10-Q

UNITED STATES SECURITIES AND

 EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________

FORM 10-Q

(Mark One)

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2011

or

[   ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________

Commission File Number 001-34204

SeaBright Holdings, Inc.

(Exact name of registrant as specified in its charter)

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

1501 4th Avenue, Suite 2600

Seattle, WA 98101

(Address of principal executive offices, including zip code)

(206) 269-8500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes [X]    No [   ]

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

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

Large accelerated filer [   ]    Accelerated filer [X]     Non-accelerated filer [   ]     Smaller reporting company [   ]

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

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

Class	Shares outstanding as of November 3, 2011
Common Stock, $0.01 Par Value	22,332,549

 SeaBright Holdings, Inc.

Index to Form 10-Q

		Page
Part I.	Financial Information
Item 1.	Financial Statements (unaudited)	2
	Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010	2
	Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months and Nine Months Ended September 30, 2011 and 2010	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
Part II.	Other Information
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 6.	Exhibits	25
Signatures		26

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2011		December 31, 2010
	(Unaudited)
	(in thousands, except share and per share amounts)
ASSETS
Fixed income securities available for sale, at fair value (amortized cost $660,588 in 2011 and $665,761 in 2010)	$	689,972	$	672,968
Cash and cash equivalents		31,199		15,958
Premiums receivable, net		18,435		15,023
Deferred premiums, net		149,464		168,842
Reinsurance recoverables		88,778		56,746
Federal income tax receivable		12,638		11,749
Deferred income taxes, net		19,667		23,458
Deferred policy acquisition costs, net		23,686		25,574
Goodwill		2,794		2,794
Other assets		39,038		33,450
Total assets	$	1,075,671	$	1,026,562
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid loss and loss adjustment expense	$	502,896	$	440,919
Unearned premiums		137,321		155,786
Reinsurance funds withheld and balances payable		7,211		6,739
Premiums payable		6,465		8,645
Accrued expenses and other liabilities		58,868		51,456
Surplus notes		12,000		12,000
Total liabilities		724,761		675,545
Contingencies (Note 7)
Stockholders’ equity:
Series A preferred stock, $0.01 par value; 750,000 shares authorized; no shares issued and outstanding		−		−
Undesignated preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued and outstanding		–		–
Common stock, $0.01 par value; 75,000,000 shares authorized; issued and outstanding – 22,299,173shares at September 30, 2011 and 22,025,450 shares at December 31, 2010		223		220
Paid-in capital		212,837		209,941
Accumulated other comprehensive income		19,870		5,591
Retained earnings		117,980		135,265
Total stockholders’ equity		350,910		351,017
Total liabilities and stockholders’ equity	$	1,075,671	$	1,026,562

See accompanying notes to unaudited condensed consolidated financial statements.

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SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 AND COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands, except share and earnings (loss) per share information)
Revenue:
Premiums earned	$	63,994		$	65,108		$	182,812		$	191,359
Claims service income		340			275			976			797
Net investment income		5,161			5,806			15,833			17,765
Net realized gains		256			3,904			663			14,287
Other income		1,044			1,014			3,338			3,304
Total revenue		70,795			76,107			203,622			227,512
Losses and expenses:
Loss and loss adjustment expenses		48,636			49,002			164,559			173,126
Underwriting, acquisition and insurance expenses		18,261			17,640			56,003			53,456
Interest expense		131			136			390			396
Goodwill impairment		–			–			–			1,527
Other expenses		2,012			1,797			6,059			5,574
Total losses and expenses		69,040			68,575			227,011			234,079
Income (loss) before taxes		1,755			7,532			(23,389	)		(6,567	)
Income tax expense (benefit)		126			2,104			(9,454	)		(4,052	)
Net income (loss)		1,629			5,428			(13,935	)		(2,515	)
Other comprehensive income:
Net unrealized gains on investment securities available for sale		13,254			11,944			22,840			25,725
Less: Reclassification adjustment for net realized gains recorded into net income		(256	)		(3,904	)		(663	)		(14,287	)
Income tax expense related to items of other comprehensive income		(4,621	)		(2,814	)		(7,898	)		(4,004	)
Other comprehensive income		8,377			5,226			14,279			7,434
Comprehensive income	$	10,006		$	10,654		$	344		$	4,919
Basic earnings (loss) per share	$	0.08		$	0.26		$	(0.66	)	$	(0.12	)
Diluted earnings (loss) per share	$	0.07		$	0.25		$	(0.66	)	$	(0.12	)
Dividends declared per share	$	0.05		$	0.05		$	0.15		$	0.15
Weighted average basic shares outstanding		21,179,035			20,909,738			21,102,373			20,850,428
Weighted average diluted shares outstanding		21,734,789			21,442,157			21,102,373			20,850,428

See accompanying notes to unaudited condensed consolidated financial statements.

-3-

SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2011			2010
	(in thousands)
Cash flows from operating activities:
Net loss	$	(13,935	)	$	(2,515	)
Adjustments to reconcile net loss to cash provided by operating activities:
Amortization of deferred policy acquisition costs		38,676			35,327
Policy acquisition costs deferred		(36,788	)		(35,001	)
Provision for depreciation and amortization		6,427			4,941
Compensation cost on restricted shares of common stock		3,278			3,402
Compensation cost on stock options		514			706
Net realized gains on investments		(663	)		(14,287	)
Deferred income tax (expense) benefit		(4,108	)		1,313
Changes in certain assets and liabilities:
Unpaid loss and loss adjustment expense		61,977			76,732
Federal income tax receivable		(889	)		(5,339	)
Reinsurance recoverables, net of reinsurance withheld		(31,557	)		(13,676	)
Unearned premiums, net of deferred premiums and premiums receivable		(2,499	)		(1,087	)
Other assets and other liabilities		(3,211	)		3,507
Net cash provided by operating activities		17,222			54,023
Cash flows from investing activities:
Purchases of investments		(112,796	)		(381,474	)
Proceeds from sales of investments		74,758			304,137
Maturities and redemption of investments		41,581			40,335
Purchases of property and equipment		(1,296	)		(1,862	)
Net cash provided by (used in) investing activities		2,247			(38,864	)
Cash flows from financing activities:
Proceeds from exercise of stock options		–			26
Grant of restricted shares of common stock		5			4
Surrender of stock in connection with restricted stock vesting		(897	)		(579	)
Stockholder dividends paid		(3,336	)		(2,200	)
Net cash used in financing activities		(4,228	)		(2,749	)
Net increase in cash and cash equivalents		15,241			12,410
Cash and cash equivalents at beginning of period		15,958			12,896
Cash and cash equivalents at end of period	$	31,199		$	25,306
Supplemental disclosures:
Interest paid on surplus notes	$	390		$	394
Payable for purchases of investments		6,309			15,166
Receivable for sales of investments		3,415			5,466
Federal income taxes refunded		4,470			–

See accompanying notes to unaudited condensed consolidated financial statements.

-4-

SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of SeaBright Holdings, Inc. (“SeaBright”) and its wholly owned subsidiaries, SeaBright Insurance Company (“SBIC”), PointSure Insurance Services, Inc. (“PointSure”), and Paladin Managed Care Services, Inc. (“PMCS”) (collectively, the “Company,” “we” or “us”). All significant intercompany transactions among these affiliated entities have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet at December 31, 2010 has been derived from the audited financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited financial statements and accompanying notes as of and for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 14, 2011.

In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (including normal recurring adjustments) necessary to state fairly the financial information set forth therein. Results of operations for the three months and nine months ended September 30, 2011 are not necessarily indicative of the results expected for the full fiscal year or for any future period.

Certain reclassifications have been made to the prior year’s financial statements to conform to classifications used in the current year.

2. Summary of Significant Accounting Policies

a.  Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Company has used significant estimates in determining unpaid loss and loss adjustment expenses, including losses that have occurred but were not reported to us by the financial reporting date; the amount and recoverability of reinsurance recoverable balances; goodwill and other intangibles; retrospective premiums; earned but unbilled premiums; deferred policy acquisition costs; income taxes; and the valuation and other-than-temporary impairments of investment securities.

b. Earnings Per Share

The following table provides the reconciliation of basic and diluted weighted average shares outstanding used in calculating earnings per share for the three month and nine month periods ended September 30, 2011 and 2010:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(in thousands)
Basic weighted average shares outstanding		21,179		20,910		21,102		20,850
Weighted average shares issuable upon exercise of outstanding stock options and vesting of nonvested restricted stock		556		532		–		–
Diluted weighted average shares outstanding		21,735		21,442		21,102		20,850

The effect of including shares issuable upon the exercise of outstanding stock options and the vesting of non-vested restricted stock was anti-dilutive for the nine month periods ended September 30, 2011 and 2010. Therefore, such shares have been excluded from the calculation of diluted weighted average shares outstanding for these periods. The numbers of such shares excluded for the nine month periods ended September 30, 2011 and 2010 were approximately 629,000 and 581,000, respectively.

-5-

SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

c. Stockholder Dividends

On August 10, 2011, the Company’s Board of Directors declared a quarterly dividend of $0.05 per common share. The dividend was paid on October 14, 2011 to stockholders of record on September 30, 2011. Any future determination to pay cash dividends on the Company’s common stock will be at the discretion of its Board of Directors and will be dependent on the Company’s earnings; financial condition; operating results; capital requirements; any contractual, regulatory or other restrictions on the payment of dividends by the Company’s subsidiaries; and other factors that the Company’s Board of Directors deems relevant.

e. Recent Accounting Pronouncements

In October 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This ASU allows insurance entities to defer costs related to the acquisition of new or renewal insurance contracts that are (1) incremental direct costs of the contract transaction (i.e., would not have occurred without the contract transaction), (2) a portion of an employee's compensation and fringe benefits related to certain activities for successful contract acquisitions, or (3) direct-response advertising costs as defined in Accounting Standards Codification (“ASC”) Subtopic 340-20, Other Assets and Deferred Costs - Capitalized Advertising Costs. All other costs related to the acquisition of new or renewal insurance contracts are required to be expensed as incurred. This ASU is effective for interim and annual periods beginning after December 15, 2011 with either prospective or retrospective application permitted. The Company will adopt this guidance retrospectively effective January 1, 2012. Although the Company continues to evaluate the impact of adopting the new guidance, it currently estimates that adoption will reduce its December 31, 2011 retained earnings (the period immediately prior to adoption) by approximately $4.5 million, net of taxes.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to increase the prominence of other comprehensive income in the financial statements. An entity will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2011, with earlier adoption permitted. The Company adopted this guidance retrospectively effective September 30, 2011.  The adoption of ASU 2011-05 did not have a material effect on the Company’s consolidated financial condition or results of operations.

In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, to simplify the current two-step goodwill impairment test required under Topic 350. Under this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If such a determination is not reached, then performance of further impairment testing is not necessary. The new guidance is effective for annual and interim goodwill tests performed for fiscal years beginning after December 15, 2011.  However, early adoption is permitted. The adoption of ASU 2011-08 is not expected to have a material effect on the Company’s consolidated financial condition or results of operations.

d.   Other Significant Accounting Policies

For a more complete discussion of the Company’s significant accounting policies, please see Note 2 to the Company’s consolidated financial statements as of and for the year ended December 31, 2010 in Part II, Item 8 of the Company’s Annual Report on Form 10-K filed with the SEC on March 14, 2011.

-6-

SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Investments

The consolidated cost or amortized cost, gross unrealized gains and losses, and estimated fair value of investment securities available for sale at September 30, 2011, and December 31, 2010 were as follows:

	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
September 30, 2011:
U.S. Treasury securities	$	25,978	$	1,562	$	–		$	27,540
Government sponsored agency securities		16,563		1,383		–			17,946
Corporate securities		162,480		8,648		(412	)		170,716
Tax-exempt municipal securities		302,380		13,328		(109	)		315,599
Mortgage pass-through securities		78,433		3,481		(1	)		81,913
Collateralized mortgage obligations		14,131		244		(40	)		14,335
Asset-backed securities		60,623		1,321		(21	)		61,923
Total investment securities available for sale	$	660,588	$	29,967	$	(583	)	$	689,972

December 31, 2010:

U.S. Treasury securities	$	26,514	$	635	$	(172	)	$	26,977
Government sponsored agency securities		23,159		943		(31	)		24,071
Corporate securities		154,652		3,532		(1,915	)		156,269
Tax-exempt municipal securities		309,935		5,555		(4,778	)		310,712
Mortgage pass-through securities		73,501		2,548		(745	)		75,304
Collateralized mortgage obligations		17,260		233		(28	)		17,465
Asset-backed securities		60,740		1,577		(147	)		62,170
Total investment securities available for sale	$	665,761	$	15,023	$	(7,816	)	$	672,968

The Company regularly reviews its investment portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of its investments. A number of criteria are considered during this process including, but not limited to: the current fair value as compared to amortized cost or cost, as appropriate, of the security; the length of time the security’s fair value has been below amortized cost or cost; the likelihood that the Company will be required to sell the security before recovery of its cost basis; objective information supporting recovery in a reasonable period of time; specific credit issues related to the issuer; and current economic conditions.  The Company has the ability and intent to hold impaired investments to maturity or for a period of time sufficient for recovery of their carrying amount. For the three months and nine months ended September 30, 2011 and 2010, the Company recognized no other-than-temporary impairment losses related to investments in debt securities.

The following table presents information about investment securities with unrealized losses at September 30, 2011:

	Less Than 12 Months					12 Months or More					Total
Investment Category	Aggregate Fair Value		Aggregate Unrealized Loss			Aggregate Fair Value		Aggregate Unrealized Loss			Aggregate Fair Value		Aggregate Unrealized Loss
						(in thousands)
Fixed Income Securities:
Corporate securities	$	16,389	$	(406	)	$	1,620	$	(6	)	$	18,009	$	(412	)
Tax-exempt municipal securities		9,859		(63	)		2,230		(46	)		12,089		(109	)
Mortgage pass-through securities (1)		1,042		(1	)		–		–			1,042		(1	)
Collateralized mortgage obligations		258		–			142		(40	)		400		(40	)
Asset backed securities		7,406		(21	)		557		–			7,963		(21	)
Total	$	34,954	$	(491	)	$	4,549	$	(92	)	$	39,503	$	(583	)

__________

(1)           Includes adjustable rate mortgage securities.

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SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents information regarding gross realized gains and losses resulting from the sale of investment securities in the three month and nine month periods ended September 30, 2011 and 2010:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands)
Gross realized gains	$	281		$	3,907		$	1,113		$	14,457
Gross realized losses		(25	)		(3	)		(450	)		(170	)
Net realized gains	$	256		$	3,904		$	663		$	14,287
Proceeds	$	28,220		$	115,756		$	119,754		$	349,938

The related reclassification adjustments in other comprehensive income on the Condensed Consolidated Statements of Operations and Comprehensive Income were determined by specific identification.

The Company had no direct sub-prime mortgage exposure in its investment portfolio as of September 30, 2011 and approximately $9.9 million of indirect exposure to sub-prime mortgages. The following table provides a breakdown of ratings on the bonds in the Company’s municipal portfolio as of September 30, 2011:

	Insured Bonds				Uninsured Bonds		Total Municipal Portfolio Based On
Rating	Insured Ratings		Underlying Ratings		Ratings		Overall Ratings (1)		Underlying Ratings
	(in thousands)
AAA	$	4,765	$	4,765	$	28,693	$	33,458	$	33,458
AA+		16,412		15,220		58,195		74,607		73,415
AA		24,458		19,085		64,533		88,991		83,618
AA-		24,134		26,198		48,354		72,488		74,552
A+		12,175		15,518		9,700		21,875		25,218
A		5,311		5,311		20,044		25,355		25,355
A-		1,046		2,204		2,991		4,037		5,195
BBB+		–		–		1,311		1,311		1,311
BBB		–		–		2,949		2,949		2,949
Pre-refunded (2)		6,074		6,074		7,349		13,423		13,423
Total	$	94,375	$	94,375	$	244,119	$	338,494	$	338,494

__________

(1) Represents insured ratings on insured bonds and ratings on uninsured bonds.

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

As of September 30, 2011, the Company had no direct investments in any bond insurer, and the following bond insurer insured more than 10% of the municipal bond investments in the Company’s portfolio:

			Insurer Ratings		Average Underlying Bond
Bond Insurer	Fair Value		S&P	Moody’s	Rating
		(millions)
National Public Finance Guarantee Corporation	$	42.1	BBB	Baa1	AA-

The Company does not expect a material impact to its investment portfolio or financial position as a result of the problems currently facing monoline bond insurers.

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SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The amortized cost and estimated fair value of fixed income securities available for sale at September 30, 2011, 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 Amortized Cost		Estimated Fair Value
	(in thousands)
Maturity
Due in one year or less	$	29,863	$	30,385
Due after one year through five years		190,555		198,268
Due after five years through ten years		260,359		275,089
Due after ten years		26,623		28,058
Securities not due at a single maturity date		153,188		158,172
Total fixed income securities	$	660,588	$	689,972

The consolidated amortized cost of investment securities available for sale deposited with various regulatory authorities at September 30, 2011 was $222.8 million.

4. Premiums

Direct premiums written totaled $55.9 million and $50.7 million for the three month periods ended September 30, 2011 and 2010, respectively, and $191.7 million and $190.2 million for the nine month periods then ended, respectively.

Premiums receivable consisted of the following at September 30, 2011 and December 31, 2010:

	September 30, 2011			December 31, 2010
	(in thousands)
Current:
Premiums receivable	$	19,342		$	15,673
Allowance for doubtful accounts	­ (907		)	­ (650		)
Premiums receivable, net.	$	18,435		$	15,023

Deferred:
Premiums receivable	$	149,710		$	169,128
Allowance for doubtful accounts	­ (246		)	­ (286		)
Premiums receivable, net.	$	149,464		$	168,842

5.  Reinsurance

Under reinsurance agreements, the Company cedes various amounts of risk to nonaffiliated insurance companies for the purpose of limiting the maximum potential loss arising from the underlying insurance risks. These reinsurance treaties do not relieve the Company from its obligations to policyholders.

On October 1, 2011, the Company entered into reinsurance agreements with nonaffiliated reinsurers wherein it retains the first $0.5 million of each loss occurrence. The next $0.5 million of losses per occurrence (excess of the first $0.5 million of losses per occurrence retained by the Company) are 50% reinsured. Losses in excess of $1.0 million per loss occurrence are fully reinsured through the program limit of $75.0 million per loss occurrence, subject to various deductibles, limitations and exclusions as more fully described in the treaties. The new reinsurance program is effective through September 30, 2012. The ceding rate for the new program decreased approximately 50% from the expiring rate primarily as a result of eliminating coverage for losses between $0.25 million and $0.5 million. The Company had different reinsurance programs in place in periods prior to October 1, 2011, as discussed in Note 8 to the Company’s consolidated financial statements as of and for the year ended December 31, 2010 included in Part II, Item 8 of the Company’s Annual Report on Form 10-K filed with the SEC on March 14, 2011.

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SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Unpaid Loss and Loss Adjustment Expenses

The following table summarizes the activity in unpaid loss and loss adjustment expense for the three month and nine month periods ended September 30, 2011 and 2010:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands)
Beginning balance:
Unpaid loss and loss adjustment expense	$	490,929		$	412,322		$	440,919		$	351,891
Reinsurance recoverable		(80,093	)		(44,052	)		(56,350	)		(34,080	)
Net balance, beginning of period		410,836			368,270			384,569			317,811
Incurred related to:
Current period		46,354			49,002			133,921			142,668
Prior periods		2,282			–			30,638			30,458
Total incurred		48,636			49,002			164,559			173,126
Paid related to:
Current period		(13,579	)		(16,347	)		(26,962	)		(29,500	)
Prior periods		(31,271	)		(21,412	)		(107,544	)		(81,924	)
Total paid		(44,850	)		(37,759	)		(134,506	)		(111,424	)
Net balance, end of period		414,622			379,513			414,622			379,513
Reinsurance recoverable		88,274			49,111			88,274			49,111
Unpaid loss and loss adjustment expense	$	502,896		$	428,624		$	502,896		$	428,624

As a result of changes in estimates of insured events in prior periods, the Company recorded net adverse development of prior accident years’ loss reserves of approximately $2.8 million in the three months ended September 30, 2011 and approximately $31.2 million in the nine months then ended. The adverse development in the third quarter of 2011 consisted of an increase in accident year 2010 direct loss reserves of approximately $3.0 million, offset by $0.2 million of net favorable development of other amounts such as unallocated loss adjustment expenses (“ULAE”), loss-based assessments and losses assumed from the NCCI pools. During the third quarter of 2011, the Company also recorded a gain of approximately $0.5 million related to the commutation of one of the layers in the reinsurance program that expired on September 30, 2009, which offsets the 2011 adverse development in the table above.

7.  Contingencies

a.  SBIC is subject to guaranty fund and other assessments by the states in which it writes business. Guaranty fund assessments are accrued at the time premiums are written. Other assessments are accrued either at the time of assessment or in the case of premium-based assessments, at the time the premiums are written, or in the case of loss-based assessments, at the time the losses are incurred. As of September 30, 2011, SBIC had a liability for guaranty fund and other assessments of $6.2 million and a guaranty fund receivable of $4.8 million. 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 and future insolvencies. The majority of assessments are paid out in the year following the year in which the premium is written or the losses are paid. Guaranty fund receivables and other surcharge items are generally realized by a charge to new and renewing policyholders in the year following the year in which the related assessments were paid.

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

8.  Share-Based Payment Arrangements

At September 30, 2011, the Company had outstanding stock options and nonvested restricted stock granted according to the terms of two equity incentive plans. The stockholders and Board of Directors approved the 2003 Stock Option Plan (the “2003 Plan”) in September 2003, and amended and restated the 2003 Plan in February 2004 and April 2008, and approved the 2005 Long-Term Equity Incentive Plan (the “2005 Plan” and, together with the 2003 Plan, the “Stock Option Plans”) in December 2004, and amended and restated the 2005 Plan in April 2007 and May 2010.

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SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of September 30, 2011, the Company reserved 776,458 shares of common stock for issuance under the 2003 Plan, of which options to purchase 479,946 shares had been granted, and 3,505,550 shares for issuance under the 2005 Plan, of which 3,039,248 shares had been granted. In January 2006, the Compensation Committee of the Board of Directors terminated the ability to grant future stock option awards under the 2003 Plan. Therefore, the Company anticipates that all future awards will be made under the 2005 Plan.

a.  Stock Options

The following table summarizes stock option activity for the nine months ended September 30, 2011:

	Shares Subject to			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
	Options			per Share		(years)		(in thousands)
Outstanding at December 31, 2010		1,354,442		$	11.09		5.7	$	1,002
Granted		167,038			9.96		–		–
Forfeited		(14,150	)		10.53		–		–
Exercised		–			–		–		–
Cancelled		(2,808	)		12.70		–		–
Outstanding at September 30, 2011		1,504,522			10.97		5.4		240
Exercisable at September 30, 2011		1,094,673			11.09		4.3		240

The September 30, 2011 aggregate intrinsic values in the table above are based on the Company’s closing stock price of $7.20 on that date. There were no proceeds from or exercises of stock options during the quarter ended September 30, 2011.

b.  Restricted Stock

The following table summarizes restricted stock activity for the nine months ended September 30, 2011:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Outstanding at December 31, 2010		1,105,125		$	11.84
Granted		491,425			9.99
Vested		(382,199	)		14.06
Forfeited		(82,371	)		10.32
Outstanding at September 30, 2011		1,131,980			10.40

As of September 30, 2011, there was approximately $6.0 million of total unrecognized compensation cost related to restricted stock granted under the 2005 Plan. That cost is expected to be recognized over a weighted-average period of approximately 2.0 years.

c.  Stock-Based Compensation

Total stock-based compensation expense recognized in the unaudited condensed consolidated statements of operations for the three month and nine month periods ended September 30, 2011 and 2010 is shown in the following table. No stock-based compensation cost was capitalized during the periods shown.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(in thousands)
Stock-based compensation expense related to:
Nonvested restricted stock	$	857	$	1,134	$	3,278	$	3,402
Stock options		163		268		514		706
Total	$	1,020	$	1,402	$	3,792	$	4,108
Total related tax benefit	$	320	$	423	$	1,208	$	1,268

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SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.  Fair Values of Assets and Liabilities

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

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

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

• Investment securities:   The Company measures and reports its financial assets and liabilities, including investment securities, in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures. The estimated fair values for available-for-sale securities are generally based on quoted market prices for securities traded in the public marketplace. The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity. Additional information with respect to fair values of the Company’s investment securities is disclosed in Note 3.

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

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

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

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

• Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. As of September 30, 2011, the Company had no Level 3 financial assets or liabilities.

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SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The table below presents the September 30, 2011 and December 31, 2010 balances of assets and liabilities measured at fair value on a recurring basis.

September 30, 2011:

	Total		Level 1		Level 2		Level 3
	(in thousands)
U.S. Treasury securities	$	27,540	$	27,540	$	—	$	—
Government sponsored agency securities		17,946		—		17,946		—
Corporate securities		170,716		—		170,716		—
Tax-exempt municipal securities		315,599		—		315,599		—
Mortgage pass-through securities		81,913		—		81,913		—
Collateralized mortgage obligations		14,335		—		14,335		—
Asset-backed securities		61,923		—		61,923		—
Total	$	689,972	$	27,540	$	662,432	$	—

December 31, 2010:

	Total		Level 1		Level 2		Level 3
	(in thousands)
U.S. Treasury securities	$	26,977	$	26,977	$	—	$	—
Government sponsored agency securities		24,071		—		24,071		—
Corporate securities		156,269		—		156,269		—
Tax-exempt municipal securities		310,712		—		310,712		—
Mortgage pass-through securities		75,304		—		75,304		—
Collateralized mortgage obligations		17,465		—		17,465		—
Asset-backed securities		62,170		—		62,170		—
Total	$	672,968	$	26,977	$	645,991	$	—

At September 30, 2011, there were no liabilities measured at fair value on a recurring basis.

Active markets are those in which transactions occur with sufficient frequency and volume to provide reliable pricing information on an ongoing basis.  Inactive markets are those in which there are few transactions for the asset, prices are not current, price quotations vary substantially either over time or among market makers, or in which little information is released publicly.  When the market for an investment is judged to be inactive, appropriate adjustments must be made to observable inputs to account for such inactivity.  As of September 30, 2011, the Company’s investment portfolio consisted of securities that it considered to be traded in active markets.  Therefore, no adjustment for market inactivity or illiquidity was necessary.  There were no transfers between levels during the three months and nine months ended September 30, 2011.

The Company obtains fair value inputs for securities in its investment portfolio from independent, nationally recognized pricing services. The pricing services utilize multidimensional pricing models that vary by asset class and incorporate relevant inputs such as available trade, bid and quote market data for identical or similar instruments, model-based valuation techniques for which significant assumptions were observable and other market information to arrive at a fair value price for each security. This process takes into consideration the relevance of observable inputs based on factors such as the level of trading activity and the volume and currency of available prices and includes appropriate adjustments for nonperformance and liquidity risks.

The Company also seeks input from independent portfolio managers and financial advisors engaged by the Company to assist in the management and oversight of its investment portfolio. The Company and an independent portfolio manager engaged by the Company review such amounts for reasonableness in relation to the following considerations, among others: recent trades of a particular security; the Company’s independent observations of recent developments affecting the economy in general and certain issuers in particular; and fair values from other sources, such as statements from the Company’s custodial banks.

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SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company holds a limited amount ($15.8 million at September 30, 2011) of privately placed corporate bonds and estimates the fair value of these bonds using an internal matrix that is based in part on market information regarding interest rates, credit spreads and liquidity. The pricing matrix begins with current U.S. Treasury rates and uses credit spreads received from third-party sources to estimate fair value. The Company includes the fair value estimates of these corporate bonds in Level 2, since all significant inputs are market observable. As some of these securities are issued by public companies, the Company compares the estimates of fair value to the fair values of these companies’ publicly traded debt to test the validity of the internal pricing matrix.

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

Cautionary Statement

You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included in Item 1 of Part I of this quarterly report. The information contained in this quarterly report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this quarterly report and in our other reports filed with the U.S. Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 14, 2011.

The discussion under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 and in this Quarterly Report on Form 10-Q, and similar discussions in our other SEC filings, describe some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.

Some of the statements in this Item 2 and elsewhere in this quarterly report may include forward-looking statements that reflect our current views with respect to future events and financial performance. These statements include forward-looking statements both with respect to us specifically and the insurance sector in general, and include statements about our expectations for future periods with respect to payroll levels, rate changes in states where we write business, our adverse development cover with Lumbermens Mutual Casualty Company (“LMC”), stockholder dividends, our capital needs and the expected effect of operational changes and cost savings initiatives. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “estimate,” “may,” “should,” “anticipate,” “will” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise.

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

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

• changes in the U.S. economy and workforce levels, including the length of the economic recovery;

• our dependency on a concentrated geographic market;

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

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

• uncertainty about the effect of rules and regulations to be promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act on us and the economy and the financial services sector in particular;

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

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

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

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

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

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

-15-

• our inability to raise capital in the future;

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

• our reliance on independent insurance brokers;

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

• our potential exposure to losses if LMC were to be placed into receivership;

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

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

• the effects of acts of terrorism or war;

• cyclical changes in the insurance industry;

• changes in accounting policies or practices; and

• changes in general economic conditions, including inflation and other factors.

The foregoing factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this quarterly report. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we project. Any forward-looking statements you read in this quarterly report reflect our views as of the date of this quarterly report with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. Before making an investment decision, you should carefully consider all of the factors identified in this quarterly report that could cause actual results to differ.

Additional information concerning these and other factors is contained in our SEC filings, including, but not limited to, our 2010 Annual Report on Form 10-K.

Overview

We are a specialty provider of multi-jurisdictional workers’ compensation insurance and, on a limited basis, commercial general liability insurance. We are domiciled in Illinois, commercially domiciled in California and headquartered in Seattle, Washington. We are licensed in 49 states, the District of Columbia and Guam, to write workers’ compensation and other lines of insurance. Traditional underwriters 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.

Our operations and financial performance have been impacted by changes in the U.S. economy.  The significant downturn in the U.S. economy in recent years led to lower reported payrolls, which has had a negative impact on our gross premiums written.  When our customers reduce their workforce levels, the level of workers' compensation insurance coverage they require, and, as a result, the premiums that we charge, are reduced, and if our customers cease operations, they may cancel or choose not to renew their policies.  The economic downturn and high levels of unemployment have the effect of increasing claims and claim severity and duration, which drives up our medical, indemnity and litigation costs.  The economic downturn has also diminished opportunities for injured workers to return to transitional, modified duty positions during their recoveries, which has lengthened the periods of their recoveries and increased our medical, indemnity and litigation costs, particularly in California.  The longer a claim remains open, the more exposed we become to the effects of medical cost inflation.  All of these factors have had, and could continue to have, a significant negative impact on our claims costs.

-16-

If we fail to accurately assess our future claims costs, our loss reserves may be inadequate to cover our actual losses.  As discussed under “Management's Discussion and Analysis of Financial Condition and Results of Operations  –  Critical Accounting Policies, Estimates and Judgments – Unpaid Loss and Loss Adjustment Expenses” in our 2010 Annual Report on Form 10-K, there are many variables that can impact the adequacy of our loss and loss adjustment expense liabilities and we continually refine our loss reserve estimates.  In response to the factors described in the preceding paragraph, we strengthened our loss reserves for prior accident years by $31.2 million in the nine months ended September 30, 2011, and $30.5 million in the nine months ended September 30, 2010. We may ultimately conclude that our current estimate of loss reserves is inadequate, if the negative claim trends described above continue or worsen. Future adverse development could require us to increase our loss reserves, which could have a material adverse effect on our earnings and financial position in the periods in which such increases are made.

It is uncertain if economic conditions will deteriorate further, or when economic conditions will show significant improvement.  If the recovery from the recent economic recession continues to be slow, or the recovery fails to positively impact employment levels, or if we experience another recession, it could further reduce payrolls and increase our claims costs, which could have a significant negative impact on our business, financial condition or results of operations.

We recently announced several changes designed to improve our operational efficiency, reduce expenses and limit our exposure to certain unprofitable or volatile segments of our business. In July 2011, we announced that we had ceased agriculture underwriting in California. This business had previously accounted for approximately 13.0% of our California premiums. In October 2011, we announced stricter eligibility requirements for our construction business in California; the closure of branch offices in Needham, Massachusetts and Concord, California; and a staff reduction of approximately six percent. In the future, we will offer California construction coverage only to contractors with estimated annual premiums of $500,000 or more, and only on loss-sensitive plans. Approximately 43.2% of our current California in-force premiums fall into the categories of construction accounts with (i) annual premiums less than $500,000 or (ii) annual premiums of $500,000 or more written on a guaranteed cost basis, which we no longer write as of October 2011. Although we expect these actions to have a negative impact on our premium writings and profitability in the short term, we believe they will enhance our prospects for long-term profitability and bring greater balance to our book of business as we grow in other jurisdictions and segments.

Results of Operations

Three Months and Nine Months Ended September 30, 2011 and 2010

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

Gross premiums written for the three months ended September 30, 2011 totaled $56.8 million, an increase of $5.1 million, or 9.9%, from $51.7 million of gross premiums written in the same period of 2010. Gross premiums written for the nine months ended September 30, 2011 totaled $194.1 million, an increase of $2.4 million, or 1.3%, from $191.7 million of gross premiums written in the same period of 2010.

Our “Program Business” contributed $20.4 million or 35.9% of gross premiums written in the three months ended September 30, 2011, compared to $16.8 million or 32.5% of gross premiums written for the same period in 2010. Our Program Business includes alternative markets, small maritime programs and small energy programs. Gross premiums written from our “core” product lines remained nearly flat as compared to the same period in 2010.

For the nine months ended September 30, 2011, our core product lines contributed $128.0 million or 66.0% of gross premiums written in the period compared to $136.3 million or 71.1% of gross premiums written in the same period in 2010. The decrease in core product lines was partially offset by an increase of $12.0 million in our Program Business, which contributed $62.5 million or 32.2% of gross premiums written in the period compared to $50.5 million or 26.3% of gross premiums written in the same period in 2010.

Excluding work we perform as the servicing carrier for the Washington State USL&H Assigned Risk Plan and excluding business assumed from the NCCI residual market pools, the total number of customers we serviced decreased from approximately 1,670 at September 30, 2010 to approximately 1,560 at September 30, 2011. The majority of the customer decrease was in our core business, which was offset by an increase of approximately 130 customers in our Program Business. By design, our Program Business will have a larger number of customers with a smaller average premium size than our core business. Our average premium size at September 30, 2011 was approximately $256,000 in our core business and $105,000 in our Program Business, compared to approximately $230,000 in our core business and $98,000 in our Program Business one year earlier.

-17-

Total in-force payrolls, a factor used in determining premiums charged, decreased 8.3% from $7.2 billion at September 30, 2010 to $6.6 billion at September 30, 2011. California continues to be our largest market, accounting for approximately $142.9 million or 50.6% of our in-force premiums at September 30, 2011. This represents a decrease of $4.2 million, or 2.9%, from approximately $147.1 million, or 49.1%, of total in-force premiums in California at September 30, 2010.

Premiums assumed from the NCCI residual markets for the three months ended September 30, 2011 totaled $0.9 million, which was nearly flat compared to the same period in 2010. For the nine months ended September 30, 2011, assumed premiums increased $1.0 million, or 71.4%, to $2.4 million from $1.4 million for the same period in 2010. The majority of the increase for the nine months ended September 30, 2011 was the result of increases in our actuarial NCCI reapportionment estimate. The balance of our gross premiums written (consisting of Washington State USL&H Assigned Risk Plan, general liability and other miscellaneous amounts) for the nine months ended September 30, 2011 totaled $1.2 million, compared to $3.5 million in the same period in 2010.

Net Premiums Written.  Net premiums written totaled $46.6 million for the three months ended September 30, 2011, which remained nearly flat as compared to the same period in 2010. For the nine months ended September 30, 2011, net premiums written totaled $164.3 million, a decrease of $13.5 million, or 7.6%, from $177.8 million in the same period of 2010. The decrease in net premiums written for the nine months ended September 30, 2011 was primarily attributable to an increase in ceded premiums written of $16.0 million as a result of a higher ceding rate in our excess of loss reinsurance program that renewed in October 2010. Our ceding rate increased by approximately 141.0% as a result of lowering the attachment point from $0.5 million to $0.25 million and increasing maximum coverage from $85.0 million to $100.0 million. The increase in ceded premiums written was partially offset by the increase in gross written premiums.

Net Premiums Earned.  Net premiums earned totaled $64.0 million for the three months ended September 30, 2011, compared to $65.1 million for the same period in 2010, representing a decrease of $1.1 million, or 1.7%. For the nine months ended September 30, 2011, net premiums earned totaled $182.8 million, a decrease of $8.5 million, or 4.5%, from $191.4 million in the same period of 2010. We record the entire annual policy premium as unearned premium when written and earn the premium over the life of the policy, which is generally twelve months. Consequently, the amount of premiums earned in any given year depends on when during the current or prior year the underlying policies were written and the actual reported payroll of the underlying policies. Our direct premiums earned increased $3.6 million, or 5.2%, to $73.3 million for the three months ended September 30, 2011 from $69.7 million for the same period in 2010. Our direct premiums earned for the nine months ended September 30, 2011 increased $5.2 million, or 2.5%, to $209.8 million from $204.6 million for the same period in 2010.

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

	Nine Months Ended September 30,
	2011					2010
	Direct Premiums Earned		%			Direct Premiums Earned		%
	($ in thousands)
California	$	104,372		49.8	%	$	95,666		46.8	%
Louisiana		19,174		9.1			19,726		9.6
Alaska		12,093		5.8			11,186		5.5
Texas		11,945		5.6			10,778		5.3
Washington		8,134		3.9			7,233		3.5
Total	$	155,718		74.2	%	$	144,589		70.7	%

Net premiums earned are also affected by premiums ceded under reinsurance agreements and premiums we involuntarily assumed from the NCCI residual markets. Ceded premiums earned for the three months ended September 30, 2011 totaled $10.6 million compared to $6.0 million for the same period in 2010, representing an increase of $4.6 million, or 76.7%. Ceded premiums earned for the nine months ended September 30, 2011 totaled $29.9 million compared to $16.4 million for the same period in 2010, representing an increase of $13.5 million, or 82.3%. The majority of the increase in ceded premiums in the three months and nine months ended September 30, 2011 was the result of higher ceding rates under our October 2010 reinsurance program. On October 1, 2011, we entered into a new reinsurance program wherein the ceding rate decreased approximately 50% from the expiring rate.  The lower ceding rate will result in lower ceded premiums and losses during the reinsurance program. Earned premiums assumed from the NCCI residual markets for the nine months ended September 30, 2011 totaled $2.9 million, which was nearly flat compared to the same period in 2010.

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Net Investment Income.  Net investment income was $5.2 million for the three months ended September 30, 2011 compared to $5.8 million for the same period in 2010, representing a decrease of $0.6 million, or 11.1%. For the nine months ended September 30, 2011, net investment income totaled $15.8 million, a decrease of $1.9 million, or 10.9%, from $17.8 million in the same period of 2010. Average invested assets for the three months ended September 30, 2011 increased $6.5 million, or 0.9%, from $703.9 million in 2010 to $710.4 million in 2011. For the nine months ended September 30, 2011, average invested assets increased $24.9 million, or 3.7%, from $680.2 million in 2010 to $705.0 million in 2011. Our yield on average invested assets for the three months ended September 30, 2011 was approximately 2.9% compared to approximately 3.3% for the same period in 2010. For the nine months ended September 30, 2010, our yield on average invested assets was 3.0% compared to approximately 3.5% for the same period in 2010.

Net Realized Gains.  Net realized gains totaled $0.3 million for the three months ended September 30, 2011 compared to $3.9 million for the same period in 2010. For the nine months ended September 30, 2011, net realized gains totaled $0.7 million compared to $14.3 million in the same period of 2010. The realized gains in 2010 related primarily to the sale of investment securities to enable us to realize a portion of our tax capital loss carry forwards, which totaled approximately $15.0 million at December 31, 2009. Those capital loss carry forwards were fully realized in 2010.

Other Income.  Other income totaled $1.0 million and $3.3 million for the three months and nine months ended September 30, 2011, respectively, which remained nearly flat as compared to the same periods in 2010. Other income is derived primarily from the operations of PointSure, our wholesale broker and third party administrator, and PMCS, our provider of medical bill review, utilization review, nurse case management and related services.

Loss and Loss Adjustment Expenses.  Loss and loss adjustment expenses totaled $48.6 million for the three months ended September 30, 2011, nearly flat compared to $49.0 million for the same period in 2010. For the nine months ended September 30, 2011, loss and loss adjustment expenses totaled $164.6 million, compared to $173.1 million for the same period in 2010, representing a decrease of $8.6 million, or 4.9%. Our net loss ratio, which is calculated by dividing loss and loss adjustment expenses less claims service income by premiums earned, for the three months ended September 30, 2011 was 75.5% compared to 74.8% for the same period in 2010. Our net loss ratio for the nine months ended September 30, 2011 was 89.5% compared to 90.1% for the same period in 2010.

As discussed under the heading “Critical Accounting Policies, Estimates and Judgments – Unpaid Loss and Loss Adjustment Expenses – Actuarial Loss Reserve Estimation Methods” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010, we use an expected loss ratio (“ELR”) method to establish the loss reserves for the current accident year. Once the accident year is complete and begins to age, the ELR method is blended with the actual paid and incurred losses development to determine the revised estimated ultimate losses for the accident year.

Accident year 2011 is incomplete, as only nine months of the year have been earned as of September 30, 2011. An ELR was established for each jurisdiction and type of loss (indemnity, medical, ALAE) and was multiplied by the booked accident year earned premium to produce the ultimate losses to date.  The ELR selections are reviewed quarterly with each internal reserve study.  Given the short experience period for the current accident year, the ELRs are usually maintained at least through the first 12 months of the accident year and revised thereafter as the underlying data matures. The net ELR used in the first nine months of accident year 2011 was 62.5%, compared to 64.5% for the same period in 2010. The 2011 accident year ELR takes into consideration the development of recent accident years, as well as the provisions of the excess-of-loss reinsurance treaty that we entered into on October 1, 2010.

For prior accident years, the ultimate loss estimates at September 30, 2011 were higher when compared to June 30, 2011 and resulted in a net increase of $2.3 million in our loss reserves in the third quarter of 2011. Adverse development of prior year direct loss reserves totaled $3.0 million and related to accident year 2010. This adverse development was offset by $0.2 million of net favorable development from other amounts such as loss based assessments, ULAE and losses assumed from the NCCI pools and a reinsurance commutation gain of $0.5 million.

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For the nine months ended September 30, 2011, our loss reserves for prior accident years increased by a net amount of $30.6 million. Adverse development of prior year direct loss reserves totaled $33.5 million and related to the following accidents years: $7.4 million in 2010, $8.5 million in 2009, $8.8 million in 2008, $6.6 million 2007 and $2.2 million in 2006 and prior. This adverse development was offset by $2.4 million of favorable net development from other amounts such as ULAE, loss based assessment and losses from the NCCI pools and a reinsurance commutation gain of $0.5 million.

Due to the longer tail nature of workers’ compensation claims, movements in an accident year’s ultimate loss estimate can be reasonably expected.

As of September 30, 2011, we had recorded a receivable of approximately $3.0 million for KEIC loss development under the adverse development cover we entered into with LMC on September 30, 2003, the date we acquired KEIC from LMC. We do not expect this receivable to have any material adverse effect on our future cash flows if LMC fails to perform its obligations under the adverse development cover. At September 30, 2011, we had access to approximately $3.1 million under a related collateralized reinsurance trust in the event that LMC fails to satisfy its obligations under the adverse development cover.

Underwriting, Acquisition and Insurance Expenses.  Underwriting expenses totaled $18.3 million for the three months ended September 30, 2011, compared to $17.6 million for the same period in 2010, representing an increase of $0.6 million, or 3.5%. For the nine months ended September 30, 2011, underwriting expenses totaled $56.0 million, an increase of $2.5 million, or 4.8%, from $53.5 million in the same period of 2010. Our net underwriting expense ratio, which is calculated by dividing underwriting, acquisition and insurance expenses by premiums earned, for the three months ended September 30, 2011 was 28.5%, compared to 27.1% for the same period in 2010. For the nine months ended September 30, 2011, our net underwriting expense ratio was 30.6%, compared to 27.9% for the same period of 2010. The increases in the expense ratios for the three month and nine month periods ended September 30, 2011 were primarily the result of increased underwriting expenses and decreased premiums earned as compared to the same periods in 2010. We estimate that the recent office closures and staff reductions will reduce underwriting expense by approximately $3.2 million annually, which will be offset in part by severance, transition services and office closure costs of approximately $1.1 million to be recognized in the fourth quarter of 2011.

Interest Expense.  Interest expense related to the surplus notes issued by our insurance subsidiary in May 2004 totaled $0.1 million and $0.4 million for the three months and nine months ended September 30, 2011, respectively, which remained nearly flat as compared to the same periods in 2010.  The surplus notes interest rate, which is calculated at the beginning of each interest payment period using the 3-month LIBOR plus 400 basis points, remained flat at 4.3% at September 30, 2011 as compared to September 30, 2010.

Other Expenses. Other expenses totaled $2.0 million for the three months ended September 30, 2011, compared to $1.8 million for same period in 2010, representing an increase of $0.2 million, or 12.0%.  For the nine months ended September 30, 2011, other expenses totaled $6.1 million, an increase of $0.5 million, or 8.7%, from $5.6 million in the same period of 2010. Other expenses result primarily from the operations of PointSure and PMCS, which accounted for approximately $1.5 million and $4.9 million of expenses for the three months and nine months ended September 30, 2011, respectively, compared to $1.5 million and $4.7 million for the same periods in 2010.

Income Tax Expense (Benefit). The effective tax rate for the three months ended September 30, 2011 was 7.2%, compared to 27.9% for the same period in 2010. For the nine months ended September 30, 2011, our effective tax rate resulted in a tax benefit equal to 40.4% of pre-tax income, compared to 61.7% in the same period of 2010. Our effective tax rates vary from the statutory tax rate of 35.0% primarily as a result of tax exempt interest income. At September 30, 2011, approximately 45.2% of our investment portfolio was invested in tax-exempt municipal bonds, compared to approximately 48.0% at September 30, 2010.

 Net Income (Loss).  Net income was $1.6 million for the three months ended September 30, 2011, compared to $5.4 million for the same period in 2010, representing a decrease of $3.8 million, or 70.0%. Net loss for the nine months ended September 30, 2011 totaled $13.9 million, an increase of $11.4 million, or 454.1%, from $2.5 million in the same period of 2010. The decrease in net income for the three months ended September 30, 2011 resulted primarily from decreases in net realized gains as compared to the same period in 2010. The increase in net loss for the nine months ended September 30, 2011 resulted primarily from decreases in net realized gains and premiums earned as compared to the same period in 2010.

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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 uses of funds are to pay claims and operating expenses, to purchase investments and to pay declared common stock dividends.

Our investment portfolio is structured so that investments mature periodically over time in reasonable relation to current expectations of future claim payments. Since we have a limited claims history, we have derived our expected future claim payments from industry and predecessor trends and included a provision for uncertainties. Our investment portfolio as of September 30, 2011 had an effective duration of 4.4 years with individual maturities extending out to 29 years. Currently, we make claim payments from positive cash flow from operations and invest excess cash in securities with appropriate maturity dates to balance against anticipated future claim payments. As these securities mature, we intend to invest any excess funds in investments with appropriate durations to match against expected future claim payments.

At September 30, 2011, our investment portfolio consisted of investment grade fixed income securities with fair values subject to fluctuations in interest rates, as well as other factors such as credit. All of the securities in our investment portfolio are accounted for as “available for sale” securities. While we have structured our investment portfolio to provide an appropriate matching of maturities with anticipated claim payments, if we decide or are required in the future to sell securities in a rising interest rate environment, we would expect to incur losses from such sales.

Our ability to adequately provide funds to pay claims comes from our disciplined underwriting and pricing standards and the purchase of reinsurance to protect us against severe claims and catastrophic events. Effective October 1, 2011, our reinsurance program provides for retention of the first $0.5 million of each loss occurrence. The next $0.5 million of losses per occurrence (excess of the first $0.5 million of losses retained by us) are 50% reinsured. Losses in excess of $1.0 million per loss occurrence are fully reinsured through the program limit of $75.0 million per loss occurrence, subject to various deductibles, limitations and exclusions as more fully described in the treaties. The new reinsurance program is effective through September 30, 2012. Given industry and predecessor trends, we believe we are sufficiently capitalized to cover our retained losses.

SeaBright is a holding company with minimal unconsolidated revenue. As SeaBright pays stockholder dividends and has other capital needs in the future, we anticipate that it will be necessary for our insurance subsidiary to pay additional dividends to SeaBright. Our insurance subsidiary is required by law to maintain a certain minimum level of surplus on a statutory basis. The payment of such dividends will be regulated as described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II of our Annual Report on Form 10-K for the year ended December 31, 2010.

Our unaudited condensed consolidated net cash provided by operating activities for the nine months ended September 30, 2011 was $17.2 million, compared to our cash flow from operations of $54.0 million for the same period in 2010. The decrease was mainly attributable to an increase in paid losses, net of reinsurance recoverables, and a decrease in premium collections.

Net cash provided by investing activities was $2.2 million in the nine months ended September 30, 2011, compared to net cash used of $38.9 million during the same period in 2010. The increase in net cash provided by investing activities was primarily driven by an increase in investment maturities and redemptions, as well as a decrease in purchases of investments.

For the nine months ended September 30, 2011, cash used in financing activities totaled $4.2 million, compared to $2.7 million in the same period in 2010. The increase was primarily due to stockholder dividend payments, which began in the second quarter of 2010, and the surrender of stock to cover tax withholding obligations associated with the vesting of restricted stock.

As of September 30, 2011, SBIC’s statutory surplus totaled $289.1 million (unaudited), compared to $300.3 million (unaudited) as of September 30, 2010.

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Contractual Obligations and Commitments

During the nine months ended September 30, 2011, there were no material changes to our contractual obligations and commitments.

Off-Balance Sheet Arrangements

As of September 30, 2011, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies, Estimates and Judgments

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

The most critical accounting policies involve the reporting of unpaid loss and loss adjustment expenses including losses that have occurred but were not reported to us by the financial reporting date, the amount and recoverability of reinsurance recoverable balances, deferred policy acquisition costs, income taxes, the valuation of goodwill, the impairment of investment securities, earned but unbilled premiums and retrospective premiums. These critical accounting policies are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II of our Annual Report on Form 10-K for the year ended December 31, 2010.

Regulation

On July 21, 2010, the President signed into law the Dodd Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which has significant implications for the insurance industry. In addition to imposing a number of new compliance obligations on publicly traded companies, the Dodd-Frank Act established the Financial Services Oversight Council (“FSOC”), which is authorized to recommend that certain systemically significant non-bank financial companies, including insurance companies, be regulated by the Board of Governors of the Federal Reserve. The Dodd-Frank Act also created within the United States Department of the Treasury a new Federal Insurance Office (“FIO”) and authorizes the federal preemption of certain state insurance laws. The FSOC and the FIO are authorized to study, monitor and report to Congress on the U.S. insurance industry and the significance of global reinsurance to the U.S. insurance market. Many sections of the Dodd-Frank Act will become effective over time, and certain provisions of the Dodd-Frank Act require the implementation of regulations that have not yet been adopted. The potential impact of the Dodd-Frank Act on the U.S. insurance industry is not clear. However, our business could be affected by changes to the U.S. system of insurance regulation or our designation or the designation of insurers or reinsurers with which we do business as systemically significant non-bank financial companies.

Recent Accounting Pronouncements

In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This ASU allows insurance entities to defer costs related to the acquisition of new or renewal insurance contracts that are (1) incremental direct costs of the contract transaction (i.e., would not have occurred without the contract transaction), (2) a portion of an employee's compensation and fringe benefits related to certain activities for successful contract acquisitions, or (3) direct-response advertising costs as defined in ASC Subtopic 340-20, Other Assets and Deferred Costs - Capitalized Advertising Costs. All other costs related to the acquisition of new or renewal insurance contracts are required to be expensed as incurred. This ASU is effective for interim and annual periods beginning after December 15, 2011 with either prospective or retrospective application permitted. We will adopt this guidance retrospectively effective January 1, 2012. Although we continue to evaluate the impact of adopting the new guidance, we currently estimate that adoption will reduce our December 31, 2011 retained earnings (the period immediately prior to adoption) by approximately $4.5 million, net of taxes.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to increase the prominence of other comprehensive income in the financial statements. An entity will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2011, with earlier adoption permitted. We adopted this guidance retrospectively effective September 30, 2011.  The adoption of ASU 2011-05 did not have a material effect on our consolidated financial condition or results of operations.

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In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment,to simplify the current two-step goodwill impairment test required under Topic 350. Under this update an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If such a determination is not reached, then performance of further impairment testing is not necessary. The new guidance is effective for annual and interim goodwill tests performed for fiscal years beginning after December 15, 2011.  However, early adoption is permitted. The adoption of ASU 2011-08 is not expected to have a material effect on our consolidated financial condition or results of operations.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Credit Risk

Credit risk is the potential economic loss principally arising from adverse changes in the financial condition of a specific debt issuer. We address this risk by investing primarily in fixed-income securities which are rated “A” or higher by Standard & Poor’s or another major rating agency. We also independently, and through our outside investment 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 $690.0 million at September 30, 2011 that are subject to interest rate risk compared with $673.0 million at December 31, 2010. We manage the exposure to interest rate risk through a disciplined asset/liability matching and capital management process. In the management of this risk, the characteristics of duration, credit and variability of cash flows are critical elements. These risks are assessed regularly and balanced within the context of the liability and capital position.

Since December 31, 2010, there have been no material changes in the quantitative or qualitative aspects of our market risk profile. For additional information regarding our exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 14, 2011.

Item 4.  Controls and Procedures

Disclosure Controls and Procedures

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

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Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during third quarter 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A.  Risk Factors

The disclosure set forth below updates specific risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC on March 14, 2011. Other than as described below, there were no material changes to the risk factors set forth in such report.

Under the heading “Item 1A. Risk Factors – Risks Related to Our Business – We could be adversely affected by the loss of one or more principal employees or by an inability to attract or retain staff,” we included a discussion about the potential adverse impact to our business of losing a member of our senior management team. On July 13, 2011, we announced the resignation of Scott H. Maw, our senior vice president and chief financial officer. On September 13, 2011, we announced the appointment of Neal A. Fuller as senior vice president and chief financial officer. As a result, the specific references to selecting a new chief financial officer and the duties of that position no longer apply.

Under the heading “Item 1A. Risk Factors – Risks Related to Our Business – 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 included a discussion of our then-current excess of loss reinsurance treaty program covering the business that we write or renew. Effective October 1, 2011, we entered into new reinsurance agreements with nonaffiliated reinsurers wherein we retain the first $0.5 million of each loss occurrence and the next $0.5 million of losses per occurrence are 50% reinsured. Losses in excess of $1.0 million per loss occurrence are fully reinsured through the program limit of $75.0 million per loss occurrence, subject to various deductibles, limitations and exclusions as more fully described in the agreements. The new reinsurance program is effective through September 30, 2012.

Under the heading “Item 1A. Risk Factors – Risks Related to Our Business – If we are unable to realize our investment objectives, our financial condition may be adversely affected,” we included a discussion of various domestic and international factors that could influence the capital markets and the value of the securities we own. On August 5, 2011, Standard & Poor’s lowered the long-term sovereign credit rating of U.S. Government debt obligations from “AAA” to “AA+”, which had an initial adverse effect on financial markets. We are unable to predict the longer-term impact that this action or any future related actions may have on financial markets.

As of September 30, 2011, our investment portfolio included approximately $338.5 million of debt securities issued by various states, counties, cities and other municipal issuers. Many of these issuers are in serious financial condition due to many factors, including the impact of the prolonged economic recession and downturn. A continuation or worsening of current economic conditions could cause the value of these securities to decline or could cause some issuers of securities in our portfolio to default on their obligations. To date, we have experienced no defaults by municipal issuers and principal and interest payments continue to be received according to schedule. Approximately 27.9% of bonds in our municipal portfolio are backed by secondary bond insurance. If issuers of municipal securities we hold default on, or delay payment of, their obligations, or if bond insurers default on their obligations or the amount of bond insurance is inadequate, our financial position and results of operations may suffer harm, which could be material.

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

The following table sets forth information in connection with purchases made by, or on behalf of, us or any affiliated purchaser, of shares of our common stock during the three months ended September 30, 2011:

	(a) Total Number of Shares (or Units) Purchased		(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Month # 1 (July 1, 2011 through July 31, 2011)		–		–		–		–
Month # 2 (August 1, 2011 through August 31, 2011)		6,194	$	9.80		–		–
Month # 3 (September 1, 2011 through September 30, 2011)		–		–		–		–

We did not repurchase any of our common stock on the open market as part of a stock repurchase program during the three months ended September 30, 2011. The above shares of common stock were surrendered by our employees to satisfy their tax withholding obligations in connection with the vesting of restricted stock awards issued under our 2005 Plan.

Item 6.  Exhibits

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

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SIGNATURES

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

	SEABRIGHT HOLDINGS, INC.
Date: November 4, 2011	By:	/s/ John G. Pasqualetto
		John G. Pasqualetto
		Chairman, President and Chief Executive Officer (Principal Executive Officer)
	By:	/s/ Neal A. Fuller
		Neal A. Fuller
		Senior Vice President, Chief Financial Officer and Assistant Secretary
		(Principal Financial Officer)

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EXHIBIT INDEX

The list of exhibits in the Exhibit Index to this quarterly report on Form 10-Q is incorporated herein by reference. Exhibits 31.1 and 31.2 are being filed as part of this quarterly report on Form 10-Q. Exhibits 32.1, 32.2 and 101 are being furnished with this quarterly report on Form 10-Q.

Exhibit

Number Description

10.1  Employment offer letter, dated as of August 25, 2011, between SeaBright Insurance Company andNeal A. Fuller (incorporated by reference to the Company’s current report on Form 8-K (file no.001-34204), filed on September 13, 2011).

10.2 Amendment, dated as of August 3, 2011, to Section 3(e) of the Amended Employment Agreement between Scott H. Maw and SeaBright Insurance Company (incorporated by reference to the Company’s current report on Form 8-K (file no. 001-34204), filed on August 5, 2011).

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

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

32.1 Section 1350 Certification (Chief Executive Officer)

32.2  Section 1350 Certification (Chief Financial Officer)

101  Interactive Data Files

EX-31.1

Exhibit 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, John G. Pasqualetto, Chairman, President and Chief Executive Officer of SeaBright Holdings, Inc., certify that:

1.      I have reviewed this quarterly report on Form 10-Q of SeaBright Holdings, Inc.;

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)      Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.      The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a)      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 4, 2011

/s/ John G. Pasqualetto

John G. Pasqualetto 

Chairman, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Neal A. Fuller, Senior Vice President, Chief Financial Officer and Assistant Secretary of SeaBright Holdings, Inc., certify that:

1.      I have reviewed this quarterly report on Form 10-Q of SeaBright Holdings, Inc.;

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)      Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.      The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a)      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 4, 2011

/s/ Neal A. Fuller

Neal A. Fuller

Senior Vice President, Chief Financial Officer and Assistant Secretary

 

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of SeaBright Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2011, as filed with the Securities and Exchange Commission (the “Report”), I, John G. Pasqualetto, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  Novemer 4, 2011

/s/ John G. Pasqualetto

John G. Pasqualetto 

Chairman, President and Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to SeaBright Holdings, Inc. and will be retained by SeaBright Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of SeaBright Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2011, as filed with the Securities and Exchange Commission (the “Report”), I, Neal A. Fuller, Senior Vice President, Chief Financial Officer and Assistant Secretary of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  November 4, 2011

/s/ Neal A. Fuller

Neal A. Fuller

Senior Vice President, Chief Financial Officer and Assistant Secretary

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to SeaBright Holdings, Inc. and will be retained by SeaBright Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) (USD $) In Thousands, except Share data	Sep. 30, 2011	Dec. 31, 2010
Fixed income securities available for sale, amortized cost (in Dollars)	$ 660,588	$ 665,761
Common stock, par value (in Dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	75,000,000	75,000,000
Common stock, shares issued	22,299,173	22,025,450
Common stock, shares outstanding	22,299,173	22,025,450
Series A Preferred Stock [Member]
Preferred stock, par value (in Dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	750,000	750,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Undesignated Preferred Stock [Member]
Preferred stock, par value (in Dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0

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Condensed Consolidated Statements of Operations (Unaudited) (USD $) In Thousands, except Share data	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Revenue:
Premiums earned	$ 63,994	$ 65,108	$ 182,812	$ 191,359
Claims service income	340	275	976	797
Net investment income	5,161	5,806	15,833	17,765
Net realized gains	256	3,904	663	14,287
Other income	1,044	1,014	3,338	3,304
Total revenue	70,795	76,107	203,622	227,512
Losses and expenses:
Loss and loss adjustment expenses	48,636	49,002	164,559	173,126
Underwriting, acquisition and insurance expenses	18,261	17,640	56,003	53,456
Interest expense	131	136	390	396
Goodwill impairment				1,527
Other expenses	2,012	1,797	6,059	5,574
Total losses and expenses	69,040	68,575	227,011	234,079
Income (loss) before taxes	1,755	7,532	(23,389)	(6,567)
Income tax expense (benefit)	126	2,104	(9,454)	(4,052)
Net income (loss)	1,629	5,428	(13,935)	(2,515)
Other comprehensive income:
Net unrealized gains on investment securities available for sale	13,254	11,944	22,840	25,725
Less: Reclassification adjustment for net realized gains recorded into net income	(256)	(3,904)	(663)	(14,287)
Income tax expense related to items of other comprehensive income	(4,621)	(2,814)	(7,898)	(4,004)
Other comprehensive income	8,377	5,226	14,279	7,434
Comprehensive income	$ 10,006	$ 10,654	$ 344	$ 4,919
Basic earnings (loss) per share (in Dollars per share)	$ 0.08	$ 0.26	$ (0.66)	$ (0.12)
Diluted earnings (loss) per share (in Dollars per share)	$ 0.07	$ 0.25	$ (0.66)	$ (0.12)
Dividends declared per share (in Dollars per share)	$ 0.05	$ 0.05	$ 0.15	$ 0.15
Weighted average basic shares outstanding (in Shares)	21,179,035	20,909,738	21,102,373	20,850,428
Weighted average diluted shares outstanding (in Shares)	21,734,789	21,442,157	21,102,373	20,850,428

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Document And Entity Information	9 Months Ended
	Sep. 30, 2011	Nov. 03, 2011
Document and Entity Information [Abstract]
Entity Registrant Name	SeaBright Holdings, Inc.
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		22,332,549
Amendment Flag	false
Entity Central Index Key	0001267201
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Accelerated Filer
Entity Well-known Seasoned Issuer	No
Document Period End Date	Sep. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3

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Note 7 - Contingencies

9 Months Ended

Sep. 30, 2011

Contingencies Disclosure [Text Block]

7.  Contingencies

a.  SBIC is subject to guaranty fund and other assessments by the states in which it writes business. Guaranty fund assessments are accrued at the time premiums are written. Other assessments are accrued either at the time of assessment or in the case of premium-based assessments, at the time the premiums are written, or in the case of loss-based assessments, at the time the losses are incurred. As of September 30, 2011, SBIC had a liability for guaranty fund and other assessments of $6.2 million and a guaranty fund receivable of $4.8 million. 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 and future insolvencies. The majority of assessments are paid out in the year following the year in which the premium is written or the losses are paid. Guaranty fund receivables and other surcharge items are generally realized by a charge to new and renewing policyholders in the year following the year in which the related assessments were paid.

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

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Note 3 - Investments

9 Months Ended

Sep. 30, 2011

Investment [Text Block]

3. Investments

The consolidated cost or amortized cost, gross unrealized gains and losses, and estimated fair value of investment securities available for sale at September 30, 2011, and December 31, 2010 were as follows:

	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
September 30, 2011:
U.S. Treasury securities	$	25,978	$	1,562	$	–		$	27,540
Government sponsored agency securities		16,563		1,383		–			17,946
Corporate securities		162,480		8,648		(412	)		170,716
Tax-exempt municipal securities		302,380		13,328		(109	)		315,599
Mortgage pass-through securities		78,433		3,481		(1	)		81,913
Collateralized mortgage obligations		14,131		244		(40	)		14,335
Asset-backed securities		60,623		1,321		(21	)		61,923
Total investment securities available for sale	$	660,588	$	29,967	$	(583	)	$	689,972

December 31, 2010:

U.S. Treasury securities	$	26,514	$	635	$	(172	)	$	26,977
Government sponsored agency securities		23,159		943		(31	)		24,071
Corporate securities		154,652		3,532		(1,915	)		156,269
Tax-exempt municipal securities		309,935		5,555		(4,778	)		310,712
Mortgage pass-through securities		73,501		2,548		(745	)		75,304
Collateralized mortgage obligations		17,260		233		(28	)		17,465
Asset-backed securities		60,740		1,577		(147	)		62,170
Total investment securities available for sale	$	665,761	$	15,023	$	(7,816	)	$	672,968

The Company regularly reviews its investment portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of its investments. A number of criteria are considered during this process including, but not limited to: the current fair value as compared to amortized cost or cost, as appropriate, of the security; the length of time the security’s fair value has been below amortized cost or cost; the likelihood that the Company will be required to sell the security before recovery of its cost basis; objective information supporting recovery in a reasonable period of time; specific credit issues related to the issuer; and current economic conditions.  The Company has the ability and intent to hold impaired investments to maturity or for a period of time sufficient for recovery of their carrying amount. For the three months and nine months ended September 30, 2011 and 2010, the Company recognized no other-than-temporary impairment losses related to investments in debt securities.

The following table presents information about investment securities with unrealized losses at September 30, 2011:

	Less Than 12 Months					12 Months or More					Total
Investment Category	Aggregate Fair Value		Aggregate Unrealized Loss			Aggregate Fair Value		Aggregate Unrealized Loss			Aggregate Fair Value		Aggregate Unrealized Loss
						(in thousands)
Fixed Income Securities:
Corporate securities	$	16,389	$	(406	)	$	1,620	$	(6	)	$	18,009	$	(412	)
Tax-exempt municipal securities		9,859		(63	)		2,230		(46	)		12,089		(109	)
Mortgage pass-through securities (1)		1,042		(1	)		–		–			1,042		(1	)
Collateralized mortgage obligations		258		–			142		(40	)		400		(40	)
Asset backed securities		7,406		(21	)		557		–			7,963		(21	)
Total	$	34,954	$	(491	)	$	4,549	$	(92	)	$	39,503	$	(583	)

__________

(1)           Includes adjustable rate mortgage securities.

The following table presents information regarding gross realized gains and losses resulting from the sale of investment securities in the three month and nine month periods ended September 30, 2011 and 2010:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands)
Gross realized gains	$	281		$	3,907		$	1,113		$	14,457
Gross realized losses		(25	)		(3	)		(450	)		(170	)
Net realized gains	$	256		$	3,904		$	663		$	14,287
Proceeds	$	28,220		$	115,756		$	119,754		$	349,938

The related reclassification adjustments in other comprehensive income on the Condensed Consolidated Statements of Operations and Comprehensive Income were determined by specific identification.

The Company had no direct sub-prime mortgage exposure in its investment portfolio as of September 30, 2011 and approximately $9.9 million of indirect exposure to sub-prime mortgages. The following table provides a breakdown of ratings on the bonds in the Company’s municipal portfolio as of September 30, 2011:

	Insured Bonds				Uninsured Bonds		Total Municipal Portfolio Based On
Rating	Insured Ratings		Underlying Ratings		Ratings		Overall Ratings (1)		Underlying Ratings
	(in thousands)
AAA	$	4,765	$	4,765	$	28,693	$	33,458	$	33,458
AA+		16,412		15,220		58,195		74,607		73,415
AA		24,458		19,085		64,533		88,991		83,618
AA-		24,134		26,198		48,354		72,488		74,552
A+		12,175		15,518		9,700		21,875		25,218
A		5,311		5,311		20,044		25,355		25,355
A-		1,046		2,204		2,991		4,037		5,195
BBB+		–		–		1,311		1,311		1,311
BBB		–		–		2,949		2,949		2,949
Pre-refunded (2)		6,074		6,074		7,349		13,423		13,423
Total	$	94,375	$	94,375	$	244,119	$	338,494	$	338,494

__________

(1) Represents insured ratings on insured bonds and ratings on uninsured bonds.

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

As of September 30, 2011, the Company had no direct investments in any bond insurer, and the following bond insurer insured more than 10% of the municipal bond investments in the Company’s portfolio:

			Insurer Ratings		Average Underlying Bond
Bond Insurer	Fair Value		S&P	Moody’s	Rating
		(millions)
National Public Finance Guarantee Corporation	$	42.1	BBB	Baa1	AA-

The Company does not expect a material impact to its investment portfolio or financial position as a result of the problems currently facing monoline bond insurers.

The amortized cost and estimated fair value of fixed income securities available for sale at September 30, 2011, 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 Amortized Cost		Estimated Fair Value
	(in thousands)
Maturity
Due in one year or less	$	29,863	$	30,385
Due after one year through five years		190,555		198,268
Due after five years through ten years		260,359		275,089
Due after ten years		26,623		28,058
Securities not due at a single maturity date		153,188		158,172
Total fixed income securities	$	660,588	$	689,972

The consolidated amortized cost of investment securities available for sale deposited with various regulatory authorities at September 30, 2011 was $222.8 million.

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Note 9 - Fair Values of Assets and Liabilities

9 Months Ended

Sep. 30, 2011

Fair Value Disclosures [Text Block]

9.  Fair Values of Assets and Liabilities

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

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

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

• Investment securities:   The Company measures and reports its financial assets and liabilities, including investment securities, in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures. The estimated fair values for available-for-sale securities are generally based on quoted market prices for securities traded in the public marketplace. The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity. Additional information with respect to fair values of the Company’s investment securities is disclosed in Note 3.

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

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

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

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

• Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. As of September 30, 2011, the Company had no Level 3 financial assets or liabilities.

The table below presents the September 30, 2011 and December 31, 2010 balances of assets and liabilities measured at fair value on a recurring basis.

September 30, 2011:

	Total		Level 1		Level 2		Level 3
	(in thousands)
U.S. Treasury securities	$	27,540	$	27,540	$	—	$	—
Government sponsored agency securities		17,946		—		17,946		—
Corporate securities		170,716		—		170,716		—
Tax-exempt municipal securities		315,599		—		315,599		—
Mortgage pass-through securities		81,913		—		81,913		—
Collateralized mortgage obligations		14,335		—		14,335		—
Asset-backed securities		61,923		—		61,923		—
Total	$	689,972	$	27,540	$	662,432	$	—

December 31, 2010:

	Total		Level 1		Level 2		Level 3
	(in thousands)
U.S. Treasury securities	$	26,977	$	26,977	$	—	$	—
Government sponsored agency securities		24,071		—		24,071		—
Corporate securities		156,269		—		156,269		—
Tax-exempt municipal securities		310,712		—		310,712		—
Mortgage pass-through securities		75,304		—		75,304		—
Collateralized mortgage obligations		17,465		—		17,465		—
Asset-backed securities		62,170		—		62,170		—
Total	$	672,968	$	26,977	$	645,991	$	—

At September 30, 2011, there were no liabilities measured at fair value on a recurring basis.

Active markets are those in which transactions occur with sufficient frequency and volume to provide reliable pricing information on an ongoing basis.  Inactive markets are those in which there are few transactions for the asset, prices are not current, price quotations vary substantially either over time or among market makers, or in which little information is released publicly.  When the market for an investment is judged to be inactive, appropriate adjustments must be made to observable inputs to account for such inactivity.  As of September 30, 2011, the Company’s investment portfolio consisted of securities that it considered to be traded in active markets.  Therefore, no adjustment for market inactivity or illiquidity was necessary.  There were no transfers between levels during the three months and nine months ended September 30, 2011.

The Company obtains fair value inputs for securities in its investment portfolio from independent, nationally recognized pricing services. The pricing services utilize multidimensional pricing models that vary by asset class and incorporate relevant inputs such as available trade, bid and quote market data for identical or similar instruments, model-based valuation techniques for which significant assumptions were observable and other market information to arrive at a fair value price for each security. This process takes into consideration the relevance of observable inputs based on factors such as the level of trading activity and the volume and currency of available prices and includes appropriate adjustments for nonperformance and liquidity risks.

The Company also seeks input from independent portfolio managers and financial advisors engaged by the Company to assist in the management and oversight of its investment portfolio. The Company and an independent portfolio manager engaged by the Company review such amounts for reasonableness in relation to the following considerations, among others: recent trades of a particular security; the Company’s independent observations of recent developments affecting the economy in general and certain issuers in particular; and fair values from other sources, such as statements from the Company’s custodial banks.

The Company holds a limited amount ($15.8 million at September 30, 2011) of privately placed corporate bonds and estimates the fair value of these bonds using an internal matrix that is based in part on market information regarding interest rates, credit spreads and liquidity. The pricing matrix begins with current U.S. Treasury rates and uses credit spreads received from third-party sources to estimate fair value. The Company includes the fair value estimates of these corporate bonds in Level 2, since all significant inputs are market observable. As some of these securities are issued by public companies, the Company compares the estimates of fair value to the fair values of these companies’ publicly traded debt to test the validity of the internal pricing matrix.

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Note 8 - Share-Based Payment Arrangements

9 Months Ended

Sep. 30, 2011

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

8.  Share-Based Payment Arrangements

At September 30, 2011, the Company had outstanding stock options and nonvested restricted stock granted according to the terms of two equity incentive plans. The stockholders and Board of Directors approved the 2003 Stock Option Plan (the “2003 Plan”) in September 2003, and amended and restated the 2003 Plan in February 2004 and April 2008, and approved the 2005 Long-Term Equity Incentive Plan (the “2005 Plan” and, together with the 2003 Plan, the “Stock Option Plans”) in December 2004, and amended and restated the 2005 Plan in April 2007 and May 2010.

As of September 30, 2011, the Company reserved 776,458 shares of common stock for issuance under the 2003 Plan, of which options to purchase 479,946 shares had been granted, and 3,505,550 shares for issuance under the 2005 Plan, of which 3,039,248 shares had been granted. In January 2006, the Compensation Committee of the Board of Directors terminated the ability to grant future stock option awards under the 2003 Plan. Therefore, the Company anticipates that all future awards will be made under the 2005 Plan.

a.  Stock Options

The following table summarizes stock option activity for the nine months ended September 30, 2011:

	Shares Subject to			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
	Options			per Share		(years)		(in thousands)
Outstanding at December 31, 2010		1,354,442		$	11.09		5.7	$	1,002
Granted		167,038			9.96		–		–
Forfeited		(14,150	)		10.53		–		–
Exercised		–			–		–		–
Cancelled		(2,808	)		12.70		–		–
Outstanding at September 30, 2011		1,504,522			10.97		5.4		240
Exercisable at September 30, 2011		1,094,673			11.09		4.3		240

The September 30, 2011 aggregate intrinsic values in the table above are based on the Company’s closing stock price of $7.20 on that date. There were no proceeds from or exercises of stock options during the quarter ended September 30, 2011.

b.  Restricted Stock

The following table summarizes restricted stock activity for the nine months ended September 30, 2011:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Outstanding at December 31, 2010		1,105,125		$	11.84
Granted		491,425			9.99
Vested		(382,199	)		14.06
Forfeited		(82,371	)		10.32
Outstanding at September 30, 2011		1,131,980			10.40

As of September 30, 2011, there was approximately $6.0 million of total unrecognized compensation cost related to restricted stock granted under the 2005 Plan. That cost is expected to be recognized over a weighted-average period of approximately 2.0 years.

c.  Stock-Based Compensation

Total stock-based compensation expense recognized in the unaudited condensed consolidated statements of operations for the three month and nine month periods ended September 30, 2011 and 2010 is shown in the following table. No stock-based compensation cost was capitalized during the periods shown.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(in thousands)
Stock-based compensation expense related to:
Nonvested restricted stock	$	857	$	1,134	$	3,278	$	3,402
Stock options		163		268		514		706
Total	$	1,020	$	1,402	$	3,792	$	4,108
Total related tax benefit	$	320	$	423	$	1,208	$	1,268

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Note 1 - Basis of Presentation

9 Months Ended

Sep. 30, 2011

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of SeaBright Holdings, Inc. (“SeaBright”) and its wholly owned subsidiaries, SeaBright Insurance Company (“SBIC”), PointSure Insurance Services, Inc. (“PointSure”), and Paladin Managed Care Services, Inc. (“PMCS”) (collectively, the “Company,” “we” or “us”). All significant intercompany transactions among these affiliated entities have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet at December 31, 2010 has been derived from the audited financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited financial statements and accompanying notes as of and for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 14, 2011.

In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (including normal recurring adjustments) necessary to state fairly the financial information set forth therein. Results of operations for the three months and nine months ended September 30, 2011 are not necessarily indicative of the results expected for the full fiscal year or for any future period.

Certain reclassifications have been made to the prior year’s financial statements to conform to classifications used in the current year.

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Note 4 - Premiums

9 Months Ended

Sep. 30, 2011

Premiums Receivable Note [Text Block]

4. Premiums

Direct premiums written totaled $55.9 million and $50.7 million for the three month periods ended September 30, 2011 and 2010, respectively, and $191.7 million and $190.2 million for the nine month periods then ended, respectively.

Premiums receivable consisted of the following at September 30, 2011 and December 31, 2010:

	September 30, 2011			December 31, 2010
	(in thousands)
Current:
Premiums receivable	$	19,342		$	15,673
Allowance for doubtful accounts	­ (907		)	­ (650		)
Premiums receivable, net.	$	18,435		$	15,023

Deferred:
Premiums receivable	$	149,710		$	169,128
Allowance for doubtful accounts	­ (246		)	­ (286		)
Premiums receivable, net.	$	149,464		$	168,842

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Note 5 - Reinsurance

9 Months Ended

Sep. 30, 2011

Reinsurance [Text Block]

5.  Reinsurance

Under reinsurance agreements, the Company cedes various amounts of risk to nonaffiliated insurance companies for the purpose of limiting the maximum potential loss arising from the underlying insurance risks. These reinsurance treaties do not relieve the Company from its obligations to policyholders.

On October 1, 2011, the Company entered into reinsurance agreements with nonaffiliated reinsurers wherein it retains the first $0.5 million of each loss occurrence. The next $0.5 million of losses per occurrence (excess of the first $0.5 million of losses per occurrence retained by the Company) are 50% reinsured. Losses in excess of $1.0 million per loss occurrence are fully reinsured through the program limit of $75.0 million per loss occurrence, subject to various deductibles, limitations and exclusions as more fully described in the treaties. The new reinsurance program is effective through September 30, 2012. The ceding rate for the new program decreased approximately 50% from the expiring rate primarily as a result of eliminating coverage for losses between $0.25 million and $0.5 million. The Company had different reinsurance programs in place in periods prior to October 1, 2011, as discussed in Note 8 to the Company’s consolidated financial statements as of and for the year ended December 31, 2010 included in Part II, Item 8 of the Company’s Annual Report on Form 10-K filed with the SEC on March 14, 2011.

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Note 6 - Unpaid Loss and Loss Adjustment Expenses

9 Months Ended

Sep. 30, 2011

Liability for Future Policy Benefits and Unpaid Claims Disclosure [Text Block]

6. Unpaid Loss and Loss Adjustment Expenses

The following table summarizes the activity in unpaid loss and loss adjustment expense for the three month and nine month periods ended September 30, 2011 and 2010:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands)
Beginning balance:
Unpaid loss and loss adjustment expense	$	490,929		$	412,322		$	440,919		$	351,891
Reinsurance recoverable		(80,093	)		(44,052	)		(56,350	)		(34,080	)
Net balance, beginning of period		410,836			368,270			384,569			317,811
Incurred related to:
Current period		46,354			49,002			133,921			142,668
Prior periods		2,282			–			30,638			30,458
Total incurred		48,636			49,002			164,559			173,126
Paid related to:
Current period		(13,579	)		(16,347	)		(26,962	)		(29,500	)
Prior periods		(31,271	)		(21,412	)		(107,544	)		(81,924	)
Total paid		(44,850	)		(37,759	)		(134,506	)		(111,424	)
Net balance, end of period		414,622			379,513			414,622			379,513
Reinsurance recoverable		88,274			49,111			88,274			49,111
Unpaid loss and loss adjustment expense	$	502,896		$	428,624		$	502,896		$	428,624

As a result of changes in estimates of insured events in prior periods, the Company recorded net adverse development of prior accident years’ loss reserves of approximately $2.8 million in the three months ended September 30, 2011 and approximately $31.2 million in the nine months then ended. The adverse development in the third quarter of 2011 consisted of an increase in accident year 2010 direct loss reserves of approximately $3.0 million, offset by $0.2 million of net favorable development of other amounts such as unallocated loss adjustment expenses (“ULAE”), loss-based assessments and losses assumed from the NCCI pools. During the third quarter of 2011, the Company also recorded a gain of approximately $0.5 million related to the commutation of one of the layers in the reinsurance program that expired on September 30, 2009, which offsets the 2011 adverse development in the table above.

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Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Cash flows from operating activities:
Net loss	$ (13,935)	$ (2,515)
Amortization of deferred policy acquisition costs	38,676	35,327
Policy acquisition costs deferred	(36,788)	(35,001)
Provision for depreciation and amortization	6,427	4,941
Compensation cost on restricted shares of common stock	3,278	3,402
Compensation cost on stock options	514	706
Net realized gains on investments	(663)	(14,287)
Deferred income tax (expense) benefit	(4,108)	1,313
Changes in certain assets and liabilities:
Unpaid loss and loss adjustment expense	61,977	76,732
Federal income tax receivable	(889)	(5,339)
Reinsurance recoverables, net of reinsurance withheld	(31,557)	(13,676)
Unearned premiums, net of deferred premiums and premiums receivable	(2,499)	(1,087)
Other assets and other liabilities	(3,211)	3,507
Net cash provided by operating activities	17,222	54,023
Cash flows from investing activities:
Purchases of investments	(112,796)	(381,474)
Proceeds from sales of investments	74,758	304,137
Maturities and redemption of investments	41,581	40,335
Purchases of property and equipment	(1,296)	(1,862)
Net cash provided by (used in) investing activities	2,247	(38,864)
Cash flows from financing activities:
Proceeds from exercise of stock options		26
Grant of restricted shares of common stock	5	4
Surrender of stock in connection with restricted stock vesting	(897)	(579)
Stockholder dividends paid	(3,336)	(2,200)
Net cash used in financing activities	(4,228)	(2,749)
Net increase in cash and cash equivalents	15,241	12,410
Cash and cash equivalents at beginning of period	15,958	12,896
Cash and cash equivalents at end of period	31,199	25,306
Supplemental disclosures:
Interest paid on surplus notes	390	394
Payable for purchases of investments	6,309	15,166
Receivable for sales of investments	3,415	5,466
Federal income taxes refunded	$ 4,470

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Note 2 - Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Significant Accounting Policies [Text Block]

2. Summary of Significant Accounting Policies

a.  Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Company has used significant estimates in determining unpaid loss and loss adjustment expenses, including losses that have occurred but were not reported to us by the financial reporting date; the amount and recoverability of reinsurance recoverable balances; goodwill and other intangibles; retrospective premiums; earned but unbilled premiums; deferred policy acquisition costs; income taxes; and the valuation and other-than-temporary impairments of investment securities.

b. Earnings Per Share

The following table provides the reconciliation of basic and diluted weighted average shares outstanding used in calculating earnings per share for the three month and nine month periods ended September 30, 2011 and 2010:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(in thousands)
Basic weighted average shares outstanding		21,179		20,910		21,102		20,850
Weighted average shares issuable upon exercise of outstanding stock options and vesting of nonvested restricted stock		556		532		–		–
Diluted weighted average shares outstanding		21,735		21,442		21,102		20,850

The effect of including shares issuable upon the exercise of outstanding stock options and the vesting of non-vested restricted stock was anti-dilutive for the nine month periods ended September 30, 2011 and 2010. Therefore, such shares have been excluded from the calculation of diluted weighted average shares outstanding for these periods. The numbers of such shares excluded for the nine month periods ended September 30, 2011 and 2010 were approximately 629,000 and 581,000, respectively.

c. Stockholder Dividends

On August 10, 2011, the Company’s Board of Directors declared a quarterly dividend of $0.05 per common share. The dividend was paid on October 14, 2011 to stockholders of record on September 30, 2011. Any future determination to pay cash dividends on the Company’s common stock will be at the discretion of its Board of Directors and will be dependent on the Company’s earnings; financial condition; operating results; capital requirements; any contractual, regulatory or other restrictions on the payment of dividends by the Company’s subsidiaries; and other factors that the Company’s Board of Directors deems relevant.

e. Recent Accounting Pronouncements

In October 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This ASU allows insurance entities to defer costs related to the acquisition of new or renewal insurance contracts that are (1) incremental direct costs of the contract transaction (i.e., would not have occurred without the contract transaction), (2) a portion of an employee's compensation and fringe benefits related to certain activities for successful contract acquisitions, or (3) direct-response advertising costs as defined in Accounting Standards Codification (“ASC”) Subtopic 340-20, Other Assets and Deferred Costs - Capitalized Advertising Costs. All other costs related to the acquisition of new or renewal insurance contracts are required to be expensed as incurred. This ASU is effective for interim and annual periods beginning after December 15, 2011 with either prospective or retrospective application permitted. The Company will adopt this guidance retrospectively effective January 1, 2012. Although the Company continues to evaluate the impact of adopting the new guidance, it currently estimates that adoption will reduce its December 31, 2011 retained earnings (the period immediately prior to adoption) by approximately $4.5 million, net of taxes.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to increase the prominence of other comprehensive income in the financial statements. An entity will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2011, with earlier adoption permitted. The Company adopted this guidance retrospectively effective September 30, 2011.  The adoption of ASU 2011-05 did not have a material effect on the Company’s consolidated financial condition or results of operations.

In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, to simplify the current two-step goodwill impairment test required under Topic 350. Under this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If such a determination is not reached, then performance of further impairment testing is not necessary. The new guidance is effective for annual and interim goodwill tests performed for fiscal years beginning after December 15, 2011.  However, early adoption is permitted. The adoption of ASU 2011-08 is not expected to have a material effect on the Company’s consolidated financial condition or results of operations.

d.   Other Significant Accounting Policies

For a more complete discussion of the Company’s significant accounting policies, please see Note 2 to the Company’s consolidated financial statements as of and for the year ended December 31, 2010 in Part II, Item 8 of the Company’s Annual Report on Form 10-K filed with the SEC on March 14, 2011.

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Condensed Consolidated Balance Sheets (Current Period Unaudited) (USD $) In Thousands	Sep. 30, 2011	Dec. 31, 2010
ASSETS
Fixed income securities available for sale, at fair value (amortized cost $660,588 in 2011 and $665,761 in 2010)	$ 689,972	$ 672,968
Cash and cash equivalents	31,199	15,958
Premiums receivable, net	18,435	15,023
Deferred premiums, net	149,464	168,842
Reinsurance recoverables	88,778	56,746
Federal income tax receivable	12,638	11,749
Deferred income taxes, net	19,667	23,458
Deferred policy acquisition costs, net	23,686	25,574
Goodwill	2,794	2,794
Other assets	39,038	33,450
Total assets	1,075,671	1,026,562
LIABILITIES AND STOCKHOLDERS’ EQUITY
Unpaid loss and loss adjustment expense	502,896	440,919
Unearned premiums	137,321	155,786
Reinsurance funds withheld and balances payable	7,211	6,739
Premiums payable	6,465	8,645
Accrued expenses and other liabilities	58,868	51,456
Surplus notes	12,000	12,000
Total liabilities	724,761	675,545
Contingencies (Note 7)
Series A preferred stock, $0.01 par value; 750,000 shares authorized; no shares issued and outstanding
Undesignated preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued and outstanding
Common stock, $0.01 par value; 75,000,000 shares authorized; issued and outstanding – 22,299,173 shares at September 30, 2011 and 22,025,450 shares at December 31, 2010	223	220
Paid-in capital	212,837	209,941
Accumulated other comprehensive income	19,870	5,591
Retained earnings	117,980	135,265
Total stockholders’ equity	350,910	351,017
Total liabilities and stockholders’ equity	$ 1,075,671	$ 1,026,562