The Representatives shall have received from KPMG LLP letters
         dated, respectively, as of the date of this Agreement, the Closing Time
         and each Date of Delivery, as the case may be, addressed to the
         Representatives, in form and substance satisfactory to the
         Representatives, relating to the financial statements of the Company
         and the Subsidiaries, including any pro forma financial statements, and
         such other matters customarily covered by comfort letters issued in
         connection with registered public offerings.

                  In the event that the letters referred to above set forth any
         change in the capital stock, increase in long-term debt or any
         decreases in stockholders' equity, operating income or net income of
         the Company, it shall be a further condition to the obligations of the
         Underwriters that such changes, decreases or increases do not, in the
         sole judgment of the Representatives, make it impractical or
         inadvisable to proceed with the purchase and delivery of the Shares as
         contemplated by the Registration Statement.


                                      -19-




         (e)      The Representatives shall have received at the Closing Time
         and on each Date of Delivery the favorable opinion of Lord, Bissell &
         Brook LLP, dated the Closing Time or such Date of Delivery, addressed
         to the Representatives and in form and substance satisfactory to the
         Representatives.

         (f)      No amendment or supplement to the Registration Statement or
         Prospectus shall have been filed to which the Underwriters shall have
         objected in writing prior to its filing.

         (g)      Prior to the Closing Time and each Date of Delivery (i) no
         stop order suspending the effectiveness of the Registration Statement
         or any order preventing or suspending the use of the Preliminary
         Prospectus or Prospectus has been issued, and no proceedings for such
         purpose shall have been initiated or threatened, by the Commission, and
         no suspension of the qualification of the Shares for offering or sale
         in any jurisdiction, or the initiation or threatening of any
         proceedings for any of such purposes, has occurred; (ii) the Company
         shall have responded to all comments of the Commission to the
         Registration Statement to the reasonable satisfaction of the
         Representatives; and (iii) the Registration Statement or any amendment
         thereto, in each case as of their respective effective dates, shall not
         contain an untrue statement of a material fact or omit to state a
         material fact required to be stated therein or necessary to make the
         statements therein not misleading, and the Preliminary Prospectus, the
         Prospectus, and any amendment or supplement thereto, as of the
         applicable filing dates and at the Closing Time and each Date of
         Delivery, shall not contain an untrue statement of a material fact or
         omit to state a material fact required to be stated therein or
         necessary to make the statements therein, in light of the circumstances
         under which they were made, not misleading.

         (h)      All filings with the Commission required by Rule 424 under the
         Securities Act to have been filed by the Closing Time shall have been
         made within the applicable time period prescribed for such filing by
         such Rule.

         (i)      Between the time of execution of this Agreement and the
         Closing Time or the relevant Date of Delivery, there shall not have
         been any Material Adverse Change and no transaction which is material
         and unfavorable to the Company shall have been entered into by the
         Company or any of the Subsidiaries, in each case, which in the
         Representatives' sole judgment, makes it impracticable or inadvisable
         to proceed with the public offering of the Shares as contemplated by
         the Registration Statement.

         (j)      The Shares shall have been approved for inclusion in the
         Nasdaq National Market.

         (k)      The NASD shall have confirmed in writing that it has decided
         to raise no objection with respect to the fairness and reasonableness
         of the underwriting terms and arrangements and shall not have raised
         any such objection after the date of such confirmation.

         (l)      The Representatives shall have received lock-up agreements
         from each officer, director, 1% or greater stockholder of the Company
         and holder of a security convertible


                                      -20-



         or exercisable into 1% or more of the Company's Common Stock, in the
         form of Exhibit A attached hereto, and such letter agreements shall be
         in full force and effect.

         (m)      The Company will, at the Closing Time and on each Date of
         Delivery, deliver to the Underwriters a certificate of its Chief
         Executive Officer and Chief Financial Officer to the effect that:

                  (i)  the representations and warranties of the Company in this
                       Agreement are true and correct, as if made on and as of
                       the date of such certificate, and the Company has
                       complied with all the agreements and satisfied all the
                       conditions on its part to be performed or satisfied at or
                       prior to the date of such certificate; and

                  (ii) subsequent to the respective dates as of which
                       information is given in the Registration Statement and
                       Prospectus, there has not been any change in the capital
                       stock or increase in the outstanding indebtedness of the
                       Company or any Subsidiary that is material to the Company
                       and the Subsidiaries considered as one enterprise.

         (n)      The Company shall have furnished to the Underwriters such
         other documents and certificates as to the accuracy and completeness of
         any statement in the Registration Statement and the Prospectus, the
         representations, warranties and statements of the Company contained
         herein, the performance by the Company of its covenants contained
         herein, and the fulfillment of any conditions contained herein, as of
         the Closing Time or any Date of Delivery, as the Underwriters may
         reasonably request.

7.       Termination:

                  The obligations of the several Underwriters hereunder shall
         be subject to termination in the absolute discretion of the
         Representatives, at any time prior to the Closing Time or any Date of
         Delivery, (i) if any of the conditions specified in Section 6 shall not
         have been fulfilled when and as required by this Agreement to be
         fulfilled, or (ii) if there has been since the respective dates as of
         which information is given in the Registration Statement, any (A)
         Material Adverse Change, (B) development involving a prospective
         Material Adverse Change other than as set forth or contemplated in the
         Preliminary Prospectus and the Prospectus, the effect of which is such
         as to make it, in the judgment of the Representatives, impracticable or
         inadvisable to market the Shares or enforce contracts for the sale of
         the Shares, or (C) material change in management of the Company or any
         Subsidiary, whether or not arising in the ordinary course of business,
         or (iii) if there has occurred any outbreak or escalation of
         hostilities or other national or international calamity or crisis or
         change in economic, political or other conditions the effect of which
         on the financial markets of the United States is such as to make it, in
         the judgment of the Representatives, impracticable to market the Shares
         or enforce contracts for the sale of the Shares, or (iv) if trading in
         any securities of the Company has been suspended by the Commission or
         by the Nasdaq National Market, or if trading generally


                                      -21-


         on the New York Stock Exchange or in the Nasdaq over-the-counter market
         has been suspended (including an automatic halt in trading pursuant to
         market-decline triggers, other than those in which solely program
         trading is temporarily halted), or limitations on prices for trading
         (other than limitations on hours or numbers of days of trading) have
         been fixed, or maximum ranges for prices for securities have been
         required, by such exchange or the NASD or the over-the-counter market
         or by order of the Commission or any other governmental authority, or
         (v) if there has been any downgrade in the ratings of the Company or
         its Subsidiaries by A.M. Best Company, or (vi) any federal or state
         statute, regulation, rule or order of any court or other governmental
         authority has been enacted, published, decreed or otherwise promulgated
         which, in the reasonable opinion of the Representatives, materially
         adversely affects or will materially adversely affect the business or
         operations of the Company.

                  If the Representatives elect to terminate this Agreement as
         provided in this Section 7, the Company and the Underwriters shall be
         notified promptly by telephone, promptly confirmed by facsimile or
         e-mail.

                  If the sale to the Underwriters of the Shares, as contemplated
         by this Agreement, is not carried out by the Underwriters for any
         reason permitted under this Agreement or if such sale is not carried
         out because the Company shall be unable to comply in all material
         respects with any of the terms of this Agreement, the Company shall not
         be under any obligation or liability under this Agreement (except to
         the extent provided in Sections 5 and 9 hereof) and the Underwriters
         shall be under no obligation or liability to the Company under this
         Agreement (except to the extent provided in Section 9 hereof) or to one
         another hereunder.

8.       Increase in Underwriters' Commitments:

                  If any Underwriter shall default at the Closing Time or on a
         Date of Delivery in its obligation to take up and pay for the Shares to
         be purchased by it under this Agreement on such date, the
         Representatives shall have the right, within 36 hours after such
         default, to make arrangements for one or more of the non-defaulting
         Underwriters, or any other underwriters, to purchase all, but not less
         than all, of the Shares which such Underwriter shall have agreed but
         failed to take up and pay for (the "Defaulted Shares"). Absent the
         completion of such arrangements within such 36-hour period, (i) if the
         total number of Defaulted Shares does not exceed 10% of the total
         number of Shares to be purchased on such date, each non-defaulting
         Underwriter shall take up and pay for (in addition to the number of
         Shares which it is otherwise obligated to purchase on such date
         pursuant to this Agreement) the portion of the total number of Shares
         agreed to be purchased by the defaulting Underwriter on such date in
         the proportion that its underwriting obligations hereunder bears to the
         underwriting obligations of all non-defaulting Underwriters; and (ii)
         if the total number of Defaulted Shares exceeds 10% of such total, the
         Representatives may terminate this Agreement by notice to the Company,
         without liability of any party (other than any defaulting underwriter)
         to any other party except that


                                      -22-





         the provisions of Sections 5 and 9 hereof shall at all times be
         effective and shall survive such termination.

                  Without relieving any defaulting Underwriter from its
         obligations hereunder, the Company agrees with the non-defaulting
         Underwriters that it will not sell any Shares hereunder on such date
         unless all of the Shares to be purchased on such date are purchased on
         such date by the Underwriters (or by substituted Underwriters selected
         by the Representatives with the approval of the Company or selected by
         the Company with the approval of the Representatives).

                  If a new Underwriter or Underwriters are substituted for a
         defaulting Underwriter in accordance with the foregoing provision, the
         Company or the non-defaulting Underwriters shall have the right to
         postpone the Closing Time or the relevant Date of Delivery for a period
         not exceeding five business days in order that any necessary changes in
         the Registration Statement and Prospectus and other documents may be
         effected.

                  The term "Underwriter" as used in this Agreement shall refer
         to and include any Underwriter substituted under this Section 8 with
         the same effect as if such substituted Underwriter had originally been
         named in this Agreement.

9.       Indemnity and Contribution by the Company and the Underwriters:

         (a)      The Company agrees to indemnify, defend and hold harmless
         each Underwriter and any person who controls any Underwriter within the
         meaning of Section 15 of the Securities Act or Section 20 of the
         Exchange Act, from and against any loss, expense, liability, damage or
         claim (including the reasonable cost of investigation) which, jointly
         or severally, any such Underwriter or controlling person may incur
         under the Securities Act, the Exchange Act or otherwise, insofar as
         such loss, expense, liability, damage or claim arises out of or is
         based upon (A) any failure on the part of the Company to comply with
         any applicable law, rule or regulation relating to the offering of
         securities being made pursuant to the Prospectus, (B) any untrue
         statement or alleged untrue statement of a material fact contained in
         the Registration Statement (or in the Registration Statement as amended
         by any post-effective amendment thereof by the Company), the Prospectus
         (the term Prospectus for the purpose of this Section 9 being deemed to
         include the Preliminary Prospectus, the Prospectus and the Prospectus
         as amended or supplemented by the Company), (C) any application or
         other document, or any amendment or supplement thereto, executed by the
         Company or based upon written information furnished by or on behalf of
         the Company filed in any jurisdiction (domestic or foreign) in order to
         qualify the Shares under the securities or blue sky laws thereof or
         filed with the NASD or the Nasdaq Stock Market (each an "Application"),
         (D) any omission or alleged omission to state a material fact required
         to be stated in any such Registration Statement or necessary to make
         the statements made therein not misleading, or (E) any omission or
         alleged omission to state a material fact required to be stated in any
         such Prospectus or necessary to make the statements made therein, in
         light of the circumstances under which they were made, not misleading;
         except insofar as any such

                                      -23-







         loss, expense, liability, damage or claim arises out of or is based
         upon any untrue statement or alleged untrue statement or omission or
         alleged omission of a material fact contained in and in conformity with
         information furnished in writing by the Underwriters through the
         Representatives to the Company expressly for use in such Registration
         Statement, Prospectus or Application; provided, further, that with
         respect to any untrue statement or alleged untrue statement in or
         omission or alleged omission from the Preliminary Prospectus the
         foregoing indemnity agreement shall not inure to the benefit of any
         Underwriter from whom the person asserting any such losses, expenses,
         liabilities, damages or claims purchased the Shares, or any person
         controlling such Underwriter, if a copy of the Prospectus (as then
         amended or supplemented if the Company shall have furnished any
         amendments or supplements thereto) was not sent or given by or on
         behalf of such Underwriter to such person, if required by law so to
         have been delivered, at or prior to the written confirmation of the
         sale of the Shares to such person, and if the Prospectus (as so amended
         or supplemented) would have cured the defect giving rise to such
         losses, expenses, liabilities, damages or claims, unless such failure
         is the result of noncompliance by the Company in furnishing copies of
         the Prospectus (or amendments or supplements thereto) pursuant to
         Section 4(c) hereof. The indemnity agreement set forth in this Section
         9(a) shall be in addition to any liability which the Company may
         otherwise have.

                  If any action is brought against an Underwriter or controlling
         person in respect of which indemnity may be sought against the Company
         pursuant to subsection (a) above, such Underwriter shall promptly
         notify the Company in writing of the institution of such action, and
         the Company shall assume the defense of such action, including the
         employment of counsel and payment of expenses; provided, however, that
         any failure or delay to so notify the Company will not relieve the
         Company of any obligation hereunder, except to the extent that its
         ability to defend is actually impaired by such failure or delay. Such
         Underwriter or controlling person shall have the right to employ its or
         their own counsel in any such case, but the fees and expenses of such
         counsel shall be at the expense of such Underwriter or such controlling
         person unless the employment of such counsel shall have been authorized
         in writing by the Company in connection with the defense of such
         action, or the Company shall not have employed counsel to have charge
         of the defense of such action within a reasonable time after notice of
         the institution of such action is given by the Underwriter or
         controlling person or such indemnified party or parties shall have
         reasonably concluded (based on the advice of counsel) that there may be
         defenses available to it or them which are different from or additional
         to those available to the Company (in which case the Company shall not
         have the right to direct the defense of such action on behalf of the
         indemnified party or parties), in any of which events such fees and
         expenses shall be borne by the Company and paid as incurred (it being
         understood, however, that the Company shall not be liable for the
         expenses of more than one separate firm of attorneys for the
         Underwriters or controlling persons in any one action or series of
         related actions in the same jurisdiction (other than local counsel in
         any such jurisdiction) representing the indemnified parties who are
         parties to such action).

                                      -24-






         Anything in this paragraph to the contrary notwithstanding, the Company
         shall not be liable for any settlement of any such claim or action
         effected without its consent.

         (b)      Each Underwriter agrees, severally and not jointly, to
         indemnify, defend and hold harmless the Company, the Company's
         directors, the Company's officers that signed the Registration
         Statement, and any person who controls the Company within the meaning
         of Section 15 of the Securities Act or Section 20 of the Exchange Act,
         from and against any loss, expense, liability, damage or claim
         (including the reasonable cost of investigation) which, jointly or
         severally, the Company or any such person may incur under the
         Securities Act, the Exchange Act or otherwise, but only insofar as such
         loss, expense, liability, damage or claim arises out of or is based
         upon (A) any untrue statement or alleged untrue statement of a material
         fact contained in and in conformity with information furnished in
         writing by such Underwriter through the Representatives to the Company
         expressly for use in the Registration Statement (or in the Registration
         Statement as amended by any post-effective amendment thereof by the
         Company), the Prospectus, or any Application, (B) any omission or
         alleged omission to state a material fact in connection with such
         information required to be stated in such Registration Statement or
         necessary to make such information not misleading, or (C) any omission
         or alleged omission to state a material fact in connection with such
         information required to be stated in such Prospectus or any Application
         or necessary to make such information, in light of the circumstances
         under which they were made, not misleading. The concession and
         reallowance figures appearing in the fourth paragraph and the
         statements set forth in the seventh, tenth, twelfth and fourteenth
         paragraphs under the caption "Underwriting" in the Preliminary
         Prospectus and the Prospectus (to the extent such statements relate to
         the Underwriters) constitute the only information furnished by or on
         behalf of any Underwriter through the Representatives to the Company
         for purposes of Section 3(m) and this Section 9. The indemnity
         agreement set forth in this Section 9(b) shall be in addition to any
         liabilities that such Underwriters may otherwise have.

                  If any action is brought against the Company or any such
         person in respect of which indemnity may be sought against any
         Underwriter pursuant to the foregoing paragraph, the Company or such
         person shall promptly notify the Representatives in writing of the
         institution of such action and the Representatives, on behalf of the
         Underwriters, shall assume the defense of such action, including the
         employment of counsel and payment of expenses. The Company or such
         person shall have the right to employ its own counsel in any such case,
         but the fees and expenses of such counsel shall be at the expense of
         the Company or such person unless the employment of such counsel shall
         have been authorized in writing by the Representatives in connection
         with the defense of such action or the Representatives shall not have
         employed counsel to have charge of the defense of such action within a
         reasonable time after notice of the institution of such action is given
         by the Company or such indemnified party or parties shall have
         reasonably concluded (based on the advice of counsel) that there may be
         defenses available to it or them which are different from or additional
         to those available to the Underwriters (in which case the
         Representatives shall not have the right to direct the


                                      -25-








         defense of such action on behalf of the indemnified party or parties),
         in any of which events such fees and expenses shall be borne by such
         Underwriter and paid as incurred (it being understood, however, that
         the Underwriters shall not be liable for the expenses of more than one
         separate firm of attorneys in any one action or series of related
         actions in the same jurisdiction (other than local counsel in any such
         jurisdiction) representing the indemnified parties who are parties to
         such action). Anything in this paragraph to the contrary
         notwithstanding, no Underwriter shall be liable for any settlement of
         any such claim or action effected without the written consent of the
         Representatives.

         (c)      If the indemnification provided for in this Section 9 is
         unavailable or insufficient to hold harmless an indemnified party under
         subsections (a) and (b) of this Section 9 in respect of any losses,
         expenses, liabilities, damages or claims referred to therein, then each
         applicable indemnifying party, in lieu of indemnifying such indemnified
         party, shall contribute to the amount paid or payable by such
         indemnified party as a result of such losses, expenses, liabilities,
         damages or claims (i) in such proportion as is appropriate to reflect
         the relative benefits received by the Company and the Underwriters from
         the offering of the Shares or (ii) if (but only if) the allocation
         provided by clause (i) above is not permitted by applicable law, in
         such proportion as is appropriate to reflect not only the relative
         benefits referred to in clause (i) above but also the relative fault of
         the Company and of the Underwriters in connection with the statements
         or omissions which resulted in such losses, expenses, liabilities,
         damages or claims, as well as any other relevant equitable
         considerations. The relative benefits received by the Company and the
         Underwriters shall be deemed to be in the same proportion as the total
         proceeds from the offering (net of underwriting discounts and
         commissions but before deducting expenses) received by the Company bear
         to the underwriting discounts and commissions received by the
         Underwriters. The relative fault of the Company and of the Underwriters
         shall be determined by reference to, among other things, whether the
         untrue statement or alleged untrue statement of a material fact or
         omission or alleged omission relates to information supplied by the
         Company or by the Underwriters and the parties' relative intent,
         knowledge, access to information and opportunity to correct or prevent
         such statement or omission. The amount paid or payable by a party as a
         result of the losses, claims, damages and liabilities referred to above
         shall be deemed to include any legal or other fees or expenses
         reasonably incurred by such party in connection with investigating or
         defending any claim or action.

         (d)      The Company and the Underwriters agree that it would not
         be just and equitable if contribution pursuant to this Section 9 were
         determined by pro rata allocation (even if the Underwriters were
         treated as one entity for such purpose) or by any other method of
         allocation which does not take account of the equitable considerations
         referred to in subsection (c)(i) and, if applicable (ii), above.
         Notwithstanding the provisions of this Section 9, no Underwriter shall
         be required to contribute any amount in excess of the underwriting
         discounts and commissions applicable to the Shares purchased by such
         Underwriter pursuant to this Agreement. No person guilty of fraudulent
         misrepresentation (within the meaning of Section 11(f) of the
         Securities Act) shall be

                                      -26-





         entitled to contribution from any person who was not guilty of such
         fraudulent misrepresentation. The Underwriters' obligations to
         contribute pursuant to this Section 9 are several in proportion to
         their respective underwriting commitments and not joint.

         (e)      The Company agrees to indemnify and hold harmless each
         Underwriter and its affiliates and each person, if any, who controls
         each Underwriter and its affiliates within the meaning of either
         Section 15 of the Securities Act or Section 20 of the Exchange Act,
         from and against any and all losses, claims, damages and liabilities
         (including, without limitation, any legal or other expenses reasonably
         incurred in connection with defending or investigating any such action
         or claim) (i) caused by any untrue statement or alleged untrue
         statement of a material fact contained in any material prepared by or
         with the consent of the Company for distribution to participants in
         connection with the Directed Share Program, or caused by any omission
         or alleged omission to state therein a material fact required to be
         stated therein or necessary to make the statements therein not
         misleading; (ii) as a result of the failure of any participant to pay
         for and accept delivery of Directed Shares that the participant has
         agreed to purchase, except to the extent such Directed Shares are
         offered to the public and purchased as part of the public offering
         contemplated herein; or (iii) related to, arising out of, or in
         connection with the Directed Share Program; provided, however, that the
         Company shall not be liable under this clause (iii) to the extent that
         a court of competent jurisdiction shall have determined by a final
         judgment that such loss, claim, damage, liability or action resulted
         directly from any such acts or failures to act undertaken or omitted to
         be taken by any Underwriter through its bad faith or willful
         misconduct.

10.      Survival:

                  The indemnity and contribution agreements contained in Section
         9 and the covenants, warranties and representations of the Company
         contained in Sections 3, 4 and 5 of this Agreement shall remain in full
         force and effect regardless of any investigation made by or on behalf
         of any Underwriter, or any person who controls any Underwriter within
         the meaning of Section 15 of the Securities Act or Section 20 of the
         Exchange Act, or by or on behalf of the Company, its directors and
         officers, or any person who controls the Company within the meaning of
         Section 15 of the Securities Act or Section 20 of the Exchange Act, and
         shall survive any termination of this Agreement or the sale and
         delivery of the Shares. The Company and each Underwriter agree promptly
         to notify the others of the commencement of any litigation or
         proceeding against it and, in the case of the Company, against any of
         the Company's officers and directors, in connection with the sale and
         delivery of the Shares, or in connection with the Registration
         Statement or Prospectus.

11.      Notices:

                  Except as otherwise provided herein, all statements, requests,
         notices and agreements shall be in writing and, if to the Underwriters,
         shall be delivered or sent by mail or facsimile transmission in care of
         Friedman, Billings, Ramsey & Co., Inc., 1001


                                      -27-

         19th Street North, Arlington, Virginia 22209, Attention: Syndicate
         Department; facsimile number 703-469-1131; if to the Company, shall be
         delivered or sent by mail or facsimile transmission to the offices of
         the Company at 2101 4th Avenue, Suite 1600, Seattle, Washington 98121;
         Attention: John G. Pasqualetto; facsimile number 206-269-8901.

12.      Governing Law; Headings:

                 THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
         ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
         CONFLICTS OF LAWS PRINCIPLES. The section headings in this Agreement
         have been inserted as a matter of convenience of reference and are not
         a part of this Agreement.

13.      Parties at Interest:

                 The Agreement herein set forth has been and is made solely for
         the benefit of the Underwriters, the Company and the controlling
         persons, directors and officers referred to in Sections 9 and 10
         hereof, and their respective successors, assigns, executors and
         administrators. No other person, partnership, association or
         corporation (including a purchaser, as such purchaser, from any of the
         Underwriters) shall acquire or have any right under or by virtue of
         this Agreement.

14.      Counterparts and Facsimile Signatures:

                 This Agreement may be signed by the parties in counterparts
         which together shall constitute one and the same agreement among the
         parties. A facsimile signature shall constitute an original signature
         for all purposes.

                 If the foregoing correctly sets forth the understanding among
         the Company and the Underwriters, please so indicate in the space
         provided below, whereupon this Agreement shall constitute a binding
         agreement among the Company and the Underwriters.

                                Very truly yours,

                                SEABRIGHT INSURANCE HOLDINGS, INC.


                                By:_____________________________
                                      Name:
                                      Title:




                                      -28-










Accepted and agreed to as of the date first above written:

FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
PIPER JAFFRAY & CO.
COCHRAN, CARONIA & CO.

As Representatives of the other Underwriters named on Schedule I hereto.

        By:   FRIEDMAN, BILLINGS, RAMSEY & CO., INC.

              By: _______________________________________
                      Name:_______________________________
                      Title:________________________________






                                      -29-








                                   Schedule I

                                                            Number of Initial             Maximum Number
                                                             Shares to be              of Option Shares to
                     Underwriter                               Purchased                  be Purchased
- ------------------------------------------------------- -------------------------- --------------------------
                                                                             

Friedman, Billings, Ramsey & Co., Inc.                            [   ]                      [   ]
                                                                   ---                        ---
Piper Jaffray & Co.                                               [   ]                      [   ]
                                                                   ---                        ---
Cochran, Caronia & Co.                                            [   ]                      [   ]
                                                                   ---                        ---

Total                                                                                        [   ]
                                                                                              ---








                                    EXHIBIT A

                             FORM OF LOCK-UP LETTER



                                                              January ___, 2005



FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
PIPER JAFFRAY & CO.
COCHRAN, CARONIA & CO.
as Representatives of the several Underwriters
c/o Friedman, Billings, Ramsey & Co., Inc.
1001 19th Street North
Arlington, Virginia  22209

Dear Sirs:

         The undersigned understands that Friedman, Billings, Ramsey & Company,
Inc., Piper Jaffray & Co. and Cochran, Caronia & Co. (the "Representatives")
propose to enter into an Underwriting Agreement (the "Underwriting Agreement"),
as Representatives of several underwriters (the "Underwriters"), with SeaBright
Insurance Holdings, Inc., a Delaware corporation (the "Company"), providing for
the public offering (the "Public Offering") by the Underwriters of shares (the
"Shares") of Common Stock of the Company (the "Common Stock").

         To induce the Underwriters to continue their efforts in connection with
the Public Offering, the undersigned hereby irrevocably agrees that, without the
prior written consent of the Representatives, it will not, during the period
commencing on the date hereof and ending on the 180-day anniversary of the date
of the final prospectus relating to the Public Offering (the "Prospectus"), (1)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for any shares of Common Stock (whether such shares or any such
securities are now owned by the undersigned or are hereafter acquired), or (2)
enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise, excluding any Shares to be sold under the Underwriting Agreement. In
addition, the undersigned agrees that, without prior written consent of the
Representatives, it will not, during the period commencing on the date hereof
and ending on the 180-day anniversary of the date of the Prospectus, make any
demand for or exercise any right with respect to, the registration under the
Securities Act






of 1933, as amended (the "Securities Act"), of any shares of Common Stock or any
security convertible into or exercisable or exchangeable for Common Stock.

         Notwithstanding the foregoing, the undersigned may transfer the
Undersigned's Shares (i) as a bona fide gift or gifts, provided that the donee
or donees thereof agree to be bound in writing by the restrictions set forth
herein, (ii) to any trust, partnership, corporation or other entity formed for
the direct or indirect benefit of the transferor or the immediate family of the
transferor, provided that a duly authorized officer, representative or trustee
of the transferee agrees in writing to be bound by the restrictions set forth
herein, and provided further that any such transfer shall not involve a
disposition for value, (iii) if the transfer occurs by operation of law, such as
rules of descent and distribution, statutes governing the effects of a merger or
a qualified domestic order, provided that the transferee executes an agreement
acknowledging that the transferee is receiving and holding the shares subject to
the provisions hereof, (iv) to an affiliate (as that term is defined in Rule 405
under the Securities Act) of the undersigned, provided that such affiliate
agrees to be bound in writing by the restrictions set forth herein, or (v) with
the prior written consent of Friedman, Billings, Ramsey & Co., Inc. on behalf of
the Underwriters. For purposes of this Lock-Up Letter Agreement, "immediate
family" shall mean any relationship by blood, marriage or adoption, not more
remote than first cousin.

         In furtherance of the foregoing, the Company and its transfer agent are
hereby authorized to decline to make any transfer of securities if such transfer
would constitute a violation or breach of this Lock-Up Letter Agreement.

         The undersigned understands that the Company and the Underwriters will
proceed with the Public Offering in reliance on this Lock-Up Letter Agreement.

         Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
agreement between the Company and the Representatives. The terms of this Lock-Up
Letter Agreement shall expire in the event the Public Offering of the firm
Shares is not consummated on or before March 1, 2005.

         If (A) the Company (i) withdraws the registration statement registering
the Shares (the "Registration Statement") or (ii) deregisters all of the Shares
covered by the Registration Statement or (B) the Underwriting Agreement is
executed but is terminated by the Representatives prior to payment for and
delivery of any of the Shares, the undersigned will be released from the
undersigned's obligations under this Lock-Up Letter Agreement.

         The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into this Lock-Up Letter Agreement and that,
upon request, the undersigned will execute any additional documents reasonably
necessary in connection with the enforcement hereof. Any obligations of the
undersigned shall be








binding upon the heirs, personal representatives, successors and assigns of the
undersigned.

                                               Very truly yours,

Dated:
      --------------------------

                                               -------------------------------
                                               (Signature)

                                               -------------------------------
                                               (Printed or Typed Name)

EX-3.1

                                                                     EXHIBIT 3.1

                AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

                                       OF

                       SEABRIGHT INSURANCE HOLDINGS, INC.
                             A DELAWARE CORPORATION

SeaBright Insurance Holdings, Inc., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:

      1. The name of the Corporation is SeaBright Insurance Holdings, Inc.

      2. The Corporation's original Certificate of Incorporation was filed with
the Secretary of State of Delaware on June 19, 2003 under the name Eagle
Insurance Holdings, Inc.

      3. This Amended and Restated Certificate of Incorporation was duly adopted
by the written consent of the Board of Directors and stockholders of the
Corporation in accordance with the provisions of Sections 242, 245, 141(f) and
228 of the Delaware General Corporation Law.

      4. This Amended and Restated Certificate of Incorporation restates and
integrates and amends the certificate of incorporation of the Corporation to
read in its entirety as set forth in full on the attached Exhibit A.

      IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed this ______ day of January, 2005.

                           SEABRIGHT INSURANCE HOLDINGS, INC.,
                           a Delaware corporation

                           By:_________________________
                                 John G. Pasqualetto
                                 Chairman, President and Chief Executive Officer



                                                                       Exhibit A

                                   ARTICLE ONE
                                      NAME

      The name of the Corporation is SeaBright Insurance Holdings, Inc. (the
"Corporation").

                                   ARTICLE TWO
                           REGISTERED OFFICE AND AGENT

      The address of the Corporation's registered office in the State of
Delaware is 9 East Loockerman Street, Suite #1-B, in the City of Dover, County
of Kent, 19901. The name of its registered agent at such address is National
Registered Agents, Inc.

                                  ARTICLE THREE
                                     PURPOSE

      The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the Delaware General Corporation Law.

                                  ARTICLE FOUR
                                  CAPITAL STOCK

                            PART A. AUTHORIZED SHARES

      The total number of shares of capital stock which the Corporation has
authority to issue is 85,750,000 shares, consisting of:

      1. 10,000,000 shares of initially undesignated Preferred Stock, par value
$0.01 per share (the "Preferred Stock");

      2. 750,000 shares of Series A Preferred Stock, par value $0.01 per share
(the "Series A Preferred "); and

      3. 75,000,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock").

      The Preferred Stock, the Series A Preferred and the Common Stock shall
have the rights, preferences and limitations set forth below.



                             PART B. PREFERRED STOCK

      The Board of Directors is authorized, subject to limitations prescribed by
law, to provide by resolution or resolutions for the issuance of shares of
Preferred Stock in one or more series, to establish the number of shares to be
included in each such series, and to fix the voting powers (if any),
designations, powers, preferences, and relative, participating, optional or
other rights, if any, of the shares of each such series, and any qualifications,
limitations or restrictions thereof. Irrespective of the provisions of Section
242(b)(2) of the Delaware General Corporation Law, the number of authorized
shares of Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority in voting power of the stock of the Corporation entitled
to vote, without the separate vote of the holders of the Preferred Stock as a
class.

                        PART C. SERIES A PREFERRED STOCK

      For so long as shares of Series A Preferred are issued and outstanding,
such shares shall have the rights, preferences and limitations set forth in this
Part C of ARTICLE FOUR. Certain capitalized terms used in this Part C of ARTICLE
FOUR have the meanings set forth in Section 9.

      Section 1. Dividends. Holders of the Series A Preferred shall not be
entitled to the payment of any dividends, except as expressly set forth in the
next sentence. When, as and if and to the extent permitted under the Delaware
General Corporation Law, the Board of Directors of the Corporation declares or
pays any dividends upon the Common Stock (whether payable in cash, securities or
other property), the Corporation shall also declare and pay to the holders of
the Series A Preferred, out of the assets of the Corporation legally available
therefor, at the same time that it declares and pays such dividends to the
holders of the Common Stock, the dividends which would have been declared and
paid with respect to the Common Stock issuable upon conversion of the Series A
Preferred had all of the outstanding Series A Preferred been converted
immediately prior to the record date for such dividend, or if no record date is
fixed, the date as of which the record holders of Common Stock entitled to such
dividends are to be determined.

      Section 2. Liquidation. Upon any liquidation, dissolution or winding up of
the Corporation (whether voluntary or involuntary), each holder of Series A
Preferred shall be entitled to be paid, before any distribution or payment is
made upon any Junior Securities, an amount in cash equal to the greater of (i)
the aggregate Liquidation Value of all shares held by such holder (plus all
declared and unpaid dividends thereon) and (ii) the amount to which such holder
would be entitled to receive upon such liquidation, dissolution or winding up if
all of such holder's Series A Preferred were converted into Common Stock
immediately prior to such event, and the holders of Series A Preferred shall not
be entitled to any further payment. If upon any liquidation, dissolution or
winding up of the Corporation the Corporation's assets to be distributed among
the holders of the Series A Preferred in respect of the outstanding Series A
Preferred are insufficient to permit payment to such holders of the aggregate
amount which they are entitled to be paid under this Section 2, then the entire
assets available to be distributed to the

                                       2


Corporation's stockholders shall be distributed pro rata among such holders of
Series A Preferred based upon the aggregate Liquidation Value (plus all declared
and unpaid dividends) of the Series A Preferred held by each such holder. Not
less than ten (10) days prior to the payment date stated therein, the
Corporation shall mail written notice of any such liquidation, dissolution or
winding up to each record holder of Series A Preferred, setting forth in
reasonable detail the amount of proceeds to be paid with respect to each share
in connection with such liquidation, dissolution or winding up. Upon the written
election of the holders of a majority of the outstanding shares of Series A
Preferred, the consolidation or merger of the Corporation into or with any other
entity or entities (whether or not the Corporation is the surviving entity) or
any other form of recapitalization or reorganization affecting the Corporation
shall be deemed to be a liquidation, dissolution or winding up of the
Corporation within the meaning of this Section 2.

      Section 3. Priority of Series A Preferred on Dividends and Redemptions. So
long as any Series A Preferred remains outstanding, without the prior written
consent of the holders of a majority of the outstanding shares of Series A
Preferred, the Corporation shall not, nor shall it permit any Subsidiary to,
redeem, purchase or otherwise acquire directly or indirectly any Junior
Securities (other than (i) pursuant to the Stockholders Agreement and (ii)
repurchases of Common Stock from present or former employees, directors or
consultants of the Corporation or any of its Subsidiaries upon termination of
employment or consultancy in accordance with arrangements approved by the
Corporation's Board of Directors), nor shall the Corporation directly or
indirectly pay or declare any dividend or make any distribution upon any Junior
Securities (other than dividends payable in shares of Common Stock or payable to
holders of Common Stock in compliance with Section 1 of this Part C above).

      Section 4. Redemptions. The Series A Preferred shall not be subject to any
required redemption on any date certain or upon the happening of any particular
event or at the option of the holders thereof or otherwise. The Series A
Preferred shall not be subject to any sinking fund or similar requirements. The
Corporation shall not, nor shall it permit any Subsidiary to, redeem or
otherwise acquire any shares of Series A Preferred, except pursuant to (i) the
Stockholders Agreement, (ii) from present or former employees, directors or
consultants of the Corporation or any of its Subsidiaries upon termination of
employment, directorship or consultancy in accordance with arrangements approved
by the Corporation's Board of Directors or (iii) a purchase offer made by the
Corporation pro rata to all holders of Series A Preferred on the basis of the
number of shares owned by each such holder. If the purchase offer made pursuant
to clause (iii) above is accepted by the holders of a majority of the
outstanding shares of Series A Preferred, each holder of Series A Preferred, by
his or its acceptance of such Series A Preferred, agrees to sell his or its pro
rata share of the Series A Preferred to be purchased by the Company at a price
equal to the Liquidation Value thereof plus all declared and unpaid dividends
thereon.

      Section 5. Conversion of Series A Preferred.

            5A. Conversion Procedure.

            (i) At any time and from time to time, any holder of Series A
Preferred may convert all or any portion of the Series A Preferred held by such
holder into a number of shares

                                       3


of Conversion Stock computed by multiplying the number of shares to be converted
by $100 and dividing the result by the Conversion Price then in effect.

            (ii) Except as otherwise provided herein, each conversion of Series
A Preferred shall be deemed to have been effected as of the close of business on
the date on which the certificate or certificates representing the Series A
Preferred to be converted have been surrendered for conversion at the principal
office of the Corporation. At the time any such conversion has been effected,
the rights of the holder of the shares converted as a holder of Series A
Preferred shall cease and the Person or Persons in whose name or names any
certificate or certificates for shares of Conversion Stock are to be issued upon
such conversion shall be deemed to have become the holder or holders of record
of the shares of Conversion Stock represented thereby.

            (iii) Notwithstanding any other provision hereof, if a conversion of
Series A Preferred is to be made in connection with a Public Offering, a Change
in Ownership, a Fundamental Change or other transaction affecting the
Corporation or any holder of Series A Preferred, the conversion of any shares of
Series A Preferred may, at the election of the holder thereof, be conditioned
upon the consummation of such transaction, in which case such conversion shall
be deemed to be effective immediately prior to the consummation of such
transaction.

            (iv) Promptly (and in any event within two (2) business days in the
case of subparagraph (a) below) after a conversion has been effected (including
a conversion pursuant to paragraph 5H below), the Corporation shall deliver to
the converting holder:

                  (a) a certificate or certificates representing the number of
shares of Conversion Stock issuable by reason of such conversion in such name or
names and such denomination or denominations as the converting holder has
specified;

                  (b) payment in an amount equal to all dividends declared with
respect to each share converted which have not been paid prior thereto in
accordance with the provisions of subparagraph (v) below, plus the amount
payable under subparagraph (ix) below with respect to such conversion; and

                  (c) a certificate representing any shares of Series A
Preferred which were represented by the certificate or certificates delivered to
the Corporation in connection with such conversion but which were not converted.

            (v) If the Corporation is not permitted under applicable law to pay
any portion of any declared and unpaid dividends on the Series A Preferred being
converted, the Corporation shall pay such dividends to the converting holder as
soon thereafter as funds of the Corporation are legally available for such
payment. At the request of any such converting holder, the Corporation shall
provide such holder with written evidence of its obligation to such holder.

            (vi) The issuance of certificates for shares of Conversion Stock
upon conversion of Series A Preferred shall be made without charge to the
holders of such Series A

                                       4


Preferred for any issuance tax in respect thereof (so long as such certificates
are issued in the name of the record holder of such Series A Preferred) or other
cost incurred by the Corporation in connection with such conversion and the
related issuance of shares of Conversion Stock. Upon conversion of each share of
Series A Preferred, the Corporation shall take all such actions as are necessary
in order to ensure that the Conversion Stock issuable with respect to such
conversion shall be validly issued, fully paid and nonassessable, free and clear
of all taxes (other than any taxes relating to any dividends paid with respect
thereto), liens, charges and encumbrances with respect to the issuance thereof.

            (vii) The Corporation shall not close its books against the transfer
of Series A Preferred or of Conversion Stock issued or issuable upon conversion
of Series A Preferred in any manner which interferes with the timely conversion
of Series A Preferred. The Corporation shall assist and cooperate with any
holder of shares required to make any governmental filings or obtain any
governmental approval prior to or in connection with any conversion of shares
hereunder (including, without limitation, making any filings required to be made
by the Corporation and paying all filing and other fees in connection
therewith).

            (viii) The Corporation shall at all times reserve and keep available
out of its authorized but unissued shares of Conversion Stock, solely for the
purpose of issuance upon the conversion of the Series A Preferred, such number
of shares of Conversion Stock issuable upon the conversion of all outstanding
Series A Preferred. All shares of Conversion Stock which are so issuable shall,
when issued, be duly and validly issued, fully paid and nonassessable and free
from all taxes, liens and charges. The Corporation shall take all such actions
as may be necessary to ensure that all such shares of Conversion Stock may be so
issued without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of Conversion
Stock may be listed (except for official notice of issuance which shall be
immediately delivered by the Corporation upon each such issuance). The
Corporation shall not take any action which would cause the number of authorized
but unissued shares of Conversion Stock to be less than the number of such
shares required to be reserved hereunder for issuance upon conversion of the
Series A Preferred.

            (ix) If any fractional interest in a share of Conversion Stock
would, except for the provisions of this subparagraph (ix), be delivered upon
any conversion of the Series A Preferred, the Corporation, in lieu of delivering
the fractional share therefor, shall pay an amount to the holder thereof equal
to the Market Price of such fractional interest as of the date of conversion.

            5B. Conversion Price.

            (i) The initial Conversion Price shall be $6.536091. In order to
prevent dilution of the conversion rights granted under this Section 5, the
Conversion Price shall be subject to adjustment from time to time pursuant to
this paragraph 5B.

            (ii) If and whenever following the date of filing of this Amended
and Restated Certificate of Incorporation the Corporation issues or sells, or in
accordance with paragraph 5C below is deemed to have issued or sold, any shares
of Common Stock for a consideration per

                                       5


share less than the Conversion Price in effect immediately prior to the time of
such issue or sale, then immediately upon such issue or sale or deemed issue or
sale the Conversion Price shall be reduced to the Conversion Price determined by
dividing (a) the sum of (1) the product derived by multiplying the Conversion
Price in effect immediately prior to such issue or sale by the number of shares
of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus
(2) the consideration, if any, received by the Corporation upon such issue or
sale, by (b) the number of shares of Common Stock Deemed Outstanding immediately
after such issue or sale.

            (iii) Notwithstanding the foregoing, there shall be no adjustment to
the Conversion Price hereunder with respect to the granting of stock options to
employees, officers, directors and consultants of the Corporation and its
Subsidiaries or the exercise thereof for an aggregate of 773,780.50 shares of
Common Stock (as such number of shares is appropriately adjusted for subsequent
stock splits, stock combinations, stock dividends and recapitalizations).

            5C. Effect on Conversion Price of Certain Events. For purposes of
determining the adjusted Conversion Price under paragraph 5B above, the
following shall be applicable:

            (i) Issuance of Rights or Options. If the Corporation in any manner
following the date of filing of this Amendment to the Amended and Restated
Certificate of Incorporation grants or sells any Options and the price per share
for which Common Stock is issuable upon the exercise of such Options, or upon
conversion or exchange of any Convertible Securities issuable upon exercise of
such Options, is less than the Conversion Price in effect immediately prior to
the time of the granting or sale of such Options, then the total maximum number
of shares of Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such Options shall be deemed to be
outstanding and to have been issued and sold by the Corporation at the time of
the granting or sale of such Options for such price per share. For purposes of
this paragraph, the "price per share for which Common Stock is issuable" shall
be determined by dividing (A) the total amount, if any, received or receivable
by the Corporation as consideration for the granting or sale of such Options,
plus the minimum aggregate amount of additional consideration payable to the
Corporation upon exercise of all such Options, plus in the case of such Options
which relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the issuance
or sale of such Convertible Securities and the conversion or exchange thereof,
by (B) the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options. No further
adjustment of the Conversion Price shall be made when Convertible Securities are
actually issued upon the exercise of such Options or when Common Stock is
actually issued upon the exercise of such Options or the conversion or exchange
of such Convertible Securities.

            (ii) Issuance of Convertible Securities. If the Corporation in any
manner following the date of filing of this Amendment to the Amended and
Restated Certificate of Incorporation issues or sells any Convertible Securities
and the price per share for which Common Stock is issuable upon conversion or
exchange thereof is less than the Conversion Price in effect immediately prior
to the time of such issue or sale, then the maximum number of shares

                                       6


of Common Stock issuable upon conversion or exchange of such Convertible
Securities shall be deemed to be outstanding and to have been issued and sold by
the Corporation at the time of the issuance or sale of such Convertible
Securities for such price per share. For the purposes of this paragraph, the
"price per share for which Common Stock is issuable" shall be determined by
dividing (A) the total amount received or receivable by the Corporation as
consideration for the issue or sale of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, payable to the
Corporation upon the conversion or exchange thereof, by (B) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities. No further adjustment of the Conversion Price shall
be made when Common Stock is actually issued upon the conversion or exchange of
such Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustments of the
Conversion Price had been or are to be made pursuant to other provisions of this
Section 5, no further adjustment of the Conversion Price shall be made by reason
of such issue or sale.

            (iii) Change in Option Price or Conversion Rate. If the purchase
price provided for in any Options, the additional consideration, if any, payable
upon the conversion or exchange of any Convertible Securities or the rate at
which any Convertible Securities are convertible into or exchangeable for Common
Stock changes at any time following the date of filing of this Amendment to the
Amended and Restated Certificate of Incorporation, the Conversion Price in
effect at the time of such change shall be immediately adjusted to the
Conversion Price which would have been in effect at such time had such Options
or Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold.

            (iv) Treatment of Expired Options and Unexercised Convertible
Securities. Upon the expiration of any Option or the termination of any right to
convert or exchange any Convertible Security without the exercise of any such
Option or right, the Conversion Price then in effect hereunder shall be adjusted
immediately to the Conversion Price which would have been in effect at the time
of such expiration or termination had such Option or Convertible Security, to
the extent outstanding immediately prior to such expiration or termination,
never been issued.

            (v) Calculation of Consideration Received. If any Common Stock,
Option or Convertible Security is issued or sold or deemed to have been issued
or sold for cash, the consideration received therefor shall be deemed to be the
amount received by the Corporation therefor (net of discounts, commissions and
related expenses). If any Common Stock, Option or Convertible Security is issued
or sold for a consideration other than cash, the amount of the consideration
other than cash received by the Corporation shall be the fair value of such
consideration, except where such consideration consists of securities, in which
case the amount of consideration received by the Corporation shall be the Market
Price thereof as of the date of receipt. If any Common Stock, Option or
Convertible Security is issued to the owners of the non-surviving entity in
connection with any merger in which the Corporation is the surviving
corporation, the amount of consideration therefor shall be deemed to be the fair
value of such portion of the net assets and business of the non-surviving entity
as is attributable to such Common Stock, Option or Convertible Security, as the
case may be. The fair value of any

                                       7


consideration other than cash and securities shall be determined jointly by the
Corporation and the holders of a majority of the outstanding Series A Preferred.
If such parties are unable to reach agreement within a reasonable period of
time, the fair value of such consideration shall be determined by an independent
appraiser experienced in valuing such type of consideration jointly selected by
the Corporation and the holders of a majority of the outstanding Series A
Preferred. The determination of such appraiser shall be final and binding upon
the parties, and the fees and expenses of such appraiser shall be borne by the
Corporation.

            (vi) Integrated Transactions. In case any Option is issued in
connection with the issue or sale of other securities of the Corporation,
together comprising one integrated transaction in which no specific
consideration is allocated to such Option by the parties thereto, the Option
shall be deemed to have been issued for such consideration as shall be
determined in good faith by the Corporation's Board of Directors.

            (vii) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation or any Subsidiary, and the disposition of any
shares so owned or held shall be considered an issue or sale of Common Stock.

            (viii) Record Date. If the Corporation takes a record of the holders
of Common Stock for the purpose of entitling them (a) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (b) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the issuance
or sale of the shares of Common Stock deemed to have been issued or sold upon
the declaration of such dividend or upon the making of such other distribution
or the date of the granting of such right of subscription or purchase, as the
case may be.

            5D. Subdivision or Combination of Common Stock. If the Corporation
at any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
shall be proportionately reduced, and if the Corporation at any time combines
(by reverse stock split or otherwise) its outstanding shares of Common Stock
into a smaller number of shares, the Conversion Price in effect immediately
prior to such combination shall be proportionately increased.

            5E. Organic Change. Prior to the consummation of any Organic Change,
the Corporation shall make appropriate provisions (in form and substance
satisfactory to the holders of a majority of the Series A Preferred then
outstanding) to ensure that each of the holders of Series A Preferred shall
thereafter have the right to acquire and receive, in lieu of or in addition to
(as the case may be) the shares of Conversion Stock immediately theretofore
acquirable and receivable upon the conversion of such holder's Series A
Preferred, such shares of stock, securities or assets as such holder would have
received in connection with such Organic Change if such holder had converted its
Series A Preferred immediately prior to such Organic Change (plus all declared
and unpaid dividends on the Series A Preferred held by such holder immediately
prior to such Organic Change). In each such case, the Corporation shall also
make appropriate provisions (in form and substance satisfactory to the holders
of a majority of the

                                       8


Series A Preferred then outstanding) to ensure that the provisions of this
Section 5 and Sections 6, 7, 8 and 9 below shall thereafter be applicable to the
Series A Preferred (including, in the case of any such consolidation, merger or
sale in which the successor entity or purchasing entity is other than the
Corporation, an immediate adjustment of the Conversion Price to the value for
the Common Stock reflected by the terms of such consolidation, merger or sale,
and a corresponding immediate adjustment in the number of shares of Conversion
Stock acquirable and receivable upon conversion of the Series A Preferred, if
the value so reflected is less than the Conversion Price in effect immediately
prior to such consolidation, merger or sale). The Corporation shall not effect
any such consolidation, merger or sale, unless prior to the consummation
thereof, the successor entity (if other than the Corporation) resulting from
such consolidation or merger or the entity purchasing such assets assumes by
written instrument (in form and substance satisfactory to the holders of a
majority of the Series A Preferred then outstanding), the obligation to deliver
to each such holder such shares of stock, securities or assets as, in accordance
with the foregoing provisions, such holder may be entitled to acquire.

            5F. Certain Events. If any event occurs of the type contemplated by
the provisions of this Section 5 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Corporation's Board of Directors shall make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of Series A
Preferred; provided that no such adjustment shall increase the Conversion Price
as otherwise determined pursuant to this Section 5 or decrease the number of
shares of Conversion Stock issuable upon conversion of each share of Series A
Preferred.

            5G. Notices.

            (i) Promptly after any adjustment of the Conversion Price, the
Corporation shall give written notice thereof to all holders of Series A
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.

            (ii) The Corporation shall give written notice to all holders of
Series A Preferred at least 20 days prior to the date on which the Corporation
closes its books or takes a record (a) with respect to any dividend or
distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock or (c) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.

            (iii) The Corporation shall also give written notice to the holders
of Series A Preferred at least 20 days prior to the date on which any Organic
Change shall take place.

            5H. Automatic Conversion. All of the outstanding shares of Series A
Preferred shall automatically convert into Conversion Stock upon the written
consent of the holders of at least 66-2/3% of the Series A Preferred then
outstanding. The Corporation shall provide written notice of such automatic
conversion to all holders of Series A Preferred at least three business days
prior to such conversion.

            Section 6. Voting Rights.

                                       9


            6A. General. The holders of the Series A Preferred shall be entitled
to notice of all stockholder meetings in accordance with the Corporation's
Bylaws, and in addition to any circumstances in which the holders of the Series
A Preferred shall be entitled to vote as a separate class under the Delaware
General Corporation Law, the holders of the Series A Preferred shall be entitled
to vote on all matters (including the election of directors) submitted to the
stockholders for a vote together with the holders of Common Stock voting
together as a single class with each share of Common Stock entitled to one vote
per share and each share of Series A Preferred entitled to a number of votes
(including fractions thereof) equal to the number of shares of Common Stock
(including fractions thereof) issuable upon conversion of such share as of the
record date for such vote (or, if no record date is specified, as of the date of
such vote).

            6B. Protective Provisions. So long as any Series A Preferred remains
outstanding, the Corporation shall not, without the vote or written consent of
the holders of a majority of the Series A Preferred then outstanding:

            (i) authorize, issue or enter into any agreement providing for the
issuance (contingent or otherwise) of, (a) any notes or debt securities
containing equity features (including, without limitation, any notes or debt
securities convertible into or exchangeable for capital stock or other equity
securities, any notes or debt securities issued in connection with the issuance
of capital stock or other equity securities or containing profit participation
features), (b) any capital stock or other equity securities (or any securities
convertible into or exchangeable for any capital stock or other equity
securities) which are senior to or on a parity with the Series A Preferred with
respect to the payment of dividends, redemptions or distributions upon
liquidation or otherwise or (c) any additional shares of Series A Preferred;

            (ii) sell or transfer or permit any Subsidiary to sell or transfer
more than 25% of the assets of the Corporation and its Subsidiaries on a
consolidated basis (computed on the basis of the greater of (i) book value in
accordance with generally accepted accounting principles consistently applied or
(ii) fair market value determined in the reasonable good faith judgment of the
Corporation's Board of Directors) in any transaction or series of transactions
(including any sale or other disposition of capital stock of any of the
Corporation's Subsidiaries (whether by merger, consolidation or otherwise), but
excluding sales of inventory in the ordinary course of business);

            (iii) merge or consolidate with any Person or permit any Subsidiary
to merge or consolidate with any Person (other than a merger or consolidation
between or among Wholly-Owned Subsidiaries);

            (iv) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation, any
reorganization into a limited liability company, a partnership or any other
non-corporate entity which is treated as a partnership for federal income tax
purposes, but excluding any stock split, stock dividend, stock combination or
like event);

                                       10


            (v) increase the number of authorized shares of Series A Preferred
or alter, change or otherwise impair or adversely affect the rights, preferences
or powers or the relative preferences and priorities of the holders of the
Series A Preferred; or

            (vi) consummate any Public Offering.

      Section 7. Registration of Transfer. The Corporation shall keep at its
principal office a register for the registration of Series A Preferred. Upon the
surrender of any certificate representing Series A Preferred at such place and
subject to compliance with any applicable securities laws, the Corporation
shall, at the request of the record holder of such certificate, execute and
deliver (at the Corporation's expense) a new certificate or certificates in
exchange therefor representing in the aggregate the number of shares represented
by the surrendered certificate. Each such new certificate shall be registered in
such name and shall represent such number of shares as is requested by the
holder of the surrendered certificate and shall be substantially identical in
form to the surrendered certificate.

      Section 8. Replacement. Upon receipt of evidence reasonably satisfactory
to the Corporation (an affidavit of the registered holder shall be satisfactory)
of the ownership and the loss, theft, destruction or mutilation of any
certificate evidencing shares of Series A Preferred, and in the case of any such
loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to
the Corporation (provided that if the holder is a financial institution or other
institutional investor or investment fund, its own agreement shall be
satisfactory) or, in the case of any such mutilation upon surrender of such
certificate, the Corporation shall (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
shares of such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate, and dividends shall accrue on the Series A Preferred represented by
such new certificate from the date to which dividends have been fully paid on
such lost, stolen, destroyed or mutilated certificate.

      Section 9. Definitions. For purposes of Part C of this ARTICLE FOUR, the
following terms shall have the following meanings:

      "Change in Ownership" means any sale, transfer or issuance or series of
sales, transfers and/or issuances of shares of the Corporation's capital stock
by the Corporation or any holders thereof which results in any Person or group
of Persons (as the term "group" is used under the Securities Exchange Act of
1934, as amended), other than the holders of Common Stock and Series A Preferred
as of the date of the Purchase Agreement, owning capital stock of the
Corporation possessing the voting power (under ordinary circumstances) to elect
a majority of the Corporation's Board of Directors.

      "Common Stock" means the Corporation's Common Stock and any other capital
stock of any class of the Corporation hereafter authorized which is not limited
to a fixed sum or percentage of par or stated value in respect to the rights of
the holders thereof to participate in dividends or in the distribution of assets
upon any liquidation, dissolution or winding up of the Corporation.

                                       11


      "Common Stock Deemed Outstanding" means, at any given time, the number of
shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to subparagraphs 5C(i)
and 5C(ii) hereof whether or not the Options or Convertible Securities are
actually exercisable at such time.

      "Conversion Stock" means shares of Common Stock; provided that if there is
a change such that the securities issuable upon conversion of the Series A
Preferred are issued by an entity other than the Corporation or there is a
change in the type or class of securities so issuable, then the term "Conversion
Stock" shall mean one share of the security issuable upon conversion of the
Series A Preferred if such security is issuable in shares, or shall mean the
smallest unit in which such security is issuable if such security is not
issuable in shares.

      "Convertible Securities" means any stock or securities directly or
indirectly convertible into or exchangeable for Common Stock.

      "Fundamental Change" means (a) any sale or transfer of more than 50% of
the assets of the Corporation and its Subsidiaries on a consolidated basis
(computed on the basis of the greater of (i) book value in accordance with
generally accepted accounting principles consistently applied or (ii) fair
market value determined in the reasonable good faith judgment of the
Corporation's Board of Directors) in any transaction or series of related
transactions (other than sales of inventory in the ordinary course of business)
and (b) any merger or consolidation to which the Corporation is a party, except
for (x) a merger which is effected solely to change the state of incorporation
of the Corporation or (y) a merger in which the Corporation is the surviving
corporation, the terms of the Series A Preferred are not changed or altered in
any respect, the Series A Preferred is not exchanged for cash, securities or
other property, and after giving effect to such merger, the holders of Common
Stock and Series A Preferred as of the date of the Purchase Agreement shall
continue to own the Corporation's outstanding capital stock possessing the
voting power (under ordinary circumstances) to elect a majority of the
Corporation's Board of Directors.

      "Junior Securities" means any capital stock or other equity securities of
the Corporation, except for the Series A Preferred.

      "Liquidation Value" of any share of Series A Preferred as of any
particular date shall be equal to $100.00.

      "Market Price" of any security means the average of the closing prices of
such security's sales on the principal securities exchanges on which such
security may at the time be listed, or, if there has been no sales on any such
exchange on any day, the average of the highest bid and lowest asked prices on
all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the representative bid and asked prices quoted in
the NASDAQ System as of 4:00 P.M., New York time, or, if on any day such
security is not quoted in the NASDAQ System, the average of the highest bid and
lowest asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged over a period of 21 days
consisting of the day prior to the day as of which "Market Price" is being
determined and the 20

                                       12


consecutive business days prior to such day. If at any time such security is not
listed on any securities exchange or quoted in the NASDAQ System or the
over-the-counter market, the "Market Price" shall be the fair value thereof
determined jointly by the Corporation and the holders of a majority of the
Series A Preferred. If such parties are unable to reach agreement within a
reasonable period of time, such fair value shall be determined by an independent
appraiser experienced in valuing securities jointly selected by the Corporation
and the holders of a majority of the Series A Preferred. The determination of
such appraiser shall be final and binding upon the parties, and the Corporation
shall pay the fees and expenses of such appraiser.

      "Options" means any rights, warrants or options to subscribe for or
purchase Common Stock or Convertible Securities.

      "Organic Change" means any recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or substantially all of the
Corporation's assets or other transaction, in each case which is effected in
such a manner that the holders of Common Stock are entitled to receive (either
directly or upon subsequent liquidation) stock, securities or assets with
respect to or in exchange for Common Stock.

      "Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.

      "Public Offering" means any offering by the Corporation of its equity or
debt securities to the public pursuant to an effective registration statement
under the Securities Act of 1933, as then in effect, or any comparable statement
under any similar federal statute then in force.

      "Stockholders Agreement" means that certain Stockholders Agreement, dated
on or about September 30, 2003, by and among the Corporation and the other
Persons signatory thereto (as the same may be amended from time to time in
accordance with its terms).

      "Subsidiary" means, with respect to any Person, any corporation, limited
liability company, partnership, association or other business entity of which
(i) if a corporation, a majority of the total voting power of shares of stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by that Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of the limited liability
company, partnership, association or other business entity gains or losses or
shall be or control the managing general partner of such limited liability
company, partnership, association or other business entity.

                                       13


      "Wholly-Owned Subsidiary" means, with respect to any Person, a Subsidiary
of which all of the issued and outstanding capital stock or other ownership
interests are owned by such Person or another Wholly-Owned Subsidiary of such
Person.

      Section 10. Amendment and Waiver. No amendment, modification or waiver
shall be binding or effective with respect to any provision of Sections 1 to 11
of this Subdivision B without the prior written consent of the holders of a
majority of the Series A Preferred outstanding at the time such action is taken
(in which case any such amendment, modification or waiver shall be binding and
effective with respect to all of the holders of the Series A Preferred);
provided that no change in the terms hereof may be accomplished by merger or
consolidation of the Corporation with another Person unless the Corporation has
obtained the prior written consent of the holders of a majority of the Series A
Preferred then outstanding.

      Section 11. Notices. All notices, demands or other communications to be
given or delivered hereunder shall be in writing and shall be deemed to have
been given when delivered personally to the recipient or one (1) business day
after being sent to the recipient by reputable overnight courier service
(charges prepaid) or five (5) business days after being mailed to the recipient
by certified or registered mail, return receipt requested and postage prepaid.
Such notices, demands and other communications shall be sent (i) to the
Corporation, at its principal executive offices and (ii) to any stockholder, at
such holder's address as it appears in the stock records of the Corporation
(unless otherwise indicated by any such holder).

                              PART D. COMMON STOCK

      Section 1. General. Except as (1) otherwise required by law or (2)
expressly provided in this Certificate of Incorporation, each share of Common
Stock shall have the same powers, rights and privileges and shall rank equally,
share ratably and be identical in all respects as to all matters.

      Section 2. Voting Rights. Except as otherwise provided by the Delaware
General Corporation Law or this Certificate of Incorporation and subject to the
rights of holders of any series of Preferred Stock, all of the voting power of
the stockholders of the Corporation shall be vested in the holders of the Common
Stock, and each holder of Common Stock shall have one vote for each share held
by such holder on all matters voted upon by the stockholders of the Corporation.

      Section 3. Dividends. Subject to the rights of the holders of Preferred
Stock, and to the other provisions of this Certificate of Incorporation, holders
of Common Stock shall be entitled to receive equally, on a per share basis, such
dividends and other distributions in cash, securities or other property of the
Corporation as may be declared thereon by the Board of Directors from time to
time out of assets or funds of the Corporation legally available therefor.

      Section 4. Liquidation Rights. In the event of any liquidation,
dissolution or winding up of the affairs of the Corporation, whether voluntary
or involuntary, after payment or provision for

                                       14


payment of the Corporation's debts and subject to the rights of the holders of
shares of Preferred Stock upon such dissolution, liquidation or winding up, the
remaining net assets of the Corporation shall be distributed among holders of
shares of Common Stock equally on a per share basis. A merger or consolidation
of the Corporation with or into any other corporation or other entity, or a sale
or conveyance of all or any part of the assets of the Corporation (which shall
not in fact result in the liquidation of the Corporation and the distribution of
assets to its stockholders) shall not be deemed to be a voluntary or involuntary
liquidation or dissolution or winding up of the Corporation within the meaning
of this Section 4.

      Section 5. Conversion Rights. The Common Stock shall not be convertible
into, or exchangeable for, shares of any other class or classes or of any other
series of the same class of the Corporation's capital stock.

      Section 6. Preemptive Rights. No holder of Common Stock shall have any
preemptive rights with respect to the Common Stock or any other securities of
the Corporation, or to any obligations convertible (directly or indirectly) into
securities of the Corporation whether now or hereafter authorized.

                                  ARTICLE FIVE
                                    DURATION

      The Corporation is to have perpetual existence.

                                   ARTICLE SIX
                               BOARD OF DIRECTORS

      Section 1. Number of Directors. Subject to any rights of the holders of
any class or series of Preferred Stock to elect additional directors under
specified circumstances, the number of directors which shall constitute the
Board of Directors shall be fixed from time to time by resolution adopted by the
affirmative vote of a majority of the total number of directors then in office.

      Section 2. Election and Term of Office. The directors shall be elected by
a plurality of the votes of the shares present in person or represented by proxy
at the meeting and entitled to vote in the election of directors; provided that,
whenever the holders of any class or series of capital stock of the Corporation
are entitled to elect one or more directors pursuant to the provisions of this
Certificate of Incorporation (including, but not limited to, any duly authorized
certificate of designation), such directors shall be elected by a plurality of
the votes of such class or series present in person or represented by proxy at
the meeting and entitled to vote in the election of such directors. The
directors shall be elected and shall hold office only in this manner, except as
provided in Section 3 of this ARTICLE SIX. Each director shall hold office until
a successor is duly elected and qualified or until his or her earlier death,
resignation or removal. Elections of directors need not be by written ballot
unless the Bylaws of the Corporation shall so provide.

                                       15


      Section 3. Newly-Created Directorships and Vacancies. Subject to the
rights of the holders of any series of Preferred Stock then outstanding, newly
created directorships resulting from any increase in the number of directors or
any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or any other cause may be
filled, so long as there is at least one remaining director, only by the Board
of Directors, provided that a quorum is then in office and present, or by a
majority of the directors then in office, if less than a quorum is then in
office, or by the sole remaining director. Directors elected to fill a newly
created directorship or other vacancies shall hold office until such director's
successor has been duly elected and qualified or until his or her earlier death,
resignation or removal as hereinafter provided.

      Section 4. Removal of Directors. Subject to the rights of the holders of
any series of Preferred Stock then outstanding, any director may be removed from
office at any time for cause, at a meeting called for that purpose, but only by
the affirmative vote of the holders of at least 66-2/3% of the voting power of
all outstanding shares of Common Stock entitled to vote generally in the
election of directors, voting together as a single class.

      Section 5. Rights of Holders of Preferred Stock. Notwithstanding the
provisions of this ARTICLE SIX, whenever the holders of one or more series of
Preferred Stock issued by the Corporation shall have the right, voting
separately or together by series, to elect directors at an annual or special
meeting of stockholders, the election, term of office, filling of vacancies and
other features of such directorship shall be governed by the rights of such
Preferred Stock as set forth in the certificate of designations governing such
series.

      Section 6. Bylaws. The Board of Directors is expressly authorized to
adopt, amend or repeal the bylaws of the Corporation. Notwithstanding the
foregoing and anything contained in this Amended and Restated Certificate of
Incorporation to the contrary, the bylaws of the Corporation shall not be
amended or repealed by the stockholders, and no provision inconsistent therewith
shall be adopted by the stockholders, without the affirmative vote of the
holders of 66-2/3% of the voting power of all outstanding shares of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class.

                                  ARTICLE SEVEN
                   LIMITATION OF LIABILITY AND INDEMNIFICATION

      Section 1. Limitation of Liability.

      (a) To the fullest extent permitted by the Delaware General Corporation
Law as it now exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than permitted prior thereto), no
director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages arising from a breach of fiduciary duty owed
to the Corporation or its stockholders.

                                       16


      (b) Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.

      Section 2. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved (including
involvement as a witness) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "proceeding"), by reason of the
fact that he or she is or was a director or officer of the Corporation or, while
a director or officer of the Corporation, is or was serving at the request of
the Corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan (an "indemnitee"), whether the basis of
such proceeding is alleged action in an official capacity as a director or
officer or in any other capacity while serving as a director or officer, shall
be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), against all expense, liability and loss
(including attorneys' fees and related disbursements, judgments, fines, excise
taxes or penalties under the Employee Retirement Income Security Act of 1974, as
amended from time to time ("ERISA"), penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such indemnitee in connection
therewith and such indemnification shall continue as to an indemnitee who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators; provided,
however, that, except as provided in Section 3 of this ARTICLE SEVEN with
respect to proceedings to enforce rights to indemnification, the Corporation
shall indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part thereof)
was authorized by the Board of Directors of the Corporation. The right to
indemnification conferred in this Section 2 of this ARTICLE SEVEN shall be a
contract right and shall include the obligation of the Corporation to pay the
expenses incurred in defending any such proceeding in advance of its final
disposition (an "advance of expenses"); provided, however, that an advance of
expenses incurred by an indemnitee shall be made only upon delivery to the
Corporation of an undertaking (an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (a "final adjudication") that such indemnitee is not entitled to be
indemnified for such expenses under this Section 2 or otherwise. The Corporation
may, by action of its Board of Directors, provide indemnification to employees
and agents of the Corporation with the same or lesser scope and effect as the
foregoing indemnification of directors and officers.

      Section 3. Procedure for Indemnification. Any indemnification of a
director or officer of the Corporation or advance of expenses under Section 2 of
this ARTICLE SEVEN shall be made promptly, and in any event within forty-five
days (or, in the case of an advance of expenses, twenty days, provided that the
director or officer has delivered the undertaking contemplated by Section 2 of
this ARTICLE SEVEN), upon the written request of the director or officer. If a
determination by the Corporation that the director or officer is entitled to
indemnification pursuant to this ARTICLE SEVEN is required, and the Corporation
fails to

                                       17


respond within sixty days to a written request for indemnity, the Corporation
shall be deemed to have approved the request. If the Corporation denies a
written request for indemnification or advance of expenses, in whole or in part,
or if payment in full pursuant to such request is not made within forty-five
days (or, in the case of an advance of expenses, twenty days, provided that the
director or officer has delivered the undertaking contemplated by Section 2 of
this ARTICLE SEVEN), the right to indemnification or advances as granted by this
ARTICLE SEVEN shall be enforceable by the director or officer in any court of
competent jurisdiction. Such person's costs and expenses incurred in connection
with successfully establishing his or her right to indemnification, in whole or
in part, in any such action shall also be indemnified by the Corporation. It
shall be a defense to any such action (other than an action brought to enforce a
claim for the advance of expenses where the undertaking required pursuant to
Section 2 of this ARTICLE SEVEN, if any, has been tendered to the Corporation)
that the claimant has not met the standards of conduct which make it permissible
under the Delaware General Corporation Law for the Corporation to indemnify the
claimant for the amount claimed, but the burden of such defense shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct. The procedure for indemnification of other employees and agents for
whom indemnification is provided pursuant to Section 2 of this ARTICLE SEVEN
shall be the same procedure set forth in this Section 3 for directors or
officers, unless otherwise set forth in the action of the Board of Directors
providing indemnification for such employee or agent.

      Section 4. Insurance. The Corporation may purchase and maintain insurance
on its own behalf and on behalf of any person who is or was a director, officer,
employee or agent of the Corporation or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss asserted against him or her and incurred by him or her in any
such capacity, whether or not the Corporation would have the power to indemnify
such person against such expenses, liability or loss under the Delaware General
Corporation Law.

      Section 5. Service for Subsidiaries. Any person serving as a director,
officer, employee or agent of another corporation, partnership, limited
liability company, joint venture or other enterprise, at least 50% of whose
equity interests are owned by the Corporation (a "subsidiary" for this ARTICLE
SEVEN) shall be conclusively presumed to be serving in such capacity at the
request of the Corporation.

      Section 6. Reliance. Persons who after the date of the adoption of this
provision become or remain directors or officers of the Corporation or who,
while a director or officer of the Corporation, become or remain a director,
officer, employee or agent of a subsidiary, shall be conclusively presumed to
have relied on the rights to indemnity, advance of expenses and other rights
contained in this ARTICLE SEVEN in entering into or continuing such service. The
rights

                                       18


to indemnification and to the advance of expenses conferred in this ARTICLE
SEVEN shall apply to claims made against an indemnitee arising out of acts or
omissions which occurred or occur both prior and subsequent to the adoption
hereof.

      Section 7. Non-Exclusivity of Rights. The rights to indemnification and to
the advance of expenses conferred in this ARTICLE SEVEN shall not be exclusive
of any other right which any person may have or hereafter acquire under this
Certificate of Incorporation or under any statute, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.

      Section 8. Merger or Consolidation. For purposes of this ARTICLE SEVEN,
references to the "Corporation" shall include, in addition to the resulting
Corporation, any constituent Corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent Corporation, or is or
was serving at the request of such constituent Corporation as a director,
officer, employee or agent of another Corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this ARTICLE
SEVEN with respect to the resulting or surviving Corporation as he or she would
have with respect to such constituent Corporation if its separate existence had
continued.

      Section 9. Savings Clause. If this ARTICLE SEVEN or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnify each person entitled to
indemnification under Section 2 of this ARTICLE SEVEN as to all expense,
liability and loss (including attorneys' fees and related disbursements,
judgments, fines, ERISA excise taxes and penalties, penalties and amounts paid
or to be paid in settlement) actually and reasonably incurred or suffered by
such person and for which indemnification is available to such person pursuant
to this ARTICLE SEVEN to the full extent permitted by any applicable portion of
this ARTICLE SEVEN that shall not have been invalidated and to the full extent
permitted by applicable law.

                                  ARTICLE EIGHT
           ACTION BY WRITTEN CONSENT/SPECIAL MEETINGS OF STOCKHOLDERS

      For so long as the Corporation's Common Stock is registered under Section
12 of the Securities Exchange Act of 1934, as amended: (i) the stockholders of
the Corporation may not take any action by written consent in lieu of a meeting,
and must take any actions at a duly called annual or special meeting of
stockholders and the power of stockholders to consent in writing without a
meeting is specifically denied and (ii) special meetings of stockholders of the
Corporation may be called only by either the Board of Directors pursuant to a
resolution adopted by the affirmative vote of the majority of the total number
of directors then in office or by the chief executive officer of the
Corporation.

                                       19


                                  ARTICLE NINE
                              CERTAIN TRANSACTIONS

      Section 1. Certain Acknowledgments. In recognition and anticipation that:
(i) the directors, officers, members, managers and/or employees of Summit
Partners, LLC, Summit Master Company, LLC or affiliates and investment funds of
such entities (collectively, "Summit") may serve as directors and/or officers of
the Corporation, (ii) Summit may engage in the same or similar activities or
related lines of business as those in which the Corporation, directly or
indirectly, may engage and/or other business activities that overlap with or
compete with those in which the Corporation, directly or indirectly, may engage,
and (iii) that the Corporation and its subsidiaries may engage in material
business transactions with Summit and that the Corporation is expected to
benefit therefrom, the provisions of this ARTICLE NINE are set forth to regulate
and define the conduct of certain affairs of the Corporation as they may involve
Summit and its directors, officers, members, managers and/or employees, and the
powers, rights, duties and liabilities of the Corporation and its officers,
directors and stockholders in connection therewith.

      Section 2. Competition and Corporate Opportunities. Summit shall not have
any duty to refrain from engaging directly or indirectly in the same or similar
business activities or lines of business as the Corporation or any of its
subsidiaries. In the event that Summit acquires knowledge of a potential
transaction or matter which may be a corporate opportunity for itself and the
Corporation or any of its subsidiaries, neither the Corporation nor any of its
subsidiaries shall have any expectancy in such corporate opportunity, and Summit
shall not have any duty to communicate or offer such corporate opportunity to
the Corporation or any of its subsidiaries and may pursue or acquire such
corporate opportunity for itself or direct such corporate opportunity to another
person.

      Section 3. Allocation of Corporate Opportunities. In the event that a
director or officer of the Corporation who is also a director, officer, member,
manager and/or employee of Summit acquires knowledge of a potential transaction
or matter which may be a corporate opportunity for the Corporation or any of its
subsidiaries and Summit, neither the Corporation nor any of its subsidiaries
shall have any expectancy in such corporate opportunity unless such corporate
opportunity is expressly offered to such person solely in his or her capacity as
a director or officer of the Corporation.

      Section 4. Certain Matters Deemed Not Corporate Opportunities. In addition
to and notwithstanding the foregoing provisions of this ARTICLE NINE, a
corporate opportunity shall not be deemed to belong to the Corporation if it is
a business opportunity that the Corporation is not financially able or
contractually permitted or legally able to undertake, or that is, from its
nature, not in the line of the Corporation's business or is of no practical
advantage to it or that is one in which the Corporation has no interest or
reasonable expectancy.

      Section 5. Agreements and Transactions with Summit. In the event that
Summit enters into an agreement or transaction with the Corporation or any of
its subsidiaries, a director or officer of the Corporation who is also a
director, officer, member, manager and/or employee of

                                       20


Summit shall have fully satisfied and fulfilled the fiduciary duty of such
director or officer to the Corporation and its stockholders with respect to such
agreement or transaction, if:

            (a) The agreement or transaction was approved, after being made
      aware of the material facts of the relationship between each of the
      Corporation or subsidiary thereof and Summit and the material terms and
      facts of the agreement or transaction, by (i) an affirmative vote of a
      majority of the members of the Board of Directors of the Corporation who
      are not persons or entities with a material financial interest in the
      agreement or transaction ("Interested Persons") or (ii) an affirmative
      vote of a majority of the members of a committee of the Board of Directors
      of the Corporation consisting of members who are not Interested Persons;

            (b) The agreement or transaction was fair to the Corporation at the
      time the agreement or transaction was entered into by the Corporation; or

            (c) The agreement or transaction was approved by an affirmative vote
      of a majority of the shares of the Corporation's Common Stock entitled to
      vote, excluding Summit and any Interested Person; provided that if no
      Common Stock is then outstanding a majority of the voting power of the
      Corporation's capital stock entitled to vote, excluding Summit and any
      Interested Person.

      Section 6. Amendment of this Article. Notwithstanding anything to the
contrary elsewhere contained in this Certificate of Incorporation, the
affirmative vote of the holders of at least 80% of the voting power of all
shares of Common Stock then outstanding, voting together as a single class,
shall be required to alter, amend or repeal, or to adopt any provision
inconsistent with, this ARTICLE NINE.

      Section 7. Deemed Notice. Any person or entity purchasing or otherwise
acquiring any interest in any shares of the Corporation shall be deemed to have
notice or and to have consented to the provisions of this ARTICLE NINE.

                                   ARTICLE TEN
                                    AMENDMENT

      The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed herein and by the laws of the state of Delaware, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding any other provision of this Certificate of
Incorporation or the Bylaws of the Corporation, and notwithstanding the fact
that a lesser percentage or separate class vote may be specified by law, this
Certificate of Incorporation, the Bylaws of the Corporation or otherwise, but in
addition to any affirmative vote of the holders of any particular class or
series of the capital stock required by law, this Certificate of Incorporation,
the Bylaws of the Corporation or otherwise, the affirmative vote of the holders
of at least 66-2/3% of the voting power of all outstanding shares of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to adopt any

                                       21


provision inconsistent with, to amend or repeal any provision of, or to adopt a
bylaw inconsistent with, ARTICLES SIX, SEVEN, EIGHT and TEN of this Certificate
of Incorporation.

                                 ARTICLE ELEVEN
               SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW

      The Corporation expressly elects to be governed by Section 203 of the
Delaware General Corporation Law.

                                   * * * * * *

                                       22

EX-3.2

                                                                     EXHIBIT 3.2

                          AMENDED AND RESTATED BY-LAWS

                                       OF

                       SEABRIGHT INSURANCE HOLDINGS, INC.

                             A Delaware corporation
                         (Adopted as of January , 2005)

                                    ARTICLE I

                                     OFFICES

      Section 1. Registered Office. The registered office of Seabright Insurance
Holdings, Inc. (the "Corporation") in the State of Delaware shall be located at
9 East Loockerman Street, #1B, in the City of Dover, County of Kent, 19901. The
name of the Corporation's registered agent at such address shall be National
Registered Agents, Inc. The registered office and/or registered agent of the
Corporation may be changed from time to time by action of the Board of Directors
of the Corporation (the "Board of Directors").

      Section 2. Other Offices. The Corporation may also have offices at such
other places, both within and without the State of Delaware, as the Board of
Directors may from time to time determine or the business of the Corporation may
require.

                                   ARTICLE II

                            MEETINGS OF STOCKHOLDERS

      Section 1. Place of Meetings. The Board of Directors may designate any
place, either within or without the State of Delaware, as the place of meeting
for any annual meeting or for any special meeting.

      Section 2. Annual Meeting. An annual meeting of the stockholders shall be
held each year at such time as is specified by the Board of Directors. At the
annual meeting, stockholders shall elect directors and transact such other
business as properly may be brought before the annual meeting pursuant to
Section 12 of ARTICLE II hereof.

      Section 3. Special Meetings. Special meetings of the stockholders may only
be called in the manner provided in the Corporation's certificate of
incorporation as then in effect (the "Certificate of Incorporation").

      Section 4. Notice of Meetings. Whenever stockholders are required or
permitted to take action at a meeting, written notice of each annual and special
meeting of stockholders stating the date, time and place of the meeting, and, in
the case of a special meeting, the purpose or purposes for which the meeting is
called, shall be given to each stockholder of record entitled to vote thereat
not less than 10 nor more than 60 days before the date of the meeting. Business



transacted at any special meeting of stockholders shall be limited to the
purposes stated in the notice. Notice shall be given personally or by mail and,
if by mail, shall be sent in a postage prepaid envelope, addressed to the
stockholder at his, her or its address as the same appears on the records of the
Corporation. Notice by mail shall be deemed given at the time when the same
shall be deposited in the United States mail, postage prepaid. Notice of any
meeting shall not be required to be given to any person who attends such
meeting, except when such person attends the meeting in person or by proxy for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened, or who, either before or after the meeting, shall submit a signed
written waiver of notice, in person or by proxy. Neither the business to be
transacted at, nor the purpose of, an annual or special meeting of stockholders
need be specified in any written waiver of notice.

      Section 5. List of Stockholders. The officer having charge of the stock
ledger of the Corporation shall prepare and make, at least 10 days before each
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, showing the address of and the
number of shares registered in the name of each stockholder. Such list shall be
open to the examination of any stockholder, for any purpose germane to the
meeting for a period of at least 10 days prior to the meeting: (a) on a
reasonably accessible electronic network, provided that the information required
to gain access to such list is provided with the notice of the meeting, or (b)
during ordinary business hours, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.

      Section 6. Quorum. The holders of a majority of the outstanding shares of
capital stock entitled to vote, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders, except as otherwise
provided by the General Corporation Law of the State of Delaware or by the
Certificate of Incorporation. If a quorum is not present, the holders of a
majority of the shares present in person or represented by proxy at the meeting,
and entitled to vote at the meeting, may adjourn the meeting to another time
and/or place. When a specified item of business requires a vote by a class or
series (if the Corporation shall then have outstanding shares of more than one
class or series) voting as a class or series, the holders of a majority of the
shares of such class or series shall constitute a quorum (as to such class or
series) for the transaction of such item of business.

      Section 7. Adjourned Meetings. When a meeting is adjourned to another time
and place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting the Corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than 30
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.

      Section 8. Vote Required. When a quorum is present, the affirmative vote
of the majority of shares present in person or represented by proxy at the
meeting and entitled to vote

                                     - 2 -


on the subject matter shall be the act of the stockholders, unless by express
provisions of an applicable law or of the Certificate of Incorporation a
different vote is required, in which case such express provision shall govern
and control the decision of such question.

      Section 9. Voting Rights. Except as otherwise provided by the General
Corporation Law of the State of Delaware, the Certificate of Incorporation, the
certificate of designation relating to any outstanding class or series of
preferred stock or these By-laws, every stockholder shall at every meeting of
the stockholders be entitled to one vote in person or by proxy for each share of
capital stock held by such stockholder.

      Section 10. Proxies. Each stockholder entitled to vote at a meeting of
stockholders may authorize another person or persons to act for him or her by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period. A duly executed proxy shall
be irrevocable if it states that it is irrevocable and if, and only as long as,
it is coupled with an interest sufficient in law to support an irrevocable
power. A proxy may be made irrevocable regardless of whether the interest with
which it is coupled is an interest in the stock itself or an interest in the
Corporation generally. Any proxy is suspended when the person executing the
proxy is present at a meeting of stockholders and elects to vote, except that
when such proxy is coupled with an interest and the fact of the interest appears
on the face of the proxy, the agent named in the proxy shall have all voting and
other rights referred to in the proxy, notwithstanding the presence of the
person executing the proxy. At each meeting of the stockholders, and before any
voting commences, all proxies filed at or before the meeting shall be submitted
to and examined by the secretary or a person designated by the secretary, and no
shares may be represented or voted under a proxy that has been found to be
invalid or irregular.

      Section 11. Advance Notice Provisions for Election of Directors.

            (a) Only persons who are nominated in accordance with the procedures
set forth in these By-laws shall be eligible to serve as directors. Nominations
of persons for election to the Board of Directors of the Corporation may be made
at a meeting of stockholders (i) by or at the direction of the Board of
Directors (or any duly authorized committee thereof) or (ii) by any stockholder
of the Corporation who was a stockholder of record at the time of giving of
notice provided for in this By-law, who is entitled to vote generally in the
election of directors at the meeting and who shall have complied with the notice
procedures set forth below in Section 11(b).

            (b) In order for a stockholder to nominate a person for election to
the Board of Directors of the Corporation at a meeting of stockholders, such
stockholder shall have delivered timely notice of such stockholder's intent to
make such nomination in writing to the secretary of the Corporation. To be
timely, a stockholder's notice to the secretary must be delivered to or mailed
and received at the principal executive offices of the Corporation (i) in the
case of an annual meeting, not less than 90 nor more than 120 days prior to the
date of the first anniversary of the previous year's annual meeting; provided,
however, that in the event the annual meeting is scheduled to be held on a date
more than 30 days prior to or delayed by more than 60 days after such
anniversary date, notice by the stockholder in order to be timely must be so
received not

                                     - 3 -


later than the close of business on the 10th day following the earlier of the
day on which notice of the date of the meeting was mailed or public disclosure
of the meeting was made and (ii) in the case of a special meeting at which
directors are to be elected, not later than the close of business on the 10th
day following the earlier of the day on which notice of the date of the meeting
was mailed or public disclosure of the meeting was made. To be in proper form, a
stockholder's notice shall set forth (i) as to each person whom the stockholder
proposes to nominate for election as a director at such meeting (A) the name,
age, business address and residence address of the person, (B) the principal
occupation or employment of the person, (C) the class or series and number of
shares of capital stock of the Corporation which are owned beneficially or of
record by the person and (D) any other information relating to the person that
would be required to be disclosed in a proxy statement or other filings required
to be made in connection with solicitations of proxies for election of directors
pursuant to Regulatoin 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"); and (ii) as to the stockholder giving the notice (A) the
name and record address of such stockholder, (B) the class or series and number
of shares of capital stock of the Corporation which are owned beneficially or of
record by such stockholder, (C) a description of all arrangements or
understandings between such stockholder and each proposed nominee and any other
person or persons (including their names) pursuant to which the nomination(s)
are to be made by such stockholder, (D) a representation that such stockholder
intends to appear in person or by proxy at the meeting to nominate the persons
named in its notice and (E) any other information relating to such stockholder
that would be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for election of
directors pursuant to Regulation 14A under the Exchange Act. Such notice must be
accompanied by a written consent of each proposed nominee to being named as a
nominee and to serve as a director if elected. For purposes of this section,
"public disclosure" shall mean disclosure in a Current Report on Form 8-K (or
any successor form) or in a press release reported by Dow Jones News Service,
Associated Press or a comparable national news service.

            (c) No person shall be eligible to serve as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
section. The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by this section, and if he should so determine, he shall
so declare to the meeting and the defective nomination shall be disregarded. A
stockholder seeking to nominate a person to serve as a director must also comply
with all applicable requirements of the Exchange Act, and the rules and
regulations thereunder with respect to the matters set forth in this section.

      Section 12. Advance Notice Provisions for Other Business to be Conducted
at an Annual Meeting. At an annual meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be (i)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors (or any duly authorized committee
thereof), (ii) brought before the meeting by or at the direction of the Board of
Directors (or any duly authorized committee thereof) or (iii) otherwise properly
brought before the meeting by a stockholder. For business to be properly brought
before an annual meeting by a stockholder, the stockholder must have given
timely notice thereof in writing to the secretary of

                                     - 4 -


the Corporation. To be timely, a stockholder's notice to the secretary must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 90 nor more than 120 days prior to the date of the
first anniversary of the previous year's annual meeting; provided, however, that
in the event the annual meeting is scheduled to be held on a date more than 30
days prior to or delayed by more than 60 days after such anniversary date,
notice by the stockholder in order to be timely must be so received not later
than the 10th day following the day on which notice of the date of the annual
meeting was mailed or public disclosure of the date of the annual meeting was
made, whichever occurs first. To be in proper form, a stockholder's notice to
the secretary shall set forth as to each matter the stockholder proposes to
bring before the annual meeting (i) a brief description of the business desired
to be brought before the annual meeting, (ii) the name and address, as they
appear on the Corporation's books, of the stockholder proposing such business,
(iii) the class and number of shares of the Corporation which are beneficially
owned by the stockholder and (iv) any material interest of the stockholder in
such business. Notwithstanding anything in these By-laws to the contrary, no
business shall be conducted at an annual meeting except in accordance with the
procedures set forth in this section. The presiding officer of an annual meeting
shall, if the facts warrant, determine and declare to the meeting that business
was not properly brought before the meeting and in accordance with the
provisions of this section; if he should so determine, he shall so declare to
the meeting and any such business not properly brought before the meeting shall
not be transacted. For purposes of this section, "public disclosure" shall mean
disclosure in a Current Report on Form 8-K (or any successor form) or in a press
release reported by Dow Jones News Service, Associated Press or a comparable
national news service. Nothing in this section shall be deemed to affect any
rights of stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.

      Section 13. Fixing a Record Date for Stockholder Meetings. In order that
the Corporation may determine the stockholders entitled to notice of or to vote
at any meeting of stockholders or any adjournment thereof, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than 60 nor less than 10 days
before the date of such meeting. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be the close of business on the next
day preceding the day on which notice is first given, or, if notice is waived,
at the close of business on the day next preceding the day on which the meeting
is held. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.

      Section 14. Fixing a Record Date for Other Purposes. In order that the
Corporation may determine the stockholders entitled to receive payment of any
dividend or other distribution or allotment or any rights or the stockholders
entitled to exercise any rights in respect of any change, conversion or exchange
of stock, or for the purposes of any other lawful action, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted, and which record date shall be
not more than 60 days prior to such action. If no record date is fixed, the
record date for determining

                                     - 5 -


stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.

                                   ARTICLE III

                                    DIRECTORS

      Section 1. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors. In
addition to such powers as are herein and in the Certificate of Incorporation
expressly conferred upon it, the Board of Directors shall have and may exercise
all the powers of the Corporation, subject to the provisions of the laws of
Delaware, the Certificate of Incorporation and these By-laws.

      Section 2. Annual Meetings. The annual meeting of the Board of Directors
shall be held without other notice than this By-law immediately after, and at
the same place as, the annual meeting of stockholders.

      Section 3. Regular Meetings and Special Meetings. Regular meetings, other
than the annual meeting, of the Board of Directors may be held without notice at
such time and at such place as shall from time to time be determined by
resolution of the Board of Directors. Special meetings of the Board of Directors
may be called by the chairman of the board, the president (if the president is a
director) or, upon the written request of at least a majority of the directors
then in office.

      Section 4. Notice of Meetings. Notice of regular meetings of the Board of
Directors need not be given except as otherwise required by law or these
By-laws. Notice of each special meeting of the Board of Directors, and of each
regular and annual meeting of the Board of Directors for which notice shall be
required, shall be given by the secretary as hereinafter provided in this
Section 4, in which notice shall be stated the time and place of the meeting.
Except as otherwise required by these By-laws, such notice need not state the
purposes of such meeting. Notice of any special meeting, and of any regular or
annual meeting for which notice is required, shall be given to each director at
least (a) 24 hours before the meeting if by telephone or by being personally
delivered or sent by telex, telecopy, email or similar means or (b) 5 days
before the meeting if delivered by mail to the director's residence or usual
place of business. Such notice shall be deemed to be delivered when deposited in
the United States mail so addressed, with postage prepaid, or when transmitted
if sent by telex, telecopy, email or similar means. Neither the business to be
transacted at, nor the purpose of, any special meeting of the Board of Directors
need be specified in the notice or waiver of notice of such meeting. Any
director may waive notice of any meeting by a writing signed by the director
entitled to the notice and filed with the minutes or corporate records.

      Section 5. Waiver of Notice and Presumption of Assent. Any member of the
Board of Directors or any committee thereof who is present at a meeting shall be
conclusively presumed to have waived notice of such meeting except when such
member attends for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. Such member shall be conclusively presumed to

                                     - 6 -


have assented to any action taken unless his or her dissent shall be entered in
the minutes of the meeting or unless his or her written dissent to such action
shall be filed with the person acting as the secretary of the meeting before the
adjournment thereof or shall be forwarded by registered mail to the secretary of
the Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to any member who voted in favor of such action.

      Section 6. Chairman of the Board, Quorum, Required Vote and Adjournment.
The Board of Directors shall elect, by the affirmative vote of a majority of the
total number of directors then in office, a chairman of the board, who shall
preside at all meetings of the stockholders and Board of Directors at which he
or she is present and shall have such powers and perform such duties as the
Board of Directors may from time to time prescribe. If the chairman of the board
is not present at a meeting of the stockholders or the Board of Directors, the
president (if the president is a director and is not also the chairman of the
board) shall preside at such meeting, and, if the president is not present at
such meeting, a majority of the directors present at such meeting shall elect
one of their members to so preside. A majority of the total number of directors
then in office shall constitute a quorum for the transaction of business. Unless
by express provision of an applicable law, the Certificate of Incorporation or
these By-laws a different vote is required, the vote of a majority of directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.

      Section 7. Committees. The Board of Directors (i) may, by resolution
passed by a majority of the entire Board of Directors, designate one or more
committees, including an executive committee, consisting of one or more of the
directors of the Corporation, and (ii) shall during such period of time as any
securities of the Corporation are listed on NASDAQ, by resolution passed by a
majority of the entire Board of Directors, designate all committees required by
the rules and regulations of NASDAQ. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. Except to the extent
restricted by applicable law or the Certificate of Incorporation, each such
committee, to the extent provided in the resolution creating it, shall have and
may exercise all the powers and authority of the Board of Directors. Each such
committee shall serve at the pleasure of the Board of Directors as may be
determined from time to time by resolution adopted by the Board of Directors or
as required by the rules and regulations of NASDAQ, if applicable. Each
committee shall keep regular minutes of its meetings and report the same to the
Board of Directors upon request.

      Section 8. Committee Rules. Each committee of the Board of Directors may
fix its own rules of procedure and shall hold its meetings as provided by such
rules, except as may otherwise be provided by a resolution of the Board of
Directors designating such committee. Unless otherwise provided in such a
resolution, the presence of at least a majority of the members of the committee
shall be necessary to constitute a quorum. Unless otherwise provided in such a
resolution, in the event that a member and that member's alternate, if
alternates are designated by the Board of Directors, of such committee is or are
absent or disqualified, the member or members thereof present at any meeting and
not disqualified from voting, whether or

                                     - 7 -


not such member or members constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in place of any such
absent or disqualified member.

      Section 9. Communications Equipment. Members of the Board of Directors or
any committee thereof may participate in and act at any meeting of such board or
committee through the use of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
and speak with each other, and participation in the meeting pursuant to this
section shall constitute presence in person at the meeting.

      Section 10. Action by Written Consent. Unless otherwise restricted by the
Certificate of Incorporation, any action required or permitted to be taken at
any meeting of the Board of Directors, or of any committee thereof, may be taken
without a meeting if all members of such board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.

      Section 11. Compensation. The Board of Directors shall have the authority
to fix the compensation, including fees and reimbursement of expenses, of
directors for services to the Corporation in any capacity.

      Section 12. Reliance on Books and Records. A member of the Board of
Directors, or a member of any committee designated by the Board of Directors
shall, in the performance of such person's duties, be fully protected in relying
in good faith upon records of the Corporation and upon such information,
opinions, reports or statements presented to the Corporation by any of the
Corporation's officers or employees, or committees of the Board of Directors, or
by any other person as to matters the member reasonably believes are within such
other person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.

                                   ARTICLE IV

                                    OFFICERS

      Section 1. Number. The officers of the Corporation shall be elected by the
Board of Directors and shall consist of a chairman of the board, a chief
executive officer, a president, one or more vice-presidents, a secretary, a
chief financial officer and such other officers and assistant officers as may be
deemed necessary or desirable by the Board of Directors. Any number of offices
may be held by the same person, except that neither the chief executive officer
nor the president shall also hold the office of secretary. In its discretion,
the Board of Directors may choose not to fill any office for any period as it
may deem advisable, except that the offices of president and secretary shall be
filled as expeditiously as possible.

      Section 2. Election and Term of Office. The officers of the Corporation
shall be elected annually by the Board of Directors at its first meeting held
after each annual meeting of stockholders or as soon thereafter as convenient.
Vacancies may be filled or new offices created and filled at any meeting of the
Board of Directors. Each officer shall hold office until a

                                     - 8 -


successor is duly elected and qualified or until his or her earlier death,
resignation or removal as hereinafter provided.

      Section 3. Removal. Any officer or agent elected by the Board of Directors
may be removed by the Board of Directors at its discretion, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed.

      Section 4. Vacancies. Any vacancy occurring in any office because of
death, resignation, removal, disqualification or otherwise may be filled by the
Board of Directors.

      Section 5. Compensation. Compensation of all executive officers shall be
approved by the Board of Directors, and no officer shall be prevented from
receiving such compensation by virtue of his or her also being a director of the
Corporation; provided however, that compensation of some or all executive
officers may be determined by a committee established for that purpose if so
authorized by the unanimous vote of the Board of Directors or as required by
applicable law or regulation, including any exchange or market upon which the
Corporation's securities are then listed for trading or quotation.

      Section 6. Chairman of the Board. The chairman of the board shall preside
at all meetings of the stockholders and of the Board of Directors and shall have
such other powers and perform such other duties as may be prescribed to him or
her by the Board of Directors or provided in these By-laws.

      Section 7. Chief Executive Officer. The chief executive officer shall have
the powers and perform the duties incident to that position. Subject to the
powers of the Board of Directors and the chairman of the board, the chief
executive officer shall be in the general and active charge of the entire
business and affairs of the Corporation, and shall be its chief policy making
officer. The chief executive officer shall have such other powers and perform
such other duties as may be prescribed by the Board of Directors or provided in
these By-laws. The chief executive officer is authorized to execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the Corporation. Whenever the president is unable to serve, by reason of
sickness, absence or otherwise, the chief executive officer shall perform all
the duties and responsibilities and exercise all the powers of the president.

      Section 8. The President. The president of the Corporation shall, subject
to the powers of the Board of Directors, the chairman of the board and the chief
executive officer, have general charge of the business, affairs and property of
the Corporation, and control over its officers, agents and employees. The
president shall see that all orders and resolutions of the Board of Directors
are carried into effect. The president is authorized to execute bonds, mortgages
and other contracts requiring a seal, under the seal of the Corporation, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly delegated by
the Board of Directors to some other officer or agent of the Corporation. The
president shall have such other powers and perform such

                                     - 9 -


other duties as may be prescribed by the chairman of the board, the chief
executive officer, the Board of Directors or as may be provided in these
By-laws.

      Section 9. Vice-Presidents. The vice-president, or if there shall be more
than one, the vice-presidents in the order determined by the Board of Directors
or the chairman of the board, shall, in the absence or disability of the
president, act with all of the powers and be subject to all the restrictions of
the president. The vice-presidents shall also perform such other duties and have
such other powers as the Board of Directors, the chairman of the board, the
chief executive officer, the president or these By-laws may, from time to time,
prescribe. The vice-presidents may also be designated as executive
vice-presidents or senior vice-presidents, as the Board of Directors may from
time to time prescribe.

      Section 10. The Secretary and Assistant Secretaries. The secretary shall
attend all meetings of the Board of Directors (other than executive sessions
thereof) and all meetings of the stockholders and record all the proceedings of
the meetings in a book or books to be kept for that purpose or shall ensure that
his or her designee attends each such meeting to act in such capacity. Under the
chairman of the board's supervision, the secretary shall give, or cause to be
given, all notices required to be given by these By-laws or by law; shall have
such powers and perform such duties as the Board of Directors, the chairman of
the board, the chief executive officer, the president or these By-laws may, from
time to time, prescribe; and shall have custody of the corporate seal of the
Corporation. The secretary, or an assistant secretary, shall have authority to
affix the corporate seal to any instrument requiring it and when so affixed, it
may be attested by his or her signature or by the signature of such assistant
secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by his
or her signature. The assistant secretary, or if there be more than one, any of
the assistant secretaries, shall in the absence or disability of the secretary,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the Board of Directors, the
chairman of the board, the chief executive officer, the president, or secretary
may, from time to time, prescribe.

      Section 11. The Chief Financial Officer. The chief financial officer shall
have the custody of the corporate funds and securities; shall keep full and
accurate all books and accounts of the Corporation as shall be necessary or
desirable in accordance with applicable law or generally accepted accounting
principles; shall deposit all monies and other valuable effects in the name and
to the credit of the Corporation as may be ordered by the chairman of the board
or the Board of Directors; shall cause the funds of the Corporation to be
disbursed when such disbursements have been duly authorized, taking proper
vouchers for such disbursements; and shall render to the Board of Directors, at
its regular meeting or when the Board of Directors so requires, an account of
the Corporation; shall have such powers and perform such duties as the Board of
Directors, the chairman of the board, the chief executive officer, the president
or these By-laws may, from time to time, prescribe.

      Section 12. Other Officers, Assistant Officers and Agents. Officers,
assistant officers and agents, if any, other than those whose duties are
provided for in these By-laws, shall have such authority and perform such duties
as may from time to time be prescribed by resolution of the Board of Directors.

                                     - 10 -


      Section 13. Absence or Disability of Officers. In the case of the absence
or disability of any officer of the Corporation and of any person hereby
authorized to act in such officer's place during such officer's absence or
disability, the Board of Directors may by resolution delegate the powers and
duties of such officer to any other officer or to any director, or to any other
person selected by it.

                                    ARTICLE V

                              CERTIFICATES OF STOCK

      Section 1. Form. The shares of stock of the Corporation shall be
represented by certificates, provided that the Board of Directors may provide by
resolution or resolutions that some or all of any or all classes or series of
stock of the Corporation shall be uncertificated shares of stock.
Notwithstanding the adoption of such a resolution by the Board of Directors,
every holder of stock represented by a certificate and, upon request, every
holder of uncertificated shares shall be entitled to have a certificate, signed
by, or in the name of the Corporation by the chairman of the board, the chief
executive officer or the president and the secretary or an assistant secretary
of the Corporation, certifying the number of shares owned by such holder in the
Corporation. If such a certificate is countersigned (i) by a transfer agent or
an assistant transfer agent other than the Corporation or its employee or (ii)
by a registrar, other than the Corporation or its employee, the signature of any
such chairman of the board, chief executive officer, president, secretary or
assistant secretary may be facsimiles. In case any officer or officers who have
signed, or whose facsimile signature or signatures have been used on, any such
certificate or certificates shall cease to be such officer or officers of the
Corporation whether because of death, resignation or otherwise before such
certificate or certificates have been delivered by the Corporation, such
certificate or certificates may nevertheless be issued and delivered as though
the person or persons who signed such certificate or certificates or whose
facsimile signature or signatures have been used thereon had not ceased to be
such officer or officers of the Corporation. All certificates for shares shall
be consecutively numbered or otherwise identified. The name of the person to
whom the shares represented thereby are issued, with the number of shares and
date of issue, shall be entered on the books of the Corporation. Shares of stock
of the Corporation shall only be transferred on the books of the Corporation by
the holder of record thereof or by such holder's attorney duly authorized in
writing, upon surrender to the Corporation of the certificate or certificates
for such shares endorsed by the appropriate person or persons, with such
evidence of the authenticity of such endorsement, transfer, authorization and
other matters as the Corporation may reasonably require, and accompanied by all
necessary stock transfer stamps. In that event, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate or certificates and record the transaction on its books. The
Board of Directors may appoint a bank or trust company organized under the laws
of the United States or any state thereof to act as its transfer agent or
registrar, or both in connection with the transfer of any class or series of
securities of the Corporation.

      Section 2. Lost Certificates. The Corporation may issue or direct a new
certificate or certificates to be issued in place of any certificate or
certificates previously issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that

                                     - 11 -


fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates, the
Corporation may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his or her legal representative, to give the Corporation a bond
sufficient to indemnify the Corporation against any claim that may be made
against the Corporation on account of the loss, theft or destruction of any such
certificate or the issuance of such new certificate.

      Section 3. Registered Stockholders. Prior to the surrender to the
Corporation of the certificate or certificates for a share or shares of stock
with a request to record the transfer of such share or shares, the Corporation
may treat the registered owner as the person entitled to receive dividends, to
vote, to receive notifications and otherwise to exercise all the rights and
powers of an owner. The Corporation shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof.

                                   ARTICLE VI

                               GENERAL PROVISIONS

      Section 1. Dividends. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, in
accordance with applicable law. Dividends may be paid in cash, in property or in
shares of the capital stock, subject to the provisions of applicable law and the
Certificate of Incorporation. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
any other purpose and the directors may modify or abolish any such reserve in
the manner in which it was created.

      Section 2. Checks, Notes, Drafts, Etc. All checks, notes, drafts or other
orders for the payment of money of the Corporation shall be signed, endorsed or
accepted in the name of the Corporation by such officer, officers, person or
persons as from time to time may be designated by the Board of Directors or by
an officer or officers authorized by the Board of Directors to make such
designation.

      Section 3. Contracts. In addition to the powers otherwise granted to
officers pursuant to ARTICLE IV hereof, the Board of Directors may authorize any
officer or officers, or any agent or agents, of the Corporation to enter into
any contract or to execute and deliver any instrument in the name of and on
behalf of the Corporation, and such authority may be general or confined to
specific instances.

      Section 4. Loans. Subject to compliance with applicable law (including the
Sarbanes-Oxley Act of 2002, as amended), the Corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the Corporation or of its

                                     - 12 -


subsidiaries, including any officer or employee who is a director of the
Corporation or its subsidiaries, whenever, in the judgment of the directors,
such loan, guaranty or assistance may reasonably be expected to benefit the
Corporation. The loan, guaranty or other assistance may be with or without
interest, and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this section shall be deemed to deny, limit
or restrict the powers of guaranty or warranty of the Corporation at common law
or under any statute.

      Section 5. Fiscal Year. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.

      Section 6. Corporate Seal. The Board of Directors may provide a corporate
seal which shall be in the form of a circle and shall have inscribed thereon the
name of the Corporation and the words "Corporate Seal, Delaware." The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise. Notwithstanding the foregoing, no seal shall be
required by virtue of this Section.

      Section 7. Voting Securities Owned By Corporation. Voting securities in
any other Corporation held by the Corporation shall be voted by the chief
executive officer, the president or a vice-president, unless the Board of
Directors specifically confers authority to vote with respect thereto, which
authority may be general or confined to specific instances, upon some other
person or officer. Any person authorized to vote securities shall have the power
to appoint proxies, with general power of substitution.

      Section 8. Inspection of Books and Records. The Board of Directors shall
have power from time to time to determine to what extent and at what times and
places and under what conditions and regulations the accounts and books of the
Corporation, or any of them, shall be open to the inspection of the
stockholders; and no stockholder shall have any right to inspect any account or
book or document of the Corporation, except as conferred by the laws of the
State of Delaware, unless and until authorized so to do by resolution of the
Board of Directors or of the stockholders of the Corporation.

      Section 9. Section Headings. Section headings in these By-laws are for
convenience of reference only and shall not be given any substantive effect in
limiting or otherwise construing any provision herein.

      Section 10. Inconsistent Provisions. In the event that any provision of
these By-laws is or becomes inconsistent with any provision of the Certificate
of Incorporation, the General Corporation Law of the State of Delaware or any
other applicable law, the provision of these By-laws shall not be given any
effect to the extent of such inconsistency but shall otherwise be given full
force and effect.

                                     - 13 -


                                   ARTICLE VII

                                   AMENDMENTS

      These By-laws may be amended, altered, changed or repealed or new By-laws
adopted only in accordance with Article Six of the Certificate of Incorporation.

                                     - 14 -

EX-5.1

                                                                     EXHIBIT 5.1

                              KIRKLAND & ELLIS LLP
                          AND AFFILIATED PARTNERSHIPS

                             200 East Randolph Drive
                             Chicago, Illinois 60601

                                  312 861-2000                      Facsimile:
                                                                   312 861-2200
                                www.kirkland.com

                                 January 3, 2005

SeaBright Insurance Holdings, Inc.
2101 4th Avenue
Suite 1600
Seattle, WA  98121

Ladies and Gentlemen:

            We are acting as special counsel to SeaBright Insurance Holdings,
Inc., a Delaware corporation (the "Company"), in connection with the proposed
registration by the Company of 8,625,000 shares of its Common Stock, par value
$0.01 per share (the "Shares"), including 1,125,000 shares of its Common Stock
to cover over-allotments, if any, pursuant to a Registration Statement on Form
S-1, originally filed with the Securities and Exchange Commission (the
"Commission") on September 17, 2004 under the Securities Act of 1933, as amended
(the "Act") (such Registration Statement, as amended or supplemented, is
hereinafter referred to as the "Registration Statement"). All of the Shares to
be registered pursuant to the Registration Statement are being offered by the
Company.

            In that connection, we have examined originals, or copies certified
or otherwise identified to our satisfaction, of such documents, corporate
records and other instruments as we have deemed necessary for the purposes of
this opinion, including (i) the corporate and organizational documents of the
Company, including the Amended and Restated Certificate of Incorporation of the
Company (the "Amended and Restated Certificate") to be filed with the Secretary
of State of the State of Delaware prior to the sale of the Shares and (ii)
minutes and records of the corporate proceedings of the Company with respect to
the issuance and sale of the Shares.

            For purposes of this opinion, we have assumed the authenticity of
all documents submitted to us as originals, the conformity to the originals of
all documents submitted to us as copies and the authenticity of the originals of
all documents submitted to us as copies. We have also assumed the legal capacity
of all natural persons, the genuineness of the signatures of persons signing all
documents in connection with which this opinion is rendered, the authority of
such persons signing on behalf of the parties thereto other than the Company and
the due authorization, execution and delivery of all documents by the parties
thereto other than the Company. We have not independently established or
verified any facts relevant to the opinions

London      Los Angeles      New York      San Francisco      Washington, D.C.



                              KIRKLAND & ELLIS LLP

SeaBright Insurance Holdings, Inc.
January 3, 2005
Page 2

expressed herein, but have relied upon statements and representations of
officers and other representatives of the Company and others.

            Based upon and subject to the foregoing qualifications, assumptions
and limitations and the further limitations set forth below, we are of the
opinion that upon filing of the Amended and Restated Certificate with the
Secretary of State of the State of Delaware, the Shares will be duly authorized,
and, when the Registration Statement becomes effective under the Act, and when
appropriate certificates representing the Shares are duly countersigned and
registered by the Company's transfer agent/registrar and delivered to the
Company's underwriters against payment of the agreed consideration therefor in
accordance with the Underwriting Agreement, the Shares will be validly issued,
fully paid and nonassessable.

            Our opinion expressed above is subject to the qualification that we
express no opinion as to the applicability of, compliance with, or effect of any
laws except the General Corporation Law of the State of Delaware.

            We hereby consent to the filing of this opinion with the Commission
as Exhibit 5.1 to the Registration Statement. We also consent to the reference
to our firm under the heading "Legal Matters" in the Registration Statement. In
giving this consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission. This opinion and consent may be incorporated by
reference in a subsequent registration statement on Form S-1 filed pursuant to
Rule 462(b) under the Act with respect to the registration of additional
securities for sale in the offering contemplated by the Registration Statement
and shall cover such additional securities, if any, registered on such
subsequent registration statement.

            We do not find it necessary for the purposes of this opinion, and
accordingly we do not purport to cover herein, the application of the securities
or "Blue Sky" laws of the various states to the issuance and sale of the Shares.



                              KIRKLAND & ELLIS LLP

SeaBright Insurance Holdings, Inc.
January 3, 2005
Page 3

            This opinion is limited to the specific issues addressed herein, and
no opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the General
Corporation Law of the State of Delaware be changed by legislative action,
judicial decision or otherwise.

                                              Sincerely,

                                              /s/  Kirkland & Ellis LLP

                                              KIRKLAND & ELLIS LLP

EX-10.7

                                                                    EXHIBIT 10.7

                       SEABRIGHT INSURANCE HOLDINGS, INC.
                      2005 LONG-TERM EQUITY INCENTIVE PLAN

1.    Purpose.

            This plan shall be known as the SeaBright Insurance Holdings, Inc.
2005 Long-Term Equity Incentive Plan (the "Plan"). The purpose of the Plan shall
be to promote the long-term growth and profitability of SeaBright Insurance
Holdings, Inc. (the "Company") and its Subsidiaries by (i) providing certain
directors, officers and employees of, and certain other individuals who perform
services for, the Company and its Subsidiaries with incentives to maximize
stockholder value and otherwise contribute to the success of the Company and
(ii) enabling the Company to attract, retain and reward the best available
persons for positions of responsibility. Grants of incentive or non-qualified
stock options, restricted stock, restricted stock units, deferred stock units,
performance awards, or any combination of the foregoing may be made under the
Plan.

2.    Definitions

            (a) "Board of Directors" and "Board" mean the board of directors of
the Company.

            (b) "Cause" means the occurrence of one or more of the following
events:

                  (i) Conviction of a felony or any crime or offense lesser than
a felony involving the property of the Company or a Subsidiary; or

                  (ii) Conduct that has caused demonstrable and serious injury
to the Company or a Subsidiary, monetary or otherwise; or

                  (iii) Willful refusal to perform or substantial disregard of
duties properly assigned, as determined by the Company or a Subsidiary, as the
case may be; or

                  (iv) Breach of duty of loyalty to the Company or a Subsidiary
or other act of fraud or dishonesty with respect to the Company or a Subsidiary.

            (c) "Change in Control" means the occurrence of one of the following
events:

                  (i) if any "person" or "group" as those terms are used in
Sections 13(d) and 14(d) of the Exchange Act or any successors thereto, other
than an Exempt Person, is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act or any successor thereto), directly or indirectly,
of securities of the Company representing 50% or more of the combined voting
power of the Company's then outstanding securities; or

                  (ii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the Board and any new directors
whose election by the Board or nomination for election by the Company's
stockholders was approved by at least two-thirds of



the directors then still in office who either were directors at the beginning of
the period or whose election was previously so approved, cease for any reason to
constitute a majority thereof; or

                  (iii) consummation of a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation (A) which would
result in all or a portion of the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation or (B) by which the corporate existence of the Company is not
affected and following which the Company's chief executive officer and directors
retain their positions with the Company (and constitute at least a majority of
the Board); or

                  (iv) consummation of a plan of complete liquidation of the
Company or a sale or disposition by the Company of all or substantially all the
Company's assets, other than a sale to an Exempt Person.

            (d) "Code" means the Internal Revenue Code of 1986, as amended.

            (e) "Committee" means the Compensation Committee of the Board, which
shall consist solely of two or more members of the Board.

            (f) "Common Stock" means the Common Stock, par value $0.01 per
share, of the Company, and any other shares into which such stock may be changed
by reason of a recapitalization, reorganization, merger, consolidation or any
other change in the corporate structure or capital stock of the Company.

            (g) "Competition" is deemed to occur if a person whose employment
with the Company or its Subsidiaries has terminated obtains a position as a
full-time or part-time employee of, as a member of the board of directors of, or
as a consultant or advisor with or to, or acquires an ownership interest in
excess of 5% of, a corporation, partnership, firm or other entity that engages
in any of the businesses of the Company or any Subsidiary with which the person
was involved in a management role at any time during his or her last five years
of employment with or other service for the Company or any Subsidiaries.

            (h) "Disability" means a disability that would entitle an eligible
participant to payment of monthly disability payments under any Company
disability plan or as otherwise determined by the Committee.

            (i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

            (j) "Exempt Person" means (i) Summit Master Company, LLC, Summit
Partners, LLC, Summit Partners, L.P. or any of their affiliates, (ii) any
person, entity or group under the control of any party included in clause (i),
or (iii) any employee benefit plan of the Company or a trustee or other
administrator or fiduciary holding securities under an employee benefit plan of
the Company.

                                       2


            (k) "Family Member" has the meaning given to such term in General
Instructions A.1(a)(5) to Form S-8 under the Securities Act of 1933, as amended,
and any successor thereto.

            (l) "Fair Market Value" of a share of Common Stock of the Company
means, as of the date in question, the officially-quoted closing selling price
of the stock (or if no selling price is quoted, the bid price) on the principal
securities exchange on which the Common Stock is then listed for trading
(including for this purpose the Nasdaq National Market) (the "Market") for the
applicable trading day or, if the Common Stock is not then listed or quoted in
the Market, the Fair Market Value shall be the fair value of the Common Stock
determined in good faith by the Board; provided, however, that when shares
received upon exercise of an option are immediately sold in the open market, the
net sale price received may be used to determine the Fair Market Value of any
shares used to pay the exercise price or applicable withholding taxes and to
compute the withholding taxes.

            (m) "Incentive Stock Option" means an option conforming to the
requirements of Section 422 of the Code and any successor thereto.

            (n) "Non-Employee Director" has the meaning given to such term in
Rule 16b-3 under the Exchange Act and any successor thereto.

            (o) "Non-qualified Stock Option" means any stock option other than
an Incentive Stock Option.

            (p) "Other Company Securities" mean securities of the Company other
than Common Stock, which may include, without limitation, unbundled stock units
or components thereof, debentures, preferred stock, warrants and securities
convertible into or exchangeable for Common Stock or other property.

            (q) "Retirement" means retirement as defined under any Company
pension plan or retirement program or termination of one's employment on
retirement with the approval of the Committee.

            (r) "Subsidiary" means a corporation or other entity of which
outstanding shares or ownership interests representing 50% or more of the
combined voting power of such corporation or other entity entitled to elect the
management thereof, or such lesser percentage as may be approved by the
Committee, are owned directly or indirectly by the Company.

3.    Administration.

            The Plan shall be administered by the Committee; provided that the
Board may, in its discretion, at any time and from time to time, resolve to
administer the Plan, in which case the term "Committee" shall be deemed to mean
the Board for all purposes herein. Subject to the provisions of the Plan, the
Committee shall be authorized to (i) select persons to participate in the Plan,
(ii) determine the form and substance of grants made under the Plan to each
participant, and the conditions and restrictions, if any, subject to which such
grants will be made, (iii) certify that the conditions and restrictions
applicable to any grant have been met, (iv) modify the terms of

                                       3


grants made under the Plan, (v) interpret the Plan and grants made thereunder,
(vi) make any adjustments necessary or desirable in connection with grants made
under the Plan to eligible participants located outside the United States and
(vii) adopt, amend, or rescind such rules and regulations, and make such other
determinations, for carrying out the Plan as it may deem appropriate. Decisions
of the Committee on all matters relating to the Plan shall be in the Committee's
sole discretion and shall be conclusive and binding on all parties. The
validity, construction, and effect of the Plan and any rules and regulations
relating to the Plan shall be determined in accordance with applicable federal
and state laws and rules and regulations promulgated pursuant thereto and the
rules and regulations of the principal securities exchange on which the Common
Stock is then listed for trading. No member of the Committee and no officer of
the Company shall be liable for any action taken or omitted to be taken by such
member, by any other member of the Committee or by any officer of the Company in
connection with the performance of duties under the Plan, except for such
person's own willful misconduct or as expressly provided by statute.

            The expenses of the Plan shall be borne by the Company. The Plan
shall not be required to establish any special or separate fund or make any
other segregation of assets to assume the payment of any award under the Plan,
and rights to the payment of such awards shall be no greater than the rights of
the Company's general creditors.

4.    Shares Available for the Plan.

            Subject to adjustments as provided in Section 16 hereof, an
aggregate of one million forty seven thousand seven hundred fifty five
(1,047,755) shares of Common Stock may be issued pursuant to the Plan, plus an
automatic annual increase on the first day of each of the Company's fiscal years
beginning in 2006 and ending in 2015 equal to the lesser of (i) two percent (2%)
of the shares of Common Stock outstanding on the last day of the immediately
preceding fiscal year or (ii) such lesser number of shares of Common Stock as
determined by the Committee (collectively, the "Shares"). Notwithstanding the
foregoing, the maximum aggregate number of Shares that may be issued pursuant to
Incentive Stock Options under the Plan shall not exceed one million forty seven
thousand seven hundred fifty five (1,047,755) (subject to adjustments as
provided in Section 16 hereof), and such number shall not be subject to annual
adjustment as described in the preceding sentence.

            Such Shares may be in whole or in part authorized and unissued or
held by the Company as treasury shares. If any grant under the Plan expires or
terminates unexercised, becomes unexercisable or is forfeited as to any Shares,
or is tendered or withheld as to any shares in payment of the exercise price of
the grant or the taxes payable with respect to the exercise, then such
unpurchased, forfeited, tendered or withheld Shares shall thereafter be
available for further grants under the Plan.

            Without limiting the generality of the foregoing provisions of this
Section 4 or the generality of the provisions of Sections 3, 6 or 18 or any
other section of this Plan, the Committee may, at any time or from time to time,
and on such terms and conditions (that are consistent with and not in
contravention of the other provisions of this Plan) as the Committee may, in its
sole discretion, determine, enter into agreements (or take other actions with
respect to

                                       4


the options) for new options containing terms (including exercise prices) more
(or less) favorable than the outstanding options.

5.    Participation.

            Participation in the Plan shall be limited to those directors
(including Non-Employee Directors), officers (including non-employee officers)
and employees of, and other individuals performing services for, the Company and
its Subsidiaries selected by the Committee (including participants located
outside the United States). Nothing in the Plan or in any grant thereunder shall
confer any right on a participant to continue in the service or employ as a
director or officer of or in the performance of services for the Company or a
Subsidiary or shall interfere in any way with the right of the Company or a
Subsidiary to terminate the employment or performance of services or to reduce
the compensation or responsibilities of a participant at any time. By accepting
any award under the Plan, each participant and each person claiming under or
through him or her shall be conclusively deemed to have indicated his or her
acceptance and ratification of, and consent to, any action taken under the Plan
by the Company, the Board or the Committee.

            Incentive Stock Options or Non-qualified Stock Options, restricted
stock awards, restricted stock unit or deferred stock unit awards, performance
awards, or any combination thereof, may be granted to such persons and for such
number of Shares as the Committee shall determine (such individuals to whom
grants are made being sometimes herein called "optionees" or "grantees," as the
case may be). Determinations made by the Committee under the Plan need not be
uniform and may be made selectively among eligible individuals under the Plan,
whether or not such individuals are similarly situated. A grant of any type made
hereunder in any one year to an eligible participant shall neither guarantee nor
preclude a further grant of that or any other type to such participant in that
year or subsequent years.

6.    Incentive and Non-qualified Options.

            The Committee may from time to time grant to eligible participants
Incentive Stock Options, Non-qualified Stock Options, or any combination
thereof; provided that the Committee may grant Incentive Stock Options only to
eligible employees of the Company or its subsidiaries (as defined for this
purpose in Section 424(f) of the Code or any successor thereto). In any one
calendar year, the Committee shall not grant to any one participant options to
purchase a number of shares of Common Stock in excess of three hundred thousand
(300,000) (as adjusted pursuant to Section 16 hereof). The options granted shall
take such form as the Committee shall determine, subject to the following terms
and conditions.

            It is the Company's intent that Non-qualified Stock Options granted
under the Plan not be classified as Incentive Stock Options, that Incentive
Stock Options be consistent with and contain or be deemed to contain all
provisions required under Section 422 of the Code and any successor thereto, and
that any ambiguities in construction be interpreted in order to effectuate such
intent. If an Incentive Stock Option granted under the Plan does not qualify as
such for any reason, then to the extent of such non-qualification, the stock
option represented thereby shall be

                                       5


regarded as a Non-qualified Stock Option duly granted under the Plan, provided
that such stock option otherwise meets the Plan's requirements for Non-qualified
Stock Options.

            (a) Price. The price per Share deliverable upon the exercise of
each option ("exercise price") may not be less than 100% of the Fair Market
Value of a share of Common Stock as of the date of grant of the option, and in
the case of the grant of any Incentive Stock Option to an employee who, at the
time of the grant, owns more than 10% of the total combined voting power of all
classes of stock of the Company or any of its Subsidiaries, the exercise price
may not be less than 110% of the Fair Market Value of a share of Common Stock as
of the date of grant of the option, in each case unless otherwise permitted by
Section 422 of the Code or any successor thereto.

            (b) Payment. Options may be exercised, in whole or in part, upon
payment of the exercise price of the Shares to be acquired. Unless otherwise
determined by the Committee, payment shall be made (i) in cash (including check,
bank draft, money order or wire transfer of immediately available funds), (ii)
by delivery of outstanding shares of Common Stock with a Fair Market Value on
the date of exercise equal to the aggregate exercise price payable with respect
to the options' exercise, (iii) by simultaneous sale through a broker reasonably
acceptable to the Committee of Shares acquired on exercise, as permitted under
Regulation T of the Federal Reserve Board or (iv) by any combination of the
foregoing.

            In the event a grantee elects to pay the exercise price payable with
respect to an option pursuant to clause (ii) above, (A) only a whole number of
share(s) of Common Stock (and not fractional shares of Common Stock) may be
tendered in payment, (B) such grantee must present evidence acceptable to the
Company that he or she has owned any such shares of Common Stock tendered in
payment of the exercise price (and that such tendered shares of Common Stock
have not been subject to any substantial risk of forfeiture) for at least six
months prior to the date of exercise, and (C) Common Stock must be delivered to
the Company. Delivery for this purpose may, at the election of the grantee, be
made either by (1) physical delivery of the certificate(s) for all such shares
of Common Stock tendered in payment of the price, accompanied by duly executed
instruments of transfer in a form acceptable to the Company, or (2) direction to
the grantee's broker to transfer, by book entry, such shares of Common Stock
from a brokerage account of the grantee to a brokerage account specified by the
Company. When payment of the exercise price is made by delivery of Common Stock,
the difference, if any, between the aggregate exercise price payable with
respect to the option being exercised and the Fair Market Value of the shares of
Common Stock tendered in payment (plus any applicable taxes) shall be paid in
cash. No grantee may tender shares of Common Stock having a Fair Market Value
exceeding the aggregate exercise price payable with respect to the option being
exercised (plus any applicable taxes).

            (c) Terms of Options. The term during which each option may be
exercised shall be determined by the Committee, but if required by the Code and
except as otherwise provided herein, no option shall be exercisable in whole or
in part more than ten years from the date it is granted, and no Incentive Stock
Option granted to an employee who at the time of the grant owns more than 10% of
the total combined voting power of all classes of stock of the Company or any of
its Subsidiaries shall be exercisable more than five years from the date it is

                                       6


granted. All rights to purchase Shares pursuant to an option shall, unless
sooner terminated, expire at the date designated by the Committee. The Committee
shall determine the date on which each option shall become exercisable and may
provide that an option shall become exercisable in installments. The Shares
constituting each installment may be purchased in whole or in part at any time
after such installment becomes exercisable, subject to such minimum exercise
requirements as may be designated by the Committee. Prior to the exercise of an
option and delivery of the Shares represented thereby, the optionee shall have
no rights as a stockholder with respect to any Shares covered by such
outstanding option (including any dividend or voting rights).

            (d) Limitations on Grants. If required by the Code, the aggregate
Fair Market Value (determined as of the grant date) of Shares for which an
Incentive Stock Option is exercisable for the first time during any calendar
year under all equity incentive plans of the Company and its Subsidiaries (as
defined in Section 422 of the Code or any successor thereto) may not exceed
$100,000.

            (e) Termination; Forfeiture.

                  (i) Death or Disability. If a participant ceases to be a
director, officer or employee of, or to perform other services for, the Company
or any Subsidiary due to death or Disability, all of the participant's options
shall become fully vested and exercisable and shall remain so for a period of
180 days from the date of such death or Disability, but in no event after the
expiration date of the options; provided that the participant does not engage in
Competition during such 180-day period unless he or she received written consent
to do so from the Board or the Committee; provided further that the Board or
Committee may extend such exercise period (and related non-competition period)
in its discretion, but in no event may such extended exercise period extend
beyond the expiration date of the options. Notwithstanding the foregoing, if the
Disability giving rise to the termination of employment is not within the
meaning of Section 22(e)(3) of the Code or any successor thereto, Incentive
Stock Options not exercised by such participant within 90 days after the date of
termination of employment will cease to qualify as Incentive Stock Options and
will be treated as Non-qualified Stock Options under the Plan if required to be
so treated under the Code.

                  (ii) Retirement. If a participant ceases to be a director,
officer or employee of, or to perform other services for, the Company or any
Subsidiary upon the occurrence of his or her Retirement, (A) all of the
participant's options that were exercisable on the date of Retirement shall
remain exercisable for, and shall otherwise terminate at the end of, a period of
90 days after the date of Retirement, but in no event after the expiration date
of the options; provided that the participant does not engage in Competition
during such 90 day period unless he or she receives written consent to do so
from the Board or the Committee; provided further that the Board or Committee
may extend such exercise period (and related non-competition period) in its
discretion, but in no event may such extended exercise period extend beyond the
expiration date of the options, and (B) all of the participant's options that
were not exercisable on the date of Retirement shall be forfeited immediately
upon such Retirement; provided, however, that such options may become fully
vested and exercisable in the discretion of the Committee. Notwithstanding the
foregoing, Incentive Stock Options not exercised by such

                                       7


participant within 90 days after Retirement will cease to qualify as Incentive
Stock Options and will be treated as Non-qualified Stock Options under the Plan
if required to be so treated under the Code.

                  (iii) Discharge for Cause. If a participant ceases to be a
director, officer or employee of , or to perform other services for, the Company
or a Subsidiary due to Cause, all of the participant's options shall expire and
be forfeited immediately upon such cessation, whether or not then exercisable.

                  (iv) Other Termination. Unless otherwise determined by the
Committee, if a participant ceases to be a director, officer or employee of, or
to otherwise perform services for, the Company or a Subsidiary for any reason
other than death, Disability, Retirement or Cause, (A) all of the participant's
options that were exercisable on the date of such cessation shall remain
exercisable for, and shall otherwise terminate at the end of, a period of 30
days after the date of such cessation, but in no event after the expiration date
of the options; provided that the participant does not engage in Competition
during such 30-day period unless he or she receives written consent to do so
from the Board or the Committee; provided further that the Board or Committee
may extend such exercise period (and related non-competition period) in its
discretion, but in no event may such extended exercise period extend beyond the
expiration date of the options, and (B) all of the participant's options that
were not exercisable on the date of such cessation shall be forfeited
immediately upon such cessation.

                  (v) Change in Control. If there is a Change in Control of the
Company and a participant is terminated from being a director, officer or
employee of, or from performing other services for, the Company or a Subsidiary
within one year after such Change in Control, all of the participant's options
shall become fully vested and exercisable upon such termination and shall remain
so for up to one year after the date of termination, but in no event after the
expiration date of the options. In addition, the Committee shall have the
authority to grant options that become fully vested and exercisable
automatically upon a Change in Control, whether or not the grantee is
subsequently terminated.

            (f) Forfeiture. If a participant exercises any of his or her options
and, within one year thereafter, either (i) is terminated from the Company or a
Subsidiary for any of the reasons specified in the definition of "Cause" set
forth in Section 2(b), or (ii) engages in Competition without having received
written consent to do so from the Board or the Committee, then the participant
may, in the discretion of the Committee, be required to pay the Company the gain
represented by the difference between the aggregate selling price of the Shares
acquired upon the options' exercise (or, if the Shares were not then sold, their
aggregate Fair Market Value on the date of exercise) and the aggregate exercise
price of the options exercised (the "Option Gain"), without regard to any
subsequent increase or decrease in the Fair Market Value of the Common Stock. In
addition, the Company may, in its discretion, deduct from any payment of any
kind (including salary or bonus) otherwise due to any such participant an amount
equal to the Option Gain.

            (g) Grant of Reload Options. The Committee may provide (either at
the time of grant or exercise of an option), in its discretion, for the grant to
a grantee who exercises all or

                                       8


any portion of an option ("Exercised Options") and who pays all or part of such
exercise price with shares of Common Stock, of an additional option (a "Reload
Option") for a number of shares of Common Stock equal to the sum (the "Reload
Number") of the number of shares of Common Stock tendered for the Exercised
Options plus, if so provided by the Committee, the number of shares of Common
Stock, if any, tendered by the grantee in connection with the exercise of the
Exercised Options to satisfy any federal, state or local tax withholding
requirements. The terms of each Reload Option, including the date of its
expiration and the terms and conditions of its exercisability and
transferability, shall be the same as the terms of the Exercised Option to which
it relates, except that (i) the grant date for each Reload Option shall be the
date of exercise of the Exercised Option to which it relates and (ii) the
exercise price for each Reload Option shall be the Fair Market Value of the
Common Stock on the grant date of the Reload Option.

7.    [Intentionally Omitted].

8.    Restricted Stock.

            The Committee may at any time and from time to time grant Shares of
restricted stock under the Plan to such participants and in such amounts as it
determines. Each grant of Shares of restricted stock shall specify the
applicable restrictions on such Shares, the duration of such restrictions (which
shall be at least six months except as otherwise determined by the Committee or
provided in the third paragraph of this Section 8), and the time or times at
which such restrictions shall lapse with respect to all or a specified number of
Shares that are part of the grant.

            The participant will be required to pay the Company the aggregate
par value of any Shares of restricted stock (or such larger amount as the Board
may determine to constitute capital under Section 154 of the Delaware General
Corporation Law, as amended, or any successor thereto) within ten days of the
date of grant, unless such Shares of restricted stock are treasury shares.
Unless otherwise determined by the Committee, certificates representing Shares
of restricted stock granted under the Plan will be held in escrow by the Company
on the participant's behalf during any period of restriction thereon and will
bear an appropriate legend specifying the applicable restrictions thereon, and
the participant will be required to execute a blank stock power therefor. Except
as otherwise provided by the Committee, during such period of restriction the
participant shall have all of the rights of a holder of Common Stock, including
but not limited to the rights to receive dividends and to vote, and any stock or
other securities received as a distribution with respect to such participant's
restricted stock shall be subject to the same restrictions as then in effect for
the restricted stock.

            Except as otherwise provided by the Committee, if a participant
ceases to be a director, officer or employee of, or to otherwise perform
services for, the Company and its Subsidiaries due to death, Disability or
Retirement during any period of restriction, all restrictions on Shares of
restricted stock granted to such participant shall lapse. At such time as a
participant ceases to be a director, officer or employee of, or otherwise
performing services for, the Company or its Subsidiaries for any other reason,
all Shares of restricted stock granted to

                                       9


such participant on which the restrictions have not lapsed shall be immediately
forfeited to the Company.

            If there is a Change in Control of the Company and a participant is
terminated from being a director, officer or employee of, or from performing
other services for, the Company or a subsidiary within one year after such
Change in Control, all restrictions on Shares of restricted stock granted to
such participant shall lapse. In addition, the Committee shall have the
authority to grant shares of restricted stock with respect to which all
restrictions shall lapse automatically upon a Change in Control, whether or not
the grantee is subsequently terminated.

9.    Restricted Stock Units; Deferred Stock Units.

            The Committee may at any time and from time to time grant restricted
stock units under the Plan to such participants and in such amounts as it
determines. Each grant of restricted stock units shall specify the applicable
restrictions on such units, the duration of such restrictions (which shall be at
least six months except as otherwise determined by the Committee or provided in
the third paragraph of this Section 9), and the time or times at which such
restrictions shall lapse with respect to all or a specified number of units that
are part of the grant.

            Each restricted stock unit shall be equivalent in value to one share
of Common Stock and shall entitle the participant to receive from the Company at
the end of the vesting period (the "Vesting Period") applicable to such unit one
Share, unless the participant elects in a timely fashion to defer the receipt of
such Shares, as provided below. Restricted stock units may be granted without
payment of cash or consideration to the Company; provided that participants
shall be required to pay to the Company the aggregate par value of the Shares
received from the Company within ten days of the issuance of such Shares unless
such Shares are treasury shares.

            Except as otherwise provided by the Committee, during the
restriction period the participant shall not have any rights as a shareholder of
the Company; provided that the participant shall have the right to receive
accumulated dividends or distributions with respect to the corresponding number
of shares of Common Stock underlying each restricted stock unit at the end of
the Vesting Period, unless such restricted stock units are converted into
deferred stock units, in which case such accumulated dividends or distributions
shall be paid by the Company to the participant at such time as the deferred
stock units are converted into Shares.

            Except as otherwise provided by the Committee, if a participant
ceases to be a director, officer or employee of, or to otherwise perform
services for, the Company or any Subsidiary due to death, Disability or
Retirement during any period of restriction, all restrictions on restricted
stock units granted to such participant shall lapse. At such time as a
participant ceases to be a director, officer or employee of, or otherwise
performing services for, the Company or any Subsidiary for any other reason, all
restricted stock units granted to such participant on which the restrictions
have not lapsed shall be immediately forfeited to the Company.

            If there is a Change in Control of the Company and a participant is
terminated from being a director, officer or employee of, or from performing
other services for, the

                                       10


Company or any Subsidiary within one year after such Change in Control, all
restrictions on restricted stock units granted to such participant shall lapse.
In addition, the Committee shall have the authority to grant restricted stock
units with respect to which all restrictions shall lapse automatically upon a
Change in Control, whether or not the grantee is subsequently terminated.

            A participant may elect by written notice to the Company, which
notice must be made before the later of (i) the close of the tax year preceding
the year in which the restricted stock units are granted or (ii) 30 days of
first becoming eligible to participate in the Plan (or, if earlier, the last day
of the tax year in which the participant first becomes eligible to participate
in the plan) and on or prior to the date the restricted stock units are granted,
to defer the receipt of all or a portion of the Shares due with respect to the
vesting of such restricted stock units; provided that the Committee may impose
such additional restrictions with respect to the time at which a participant may
elect to defer receipt of Shares subject to the deferral election, and any other
terms with respect to a grant of restricted stock units to the extent the
Committee deems necessary to enable the participant to defer recognition of
income with respect to such units until the Shares underlying such units are
issued or distributed to the participant. Upon such deferral, the restricted
stock units so deferred shall be converted into deferred stock units. Except as
provided below, delivery of Shares with respect to deferred stock units shall be
made at the end of the deferral period set forth in the participant's deferral
election notice (the "Deferral Period"). Deferral Periods shall be no less than
one year after the vesting date of the applicable restricted stock units.

            Except as otherwise provided by the Committee, during such Deferral
Period the participant shall not have any rights as a shareholder of the
Company; provided that, the participant shall have the right to receive
accumulated dividends or distributions with respect to the corresponding number
of shares of Common Stock underlying each deferred stock unit at the end of the
Deferral Period when such deferred stock units are converted into Shares.

            Except as otherwise provided by the Committee, if a Participant
ceases to be a director, officer or employee of, or to otherwise perform
services for, the Company or any Subsidiary upon his or her death prior to the
end of the Deferral Period, the participant shall receive payment in Shares in
respect of such participant's deferred stock units which would have matured or
been earned at the end of such Deferral Period as if the applicable Deferral
Period had ended as of the date of such participant's death.

            Except as otherwise provided by the Committee, if a participant
ceases to be a director, officer or employee of, or to otherwise perform
services for, the Company or any Subsidiary upon becoming disabled (as defined
under Section 409A(a)(2)(C) of the Code) or Retirement or for any other reason
except termination for Cause prior to the end of the Deferral Period, the
participant shall receive payment in Shares in respect of such participant's
deferred stock units at the end of the applicable Deferral Period or on such
accelerated basis as the Committee may determine, to the extent permitted by
regulations issued under Section 409A(a)(3) of the Code.

            Except as otherwise provided by the Committee, if a participant
ceases to be a director, officer or employee of, or to otherwise perform
services for, the Company or any

                                       11


Subsidiary due to termination for Cause such participant shall immediately
forfeit any deferred stock units which would have matured or been earned at the
end of the applicable Deferral Period.

            Except as otherwise provided by the Committee, in the event of a
Change in Control that also constitutes a "change in the ownership or effective
control of" the Company, or a change in the ownership of a substantial portion
of the Company's assets (in each case as determined under regulations issued
pursuant to Section 409A(a)(2)(A)(v) of the Code), a participant shall receive
payment in Shares in respect of such participant's deferred stock units which
would have matured or been earned at the end of the applicable Deferral Period
as if such Deferral Period had ended immediately prior to the Change in Control;
provided, however, that if an event that constitutes a Change in Control
hereunder does not constitute a "change in control" under Section 409A of the
Code (or the regulations promulgated thereunder), no payments with respect to
the deferred stock units shall be made under this paragraph to the extent such
payments would constitute an impermissible acceleration under Section 409A of
the Code.

10.   Performance Awards.

            Performance awards may be granted to participants at any time and
from time to time as determined by the Committee. The Committee shall have
complete discretion in determining the size and composition of performance
awards granted to a participant. The period over which performance is to be
measured (a "performance cycle") shall commence on the date specified by the
Committee and shall end on the last day of a fiscal year specified by the
Committee. A performance award shall be paid no later than the 15th day of the
third month following the completion of a performance cycle. Performance awards
may include (i) specific dollar-value target awards (ii) performance units, the
value of each such unit being determined by the Committee at the time of
issuance, and/or (iii) performance Shares, the value of each such Share being
equal to the Fair Market Value of a share of Common Stock.

            The value of each performance award may be fixed or it may be
permitted to fluctuate based on a performance factor (e.g., return on equity)
selected by the Committee.

            The Committee shall establish performance goals and objectives for
each performance cycle on the basis of such criteria and objectives as the
Committee may select from time to time, including, without limitation, the
performance of the participant, the Company, one or more of its Subsidiaries or
divisions or any combination of the foregoing. During any performance cycle, the
Committee shall have the authority to adjust the performance goals and
objectives for such cycle for such reasons as it deems equitable.

            The Committee shall determine the portion of each performance award
that is earned by a participant on the basis of the Company's performance over
the performance cycle in relation to the performance goals for such cycle. The
earned portion of a performance award may be paid out in Shares, cash, Other
Company Securities, or any combination thereof, as the Committee may determine.

                                       12


            A participant must be a director, officer or employee of, or
otherwise perform services for, the Company or its Subsidiaries at the end of
the performance cycle in order to be entitled to payment of a performance award
issued in respect of such cycle; provided, however, that except as otherwise
determined by the Committee, if a participant ceases to be a director, officer
or employee of, or to otherwise perform services for, the Company and its
Subsidiaries upon his or her death, Retirement, or Disability prior to the end
of the performance cycle, the participant shall earn a proportionate portion of
the performance award based upon the elapsed portion of the performance cycle
and the Company's performance over that portion of such cycle.

            In the event of a Change in Control, a participant shall earn no
less than the portion of the performance award that the participant would have
earned if the applicable performance cycle(s) had terminated as of the date of
the Change in Control.

11.   Withholding Taxes.

            (a) Participant Election. Unless otherwise determined by the
Committee, a participant may elect to deliver shares of Common Stock (or have
the Company withhold shares acquired upon exercise of an option or deliverable
upon grant or vesting of restricted stock, as the case may be) to satisfy, in
whole or in part, the amount the Company is required to withhold for taxes in
connection with the exercise of an option or the delivery of restricted stock
upon grant or vesting, as the case may be. Such election must be made on or
before the date the amount of tax to be withheld is determined. Once made, the
election shall be irrevocable. The fair market value of the shares to be
withheld or delivered will be the Fair Market Value as of the date the amount of
tax to be withheld is determined. In the event a participant elects to deliver
or have the Company withhold shares of Common Stock pursuant to this Section
11(a), such delivery or withholding must be made subject to the conditions and
pursuant to the procedures set forth in Section 6(b) with respect to the
delivery or withholding of Common Stock in payment of the exercise price of
options.

            (b) Company Requirement. The Company may require, as a condition to
any grant or exercise under the Plan or to the delivery of certificates for
Shares issued hereunder, that the grantee make provision for the payment to the
Company, either pursuant to Section 11(a) or this Section 11(b), of federal,
state or local taxes of any kind required by law to be withheld with respect to
any grant or delivery of Shares. The Company, to the extent permitted or
required by law, shall have the right to deduct from any payment of any kind
(including salary or bonus) otherwise due to a grantee, an amount equal to any
federal, state or local taxes of any kind required by law to be withheld with
respect to any grant or delivery of Shares under the Plan.

12.   Written Agreement; Vesting.

            Unless the Committee determines otherwise, each employee to whom a
grant is made under the Plan shall enter into a written agreement with the
Company that shall contain such provisions, including without limitation vesting
requirements, consistent with the provisions of the Plan, as may be approved by
the Committee. Unless the Committee determines otherwise and except as otherwise
provided in Sections 6, 7, 8, 9 and 10 in connection with a Change in

                                       13


Control or certain occurrences of termination, no grant under this Plan may be
exercised, and no restrictions relating thereto may lapse, within six months of
the date such grant is made.

13.   Transferability.

            Unless the Committee determines otherwise, no award granted under
the Plan shall be transferable by a participant other than by will or the laws
of descent and distribution or to a participant's Family Member by gift or a
qualified domestic relations order as defined by the Code. Unless the Committee
determines otherwise, an option may be exercised only by the optionee or grantee
thereof; by his or her Family Member if such person has acquired the option by
gift or qualified domestic relations order; by the executor or administrator of
the estate of any of the foregoing or any person to whom the option is
transferred by will or the laws of descent and distribution; or by the guardian
or legal representative of any of the foregoing; provided that Incentive Stock
Options may be exercised by any Family Member, guardian or legal representative
only if permitted by the Code and any regulations thereunder. All provisions of
this Plan shall in any event continue to apply to any award granted under the
Plan and transferred as permitted by this Section 13, and any transferee of any
such award shall be bound by all provisions of this Plan as and to the same
extent as the applicable original grantee.

14.   Listing, Registration and Qualification.

            If the Committee determines that the listing, registration or
qualification upon any securities exchange or under any law of Shares subject to
any option, performance award, restricted stock unit, deferred stock unit or
restricted stock grant is necessary or desirable as a condition of, or in
connection with, the granting of same or the issue or purchase of Shares
thereunder, no such option may be exercised in whole or in part, no such
performance award may be paid out, and no Shares may be issued, unless such
listing, registration or qualification is effected free of any conditions not
acceptable to the Committee.

15.   Transfer of Employee.

            The transfer of an employee from the Company to a Subsidiary, from a
Subsidiary to the Company, or from one Subsidiary to another shall not be
considered a termination of employment; nor shall it be considered a termination
of employment if an employee is placed on military or sick leave or such other
leave of absence which is considered by the Committee as continuing intact the
employment relationship.

16.   Adjustments.

            In the event of a reorganization, recapitalization, stock split,
stock dividend, combination of shares, merger, consolidation, distribution of
assets, or any other change in the corporate structure or shares of the Company,
the Committee shall make such adjustment as it deems appropriate in the number
and kind of Shares or other property available for issuance under the Plan
(including, without limitation, the total number of Shares available for
issuance under the Plan pursuant to Section 4), in the number and kind of
options, Shares, restricted stock units, deferred stock units or other property
covered by grants previously made under the Plan,

                                       14


and in the exercise price of outstanding options. Any such adjustment shall be
final, conclusive and binding for all purposes of the Plan. In the event of any
merger, consolidation or other reorganization in which the Company is not the
surviving or continuing corporation or in which a Change in Control is to occur,
all of the Company's obligations regarding awards that were granted hereunder
and that are outstanding on the date of such event shall, on such terms as may
be approved by the Committee prior to such event, be (a) canceled in exchange
for cash or other property (but, with respect to vested deferred stock units,
only if such merger, consolidation, other reorganization, or Change in Control
constitutes a "change in ownership or control" of the Company or a "change in
the ownership of a substantial portion" of the Company's assets, as determined
pursuant to regulations issued under Section 409A(a)(2)(A)(v) of the Code) or
(b) assumed by the surviving or continuing corporation.

            Without limitation of the foregoing, in connection with any
transaction of the type specified by clause (iii) of the definition of a Change
in Control in Section 2(c), the Committee may, in its discretion, (i) cancel any
or all outstanding options under the Plan in consideration for payment to the
holders thereof of an amount equal to the portion of the consideration that
would have been payable to such holders pursuant to such transaction if their
options had been fully exercised immediately prior to such transaction, less the
aggregate exercise price that would have been payable therefor, or (ii) if the
amount that would have been payable to the option holders pursuant to such
transaction if their options had been fully exercised immediately prior thereto
would be equal to or less than the aggregate exercise price that would have been
payable therefor, cancel any or all such options for no consideration or payment
of any kind. Payment of any amount payable pursuant to the preceding sentence
may be made in cash or, in the event that the consideration to be received in
such transaction includes securities or other property, in cash and/or
securities or other property in the Committee's discretion.

17.   Amendment and Termination of the Plan.

            The Board of Directors or the Committee, without approval of the
stockholders, may amend or terminate the Plan, except that no amendment shall
become effective without prior approval of the stockholders of the Company if
stockholder approval would be required by applicable law or regulations or by
any listing requirement of the principal stock exchange on which the Common
Stock is then listed.

18.   Amendment or Substitution of Awards under the Plan.

            The terms of any outstanding award under the Plan may be amended
from time to time by the Committee in its discretion in any manner that it deems
appropriate, including, but not limited to, acceleration of the date of exercise
of any award and/or payments thereunder or of the date of lapse of restrictions
on Shares (but only to the extent permitted by regulations issued under Section
409A(a)(3) of the Code); provided that, except as otherwise provided in Section
16, no such amendment shall adversely affect in a material manner any right of a
participant under the award without his or her written consent, and provided
further that the Committee shall not reduce the exercise price of any options
awarded under the Plan without approval of the stockholders of the Company. The
Committee may, in its discretion, permit holders of awards under the Plan to
surrender outstanding awards in order to exercise or realize rights under other

                                       15


awards, or in exchange for the grant of new awards, or require holders of awards
to surrender outstanding awards as a condition precedent to the grant of new
awards under the Plan, but only if such surrender, exercise, realization,
exchange, or grant (a) would not constitute a distribution of deferred
compensation for purposes of Section 409A(a)(3) of the Code or (b) constitutes a
distribution of deferred compensation that is permitted under regulations issued
pursuant to Section 409A(a)(3) of the Code.

19.   Commencement Date; Termination Date.

            The date of commencement of the Plan shall be the date on which the
Company's Registration Statement on Form S-1 (File No. 333-119111) is declared
effective by the Securities and Exchange Commission.

            Unless previously terminated upon the adoption of a resolution of
the Board terminating the Plan, the Plan shall terminate at the close of
business on the ten year anniversary of the date on which the Company's
Registration Statement on Form S-1 (File No. 333-119111) is declared effective
by the Securities and Exchange Commission. No termination of the Plan shall
materially and adversely affect any of the rights or obligations of any person,
without his or her written consent, under any grant of options or other
incentives theretofore granted under the Plan.

20.   Severability. Whenever possible, each provision of the Plan shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of the Plan is held to be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of the Plan.

21.   Governing Law. The Plan shall be governed by the corporate laws of the
State of Delaware, without giving effect to any choice of law provisions that
might otherwise refer construction or interpretation of the Plan to the
substantive law of another jurisdiction.

                                       16

EX-10.42

                                                                   EXHIBIT 10.42


                    FORM OF [NON-QUALIFIED] [INCENTIVE] STOCK
                             OPTION AWARD AGREEMENT


                 [SEABRIGHT INSURANCE HOLDINGS, INC. LETTERHEAD]

                                 ______ __, ____


- --------------

- --------------

- --------------

- --------------


              Re: Grant of [NON-QUALIFIED] [INCENTIVE] Stock Option

Dear ____________:

         SeaBright Insurance Holdings, Inc. (the "Company") is pleased to advise
you that, pursuant to the Company's 2005 Long-Term Equity Incentive Plan (the
"Plan"), the Committee has granted to you an option (the "Option") to acquire
shares of Common Stock, as set forth below, subject to the terms and conditions
set forth herein:

                Number of Option Shares:
                                                        -------------
                Date of Grant:
                                                        -------------
                Exercise Price per Option Share:
                                                        -------------

                Vesting Dates of Option Shares:
                                                        -------------

                                                        -------------

                                                        -------------

                                                        -------------

                Expiration Date of All Option Shares:
                                                        -------------

         [THE OPTION IS NOT INTENDED TO BE AN "INCENTIVE STOCK OPTION" WITHIN
THE MEANING OF SECTION 422 OF THE CODE.] [THE OPTION IS INTENDED TO BE AN
"INCENTIVE STOCK OPTION" WITHIN THE MEANING OF SECTION 422 OF THE CODE. IF THE
OPTION DOES NOT QUALIFY AS SUCH FOR ANY REASON, THEN TO THE EXTENT OF SUCH
NON-QUALIFICATION, THE OPTION SHALL BE REGARDED AS A NON-QUALIFIED STOCK
OPTION.]

         Any capitalized terms used herein and not defined herein have the
meaning set forth in the Plan.




1.       Option.

         (a) Term. Subject to the terms and conditions set forth herein, the
Company hereby grants to you (or such other persons as permitted by paragraph 5)
an Option to purchase the Option Shares at the exercise price per Option Share
set forth above in the introductory paragraph of this letter agreement (the
"Exercise Price"), payable upon exercise as set forth in paragraph 1(b) below.
The Option shall expire at the close of business on the date set forth above in
the introductory paragraph of this letter agreement (the "Expiration Date"),
which is the tenth anniversary of the date of grant set forth above in the
introductory paragraph of this letter agreement (the "Grant Date"), subject to
earlier expiration as provided under the Plan should your employment or service
with the Company or a Subsidiary terminate. The Exercise Price and the number
and kind of shares of Common Stock or other property for which the Option may be
exercised shall be subject to adjustment as provided under the Plan. For
purposes of this letter agreement, "Option Shares" mean (i) all shares of Common
Stock issued or issuable upon the exercise of the Option and (ii) all shares of
Common Stock issued with respect to the Common Stock referred to in clause (i)
above by way of stock dividend or stock split or in connection with any
conversion, merger, consolidation or recapitalization or other reorganization
affecting the Common Stock.

         (b) Payment of Option Price. Subject to paragraph 2 below, the Option
may be exercised in whole or in part upon payment of an amount (the "Option
Price") equal to the product of (i) the Exercise Price and (ii) the number of
Option Shares to be acquired. Payment of the Option Price shall be made as
provided under the Plan.

         2. Exercisability/Vesting and Expiration.

         (a) Normal Vesting. The Option granted hereunder may be exercised only
to the extent it has become vested. The Option shall vest in as indicated by the
vesting dates of Option Shares set forth in the introductory paragraph of this
letter agreement.

         (b) Normal Expiration. In no event shall any part of the Option be
exercisable after the Expiration Date.

         (c) Effect on Vesting and Expiration of Employment Termination.
Notwithstanding paragraphs 2(a) and (b) above, the special vesting and
expiration rules set forth in the Plan shall apply if your employment or service
with the Company or a Subsidiary terminates prior to the Option becoming fully
vested and/or prior to the Expiration Date.

         3. Procedure for Exercise. You may exercise all or any portion of the
Option, to the extent it has vested and is outstanding, at any time and from
time to time prior to the Expiration Date, by delivering written notice to the
Company in the form attached hereto as Exhibit A, together with payment of the
Option Price in accordance with the provisions set forth in the Plan. The Option
may not be exercised for a fraction of an Option Share.

         4. Withholding of Taxes.

         (a) Participant Election. Unless otherwise determined by the Committee,
you may elect to deliver shares of Common Stock (or have the Company withhold
Option Shares


                                      -2-


acquired upon exercise of the Option) to satisfy, in whole or in part, the
amount the Company is required to withhold for taxes in connection with the
exercise of the Option. Such election must be made on or before the date the
amount of tax to be withheld is determined. Once made, the election shall be
irrevocable. The fair market value of the shares to be withheld or delivered
will be the Fair Market Value as of the date the amount of tax to be withheld is
determined.

         (b) Company Requirement. The Company, to the extent permitted or
required by law, shall have the right to deduct from any payment of any kind
(including salary or bonus) otherwise due to you, an amount equal to any
federal, state or local taxes of any kind required by law to be withheld with
respect to the delivery of Option Shares under this letter agreement.

         5. Transferability of Option. You may transfer the Option granted
hereunder only by will or the laws of descent and distribution or to any of your
Family Members by gift or a qualified domestic relations order as defined by the
Code. Unless the context requires otherwise, references herein to you are deemed
to include any permitted transferee under this paragraph 5. The Option may be
exercised only by you; by your Family Member if such person has acquired the
Option by gift or qualified domestic relations order; by the executor or
administrator of the estate of any of the foregoing or any person to whom the
Option is transferred by will or the laws of descent and distribution; or by the
guardian or representative of any of the foregoing; provided that Incentive
Stock Options may be exercised by any guardian or legal representative only if
permitted by the Code and any regulations thereunder.

         6. Conformity with Plan. The Option is intended to conform in all
respects with, and is subject to all applicable provisions of, the Plan (which
is incorporated herein by reference). Inconsistencies between this letter
agreement and the Plan shall be resolved in accordance with the terms of the
Plan. By executing and returning the enclosed copy of this letter agreement, you
acknowledge your receipt of this letter agreement and the Plan and agree to be
bound by all of the terms of this letter agreement and the Plan.

         7. Rights of Participants. Nothing in this letter agreement shall
interfere with or limit in any way the right of the Company to terminate your
employment or other performance of services at any time (with or without Cause),
nor confer upon you any right to continue in the employ or as a director or
officer of, or in the performance of other services for, the Company or a
Subsidiary for any period of time, or to continue your present (or any other)
rate of compensation or level of responsibility. Nothing in this letter
agreement shall confer upon you any right to be selected again as a Plan
participant.

         8. Amendment or Substitution of Option. The terms of the Option may be
amended from time to time by the Committee in its discretion in any manner that
it deems appropriate (including, but not limited to, acceleration of the date of
exercise of the Option); provided that no such amendment shall adversely affect
in a material manner any of your rights under the award without your written
consent.

         9. Successors and Assigns. Except as otherwise expressly provided
herein, all covenants and agreements contained in this letter agreement by or on
behalf of any of the


                                      -3-


parties hereto shall bind and inure to the benefit of the respective successors
and permitted assigns of the parties hereto whether so expressed or not.

         10. Severability. Whenever possible, each provision of this letter
agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this letter agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this letter agreement.

         11. Counterparts. This letter agreement may be executed simultaneously
in two or more counterparts, each of which shall constitute an original, but all
of which taken together shall constitute one and the same letter agreement.

         12. Descriptive Headings. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.

         13. Governing Law. THE VALIDITY, CONSTRUCTION, INTERPRETATION,
ADMINISTRATION AND EFFECT OF THE PLAN, AND OF ITS RULES AND REGULATIONS, AND
RIGHTS RELATING TO THE PLAN AND TO THIS LETTER AGREEMENT, SHALL BE GOVERNED BY
THE SUBSTANTIVE LAWS, BUT NOT THE CHOICE OF LAW RULES, OF THE STATE OF DELAWARE.

         14. Notices. All notices, demands or other communications to be given
or delivered under or by reason of the provisions of this letter agreement shall
be in writing and shall be deemed to have been given when (i) delivered
personally, (ii) mailed by certified or registered mail, return receipt
requested and postage prepaid, (iii) sent by facsimile or (iv) sent by reputable
overnight courier, to the recipient. Such notices, demands and other
communications shall be sent to you at the address specified in this letter
agreement and to the Company at 2101 4th Avenue, Suite 1600, Seattle, Washington
98121, Attn: ____________, or to such other address or to the attention of such
other person as the recipient party has specified by prior written notice to the
sending party.

         15. Entire Agreement. This letter agreement and the terms of the Plan
constitute the entire understanding between you and the Company, and supersede
all other agreements, whether written or oral, with respect to your acquisition
of the Option Shares.

                                 *  *  *  *  *


                                      -4-



                 SIGNATURE PAGE TO STOCK OPTION AWARD AGREEMENT


         Please execute the extra copy of this letter agreement in the space
below and return it to the Company to confirm your understanding and acceptance
of the agreements contained in this letter agreement.

                                              Very truly yours,


                                              SEABRIGHT INSURANCE HOLDINGS, INC.


                                              By:
                                                 -------------------------------

                                              Name:
                                                   -----------------------------

                                              Title:
                                                    ----------------------------


Enclosures:   Extra copy of this letter agreement
              Copy of the Plan


         The undersigned hereby acknowledges having read this letter agreement
and the Plan and hereby agrees to be bound by all provisions set forth herein
and in the Plan.



                                              OPTIONEE


                                              ----------------------------------



Dated as of:
             -------------------









                                                                       EXHIBIT A


               FORM OF LETTER TO BE USED TO EXERCISE STOCK OPTION



                              --------------------
                                      Date

- --------------

- --------------

- --------------

Attention:
          -----------------------

         I wish to exercise the stock option granted on _________ and evidenced
by a Stock Option Award Agreement dated as of ___________, to acquire _________
shares of Common Stock of _________, at an option price of $_______ per share.
In accordance with the provisions of paragraph 1 of the Stock Option Award
Agreement, I wish to make payment of the exercise price (please check all that
apply):

               [ ]  in cash
               [ ]  by delivery of shares of Common Stock held by me
               [ ]  by simultaneous sale through a broker

Please issue a certificate for these shares in the following name:



- -----------------------------
Name


- -----------------------------
Address

                                             Very truly yours,


                                             -----------------------------------
                                             Signature


                                             -----------------------------------
                                             Typed or Printed Name


                                             -----------------------------------
                                             Social Security Number

EX-23.1

                                                                    EXHIBIT 23.1

                  Consent of Independent Registered Public Accounting Firm

The Board of Directors
SeaBright Insurance Holdings, Inc.

We consent to the use of our reports included herein and to the reference to our
firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.

Our report on the combined financial statements of the Predecessor refers to the
Predecessor's adoption of the provisions of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets.


/s/ KPMG LLP

Seattle, WA
December 29, 2004

CORRESP

200 East Randolph Drive
Chicago, Illinois 60601

     James S. Rowe
To Call Writer Directly:
     312 861-2191
jrowe@kirkland.com 312 861-2000
 
www.kirkland.com Facsimile:
312 660-0115

January 3, 2005

VIA EDGAR SUBMISSION AND
OVERNIGHT DELIVERY

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Mail Stop 3-09
Attention: Mr. Albert C. Lee

Re: SeaBright Insurance Holdings, Inc.
Amendment No. 4 to Registration Statement on Form S-1
File Number 333-119111

Ladies and Gentlemen:

     SeaBright Insurance Holdings, Inc., a Delaware corporation (the “Company”), has today filed with the Securities and Exchange Commission, pursuant to the requirements of the Securities Act of 1933, as amended, and Regulation S-T thereunder, an Amendment No. 4 to its Registration Statement on Form S-1 (the “Amendment”).

     On behalf of the Company, we are writing to formally respond to your inquiries relating to the Company’s February 2004 and December 2004 stock splits. To date, the Company has issued 508,365.25 shares of its convertible preferred stock at a cost and liquidation value of $100.00 per share. The initial conversion price of the preferred stock was $100.00 per share, resulting in an initial conversion ratio of one share of common stock for each share of preferred stock. In February of 2004, the Company’s Board of Directors approved a two-for-one split of the Company’s authorized common shares by reducing the conversion price to $50.00 per share and increasing by a factor of two the number of common shares into which each preferred share could be converted ($50.00 x 2 shares = $100 original liquidation value). In December 2004, the Company’s Board of Directors approved a further 7.649832-for-one split of the Company’s authorized common shares by reducing the conversion price to $6.54 per share and increasing by a factor of 7.649832 the number of common shares into which each preferred share could be converted ($6.54 x (2 x 7.649832) shares = $100 original liquidation value). These adjustments affected all of the Company’s outstanding equity interests equally. The Company’s outstanding equity interests consist solely of preferred stock and options to purchase the Company’s common stock. At no time have there been any shares of common stock

London Los Angeles New York San Francisco Washington, D.C.

Securities and Exchange Commission
January 3, 2005
Page 2

outstanding. The options were amended by the Company’s Board of Directors in a manner consistent with the terms of the plan pursuant to which they were issued to make appropriate, equivalent adjustment to the exercise price of each option and the number of shares that could be acquired upon exercise of each option. Thus, an option to purchase two shares of common stock at $50 per share immediately before the stock split that occurred in December 2004 became, without any action on the part of the holder, an option to purchase 15.3 shares of common stock at an exercise price at $6.54 per share (requiring, as before, the option holder to pay $100 in consideration for an equivalent proportion of the outstanding equity of the Company).

     As all of the foregoing calculations illustrate, the stock splits effected by adjusting the conversion price of the Company’s outstanding preferred stock have had no economic impact on the holders of any of the Company’s equity interests. We understand that these types of adjustments are common among companies preparing for initial public offerings of their common stock. It should be noted that the result would have been the same had the preferred shareholders converted their preferred stock into common stock prior to the two-for-one stock split and then the Company’s Board of Directors approved a 15.3-for-one stock split.

     The Company has reviewed the relevant accounting literature dealing with beneficial conversion features (including Emerging Issues Task Force (“EITF”) 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features of Contingently Adjustable Conversion Ratios,” and EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”). EITF 98-5 defines a beneficial conversion feature as “convertible preferred stock with a nondetachable conversion feature that is in-the-money at the commitment date” (italics added). The Company’s preferred stock was issued at an initial liquidation value of $100 per share and provided for conversion at the rate of one share of common stock for each share of preferred stock. The subsequent adjustments outlined above reduced the conversion price of the preferred to $6.54 per share and, accordingly, increased in like proportion the number of shares of common stock into which each share of preferred stock could be converted (and indirectly, the number of shares into which the outstanding options could be exercised and the corresponding exercise price). There was no “in-the-money” conversion feature at the commitment date (as defined in EITF 98-5) and we do not believe that these adjustments to the Company’s capital structure constitute a “beneficial conversion feature” or a preferred stock dividend, since the conversion ratio was increased by the same proportion as the reduction in the conversion price (before: $100.00 per share x 1 share = $100.00 liquidation value; after: $6.54 per share x 15.3 shares = $100.00 liquidation value).

* * * * *

Securities and Exchange Commission
January 3, 2005
Page 3

     For your convenience, copies of the Amendment are enclosed, and have been marked to show changes from Amendment No. 3 to the Registration Statement on Form S-1 filed on December 8, 2004. Please do not hesitate to contact the undersigned at the number above with any questions or comments regarding this filing.

Sincerely,
 

/s/ James S. Rowe  

James S. Rowe 

cc: John G. Pasqualetto
      SeaBright Insurance Holdings, Inc.