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 March 31, 2012

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 May 4, 2012
Common Stock, $0.01 Par Value	22,390,459

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 March 31, 2012 and December 31, 2011	2
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2012 and 2011	3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011	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	21
Item 4.	Controls and Procedures	22
Part II.	Other Information
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 6.	Exhibits	23
Signatures		24

-1-

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31, 2012			December 31, 2011
			(As adjusted)
	(in thousands, except share and per share amounts)
ASSETS
Fixed income securities available for sale, at fair value (amortized cost $667,386 in 2012 and $665,891 in 2011)	$	692,072		$	700,346
Cash and cash equivalents		56,297			28,503
Premiums receivable, net		15,671			18,332
Deferred premiums, net		140,569			142,486
Reinsurance recoverables		97,714			94,173
Federal income tax recoverable		2,864			12,823
Deferred income taxes, net		25,070			21,681
Deferred policy acquisition costs, net		14,661			14,844
Goodwill		2,794			2,794
Other assets		43,773			38,314
Total assets	$	1,091,485		$	1,074,296
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid loss and loss adjustment expense	$	520,008		$	518,044
Unearned premiums		131,250			130,300
Reinsurance funds withheld and balances payable		9,139			7,079
Premiums payable		6,788			6,351
Accrued expenses and other liabilities		62,181			51,553
Surplus notes		12,000			12,000
Total liabilities		741,366			725,327
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 – 22,409,710 shares at March 31, 2012 and 22,327,749shares at December 31, 2011		224			223
Paid-in capital		214,242			213,746
Accumulated other comprehensive income		16,948			23,269
Retained earnings		118,705			111,731
Total stockholders' equity		350,119			348,969
Total liabilities and stockholders' equity	$	1,091,485		$	1,074,296

See accompanying notes to unaudited condensed consolidated financial statements.

-2-

SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended March 31,
	2012			2011
				(As adjusted)
	(in thousands, except share and per share information)
Revenue:
Premiums earned	$	59,089		$	56,730
Claims service income		304			333
Net investment income		5,023			5,375
Net realized gains		7,973			298
Other income		932			1,064
		73,321			63,800
Losses and expenses:
Loss and loss adjustment expenses		43,386			43,266
Underwriting, acquisition and insurance expenses		16,918			18,977
Interest expense		136			130
Other expenses		1,832			1,970
		62,272			64,343
Income (loss) before taxes		11,049			(543	)
Income tax expense (benefit)		2,954			(425	)
Net income (loss)		8,095			(118	)
Other comprehensive loss:
Change in net unrealized gains on investment securities available for sale		(1,796	)		(1,320	)
Less: Reclassification adjustment for net realized gains recorded into net income		(7,973	)		(298	)
Income tax benefit related to items of other comprehensive income		3,448			578
Other comprehensive loss		(6,321	)		(1,040	)
Comprehensive income (loss)	$	1,774		$	(1,158	)
Basic earnings (loss) per share	$	0.38		$	(0.01	)
Diluted earnings (loss) per share	$	0.37		$	(0.01	)
Dividends declared per share	$	0.05		$	0.05
Weighted average basic shares outstanding		21,176,744			20,950,808
Weighted average diluted shares outstanding		21,794,378			20,950,808

 

See accompanying notes to unaudited condensed consolidated financial statements.

-3-

SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
	2012				2011
				(As adjusted)
	(in thousands)
Cash flows from operating activities:
Net income (loss)	$	8,095			$	(118	)
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of deferred policy acquisition costs		8,247				8,294
Policy acquisition costs deferred		(8,064	)			(9,141	)
Depreciation and amortization		2,312				2,145
Compensation cost on restricted shares of common stock		952				1,368
Compensation cost on stock options		156				183
Net realized gain on investments		(7,973	)			(298	)
Deferred income tax expense (benefit)		58				(430	)
Changes in certain assets and liabilities:
Unpaid loss and loss adjustment expense		1,964				6,058
Federal income tax recoverable		9,959				4,467
Reinsurance recoverables, net of reinsurance withheld		(2,391	)			(8,213	)
Unearned premiums, net of deferred premiums and premiums receivable		5,528				830
Other assets and other liabilities		504				2,431
Net cash provided by operating activities		19,347				7,576
Cash flows from investing activities:
Purchases of investments		(154,711	)			(45,936	)
Sales of investments		144,929				36,893
Maturities and redemption of investments		20,297				12,005
Purchases of property and equipment		(339	)			(367	)
Net cash provided by investing activities		10,176				2,595
Cash flows from financing activities:
Stockholder dividends paid		(1,116	)			(1,101	)
Surrender of stock in connection with restricted stock vesting		(613	)			(830	)
Net cash used in financing activities		(1,729	)			(1,931	)
Net increase in cash and cash equivalents		27,794				8,240
Cash and cash equivalents at beginning of period		28,503				15,958
Cash and cash equivalents at end of period	$	56,297			$	24,198
Supplemental disclosures:
Interest paid on surplus notes	$	137			$	131
Federal income taxes recovered		(7,018	)			(4,470	)
Accrual for unsettled purchases of investments		11,523				–
Receivable from sale of investments		7,617				–

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, 2011 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. The 2011 financial statements have been revised to reflect the impact of retrospective adoption on January 1, 2012 of Accounting Standards Update (“ASU”) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. See Note 2.e. for additional disclosure regarding these adjustments. 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, 2011 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 5, 2012.

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 ended March 31, 2012 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 periods ended March 31, 2012 and 2011:

	Three Months Ended March 31,
	2012		2011
	(in thousands)
Basic weighted average shares outstanding		21,177		20,951
Weighted average shares issuable upon exercise of outstanding stock options and vesting of nonvested restricted stock		617		–
Diluted weighted average shares outstanding		21,794		20,951

-5- 

SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The effect of including certain shares issuable upon the exercise of outstanding stock options and the vesting of non-vested restricted stock was anti-dilutive for the three month periods ended March 31, 2012 and 2011. 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 three month periods ended March 31, 2012 and 2011 were approximately 855,000 and 1,445,000, respectively.

c.        Stockholder Dividends

On March 6, 2012, the Company's Board of Directors declared a quarterly dividend of $0.05 per common share. The dividend was paid on April 13, 2012 to stockholders of record on March 30, 2012. 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.

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, 2011 in Part II, Item 8 of the Company's 2011 Annual Report on Form 10-K filed with the SEC on March 5, 2012.

e.        Accounting Pronouncements

In October 2010, the Financial Accounting Standards Board (the “FASB”) issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This ASU allows insurance entities to defer only direct incremental costs associated with successful insurance contract acquisitions or renewals. All other costs related to the acquisition of new or renewal insurance contracts are required to be expensed as incurred. The Company adopted this guidance retrospectively effective January 1, 2012 and has adjusted its previously issued financial information.

Adoption of this guidance affected the December 31, 2011 carrying value of deferred policy acquisition costs as follows:

	December 31, 2011
	As Previously Reported		Effect of Change		As Currently Reported
	(in thousands)
Deferred policy acquisition costs, net	$	21,834	$	6,990	$	14,844

 

The effect of adoption of this new guidance on the consolidated balance sheet as of December 31, 2011 and on stockholders' equity as of December 31, 2010 was as follows:

	As Previously Reported		Effect of Change			As Currently Reported
	(in thousands)
December 31, 2011:
Deferred policy acquisition costs, net	$	21,834	$	(6,990	)	$	14,844
Deferred income taxes, net		19,233		2,448			21,681
Retained earnings		116,273		(4,542	)		111,731
Total stockholders' equity		353,511		(4,542	)		348,969
December 31, 2010:
Retained earnings		135,265		(4,487	)		130,778
Total stockholders' equity		351,017		(4,487	)		346,530

-6- 

SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The effect of adoption of this new guidance on the condensed consolidated statement of operations and comprehensive income (loss) for the three months ended March 31, 2011 was as follows:

	As Previously Reported			Effect of Change			As Currently Reported
	(in thousands)
Underwriting, acquisition and insurance expenses	$	18,414		$	563		$	18,977
Income tax expense (benefit)		(228	)		(197	)		(425	)
Net income (loss)		248			(366	)		(118	)
Basic earnings (loss) per share		0.01			(0.02	)		(0.01	)
Diluted earnings (loss) per share		0.01			(0.02	)		(0.01	)

3.        Investments

The consolidated cost or amortized cost, gross unrealized gains and losses, and estimated fair value of investment securities available for sale at March 31, 2012 and December 31, 2011 were as follows:

	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
March 31, 2012:
U.S. Treasury securities	$	28,734	$	1,271	$	(8	)	$	29,997
Government sponsored agency securities		24,904		760		(31	)		25,633
Corporate securities		158,537		5,443		(813	)		163,167
Taxable municipal securities		22,792		1,400		(15	)		24,177
Tax-exempt municipal securities		277,806		14,172		(216	)		291,762
Mortgage pass-through securities		89,102		1,837		(53	)		90,886
Collateralized mortgage obligations		11,761		124		(42	)		11,843
Asset-backed securities		53,750		888		(31	)		54,607
Total investment securities available for sale	$	667,386	$	25,895	$	(1,209	)	$	692,072
December 31, 2011:
U.S. Treasury securities	$	24,989	$	1,579	$	–		$	26,568
Government sponsored agency securities		15,567		1,330		–			16,897
Corporate securities		167,125		9,682		(578	)		176,229
Tax-exempt municipal securities		308,953		17,903		(1	)		326,855
Mortgage pass-through securities		77,532		3,399		–			80,931
Collateralized mortgage obligations		14,546		168		(54	)		14,660
Asset-backed securities		57,179		1,052		(25	)		58,206
Total investment securities available for sale	$	665,891	$	35,113	$	(658	)	$	700,346

 

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 month periods ended March 31, 2012 and 2011, the Company recognized no other-than-temporary impairment losses related to investments in debt securities.

-7-

SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents information about investment securities with unrealized losses at March 31, 2012:

	Less Than 12 Months						12 Months or More				Total
Investment Category	Aggregate Fair Value		Aggregate Unrealized Loss			Aggregate Fair Value		Aggregate Unrealized Loss			Aggregate Fair Value		Aggregate Unrealized Loss
						(in thousands)
U.S. Treasury securities	$	1,426	$	(8	)	$	–	$	–		$	1,426	$	(8	)
Government sponsored agency securities (1)		10,409		(31	)		–		–			10,409		(31	)
Corporate securities		63,801		(813	)		–		–			63,801		(813	)
Taxable municipal securities		2,677		(15	)		–		–			2,677		(15	)
Tax-exempt municipal securities		15,041		(216	)		–		–			15,041		(216	)
Mortgage pass-through securities (2)		14,094		(53	)		–		–			14,094		(53	)
Collateralized mortgage obligations		2,722		(7	)		139		(35	)		2,861		(42	)
Asset-backed securities		5,122		(31	)		–		–			5,122		(31	)
Total	$	115,292	$	(1,174	)	$	139	$	(35	)	$	115,431	$	(1,209	)

_____________

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

(2)     Includes adjustable rate mortgage securities.

The following table presents information regarding gross realized gains and losses resulting from the sale of investment securities in the three month periods ended March 31, 2012 and 2011:

	Three Months Ended March 31,
	2012			2011
	(in thousands)
Gross realized gains	$	7,987		$	524
Gross realized losses		(14	)		(226	)
Net realized gains	$	7,973		$	298
Proceeds	$	144,929		$	36,893

 

The related reclassification adjustments in other comprehensive income on the condensed consolidated statements of operations and comprehensive income (loss) were determined by specific identification.

The Company had no direct sub-prime mortgage exposure in its investment portfolio as of March 31, 2012 and approximately $9.8 million of indirect exposure to sub-prime mortgages. The following table provides a breakdown of ratings on the bonds in the Company's municipal portfolio as of March 31, 2012:

	Insured Bonds				Uninsured Bonds		Total Municipal Portfolio (1) Based On
Rating	Insured Ratings		Underlying  Ratings		Ratings		Overall Ratings (2)		Underlying  Ratings
	(in thousands)
AAA	$	4,786	$	4,786	$	27,357	$	32,143	$	32,143
AA+		9,538		7,255		62,255		71,793		69,510
AA		13,144		13,849		70,159		83,303		84,008
AA-		27,870		24,466		40,636		68,506		65,102
A+		9,096		15,107		7,701		16,797		22,808
A		2,256		2,256		20,385		22,641		22,641
A-		2,060		1,031		5,918		7,978		6,949
BBB		–		–		2,971		2,971		2,971
Pre-refunded (3)		6,172		6,172		3,635		9,807		9,807
Total	$	74,922	$	74,922	$	241,017	$	315,939	$	315,939

__________

(1)     Consists of $291.8 million of tax-exempt municipal bonds and $24.2 million of taxable municipal bonds.

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

(3)    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.

-8-

SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2012, 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 Rating
Bond Insurer	Fair Value		S&P	Moody's
	(Millions)
National Public Finance Guarantee Corporation	$	34.3	BBB	Baa2	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 March 31, 2012, by contractual maturity, are set forth below. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	Cost or		Estimated
	Amortized Cost		Fair Value
Maturity	(in thousands)
Due in one year or less	$	21,595	$	21,845
Due after one year through five years		191,000		197,597
Due after five years through ten years		272,787		286,544
Due after ten years		27,390		28,750
Securities not due at a single maturity date		154,614		157,336
Total fixed income securities	$	667,386	$	692,072

 

The consolidated amortized cost of investment securities available for sale deposited with various regulatory authorities at March 31, 2012 was $307.4 million.

4.        Premiums

Direct premiums written totaled $65.2 million and $68.3 million for the three month periods ended March 31, 2012 and 2011, respectively.

Premiums receivable consisted of the following at March 31, 2012 and December 31, 2011:

	March 31, 2012			December 31, 2011
Current:	(in thousands)
Premiums receivable	$	17,053		$	19,362
Allowance for doubtful accounts		(1,382	)		(1,030	)
Premiums receivable, net of allowance	$	15,671		$	18,332

 

	March 31, 2012			December 31, 2011
Deferred:	(in thousands)
Premiums receivable	$	140,796		$	142,713
Allowance for doubtful accounts		(227	)		(227	)
Premiums receivable, net of allowance	$	140,569		$	142,486

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.

-9-

SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 set forth in Note 8 to the Company's consolidated financial statements as of and for the year ended December 31, 2011 in Part II, Item 8 of the Company's Annual Report on Form 10-K filed with the SEC on March 5, 2012.

6.        Unpaid Loss and Loss Adjustment Expenses

The following table summarizes the activity in unpaid loss and loss adjustment expense for the three month periods ended March 31, 2012 and 2011:

	Three Months Ended March 31,
	2012			2011
	(in thousands)
Beginning balance:
Unpaid loss and loss adjustment expense	$	518,044		$	440,919
Reinsurance recoverables		(93,710	)		(56,350	)
Net balance, beginning of period		424,334			384,569
Incurred related to:
Current period		43,341			42,031
Prior periods		45			1,235
Total incurred		43,386			43,266
Paid related to:
Current period		(2,718	)		(4,077	)
Prior periods		(42,107	)		(40,345	)
Total paid		(44,825	)		(44,422	)
Net balance, end of period		422,895			383,413
Reinsurance recoverables		97,113			63,564
Unpaid loss and loss adjustment expense	$	520,008		$	446,977

As a result of changes in estimates of insured events in prior periods, unpaid loss and loss adjustment expenses increased by a net amount of $45,000 in the three months ended March 31, 2012. Favorable development of prior year direct loss reserves totaled $11,000 and related to accident year 2011. This favorable development was offset by $56,000 of net adverse development of other amounts such as unallocated loss adjustment expense (“ULAE”), loss based assessments and losses assumed from National Council on Compensation Insurance (“NCCI”) residual market pools.

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 March 31, 2012, SBIC had a liability for guaranty fund and other assessments of $7.0 million and a guaranty fund receivable of $5.8 million. These amounts represent management's best estimate based on information received from the states in which it writes business and may change due to many factors, including the Company's share of the ultimate cost of current and future insolvencies. The majority of assessments are paid out in the year following the year in which the premium is written or the losses are paid. Guaranty fund receivables and other surcharge items are generally realized by a charge to new and renewing policyholders in the year following the year in which the related assessments were paid.

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SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

c.  In 2003, the Company entered into a claims administration services agreement with Lumbermens Mutual Casualty Company (“LMC”) and certain of its affiliates under which the Company provides claims administration services for two predecessor companies that are in runoff. The Company and LMC are negotiating the finalization of the financial arrangements of that agreement. Although we are unable to predict the outcome of these negotiations, we do not expect it to have a negative impact on our future financial position or results of operations.

8.        Share-Based Payment Arrangements

At March 31, 2012, 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, May 2010 and April 2012.

At March 31, 2012, 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 3,952,105 shares for issuance under the 2005 Plan, of which 3,132,767 shares had been granted. In January 2006, the Compensation Committee of the Board of Directors terminated the ability to grant future stock options awards under the 2003 Plan. Therefore, the Company anticipates that all future awards will be made under the 2005 Plan.

a.        Stock Options

The following table summarizes stock option activity for the three months ended March 31, 2012:

						Weighted Average
				Weighted Average		Remaining		Aggregate
	Shares Subject			Exercise Price		Contractual Life		Intrinsic Value
	to Options				per Share	(years)		(in thousands)
Outstanding at December 31, 2011		1,474,040		$	10.94		5.1	$	404
Granted		2,600			8.06	−		−
Forfeited		(1,487	)		10.61	−		−
Cancelled		(1,800	)		13.63	−		−
Outstanding at March 31, 2012		1,473,353			10.94		4.9		948
Exercisable at March 31, 2012		1,179,281			11.08		4.0		937

 

The March 31, 2012 aggregate intrinsic values in the table above are based on the Company's closing stock price of $9.09 on March 30, 2012. There were no proceeds from or exercises of stock options during the quarter ended March 31, 2012.

As of March 31, 2012, there was approximately $0.8 million of total unrecognized compensation cost related to stock options granted under the 2005 Plan. That cost is expected to be recognized over a weighted-average period of approximately 2.3 years.

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SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

b.        Restricted Stock

The following table summarizes restricted stock activity for the three months ended March 31, 2012:

				Weighted Average
	Number of Shares			Grant Date Fair Value
Outstanding at December 31, 2011		1,160,556		$	10.15
Granted		153,515			8.97
Vested		(241,637	)		10.62
Forfeited		(3,750	)		10.42
Outstanding at March 31, 2012		1,068,684			9.88

During the three months ended March 31, 2012, the Company granted, for the first time, shares of performance-based restricted stock to certain executives of the Company. These performance-based shares, which totaled 145,715, were issued under the 2005 Plan and will vest in varying amounts if the Company's tangible book value per share, adjusted to exclude unrealized gains and losses and adjusted for dividends and share repurchases, as of December 31, 2012 equals or exceeds certain levels of improvement. The number of shares granted was based upon achievement of the target level of improvement, at which 100% will vest. The actual level of achievement of the performance-based goal will be determined using the Company's consolidated GAAP financial statements as of and for the year ending December 31, 2012 and may range from 50% of target at the threshold level to 200% of target at the maximum improvement level. If the threshold level of improvement is not achieved, all performance-based awards will be forfeited. Any shares that are earned through achievement of the performance-based goal will vest in three equal installments on the following dates: the date in early 2013 on which the Company publicly releases its results for fiscal year 2012; December 31, 2013; and December 31, 2014. Grantees must remain employed in good standing by the Company at the vesting dates in order to receive the vested shares.

As of March 31, 2012, there was approximately $5.7 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 and comprehensive income (loss) for the three month periods ended March 31, 2012 and 2011 is shown in the following table. No stock-based compensation cost was capitalized during the periods shown.

	Three Months Ended March 31,
	2012		2011
	(in thousands)
Stock-based compensation expense related to:
Nonvested restricted stock	$	952	$	1,368
Stock options		156		183
Total	$	1,108	$	1,551
Total related tax benefit	$	356	$	499

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.

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SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

• Investment securities:   The Company measures and reports its financial assets and liabilities, including investment securities, in accordance with the FASB Accounting Standards Codification (“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 consists of U.S. Treasury securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

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

• Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. As of March 31, 2012, the Company had no Level 3 financial assets or liabilities.

The tables below present the March 31, 2012 and December 31, 2011 balances of assets and liabilities measured at fair value on a recurring basis.

March 31, 2012:

	Total		Level 1		Level 2		Level 3
	(In thousands)
U.S. Treasury securities	$	29,997	$	29,997	$	-	$	-
Government sponsored agency securities		25,633	−			25,633		-
Corporate securities		163,167	−			163,167		-
Taxable municipal securities		24,177	−			24,177		-
Tax-exempt municipal securities		291,762	−			291,762		-
Mortgage pass-through securities		90,886	−			90,886		-
Collateralized mortgage obligations		11,843	−			11,843		-
Asset-backed securities		54,607	−			54,607		-
Total	$	692,072	$	29,997	$	662,075	$	-

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SEABRIGHT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

December 31, 2011:
 

		Total		Level 1		Level 2		Level 3
		(In thousands)
U.S. Treasury securities	$	26,568	$	26,568	$	-	$	-
Government sponsored agency securities		16,897		-		16,897		-
Corporate securities		176,229		-		176,229		-
Tax-exempt municipal securities		326,855		-		326,855		-
Mortgage pass-through securities		80,931		-		80,931		-
Collateralized mortgage obligations		14,660		-		14,660		-
Asset-backed securities		58,206		-		58,206		-
Total	$	700,346	$	26,568	$	673,778	$	-

At March 31, 2012, 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 March 31, 2012, the Company's investment portfolio consisted of securities that it considered to be traded in active markets. Therefore, no adjustment for market inactivity or illiquidity was necessary. There were no transfers between levels during the three months ended March 31, 2012.

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 ($20.9 million at March 31, 2012) 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, 2011 filed with the SEC on March 5, 2012.

The discussion under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 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 2011 Annual Report on Form 10-K.

Overview

We are a holding company whose wholly-owned subsidiary, SeaBright Insurance Company, operates as a specialty provider of multi-jurisdictional workers' compensation insurance. Through our other wholly-owned subsidiaries, PointSure Insurance Services, Inc. and Paladin Managed Care Services, Inc., we also provide related wholesale brokerage services and integrated managed medical care services. SeaBright Insurance Company is domiciled in Illinois, commercially domiciled in California and headquartered in Seattle, Washington. SeaBright Insurance Company is 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 from 2008 through 2010 led to lower reported payrolls, which has had a negative impact on our gross premiums written, and the recovery that began in 2010 has not resulted in a significant improvement in reported payrolls. The economic downturn had a particularly severe impact on the construction industry. 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.

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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 2011 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. Quarterly, management determines what, if any, adjustments to prior accident years' loss reserves are necessary after considering the results of actuarial studies performed by internal and/or consulting actuaries; the impact of recent operational initiatives on our claims costs and loss reserves; discussions with key executives in Underwriting, Claims, and other relevant functional areas; changing environmental conditions; and other factors. In response to the factors described in the preceding paragraph, we strengthened our loss reserves for prior accident years by $31.4 million in 2011 and $45,000 in the first quarter of 2012. We may ultimately conclude that our current estimate of loss reserves is inadequate, if the negative claim trends experienced over the last several years 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.

Results of Operations

Three Months Ended March 31, 2012 and 2011

Gross Premiums Written. Gross premiums written consists of direct premiums written and premiums assumed from the NCCI residual market pools. The number of customers we service, in-force payrolls and in-force premiums represent some of the factors we consider when analyzing gross premiums written. 

Gross premiums written for the three months ended March 31, 2012 totaled $66.7 million, a decrease of $2.8 million, or 4.0%, from $69.5 million of gross premiums written in the same period of 2011. Our “core” product lines contributed $44.4 million, or 66.6%, of the total gross premiums written for the three months ended March 31, 2012 compared to $44.1 million, or 63.5%, in the same period of 2011. The slight increase in our core product lines was offset by a net $3.4 million decrease in our “Program Business,” which contributed $21.6 million of gross premiums written for the quarter ended March 31, 2012. Our Program Business includes alternative markets and small maritime programs. The reductions in written premiums and customer count resulted in part from our previously announced efforts to reduce our concentration in the California construction and agriculture markets. We have also experienced a reduction in our renewal retention rates as a result of rate increases and other underwriting actions we've taken in response to upward trends in medical and indemnity claims costs. Our overall renewal retention rate for the first quarter of 2012 was 63.0%, down from 65.0% in the fourth quarter of 2011 and 70.0% in the first quarter of 2011.

Excluding work we perform as the servicing carrier for the Washington State USL&H Compensation Act Assigned Risk Plan (the “Washington USL&H Plan”), the total number of customers we serviced decreased from approximately 1,600 at March 31, 2011 to approximately 1,420 at March 31, 2012. The majority of the customer decrease was in our core business, which was offset by an increase of approximately 75 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 book of business. Our average premium size at March 31, 2012 was approximately $285,000 in our core business and approximately $97,000 in our Program Business, compared to approximately $242,000 in our core business and approximately $105,000 in our Program Business one year earlier.

Total in-force payrolls, a factor used in determining premiums charged, decreased 4.3% from $6.9 billion at March 31, 2011 to $6.6 billion a year later. California continues to be our largest market, accounting for approximately $109.3 million, or 43.3%, of our in-force premiums at March 31, 2012. This represents a decrease of $34.6 million, or 24.0%, from approximately $143.9 million, or 50.6% of total in-force premiums in California at March 31, 2011.

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Premiums assumed from the NCCI residual market pools for the three months ended March 31, 2012 totaled $1.5 million, an increase of $0.3 million, or 25.0%, from $1.2 million during the same period in 2011. The majority of the increase was the result of increases in our actuarial NCCI reapportionment estimate. The balance of our gross premiums written (consisting of Washington USL&H Plan, general liability and other miscellaneous amounts) for the three months ended March 31, 2012 totaled $1.4 million, compared to $1.3 million in the same period in 2011.

Net Premiums Written. Net premiums written totaled $60.3 million for the three months ended March 31, 2012 compared to $59.6 million in the same period in 2011, representing an increase of $0.7 million, or 1.2%. The increase in net premiums written was primarily attributable to a decrease in gross written premium of $2.8 million, offset by a decrease in ceded premiums written of $3.5 million as a result of a lower ceding rate in our excess of loss reinsurance program that renewed in October 2011. Our ceding rate decreased by approximately 50% as a result of raising the attachment point from $0.25 million to $0.5 million and reducing maximum coverage from $100.0 million to $75.0 million. The coverage provided by the reinsurance program that renewed in October 2011 is more in line with historical levels.

Net Premiums Earned. Net premiums earned totaled $59.1 million for the three months ended March 31, 2012 compared to $56.7 million for the same period in 2011, representing an increase of $2.4 million, or 4.2%. 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 totaled $63.9 million for the three months ended March 31, 2012, a decrease of $1.1 million, or 1.7%, from $65.0 million for the same period in 2011.

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

	Quarter Ended March 31,
	2012					2011
	Direct Premiums Earned		%			Direct Premiums Earned		%
	($ in thousands)
California	$	27,493		43.0	%	$	32,735		50.4	%
Louisiana		6,158		9.6			5,937		9.1
Texas		3,681		5.8			3,777		5.8
Washington		3,196		5.0			3,108		4.8
Pennsylvania		2,745		4.3			2,201		3.4
Total	$	43,273		67.7	%	$	47,758		73.5	%

 

Net premiums earned are also affected by premiums ceded under reinsurance agreements. Ceded premiums earned for the three months ended March 31, 2012 totaled $6.0 million compared to $9.5 million for the same period in 2011, representing a decrease of $3.5 million, or 36.8%. This decrease was primarily attributable to lower ceding rates under our October 2011 reinsurance program.

Net Investment Income. Net investment income was $5.0 million for the three months ended March 31, 2012 compared to $5.4 million for the same period in 2011, representing a decrease of $0.4 million, or 6.5%. Average invested assets for the three months ended March 31, 2012 increased $48.5 million, or 7.0%, from $690.1 million in 2011 to $738.6 million in 2012. Our yield on average invested assets decreased from approximately 3.1% for the three months ended March 31, 2011 to approximately 2.7% for the same period in 2012, driven mainly by reduced reinvestment rates.

Net Realized Gains. Net realized gains totaled $8.0 million for the three months ended March 31, 2012 compared to $0.3 million for the same period in 2011. The increase in net realized gains resulted from the sale of investment securities in order to reduce exposure to interest rate risk and realize a portion of our tax loss carry forwards. The majority of proceeds from these sales were reinvested in taxable securities in a continuing effort to shorten the overall portfolio duration and reduce the municipal exposure.

Other Income. Other income totaled $0.9 million for the three months ended March 31, 2012 compared to $1.1 million for the same period in 2011, representing a decrease of $0.2 million, or 12.4%. Other income is derived primarily from the operations of PointSure, our wholesale insurance broker, and PMCS, our provider of medical bill review, utilization review, nurse case management and related services.

-18-

Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses totaled $43.4 million for the three months ended March 31, 2012 compared to $43.3 million for the same period in 2011, representing an increase of $0.1 million, or 0.3%. Our net loss ratio, which is calculated by dividing loss and loss adjustment expenses less claims service income by premiums earned, for the three months ended March 31, 2012 was 72.9% compared to 75.7% for the same period in 2011. The decrease in our net loss ratio for the three months ended March 31, 2012 was primarily attributable to lower adverse development of prior accident years' loss reserves in 2012.

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, 2011, 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 loss development to determine the revised estimated ultimate losses for the accident year.

Accident year 2012 is incomplete, as only three months of the year have been earned as of March 31, 2012. 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 quarter of 2012 was 65.0%, compared to 62.5% used for the 2011 accident year in the same quarter of last year. The 2011 net ELR was subsequently increased to 65.0% in the fourth quarter of 2011, after reviewing the year-to-date results for the 2011 accident year and considering the adverse development in recent accident years. The 2012 accident year ELR takes into consideration the following factors, among others: the development of recent accident years, the impact of recent rate increases, and provisions of the excess-of-loss reinsurance treaty that we entered into on October 1, 2011.

For prior accident years, the net ultimate loss estimates at March 31, 2012 were slightly higher when compared to December 31, 2011 and resulted in a net increase of $45,000 in our loss reserves in the first quarter of 2012, compared to a net increase of $1.2 million recorded in the same period of last year. Favorable development of prior year direct loss reserves totaled $11,000, which was offset by $56,000 of net adverse development of other amounts such as ULAE, loss based assessments and losses assumed from the NCCI pools.

As of March 31, 2012, we had recorded a receivable of approximately $3.1 million for KEIC loss development under the adverse development cover we entered into with LMC on September 30, 2003, the date we acquired KEIC from LMC. We do not expect this receivable to have any material adverse effect on our future cash flows if LMC fails to perform its obligations under the adverse development cover. At March 31, 2012, we had access to approximately $3.1 million under the related collateralized reinsurance trust in the event that LMC fails to satisfy its obligations under the adverse development cover. December 31, 2011 was the date as of which the parties are to settle amounts due under the adverse development cover. We are currently working through the final settlement of the receivable from LMC.

Underwriting, Acquisition and Insurance Expenses. Underwriting expenses totaled $16.9 million for the three months ended March 31, 2012, compared to $19.0 million for the same period in 2011, representing a decrease of $2.2 million, or 11.7%. Our net underwriting expense ratio, which is calculated by dividing underwriting, acquisition and insurance expenses by premiums earned, for the three months ended March 31, 2012 was 28.6%, compared to 33.5% for the same period in 2011. The decrease in the expense ratio for the three months ended March 31, 2012 was primarily the result of an increase in premiums earned and a decrease in employee expenses and stock option forfeitures incurred as compared to the same period in 2011.

Interest Expense. Interest expense related to the surplus notes issued by our insurance subsidiary in May 2004 totaled $136,000 for the three months ended March 31, 2012, compared to $130,000 for the same period in 2011, representing an increase of $6,000, or 4.6%. 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, was 4.5% at March 31, 2012 as compared to 4.3% at March 31, 2011.

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Other Expenses. Other expenses totaled $1.8 million for the three months ended March 31, 2012 compared to $2.0 million for the same period in 2011, representing a decrease of $0.2 million, or 7.0%. Other expenses result primarily from the operations of PointSure and PMCS, which together accounted for approximately $1.5 million of expenses for the three months ended March 31, 2012, compared to approximately $1.7 million for the same period in 2011.

Income Tax Expense. The effective tax rate for the three months ended March 31, 2012 was 26.7%, compared to 78.3% for the same period in 2011. Our effective tax rate differed from the statutory tax rate of 35.0% primarily as a result of tax exempt interest income. At March 31, 2012, approximately 42% of our investment portfolio was invested in tax exempt municipal bonds.

Net Income. Net income was $8.1 million for the three months ended March 31, 2012, compared to a net loss of $0.1 million for the same period in 2011. The increase in net income for the three months ended March 31, 2012 was primarily the result of increases in net realized gains and premiums earned.

Liquidity and Capital Resources

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

Our investment portfolio is structured so that investments mature periodically over time in reasonable relation to current expectations of future claim payments. Since we have limited claims history, we have derived our expected future claim payments from industry and predecessor trends and included a provision for uncertainties. Our investment portfolio as of March 31, 2012 had an effective duration of 4.35 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 March 31, 2012, 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, 2011.

Our condensed consolidated net cash provided by operating activities for the three months ended March 31, 2012 was $19.3 million, compared to $7.6 million for the same period in 2011. The increase is mainly attributable to an increase in premium collections and a decrease in paid losses net of reinsurance.

Net cash provided by investing activities was $10.2 million in the three months ended March 31, 2012, compared to $2.6 million in the same period in 2011. The increase in net cash provided by investing activities was primarily driven by higher net investment sales activity (sales and maturities, net of purchases).

For the three months ended March 31, 2012, cash used in financing activities totaled $1.7 million, compared to $1.9 million in the same period in 2011. The decrease was primarily due to a decrease in tax withholding obligations associated with the vesting of restricted stock.

As of March 31, 2012, SBIC's statutory surplus totaled $299.8 million, compared to $302.2 million as of March 31, 2011.

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Contractual Obligations and Commitments

During the three months ended March 31, 2012, there were no material changes to our contractual obligations and commitments.

Off-Balance Sheet Arrangements

As of March 31, 2012, 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, 2011.

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 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.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

Credit Risk

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

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Interest Rate Risk

We had fixed-income investments with a fair value of $692.1 million at March 31, 2012 and $700.3 million at December 31, 2011 that are subject to interest rate risk. We manage the exposure to interest rate risk through a disciplined asset/liability matching and capital management process. In the management of this risk, the characteristics of duration, credit and variability of cash flows are critical elements. These risks are assessed regularly and balanced within the context of the liability and capital position.

Since December 31, 2011, 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, 2011, filed with the SEC on March 5, 2012.

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 our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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 our first fiscal quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A. Risk Factors

During the quarter ended March 31, 2012, there were no material changes to the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 5, 2012.

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

The following table sets forth information in connection with purchases made by, or on behalf of, us or any affiliated purchaser, of shares of our common stock during the three months ended March 31, 2012:

	(a) Total Number of Shares (or Units) Purchased		(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Month #1 (January 1, 2012 through January 31, 2012)		–		–		–		–
Month #2 (February 1, 2012 through February 29, 2012)		–		–		–		–
Month # 3 (March 1, 2012 through March 31, 2012)		67,804	$	9.04		–		–

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We did not repurchase any of our common stock on the open market as part of a stock repurchase program during the three months ended March 31, 2012. 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: May 7, 2012
	By:	/s/ John G. Pasqualetto
		John G. Pasqualetto
		Chairman, President and Chief 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 and 32.2 are being furnished with this quarterly report on Form 10-Q.

Exhibit Number	Description
10.1*	Amended and Restated 2005 Long-Term Equity Incentive Plan
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

____________

*     Filed herewith.

EX-10

Exhibit 10.1

SeaBright Insurance Holdings, Inc.

Amended and Restated 2005 Long-Term Equity Incentive Plan

1.         Purpose

This plan shall be known as the SeaBright Insurance Holdings, Inc. Amended and Restated 2005 Long-Term Equity Incentive Plan (the “Plan”). The purpose of the Plan shall be to promote the long-term growth and profitability of SeaBright Insurance Holdings, Inc. (the “Company”) and its Subsidiaries by (i) providing certain directors, officers and employees of, and certain other individuals who perform services for, the Company and its Subsidiaries with incentives to maximize stockholder value and otherwise contribute to the success of the Company and (ii) enabling the Company to attract, retain and reward the best available persons for positions of responsibility. Grants of incentive or non-qualified stock options, restricted stock, restricted stock units, deferred stock units, performance awards, Section 162(m) Awards or any combination of the foregoing may be made under the Plan.

2.         Definitions

(a)  “Board of Directors” and “Board” mean the board of directors of the Company.

(b)  “Cause” means, unless otherwise determined by the Committee at the time of grant of an award, the occurrence of one or more of the following events:

(i) Conviction of a felony or any crime or offense lesser than a felony involving the property of the Company or a Subsidiary; or

(ii) Conduct that has caused demonstrable and serious injury to the Company or a Subsidiary, monetary or otherwise; or

(iii) Willful refusal to perform or substantial disregard of duties properly assigned, as determined by the Company or a Subsidiary, as the case may be; or

(iv) Breach of duty of loyalty to the Company or a Subsidiary or other act of fraud or dishonesty with respect to the Company or a Subsidiary.

(c)  “Change in Control” means, unless otherwise determined by the Committee at the time of grant of an award, the occurrence of one of the following events:

(i) if any “person” or “group” as those terms are used in Sections 13(d) and 14(d) of the Exchange Act or any successors thereto, other than an Exempt Person, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act or any successor thereto), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities; or

(ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new directors whose election by the Board or nomination for election by the Company’s stockholders was approved by at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election was previously so approved, cease for any reason to constitute a majority thereof; or

 (iii) consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation (A) which would result in all or a portion of the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) by which the corporate existence of the Company is not affected and following which the Company’s chief executive officer and directors retain their positions with the Company (and constitute at least a majority of the Board); or

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(iv) consummation of a plan of complete liquidation of the Company or a sale or disposition by the Company of all or substantially all the Company’s assets, other than a sale to an Exempt Person.

(d)  “Code” means the Internal Revenue Code of 1986, as amended.

(e)  “Committee” means the Compensation Committee of the Board, which shall consist solely of two or more members of the Board.

(f)  “Common Stock” means the Common Stock, par value $0.01 per share, of the Company, and any other shares into which such stock may be changed by reason of a recapitalization, reorganization, merger, consolidation or any other change in the corporate structure or capital stock of the Company.

(g)  “Competition ” is deemed to occur if a person whose employment with the Company or its Subsidiaries has terminated obtains a position as a full-time or part-time employee of, as a member of the board of directors of, or as a consultant or advisor with or to, or acquires an ownership interest in excess of 5% of, a corporation, partnership, firm or other entity that engages in any of the businesses of the Company or any Subsidiary with which the person was involved in a management role at any time during his or her last five years of employment with or other service for the Company or any Subsidiaries.

(h)  “Disability” means a disability that would entitle an eligible participant to payment of monthly disability payments under any Company disability plan or as otherwise determined by the Committee. Notwithstanding the foregoing, for purposes of the grant of an award subject to Section 409A of the Code that is settled or distributed upon a “Disability,” “Disability” means for that purpose that a participant is disabled under Sections 409A(a)(2)(C)(i) or (ii) of the Code.

(i)  “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(j)  “Exempt Person” means (i) Summit Master Company, LLC, Summit Partners, LLC, Summit Partners, L.P. or any of their affiliates, (ii) any person, entity or group under the control of any party included in clause (i), or (iii) any employee benefit plan of the Company or a trustee or other administrator or fiduciary holding securities under an employee benefit plan of the Company.

(k)  “Family Member ” has the meaning given to such term in General Instructions A.1(a)(5) to Form S-8 under the Securities Act of 1933, as amended, and any successor thereto.

(l)  “Fair Market Value ” of a share of Common Stock of the Company means, as of the date in question, the officially-quoted closing selling price of the stock (or if no selling price is quoted, the bid price) on the principal securities exchange on which the Common Stock is then listed for trading (including for this purpose the Nasdaq National Market) (the “Market”) for the applicable trading day or, if the Common Stock is not then listed or quoted in the Market, the Fair Market Value shall be the fair value of the Common Stock determined in good faith by the Board taking into account the requirements of Section 409A of the Code; provided, however, that when shares received upon exercise of an option are immediately sold in the open market, the net sale price received may be used to determine the Fair Market Value of any shares used to pay the exercise price or applicable withholding taxes and to compute the withholding taxes. For purposes of the grant of any stock option under the Plan that is intended to be exempt from the requirements of Section 409A of the Code, Fair Markey Value may be determined in any manner permitted under Section 409A of the Code.

(m)  “Incentive Stock Option” means an option conforming to the requirements of Section 422 of the Code and any successor thereto.

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(n)  “Involuntary Termination ” means, unless otherwise determined by the Committee at the time of grant of an award, (i) the participant’s involuntary dismissal or discharge by the Company or a Subsidiary or by its or their successor for reasons other than Cause or (ii) such individual’s voluntary resignation following (A) a change in his or her position with the Company which materially reduces his or her level of responsibility, (B) a reduction in his or her level of compensation (base salary or any target incentive compensation) by more than ten percent or (C) a relocation of such individual’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Company or a Subsidiary or by its or their successor without the participant’s written consent.

 (o)  “Non-Employee Director” has the meaning given to such term in Rule 16b-3 under the Exchange Act and any successor thereto.

(p)  “Non-qualified Stock Option” means any stock option other than an Incentive Stock Option.

(q)  “Other Company Securities ” mean securities of the Company other than Common Stock, which may include, without limitation, unbundled stock units or components thereof, debentures, preferred stock, warrants and securities convertible into or exchangeable for Common Stock or other property.

(r)  “Performance Goals” has the meaning set forth on Exhibit A.

(s)  “Retirement” means, unless otherwise determined by the Committee at the time of grant of an award, retirement as defined under any Company pension plan or retirement program or termination of one’s employment on retirement with the approval of the Committee.

(t)  “Section 162(m) Award” means any award under the Plan that is intended to qualify for the “performance-based” compensation exception under Section 162(m) of the Code and the treasury regulations and other official guidance promulgated thereunder.

(u)  “Subsidiary ” means a corporation or other entity of which outstanding shares or ownership interests representing 50% or more of the combined voting power of such corporation or other entity entitled to elect the management thereof, or such lesser percentage as may be approved by the Committee, are owned directly or indirectly by the Company. Notwithstanding the foregoing, for purposes of the grant of any Incentive Stock Option, “Subsidiary” means any subsidiary corporation of the Company within the meaning of Section 424(f) of the Code.

3.         Administration

The Plan shall be administered by the Committee; provided that the Board may, in its discretion, at any time and from time to time, resolve to administer the Plan, in which case the term “Committee” shall be deemed to mean the Board for all purposes herein. Subject to the provisions of the Plan, the Committee shall be authorized to (i) select persons to participate in the Plan, (ii) determine the form and substance of grants made under the Plan to each participant, and the conditions and restrictions, if any, subject to which such grants will be made, (iii) certify that the conditions and restrictions applicable to any grant have been met, (iv) modify the terms of grants made under the Plan, (v) interpret the Plan and grants made thereunder, (vi) make any adjustments necessary or desirable in connection with grants made under the Plan to eligible participants located outside the United States and (vii) adopt, amend, or rescind such rules and regulations, and make such other determinations, for carrying out the Plan as it may deem appropriate. Decisions of the Committee on all matters relating to the Plan shall be in the Committee’s sole discretion and shall be conclusive and binding on all parties. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with applicable federal and state laws and rules and regulations promulgated pursuant thereto and the rules and regulations of the principal securities exchange on which the Common Stock is then listed for trading. No member of the Committee and no officer of the Company shall be liable for any action taken or omitted to be taken by such member, by any other member of the Committee or by any officer of the Company in connection with the performance of duties under the Plan, except for such person’s own willful misconduct or as expressly provided by statute.

The expenses of the Plan shall be borne by the Company. The Plan shall not be required to establish any special or separate fund or make any other segregation of assets to assume the payment of any award under the Plan, and rights to the payment of such awards shall be no greater than the rights of the Company’s general creditors.

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4.         Shares Available for the Plan.

Subject to adjustments as provided in Section 16 hereof, an aggregate of three million sixty-five thousand forty-one (3,065,041) Shares of Common Stock may be issued pursuant to the Plan, plus an automatic annual increase on the first day of each of the Company’s fiscal years beginning in 2011 and ending in 2015 equal to the lesser of (i) two percent (2%) of the shares of Common Stock outstanding on the last day of the immediately preceding fiscal year, and (ii) 750,000 such (collectively, the “Shares”). Notwithstanding the foregoing, the maximum aggregate number of Shares that may be issued pursuant to Incentive Stock Options under the Plan shall not exceed three million sixty-five thousand forty-one (3,065,041) Shares (subject to adjustments as provided in Section 16 hereof), and such number shall not be subject to annual adjustment as described in the preceding sentence.

Such Shares may be in whole or in part authorized and unissued or held by the Company as treasury shares. If any grant under the Plan expires or terminates unexercised, becomes unexercisable or is forfeited as to any Shares, then such unpurchased or forfeited Shares shall thereafter be available for further grants under the Plan.

Without limiting the generality of the foregoing provisions of this Section 4 or the generality of the provisions of Sections 3, 6 or 18 or any other section of this Plan, the Committee may, at any time or from time to time, and on such terms and conditions (that are consistent with and not in contravention of the other provisions of this Plan) as the Committee may, in its sole discretion, determine, enter into agreements (or take other actions with respect to the options) for new options containing terms (including exercise prices) more (or less) favorable than the outstanding options.

The maximum number of Shares of Common Stock subject to any award of Incentive Stock Options, Non-qualified Stock Options, or other types of award under the Plan for which the grant of such award or the lapse of the relevant restriction period is subject to the attainment of Performance Goals, which may be granted under the Plan during any calendar year of the Company to any eligible participant in the Plan shall be 300,000 Shares per type of award (which shall be subject to any further increase or decrease pursuant to Section 16). Each performance award to be paid in Shares shall be referenced to one share of Common Stock and shall be charged against the available Shares under this Plan at the time the unit value measurement is converted to a referenced number of Shares of Common Stock in accordance with Section 10. There are no annual individual share limitations on awards of restricted stock, restricted stock units, deferred stock units or performance awards that are not intended to be Section 162(m) Awards. The maximum cash payment under any performance award payable in cash to any eligible participant in the Plan with respect to any calendar year and for which the payment of such award is subject to the attainment of Performance Goals shall be $5,000,000. The foregoing individual participant limitations shall be cumulative; that is, to the extent that Shares of Common Stock for which awards are permitted to be granted to an eligible participant during a calendar year are not covered by an award to such eligible participant in a calendar year, the number of Shares of Common Stock available for awards to such eligible participant shall automatically increase in the subsequent calendar years during the term of the Plan until used.

5.         Participation

Participation in the Plan shall be limited to those directors (including Non-Employee Directors), officers (including non-employee officers) and employees of, and other individuals performing services for, the Company and its Subsidiaries selected by the Committee (including participants located outside the United States). Nothing in the Plan or in any grant thereunder shall confer any right on a participant to continue in the service or employ as a director or officer of or in the performance of services for the Company or a Subsidiary or shall interfere in any way with the right of the Company or a Subsidiary to terminate the employment or performance of services or to reduce the compensation or responsibilities of a participant at any time. By accepting any award under the Plan, each participant and each person claiming under or through him or her shall be conclusively deemed to have indicated his or her acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board or the Committee.

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Incentive Stock Options or Non-qualified Stock Options, restricted stock awards, restricted stock unit or deferred stock unit awards, performance awards, or any combination thereof, may be granted to such persons and for such number of Shares as the Committee shall determine (such individuals to whom grants are made being sometimes herein called “optionees” or “grantees,” as the case may be). Determinations made by the Committee under the Plan need not be uniform and may be made selectively among eligible individuals under the Plan, whether or not such individuals are similarly situated. A grant of any type made hereunder in any one year to an eligible participant shall neither guarantee nor preclude a further grant of that or any other type to such participant in that year or subsequent years.

6.         Incentive and Non-qualified Options

The Committee may from time to time grant to eligible participants Incentive Stock Options, Non-qualified Stock Options, or any combination thereof; provided that the Committee may grant Incentive Stock Options only to eligible employees of the Company or its Subsidiaries. The options granted shall take such form as the Committee shall determine, subject to the following terms and conditions.

It is the Company’s intent that Non-qualified Stock Options granted under the Plan not be classified as Incentive Stock Options, that Incentive Stock Options be consistent with and contain or be deemed to contain all provisions required under Section 422 of the Code and any successor thereto, and that any ambiguities in construction be interpreted in order to effectuate such intent. If an Incentive Stock Option granted under the Plan does not qualify as such for any reason, then to the extent of such non-qualification, the stock option represented thereby shall be regarded as a Non-qualified Stock Option duly granted under the Plan, provided that such stock option otherwise meets the Plan’s requirements for Non-qualified Stock Options.

(a)  Price

The price per Share deliverable upon the exercise of each option (“exercise price”) may not be less than 100% of the Fair Market Value of a share of Common Stock as of the date of grant of the option, and in the case of the grant of any Incentive Stock Option to an employee who, at the time of the grant, owns more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries, the exercise price may not be less than 110% of the Fair Market Value of a share of Common Stock as of the date of grant of the option, in each case unless otherwise permitted by Section 422 of the Code or any successor thereto.

(b)  Payment

Options may be exercised, in whole or in part, upon payment of the exercise price of the Shares to be acquired. Unless otherwise determined by the Committee, payment shall be made (i) in cash (including check, bank draft, money order or wire transfer of immediately available funds), (ii) by delivery of outstanding shares of Common Stock with a Fair Market Value on the date of exercise equal to the aggregate exercise price payable with respect to the options’ exercise, (iii) by simultaneous sale through a broker reasonably acceptable to the Committee of Shares acquired on exercise, as permitted under Regulation T of the Federal Reserve Board or (iv) by any combination of the foregoing.

In the event a grantee elects to pay the exercise price payable with respect to an option pursuant to clause (ii) above, (A) only a whole number of share(s) of Common Stock (and not fractional shares of Common Stock) may be tendered in payment, (B) such grantee must present evidence acceptable to the Company that he or she has owns any such shares of Common Stock tendered in payment of the exercise price prior to the date of exercise, and (C) Common Stock must be delivered to the Company. Delivery for this purpose may, at the election of the grantee, be made either by (1) physical delivery of the certificate(s) for all such shares of Common Stock tendered in payment of the price, accompanied by duly executed instruments of transfer in a form acceptable to the Company, or (2) direction to the grantee’s broker to transfer, by book entry, such shares of Common Stock from a brokerage account of the grantee to a brokerage account specified by the Company. When payment of the exercise price is made by delivery of Common Stock, the difference, if any, between the aggregate exercise price payable with respect to the option being exercised and the Fair Market Value of the shares of Common Stock tendered in payment (plus any applicable taxes) shall be paid in cash. No grantee may tender shares of Common Stock having a Fair Market Value exceeding the aggregate exercise price payable with respect to the option being exercised (plus any applicable taxes).

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(c)  Terms of Options

The term during which each option may be exercised shall be determined by the Committee, but if required by the Code and except as otherwise provided herein, no option shall be exercisable in whole or in part more than ten years from the date it is granted, and no Incentive Stock Option granted to an employee who at the time of the grant owns more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries shall be exercisable more than five years from the date it is granted. All rights to purchase Shares pursuant to an option shall, unless sooner terminated, expire at the date designated by the Committee. The

Committee shall determine the date on which each option shall become exercisable and may provide that an option shall become exercisable in installments. The Shares constituting each installment may be purchased in whole or in part at any time after such installment becomes exercisable, subject to such minimum exercise requirements as may be designated by the Committee. Prior to the exercise of an option and delivery of the Shares represented thereby, the optionee shall have no rights as a stockholder with respect to any Shares covered by such outstanding option (including any dividend or voting rights).

(d)  Limitations on Grants

If required by the Code, the aggregate Fair Market Value (determined as of the grant date) of Shares for which an Incentive Stock Option is exercisable for the first time during any calendar year under all equity incentive plans of the Company and its Subsidiaries (as defined in Section 422 of the Code or any successor thereto) may not exceed $100,000.

(e)  Termination; Forfeiture

(i)  Death or Disability

Unless otherwise determined by the Committee at the time of grant of an award, if a participant ceases to be a director, officer or employee of, or to perform other services for, the Company or any Subsidiary due to death or Disability, all of the participant’s options shall become fully vested and exercisable and shall remain so for a period of 180 days from the date of such death or Disability, but in no event after the expiration date of the options; provided that the participant does not engage in Competition during such 180-day period unless he or she received written consent to do so from the Board or the Committee; provided further that the Board or Committee may extend such exercise period (and related non-competition period) in its discretion, but in no event may such extended exercise period extend beyond the expiration date of the options. Notwithstanding the foregoing, if the Disability giving rise to the termination of employment is not within the meaning of Section 22(e)(3) of the Code or any successor thereto, Incentive Stock Options not exercised by such participant within 90 days after the date of termination of employment will cease to qualify as Incentive Stock Options and will be treated as Non-qualified Stock Options under the Plan if required to be so treated under the Code.

(ii)  Retirement

Unless otherwise determined by the Committee at the time of grant of an award, if a participant ceases to be a director, officer or employee of, or to perform other services for, the Company or any Subsidiary upon the occurrence of his or her Retirement, (A) all of the participant’s options that were exercisable on the date of Retirement shall remain exercisable for, and shall otherwise terminate at the end of, a period of 90 days after the date of Retirement, but in no event after the expiration date of the options; provided that the participant does not engage in Competition during such 90 day period unless he or she receives written consent to do so from the Board or the Committee; provided further that the Board or Committee may extend such exercise period (and related non-competition period) in its discretion, but in no event may such extended exercise period extend beyond the expiration date of the options, and (B) all of the participant’s options that were not exercisable on the date of Retirement shall be forfeited immediately upon such Retirement; provided, however, that such options may become fully vested and exercisable in the discretion of the Committee. Notwithstanding the foregoing, Incentive Stock Options not exercised by such participant within 90 days after Retirement will cease to qualify as Incentive Stock Options and will be treated as Non-qualified Stock Options under the Plan if required to be so treated under the Code.

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(iii)  Discharge for Cause

Unless otherwise determined by the Committee, if a participant ceases to be a director, officer or employee of , or to perform other services for, the Company or a Subsidiary due to Cause, all of the participant’s options shall expire and be forfeited immediately upon such cessation, whether or not then exercisable.

(iv)  Other Termination

Unless otherwise determined by the Committee, if a participant ceases to be a director, officer or employee of, or to otherwise perform services for, the Company or a Subsidiary for any reason other than death, Disability,

Retirement or Cause, (A) all of the participant’s options that were exercisable on the date of such cessation shall remain exercisable for, and shall otherwise terminate at the end of, a period of 30 days after the date of such cessation, but in no event after the expiration date of the options; provided that the participant does not engage in Competition during such 30-day period unless he or she receives written consent to do so from the Board or the Committee; provided further that the Board or Committee may extend such exercise period (and related non-competition period) in its discretion, but in no event may such extended exercise period extend beyond the expiration date of the options, and (B) all of the participant’s options that were not exercisable on the date of such cessation shall be forfeited immediately upon such cessation.

(v)  Change in Control

Unless otherwise determined by the Committee at the time of grant of an award, if there is a Change in Control of the Company and a participant is terminated from being a director, officer or employee of, or from performing other services for the Company or a Subsidiary through an “Involuntary Termination” effected within forty-eight (48) months following the effective date of such Change in Control, all of participant’s options shall automatically accelerate and become fully vested and exercisable. Any option so accelerated will remain exercisable until the earlier of (i) the expiration of the option term or (ii) the end of a one- year period measured from the date of the Involuntary Termination as defined herein. In addition, the Committee shall have the authority to grant options that become fully vested and exercisable automatically upon a Change in Control, whether or not the grantee is subsequently terminated.

(f)  Forfeiture

If a participant exercises any of his or her options and, within one year thereafter, either (i) is terminated from the Company or a Subsidiary for any of the reasons specified in the definition of “Cause” set forth in Section 2(b), or (ii) engages in Competition without having received written consent to do so from the Board or the Committee, then the participant may, in the discretion of the Committee, be required to pay the Company the gain represented by the difference between the aggregate selling price of the Shares acquired upon the options’ exercise (or, if the Shares were not then sold, their aggregate Fair Market Value on the date of exercise) and the aggregate exercise price of the options exercised (the “Option Gain”), without regard to any subsequent increase or decrease in the Fair Market Value of the Common Stock. In addition, the Company may, in its discretion, deduct from any payment of any kind (including salary or bonus) otherwise due to any such participant an amount equal to the Option Gain, provided, however, that no such deduction may occur from any payment that is characterized as “nonqualified deferred compensation” to the extent that such deduction would result in adverse tax consequences under Section 409A of the Code.

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(g)  Repricings of Options Prohibited.

Notwithstanding any other provision of the Plan to the contrary, outstanding Incentive Stock Options and Non-qualified Stock Options may not be modified to reduce the exercise price thereof nor may a new stock option with a lower exercise price be substituted for a surrendered stock option nor, subject to the provisions of Section 16 of the Plan, may a stock option be cancelled for cash or another award, unless such action is approved by the stockholders of the Company.

7.         Section 162(m) Awards

Awards of Incentive Stock Options and Non-qualified Stock Options granted under the Plan are intended by their terms to qualify as Section 162(m) Awards. Awards of restricted stock, restricted stock units, deferred stock units and performance awards granted under the Plan may qualify as Section 162(m) Awards if the awards are granted or become payable or vested based upon the achievement of Performance Goals in accordance with this Section 7.

In the case of an award of restricted stock, restricted stock units, deferred stock units or a performance award that is intended to be a Section 162(m) Award, the Committee shall make such determinations with respect to such an award and shall establish the objective performance criteria and the individual target award (if any) applicable to each participant or class of participants in writing within ninety (90) days after the beginning of the applicable performance period (or such other time period as is required under Section 162(m) of the Code) and while the outcome of the Performance Goals is substantially uncertain. The applicable performance criteria shall be based on one or more of the Performance Goals set forth in Exhibit A hereto.

Subject to the provisions of the Plan, the Committee shall, in its sole discretion, have authority to determine the eligible participants to whom, and the time or times at which, Section 162(m) Awards shall be made, the vesting and payment provisions applicable to such awards, and all other terms and conditions of such awards. As and to the extent required by Section 162(m) of the Code, the terms of an award that is a Section 162(m) Award must state, in terms of an objective formula or standard, the method of computing the amount of compensation payable under the award, and must preclude discretion to increase the amount of compensation payable under the terms of the award (but may allow the Committee discretion to decrease the amount of compensation payable).

For each participant, the Committee may specify a targeted performance award. The individual target award may be expressed, at the Committee’s discretion, as a fixed dollar amount, a percentage of base pay or total pay (excluding payments made under the Plan), or an amount determined pursuant to an objective formula or standard. Establishment of an individual target award for a participant for a calendar year shall not imply or require that the same level individual target award (if any such award is established by the Committee for the relevant participant) be set for any subsequent calendar year. At the time the Performance Goals are established, the Committee shall prescribe a formula to determine the percentages (which may be greater than 100%) of the individual target award which may be payable based upon the degree of attainment of the Performance Goals during the calendar year.

The measurements used in Performance Goals set under the Plan shall be determined in accordance with generally accepted accounting principles, except, to the extent that any objective Performance Goals are used, if any measurements require deviation from generally accepted accounting principles, such deviation shall be at the discretion of the Committee at the time the Performance Goals are set or at such later time to the extent permitted under Section 162(m) of the Code.

At the expiration of the applicable performance period, the Committee shall determine and certify in writing the extent to which the Performance Goals established pursuant to this Section 11 have been achieved and the percentage of the participant’s individual target award that has been vested and earned. Following the Committee’s determination and certification in accordance with the foregoing, the Section 162(m) Award shall become vested and payable (or deferred, in the case of deferred stock units) in accordance with the terms and conditions of the applicable award agreement.

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8.         Restricted Stock

The Committee may at any time and from time to time grant Shares of restricted stock under the Plan to such participants and in such amounts as it determines. Each grant of Shares of restricted stock shall specify the applicable restrictions on such Shares, the duration of such restrictions (which shall be at least six months except as otherwise determined by the Committee or provided in the third paragraph of this Section 8), and the time or times at which such restrictions shall lapse with respect to all or a specified number of Shares that are part of the grant.

The participant will be required to pay the Company the aggregate par value of any Shares of restricted stock (or such larger amount as the Board may determine to constitute capital under Section 154 of the Delaware General Corporation Law, as amended, or any successor thereto) within ten days of the date of grant, unless such Shares of restricted stock are treasury shares. Unless otherwise determined by the Committee, certificates representing Shares of restricted stock granted under the Plan will be held in escrow by the Company on the participant’s behalf during any period of restriction thereon and will bear an appropriate legend specifying the applicable restrictions thereon, and the participant will be required to execute a blank stock power therefor. Except as otherwise provided by the Committee, during such period of restriction the participant shall have all of the rights of a holder of Common Stock, including but not limited to the rights to receive dividends and to vote, and any stock or other securities received as a distribution with respect to such participant’s restricted stock shall be subject to the same restrictions as then in effect for the restricted stock.

Except as otherwise provided by the Committee, if a participant ceases to be a director, officer or employee of, or to otherwise perform services for, the Company and its Subsidiaries due to death, Disability or Retirement during any period of restriction, all restrictions on Shares of restricted stock granted to such participant shall lapse. At such time as a participant ceases to be a director, officer or employee of, or otherwise performing services for, the Company or its Subsidiaries for any other reason, all Shares of restricted stock granted to such participant on which the restrictions have not lapsed shall be immediately forfeited to the Company.

Unless otherwise determined by the Committee at the time of grant of an award, if there is a Change in Control of the Company and a participant is terminated from being a director, officer or employee of, or from performing other services for the Company or a Subsidiary through an Involuntary Termination effected within forty-eight (48) months following the effective date of such Change in Control, all restrictions on Shares of restricted stock granted to such participant shall automatically lapse. In addition, the Committee shall have the authority to grant shares of restricted stock with respect to which all restrictions shall lapse automatically upon a Change in Control, whether or not the grantee is subsequently terminated.

9.         Restricted Stock Units; Deferred Stock Units

The Committee may at any time and from time to time grant restricted stock units under the Plan to such participants and in such amounts as it determines. Each grant of restricted stock units shall specify the applicable restrictions on such units, the duration of such restrictions (which shall be at least six months except as otherwise determined by the Committee or provided in the third paragraph of this Section 9), and the time or times at which such restrictions shall lapse with respect to all or a specified number of units that are part of the grant.

Each restricted stock unit shall be equivalent in value to one share of Common Stock and shall entitle the participant to receive from the Company at the end of the vesting period (the “Vesting Period”) applicable to such unit one Share, unless the participant elects in a timely fashion to defer the receipt of such Shares, as provided below. Restricted stock units may be granted without payment of cash or consideration to the Company; provided that participants shall be required to pay to the Company the aggregate par value of the Shares received from the Company within ten days of the issuance of such Shares unless such Shares are treasury shares.

Except as otherwise provided by the Committee, during the restriction period the participant shall not have any rights as a shareholder of the Company; provided that the participant shall have the right to receive accumulated dividends or distributions with respect to the corresponding number of shares of Common Stock underlying each restricted stock unit at the end of the Vesting Period, unless such restricted stock units are converted into deferred stock units, in which case such accumulated dividends or distributions shall be paid by the Company to the participant at such time as the deferred stock units are converted into Shares.

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Except as otherwise provided by the Committee, if a participant ceases to be a director, officer or employee of, or to otherwise perform services for, the Company or any Subsidiary due to death, Disability or Retirement during any period of restriction, all restrictions on restricted stock units granted to such participant shall lapse. At such time as a participant ceases to be a director, officer or employee of, or otherwise performing services for, the Company or any Subsidiary for any other reason, all restricted stock units granted to such participant on which the restrictions have not lapsed shall be immediately forfeited to the Company.

Except as otherwise provided by the Committee at the time of grant of an award, if there is a Change in Control of the Company and a participant is terminated from being a director, officer or employee of, or from performing other services for the Company or a Subsidiary through an Involuntary Termination effected within forty-eight (48) months following the effective date of such Change in Control, all restrictions on restricted stock units granted to such participant shall automatically lapse. In addition, the Committee shall have the authority to grant restricted stock units with respect to which all restrictions shall lapse automatically upon a Change in Control, whether or not the grantee is subsequently terminated.

A participant may elect by written notice to the Company, which notice must be made before the later of (i) the close of the tax year preceding the year in which the restricted stock units are granted or (ii) 30 days of first becoming eligible to participate in the Plan (or, if earlier, the last day of the tax year in which the participant first becomes eligible to participate in the plan) and on or prior to the date the restricted stock units are granted, to defer the receipt of all or a portion of the Shares due with respect to the vesting of such restricted stock units; provided that the Committee may impose such additional restrictions with respect to the time at which a participant may elect to defer receipt of Shares subject to the deferral election, and any other terms with respect to a grant of restricted stock units to the extent the Committee deems necessary to enable the participant to defer recognition of income with respect to such units until the Shares underlying such units are issued or distributed to the participant. Upon such deferral, the restricted stock units so deferred shall be converted into deferred stock units. Except as provided below, delivery of Shares with respect to deferred stock units shall be made at the end of the deferral period set forth in the participant’s deferral election notice (the “Deferral Period”). Deferral Periods shall be no less than one year after the vesting date of the applicable restricted stock units.

Except as otherwise provided by the Committee, during such Deferral Period the participant shall not have any rights as a shareholder of the Company; provided that, the participant shall have the right to receive accumulated dividends or distributions with respect to the corresponding number of shares of Common Stock underlying each deferred stock unit at the end of the Deferral Period when such deferred stock units are converted into Shares.

Except as otherwise provided by the Committee, if a Participant ceases to be a director, officer or employee of, or to otherwise perform services for, the Company or any Subsidiary upon his or her death prior to the end of the Deferral Period, the participant shall receive payment in Shares in respect of such participant’s deferred stock units which would have matured or been earned at the end of such Deferral Period as if the applicable Deferral Period had ended as of the date of such participant’s death.

Except as otherwise provided by the Committee, if a participant ceases to be a director, officer or employee of, or to otherwise perform services for, the Company or any Subsidiary upon becoming disabled (as defined under Section 409A(a)(2)(C) of the Code) or Retirement or for any other reason except termination for Cause prior to the end of the Deferral Period, the participant shall receive payment in Shares in respect of such participant’s deferred stock units at the end of the applicable Deferral Period or on such accelerated basis as the Committee may determine, to the extent permitted by, and subject to the limitations of, Section 409A of the Code and regulations promulgated thereunder.

Except as otherwise provided by the Committee, if a participant ceases to be a director, officer or employee of, or to otherwise perform services for, the Company or any Subsidiary due to termination for Cause such participant shall immediately forfeit any deferred stock units which would have matured or been earned at the end of the applicable Deferral Period.

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Except as otherwise provided by the Committee, in the event of a Change in Control that also constitutes a “change in the ownership or effective control of” the Company, or a change in the ownership of a substantial portion of the Company’s assets (in each case as determined under Section 409A of the Code), a participant shall receive payment in Shares in respect of such participant’s deferred stock units which would have matured or been earned at the end of the applicable Deferral Period as if such Deferral Period had ended immediately prior to the Change in Control; provided, however, that if an event that constitutes a Change in Control hereunder does not constitute a “change in control” under Section 409A of the Code (or the regulations promulgated thereunder), no payments with respect to the deferred stock units shall be made under this paragraph to the extent such payments would constitute an impermissible acceleration under Section 409A of the Code.

10.       Performance Awards

Performance awards may be granted to participants at any time and from time to time as determined by the Committee. The Committee shall have complete discretion in determining the size and composition of performance awards granted to a participant. The period over which performance is to be measured (a “performance cycle”) shall commence on the date specified by the Committee and shall end on the last day of a fiscal year specified by the Committee. Unless otherwise determined by the Committee at the time of grant of an award, a performance award shall be paid no later than the 15th day of the third month following the completion of a performance cycle. Performance awards may include (i) specific dollar-value target awards (ii) performance units, the value of each such unit being determined by the Committee at the time of issuance, and/or (iii) performance Shares, the value of each such Share being equal to the Fair Market Value of a share of Common Stock.

The value of each performance award may be fixed or it may be permitted to fluctuate based on a performance factor (e.g., return on equity) selected by the Committee.

The Committee shall establish performance goals and objectives for each performance cycle on the basis of such criteria and objectives as the Committee may select from time to time, including, without limitation, the performance of the participant, the Company, one or more of its Subsidiaries or divisions or any combination of the foregoing. During any performance cycle, the Committee shall have the authority to adjust the performance goals and objectives for such cycle for such reasons as it deems equitable.

The Committee shall determine the portion of each performance award that is earned by a participant on the basis of the Company’s performance over the performance cycle in relation to the performance goals for such cycle. The earned portion of a performance award may be paid out in Shares, cash, Other Company Securities, or any combination thereof, as the Committee may determine.

A participant must be a director, officer or employee of, or otherwise perform services for, the Company or its Subsidiaries at the end of the performance cycle in order to be entitled to payment of a performance award issued in respect of such cycle; provided, however, that except as otherwise determined by the Committee, if a participant ceases to be a director, officer or employee of, or to otherwise perform services for, the Company and its Subsidiaries upon his or her death, Retirement, or Disability prior to the end of the performance cycle, the participant shall earn a proportionate portion of the performance award based upon the elapsed portion of the performance cycle and the Company’s performance over that portion of such cycle.

In the event of a Change in Control, a participant shall earn no less than the portion of the performance award that the participant would have earned if the applicable performance cycle(s) had terminated as of the date of the Change in Control.

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11.       Withholding Taxes

(a)  Participant Election

Unless otherwise determined by the Committee, a participant may elect to deliver shares of Common Stock (or have the Company withhold shares acquired upon exercise of an option or deliverable upon grant or vesting of restricted stock, as the case may be) to satisfy, in whole or in part, the amount the Company is required to withhold for taxes in connection with the exercise of an option or the delivery of restricted stock upon grant or vesting, as the case may be. Such election must be made on or before the date the amount of tax to be withheld is determined. Once made, the election shall be irrevocable. The fair market value of the shares to be withheld or delivered will be the Fair Market Value as of the date the amount of tax to be withheld is determined. In the event a participant elects to deliver or have the Company withhold shares of Common Stock pursuant to this Section 11(a), such delivery or withholding must be made subject to the conditions and pursuant to the procedures set forth in Section 6(b) with respect to the delivery or withholding of Common Stock in payment of the exercise price of options. Shares withheld to pay withholding taxes may not exceed the minimum statutory withholding rate.

(b)  Company Requirement

The Company may require, as a condition to any grant or exercise under the Plan or to the delivery of certificates for Shares issued hereunder, that the grantee make provision for the payment to the Company, either pursuant to Section 11(a) or this Section 11(b), of federal, state or local taxes of any kind required by law to be withheld with respect to any grant or delivery of Shares. The Company, to the extent permitted or required by law, shall have the right to deduct from any payment of any kind (including salary or bonus) otherwise due to a grantee, an amount equal to any federal, state or local taxes of any kind required by law to be withheld with respect to any grant or delivery of Shares under the Plan. Shares withheld to pay withholding taxes may not exceed the minimum statutory withholding rate; provided, however, that no such deduction may occur from any payment that is characterized as “nonqualified deferred compensation” to the extent that such deduction would result in adverse tax consequences under Section 409A of the Code.

12.       Written Agreement; Vesting

Unless the Committee determines otherwise, each employee to whom a grant is made under the Plan shall enter into a written agreement with the Company that shall contain such provisions, including without limitation vesting requirements, consistent with the provisions of the Plan, as may be approved by the Committee. Unless the Committee determines otherwise and except as otherwise provided in Sections 6, 7, 8, 9 and 10 in connection with a Change in Control or certain occurrences of termination, no grant under this Plan may be exercised, and no restrictions relating thereto may lapse, within six months of the date such grant is made.

13.       Transferability

Unless the Committee determines otherwise, no award granted under the Plan shall be transferable by a participant other than by will or the laws of descent and distribution or to a participant’s Family Member by gift or a qualified domestic relations order as defined by the Code. Unless the Committee determines otherwise, an option may be exercised only by the optionee or grantee thereof; by his or her Family Member if such person has acquired the option by gift or qualified domestic relations order; by the executor or administrator of the estate of any of the foregoing or any person to whom the option is transferred by will or the laws of descent and distribution; or by the guardian or legal representative of any of the foregoing; provided that Incentive Stock Options may be exercised by any Family Member, guardian or legal representative only if permitted by the Code and any regulations thereunder. All provisions of this Plan shall in any event continue to apply to any award granted under the Plan and transferred as permitted by this Section 13, and any transferee of any such award shall be bound by all provisions of this Plan as and to the same extent as the applicable original grantee.

14.       Listing, Registration and Qualification

If the Committee determines that the listing, registration or qualification upon any securities exchange or under any law of Shares subject to any option, performance award, restricted stock unit, deferred stock unit or restricted stock grant is necessary or desirable as a condition of, or in connection with, the granting of same or the issue or purchase of Shares thereunder, no such option may be exercised in whole or in part, no such performance award may be paid out, and no Shares may be issued, unless such listing, registration or qualification is effected free of any conditions not acceptable to the Committee.

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15.       Transfer of Employee

The transfer of an employee from the Company to a Subsidiary, from a Subsidiary to the Company, or from one Subsidiary to another shall not be considered a termination of employment; nor shall it be considered a termination of employment if an employee is placed on military or sick leave or such other leave of absence which is considered by the Committee as continuing intact the employment relationship.

16.       Adjustments

In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, distribution of assets, or any other change in the corporate structure or shares of the Company, the Committee shall make such adjustment as it deems appropriate in the number and kind of Shares or other property available for issuance under the Plan (including, without limitation, the total number of Shares available for issuance under the Plan pursuant to Section 4), in the number and kind of options, Shares, restricted stock units, deferred stock units or other property covered by grants previously made under the Plan, and in the exercise price of outstanding options. Any such adjustment shall be final, conclusive and binding for all purposes of the Plan and shall take into account the applicable requirements of Section 409A of the Code. In the event of any merger, consolidation or other reorganization in which the Company is not the surviving or continuing corporation or in which a Change in Control is to occur, all of the Company’s obligations regarding awards that were granted hereunder and that are outstanding on the date of such event shall, on such terms as may be approved by the Committee prior to such event, be (a) canceled in exchange for cash or other property taking into account the requirements of Section 409A of the Code, or (b) assumed by the surviving or continuing corporation.

Without limitation of the foregoing, in connection with any transaction of the type specified by clause (iii) of the definition of a Change in Control in Section 2(c), the Committee may, in its discretion, (i) cancel any or all outstanding options under the Plan in consideration for payment to the holders thereof of an amount equal to the portion of the consideration that would have been payable to such holders pursuant to such transaction if their options had been fully exercised immediately prior to such transaction, less the aggregate exercise price that would have been payable therefor, or (ii) if the amount that would have been payable to the option holders pursuant to such transaction if their options had been fully exercised immediately prior thereto would be equal to or less than the aggregate exercise price that would have been payable therefor, cancel any or all of such options for no consideration or payment of any kind. Payment of any amount payable pursuant to the preceding sentence may be made in cash or, in the event that the consideration to be received in such transaction includes securities or other property, in cash and/or securities or other property in the Committee’s discretion.

17.       Amendment and Termination of the Plan

The Board of Directors or the Committee, without approval of the stockholders, may amend or terminate the Plan, except that no amendment shall become effective without prior approval of the stockholders of the Company if stockholder approval would be required by applicable law or regulations or by any listing requirement of the principal stock exchange on which the Common Stock is then listed.

18.       Amendment or Substitution of Awards under the Plan.

The terms of any outstanding award under the Plan may be amended from time to time by the Committee in its discretion in any manner that it deems appropriate, including, but not limited to, acceleration of the date of exercise of any award and/or payments thereunder or of the date of lapse of restrictions on Shares (but only to the extent permitted by Section 409A of the Code); provided that, except as otherwise provided in Section 16, no such amendment shall adversely affect in a material manner any right of a participant under the award without his or her written consent, and provided further that the Committee shall not reduce the exercise price of any options awarded under the Plan or take any other action that would constitute a repricing under Section 6(g) without approval of the stockholders of the Company.

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19.       Commencement Date; Termination Date.

The date of commencement of the Plan shall be the date on which the Company’s Registration Statement on Form S-1 (File No. 333-119111) is declared effective by the Securities and Exchange Commission.

Unless previously terminated upon the adoption of a resolution of the Board terminating the Plan, the Plan shall terminate at the close of business on the ten year anniversary of the date on which the Company’s Registration Statement on Form S-1 (File No. 333-119111) is declared effective by the Securities and Exchange Commission. No termination of the Plan shall materially and adversely affect any of the rights or obligations of any person, without his or her written consent, under any grant of options or other incentives theretofore granted under the Plan.

No award shall be granted pursuant to the Plan following the date of the Plan’s termination, but awards granted prior to such date may extend beyond that date; provided that no Section 162(m) Award (other than an Incentive Stock Option or Non-qualified Stock Option) shall be granted on or after the fifth anniversary of the stockholder approval of the Plan unless the Performance Goals set forth on Exhibit A are reapproved (or other designated performance goals are approved) by the stockholders no later than the first stockholder meeting that occurs in the fifth year following the year in which stockholders approve the Performance Goals set forth on Exhibit A.

20.       Severability

Whenever possible, each provision of the Plan shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Plan is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of the Plan.

21.       Governing Law

The Plan shall be governed by the corporate laws of the State of Delaware, without giving effect to any choice of law provisions that might otherwise refer construction or interpretation of the Plan to the substantive law of another jurisdiction.

22.       Section 409A of the Code

The Plan is intended to comply with the applicable requirements of Section 409A of the Code and shall be limited, construed and interpreted in accordance with such intent. To the extent that any award under the Plan is subject to Section 409A of the Code, it shall be paid in a manner that will comply with Section 409A of the Code, including proposed, temporary or final regulations or any other guidance issued by the Secretary of the Treasury and the Internal Revenue Service with respect thereto. Notwithstanding anything herein to the contrary, any provision in the Plan or any award agreement that is inconsistent with Section 409A of the Code shall be deemed to be amended to comply with Section 409A of the Code and shall not require the consent of the affected participants or their beneficiaries, and to the extent that such provision cannot be amended to comply therewith, such provision shall be null and void.

- 14 -

EXHIBIT A

PERFORMANCE GOALS

To the extent permitted under Section 162(m) of the Code, performance goals established for purposes of the grant or vesting of awards of restricted stock, restricted stock units, deferred stock units, and/or performance awards, each intended to be “performance-based” under Section 162(m) of the Code, shall be based on the attainment of certain target levels of, or a specified increase or decrease (as applicable) in one or more of the following performance goals (“Performance Goals”):

• earnings per share;

• operating income;

• net income (before or after taxes);

• growth in book value;

• growth in tangible book value;

• relative combined ratio performance compared to industry;

• earnings before interest, tax, depreciation and amortization;

• return on equity;

• return on assets;

• net revenues;

• gross revenues;

• revenue growth;

• service revenues;

• market share;

• reduction in operating expenses;

• direct premiums written adjusted to exclude assigned premiums;

• combined ratio adjusted to exclude reserve additions and releases.

The Compensation Committee may designate additional business criteria on which the performance goals may be based or adjust, modify or amend those criteria.

To the extent permitted under Section 162(m) of the Code, the Committee may, in its sole discretion, also exclude, or adjust to reflect, the impact of an event or occurrence that the Committee determines should be appropriately excluded or adjusted, including:

(a)  restructurings, discontinued operations, extraordinary items or events, and other unusual or non-recurring charges as described in Accounting Principles Board Opinion No. 30 and/or management’s discussion and analysis of financial condition and results of operations appearing or incorporated by reference in the Company’s Form 10-K for the applicable year;

- 15 -

(b)  an event either not directly related to the operations of the Company or not within the reasonable control of the Company’s management; or

(c)  a change in tax law or accounting standards required by generally accepted accounting principles.

Performance Goals may also be based upon individual participant performance goals, as determined by the Committee, in its sole discretion.

In addition, such Performance Goals may be based upon the attainment of specified levels of Company (or subsidiary, division, other operational unit or administrative department of the Company) performance under one or more of the measures described above relative to the performance of other corporations. To the extent permitted under Section 162(m) of the Code, but only to the extent permitted under Section 162(m) of the Code (including, without limitation, compliance with any requirements for stockholder approval), the Committee may also:

(a)  designate additional business criteria on which the performance goals may be based; or

(b)  adjust, modify or amend the aforementioned business criteria.

- 16 -

EX-31

Exhibit 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, John G. Pasqualetto, 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: May 7, 2012
	/s/  John G. Pasqualetto
	John G. Pasqualetto
	Chairman, President and Chief Executive Officer

EX-31

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: May 7, 2012
	/s/ Neal A. Fuller
	Neal A. Fuller
	Senior Vice President – Chief Financial Officer
	and Assistant Secretary

Senior

EX-32

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 March 31, 2012, 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: May 7, 2012
	/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

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 March 31, 2012, 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: May 7, 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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Note 4 - Premiums

3 Months Ended

Mar. 31, 2012

Premiums Receivable Note [Text Block]

4.        Premiums

Direct premiums written totaled $65.2 million and $68.3 million for the three month periods ended March 31, 2012 and 2011, respectively.

Premiums receivable consisted of the following at March 31, 2012 and December 31, 2011:

	March 31, 2012			December 31, 2011
Current:	(in thousands)
Premiums receivable	$	17,053		$	19,362
Allowance for doubtful accounts		(1,382	)		(1,030	)
Premiums receivable, net of allowance	$	15,671		$	18,332

	March 31, 2012			December 31, 2011
Deferred:	(in thousands)
Premiums receivable	$	140,796		$	142,713
Allowance for doubtful accounts		(227	)		(227	)
Premiums receivable, net of allowance	$	140,569		$	142,486

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Note 3 - Investments

3 Months Ended

Mar. 31, 2012

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 March 31, 2012 and December 31, 2011 were as follows:

	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
March 31, 2012:
U.S. Treasury securities	$	28,734	$	1,271	$	(8	)	$	29,997
Government sponsored agency securities		24,904		760		(31	)		25,633
Corporate securities		158,537		5,443		(813	)		163,167
Taxable municipal securities		22,792		1,400		(15	)		24,177
Tax-exempt municipal securities		277,806		14,172		(216	)		291,762
Mortgage pass-through securities		89,102		1,837		(53	)		90,886
Collateralized mortgage obligations		11,761		124		(42	)		11,843
Asset-backed securities		53,750		888		(31	)		54,607
Total investment securities available for sale	$	667,386	$	25,895	$	(1,209	)	$	692,072
December 31, 2011:
U.S. Treasury securities	$	24,989	$	1,579	$	–		$	26,568
Government sponsored agency securities		15,567		1,330		–			16,897
Corporate securities		167,125		9,682		(578	)		176,229
Tax-exempt municipal securities		308,953		17,903		(1	)		326,855
Mortgage pass-through securities		77,532		3,399		–			80,931
Collateralized mortgage obligations		14,546		168		(54	)		14,660
Asset-backed securities		57,179		1,052		(25	)		58,206
Total investment securities available for sale	$	665,891	$	35,113	$	(658	)	$	700,346

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 month periods ended March 31, 2012 and 2011, 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 March 31, 2012:

	Less Than 12 Months						12 Months or More				Total
Investment Category	Aggregate Fair Value		Aggregate Unrealized Loss			Aggregate Fair Value		Aggregate Unrealized Loss			Aggregate Fair Value		Aggregate Unrealized Loss
						(in thousands)
U.S. Treasury securities	$	1,426	$	(8	)	$	–	$	–		$	1,426	$	(8	)
Government sponsored agency securities (1)		10,409		(31	)		–		–			10,409		(31	)
Corporate securities		63,801		(813	)		–		–			63,801		(813	)
Taxable municipal securities		2,677		(15	)		–		–			2,677		(15	)
Tax-exempt municipal securities		15,041		(216	)		–		–			15,041		(216	)
Mortgage pass-through securities (2)		14,094		(53	)		–		–			14,094		(53	)
Collateralized mortgage obligations		2,722		(7	)		139		(35	)		2,861		(42	)
Asset-backed securities		5,122		(31	)		–		–			5,122		(31	)
Total	$	115,292	$	(1,174	)	$	139	$	(35	)	$	115,431	$	(1,209	)

_____________

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

(2)     Includes adjustable rate mortgage securities.

The following table presents information regarding gross realized gains and losses resulting from the sale of investment securities in the three month periods ended March 31, 2012 and 2011:

	Three Months Ended March 31,
	2012			2011
	(in thousands)
Gross realized gains	$	7,987		$	524
Gross realized losses		(14	)		(226	)
Net realized gains	$	7,973		$	298
Proceeds	$	144,929		$	36,893

The related reclassification adjustments in other comprehensive income on the condensed consolidated statements of operations and comprehensive income (loss) were determined by specific identification.

The Company had no direct sub-prime mortgage exposure in its investment portfolio as of March 31, 2012 and approximately $9.8 million of indirect exposure to sub-prime mortgages. The following table provides a breakdown of ratings on the bonds in the Company's municipal portfolio as of March 31, 2012:

	Insured Bonds				Uninsured Bonds		Total Municipal Portfolio (1) Based On
Rating	Insured Ratings		Underlying  Ratings		Ratings		Overall Ratings (2)		Underlying  Ratings
	(in thousands)
AAA	$	4,786	$	4,786	$	27,357	$	32,143	$	32,143
AA+		9,538		7,255		62,255		71,793		69,510
AA		13,144		13,849		70,159		83,303		84,008
AA-		27,870		24,466		40,636		68,506		65,102
A+		9,096		15,107		7,701		16,797		22,808
A		2,256		2,256		20,385		22,641		22,641
A-		2,060		1,031		5,918		7,978		6,949
BBB		–		–		2,971		2,971		2,971
Pre-refunded (3)		6,172		6,172		3,635		9,807		9,807
Total	$	74,922	$	74,922	$	241,017	$	315,939	$	315,939

(1)     Consists of $291.8 million of tax-exempt municipal bonds and $24.2 million of taxable municipal bonds.

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

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

As of March 31, 2012, 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 Rating
Bond Insurer	Fair Value		S&P	Moody's
	(Millions)
National Public Finance Guarantee Corporation	$	34.3	BBB	Baa2	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 March 31, 2012, by contractual maturity, are set forth below. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	Cost or		Estimated
	Amortized Cost		Fair Value
Maturity	(in thousands)
Due in one year or less	$	21,595	$	21,845
Due after one year through five years		191,000		197,597
Due after five years through ten years		272,787		286,544
Due after ten years		27,390		28,750
Securities not due at a single maturity date		154,614		157,336
Total fixed income securities	$	667,386	$	692,072

The consolidated amortized cost of investment securities available for sale deposited with various regulatory authorities at March 31, 2012 was $307.4 million.

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Condensed Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
ASSETS
Fixed income securities available for sale, at fair value (amortized cost $667,386 in 2012 and $665,891 in 2011)	$ 692,072	$ 700,346
Cash and cash equivalents	56,297	28,503
Premiums receivable, net	15,671	18,332
Deferred premiums, net	140,569	142,486
Reinsurance recoverables	97,714	94,173
Federal income tax recoverable	2,864	12,823
Deferred income taxes, net	25,070	21,681
Deferred policy acquisition costs, net	14,661	14,844
Goodwill	2,794	2,794
Other assets	43,773	38,314
Total assets	1,091,485	1,074,296
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid loss and loss adjustment expense	520,008	518,044
Unearned premiums	131,250	130,300
Reinsurance funds withheld and balances payable	9,139	7,079
Premiums payable	6,788	6,351
Accrued expenses and other liabilities	62,181	51,553
Surplus notes	12,000	12,000
Total liabilities	741,366	725,327
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 – 22,409,710 shares at March 31, 2012 and 22,327,749 shares at December 31, 2011	224	223
Paid-in capital	214,242	213,746
Accumulated other comprehensive income	16,948	23,269
Retained earnings	118,705	111,731
Total stockholders' equity	350,119	348,969
Total liabilities and stockholders' equity	$ 1,091,485	$ 1,074,296

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Note 1 - Basis of Presentation

3 Months Ended

Mar. 31, 2012

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, 2011 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. The 2011 financial statements have been revised to reflect the impact of retrospective adoption on January 1, 2012 of Accounting Standards Update (“ASU”) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. See Note 2.e. for additional disclosure regarding these adjustments. 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, 2011 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 5, 2012.

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 ended March 31, 2012 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 2 - Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2012

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 periods ended March 31, 2012 and 2011:

	Three Months Ended March 31,
	2012		2011
	(in thousands)
Basic weighted average shares outstanding		21,177		20,951
Weighted average shares issuable upon exercise of outstanding stock options and vesting of nonvested restricted stock		617		–
Diluted weighted average shares outstanding		21,794		20,951

The effect of including certain shares issuable upon the exercise of outstanding stock options and the vesting of non-vested restricted stock was anti-dilutive for the three month periods ended March 31, 2012 and 2011. 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 three month periods ended March 31, 2012 and 2011 were approximately 855,000 and 1,445,000, respectively.

c.        Stockholder Dividends

On March 6, 2012, the Company's Board of Directors declared a quarterly dividend of $0.05 per common share. The dividend was paid on April 13, 2012 to stockholders of record on March 30, 2012. 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.

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, 2011 in Part II, Item 8 of the Company's 2011 Annual Report on Form 10-K filed with the SEC on March 5, 2012.

e.        Accounting Pronouncements

In October 2010, the Financial Accounting Standards Board (the “FASB”) issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This ASU allows insurance entities to defer only direct incremental costs associated with successful insurance contract acquisitions or renewals. All other costs related to the acquisition of new or renewal insurance contracts are required to be expensed as incurred. The Company adopted this guidance retrospectively effective January 1, 2012 and has adjusted its previously issued financial information.

Adoption of this guidance affected the December 31, 2011 carrying value of deferred policy acquisition costs as follows:

	December 31, 2011
	As Previously Reported		Effect of Change		As Currently Reported
	(in thousands)
Deferred policy acquisition costs, net	$	21,834	$	6,990	$	14,844

The effect of adoption of this new guidance on the consolidated balance sheet as of December 31, 2011 and on stockholders' equity as of December 31, 2010 was as follows:

	As Previously Reported		Effect of Change			As Currently Reported
	(in thousands)
December 31, 2011:
Deferred policy acquisition costs, net	$	21,834	$	(6,990	)	$	14,844
Deferred income taxes, net		19,233		2,448			21,681
Retained earnings		116,273		(4,542	)		111,731
Total stockholders' equity		353,511		(4,542	)		348,969
December 31, 2010:
Retained earnings		135,265		(4,487	)		130,778
Total stockholders' equity		351,017		(4,487	)		346,530

The effect of adoption of this new guidance on the condensed consolidated statement of operations and comprehensive income (loss) for the three months ended March 31, 2011 was as follows:

	As Previously Reported			Effect of Change			As Currently Reported
	(in thousands)
Underwriting, acquisition and insurance expenses	$	18,414		$	563		$	18,977
Income tax expense (benefit)		(228	)		(197	)		(425	)
Net income (loss)		248			(366	)		(118	)
Basic earnings (loss) per share		0.01			(0.02	)		(0.01	)
Diluted earnings (loss) per share		0.01			(0.02	)		(0.01	)

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Condensed Consolidated Balance Sheets (Unaudited) (Parentheticals) (USD $) In Thousands, except Share data, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Fixed income securities available for sale, amortized cost (in Dollars)	$ 667,386	$ 665,891
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	22,409,710	22,327,749
Common stock, shares outstanding	22,409,710	22,327,749
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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Document And Entity Information	3 Months Ended
	Mar. 31, 2012	May 04, 2012
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		22,390,459
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	Mar. 31, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1

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Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Revenue:
Premiums earned	$ 59,089	$ 56,730
Claims service income	304	333
Net investment income	5,023	5,375
Net realized gains	7,973	298
Other income	932	1,064
	73,321	63,800
Losses and expenses:
Loss and loss adjustment expenses	43,386	43,266
Underwriting, acquisition and insurance expenses	16,918	18,977
Interest expense	136	130
Other expenses	1,832	1,970
	62,272	64,343
Income (loss) before taxes	11,049	(543)
Income tax expense (benefit)	2,954	(425)
Net income (loss)	8,095	(118)
Other comprehensive loss:
Change in net unrealized gains on investment securities available for sale	(1,796)	(1,320)
Less: Reclassification adjustment for net realized gains recorded into net income	(7,973)	(298)
Income tax benefit related to items of other comprehensive income	3,448	578
Other comprehensive loss	(6,321)	(1,040)
Comprehensive income (loss)	$ 1,774	$ (1,158)
Basic earnings (loss) per share (in Dollars per share)	$ 0.38	$ (0.01)
Diluted earnings (loss) per share (in Dollars per share)	$ 0.37	$ (0.01)
Dividends declared per share (in Dollars per share)	$ 0.05	$ 0.05
Weighted average basic shares outstanding (in Shares)	21,176,744	20,950,808
Weighted average diluted shares outstanding (in Shares)	21,794,378	20,950,808

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Note 7 - Contingencies

3 Months Ended

Mar. 31, 2012

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 March 31, 2012, SBIC had a liability for guaranty fund and other assessments of $7.0 million and a guaranty fund receivable of $5.8 million. These amounts represent management's best estimate based on information received from the states in which it writes business and may change due to many factors, including the Company's share of the ultimate cost of current and future insolvencies. The majority of assessments are paid out in the year following the year in which the premium is written or the losses are paid. Guaranty fund receivables and other surcharge items are generally realized by a charge to new and renewing policyholders in the year following the year in which the related assessments were paid.

b.  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.

c.  In 2003, the Company entered into a claims administration services agreement with Lumbermens Mutual Casualty Company (“LMC”) and certain of its affiliates under which the Company provides claims administration services for two predecessor companies that are in runoff. The Company and LMC are negotiating the finalization of the financial arrangements of that agreement. Although we are unable to predict the outcome of these negotiations, we do not expect it to have a negative impact on our future financial position or results of operations.

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Note 6 - Unpaid Loss and Loss Adjustment Expenses

3 Months Ended

Mar. 31, 2012

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 periods ended March 31, 2012 and 2011:

	Three Months Ended March 31,
	2012			2011
	(in thousands)
Beginning balance:
Unpaid loss and loss adjustment expense	$	518,044		$	440,919
Reinsurance recoverables		(93,710	)		(56,350	)
Net balance, beginning of period		424,334			384,569
Incurred related to:
Current period		43,341			42,031
Prior periods		45			1,235
Total incurred		43,386			43,266
Paid related to:
Current period		(2,718	)		(4,077	)
Prior periods		(42,107	)		(40,345	)
Total paid		(44,825	)		(44,422	)
Net balance, end of period		422,895			383,413
Reinsurance recoverables		97,113			63,564
Unpaid loss and loss adjustment expense	$	520,008		$	446,977

As a result of changes in estimates of insured events in prior periods, unpaid loss and loss adjustment expenses increased by a net amount of $45,000 in the three months ended March 31, 2012. Favorable development of prior year direct loss reserves totaled $11,000 and related to accident year 2011. This favorable development was offset by $56,000 of net adverse development of other amounts such as unallocated loss adjustment expense (“ULAE”), loss based assessments and losses assumed from National Council on Compensation Insurance (“NCCI”) residual market pools.

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Note 8 - Share-Based Payment Arrangements

3 Months Ended

Mar. 31, 2012

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

8.        Share-Based Payment Arrangements

At March 31, 2012, 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, May 2010 and April 2012.

At March 31, 2012, 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 3,952,105 shares for issuance under the 2005 Plan, of which 3,132,767 shares had been granted. In January 2006, the Compensation Committee of the Board of Directors terminated the ability to grant future stock options awards under the 2003 Plan. Therefore, the Company anticipates that all future awards will be made under the 2005 Plan.

a.        Stock Options

The following table summarizes stock option activity for the three months ended March 31, 2012:

						Weighted Average
				Weighted Average		Remaining		Aggregate
	Shares Subject			Exercise Price		Contractual Life		Intrinsic Value
	to Options				per Share	(years)		(in thousands)
Outstanding at December 31, 2011		1,474,040		$	10.94		5.1	$	404
Granted		2,600			8.06	−		−
Forfeited		(1,487	)		10.61	−		−
Cancelled		(1,800	)		13.63	−		−
Outstanding at March 31, 2012		1,473,353			10.94		4.9		948
Exercisable at March 31, 2012		1,179,281			11.08		4.0		937

The March 31, 2012 aggregate intrinsic values in the table above are based on the Company's closing stock price of $9.09 on March 30, 2012. There were no proceeds from or exercises of stock options during the quarter ended March 31, 2012.

As of March 31, 2012, there was approximately $0.8 million of total unrecognized compensation cost related to stock options granted under the 2005 Plan. That cost is expected to be recognized over a weighted-average period of approximately 2.3 years.

b.        Restricted Stock

The following table summarizes restricted stock activity for the three months ended March 31, 2012:

				Weighted Average
	Number of Shares			Grant Date Fair Value
Outstanding at December 31, 2011		1,160,556		$	10.15
Granted		153,515			8.97
Vested		(241,637	)		10.62
Forfeited		(3,750	)		10.42
Outstanding at March 31, 2012		1,068,684			9.88

During the three months ended March 31, 2012, the Company granted, for the first time, shares of performance-based restricted stock to certain executives of the Company. These performance-based shares, which totaled 145,715, were issued under the 2005 Plan and will vest in varying amounts if the Company's tangible book value per share, adjusted to exclude unrealized gains and losses and adjusted for dividends and share repurchases, as of December 31, 2012 equals or exceeds certain levels of improvement. The number of shares granted was based upon achievement of the target level of improvement, at which 100% will vest. The actual level of achievement of the performance-based goal will be determined using the Company's consolidated GAAP financial statements as of and for the year ending December 31, 2012 and may range from 50% of target at the threshold level to 200% of target at the maximum improvement level. If the threshold level of improvement is not achieved, all performance-based awards will be forfeited. Any shares that are earned through achievement of the performance-based goal will vest in three equal installments on the following dates: the date in early 2013 on which the Company publicly releases its results for fiscal year 2012; December 31, 2013; and December 31, 2014. Grantees must remain employed in good standing by the Company at the vesting dates in order to receive the vested shares.

As of March 31, 2012, there was approximately $5.7 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 and comprehensive income (loss) for the three month periods ended March 31, 2012 and 2011 is shown in the following table. No stock-based compensation cost was capitalized during the periods shown.

	Three Months Ended March 31,
	2012		2011
	(in thousands)
Stock-based compensation expense related to:
Nonvested restricted stock	$	952	$	1,368
Stock options		156		183
Total	$	1,108	$	1,551
Total related tax benefit	$	356	$	499

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Note 9 - Fair Values of Assets and Liabilities

3 Months Ended

Mar. 31, 2012

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 the FASB Accounting Standards Codification (“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 consists of U.S. Treasury securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

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

• Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. As of March 31, 2012, the Company had no Level 3 financial assets or liabilities.

The tables below present the March 31, 2012 and December 31, 2011 balances of assets and liabilities measured at fair value on a recurring basis.

March 31, 2012:

	Total		Level 1		Level 2		Level 3
	(In thousands)
U.S. Treasury securities	$	29,997	$	29,997	$	-	$	-
Government sponsored agency securities		25,633	−			25,633		-
Corporate securities		163,167	−			163,167		-
Taxable municipal securities		24,177	−			24,177		-
Tax-exempt municipal securities		291,762	−			291,762		-
Mortgage pass-through securities		90,886	−			90,886		-
Collateralized mortgage obligations		11,843	−			11,843		-
Asset-backed securities		54,607	−			54,607		-
Total	$	692,072	$	29,997	$	662,075	$	-

		Total		Level 1		Level 2		Level 3
		(In thousands)
U.S. Treasury securities	$	26,568	$	26,568	$	-	$	-
Government sponsored agency securities		16,897		-		16,897		-
Corporate securities		176,229		-		176,229		-
Tax-exempt municipal securities		326,855		-		326,855		-
Mortgage pass-through securities		80,931		-		80,931		-
Collateralized mortgage obligations		14,660		-		14,660		-
Asset-backed securities		58,206		-		58,206		-
Total	$	700,346	$	26,568	$	673,778	$	-

At March 31, 2012, 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 March 31, 2012, the Company's investment portfolio consisted of securities that it considered to be traded in active markets. Therefore, no adjustment for market inactivity or illiquidity was necessary. There were no transfers between levels during the three months ended March 31, 2012.

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 ($20.9 million at March 31, 2012) 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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Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Cash flows from operating activities:
Net income (loss)	$ 8,095	$ (118)
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of deferred policy acquisition costs	8,247	8,294
Policy acquisition costs deferred	(8,064)	(9,141)
Depreciation and amortization	2,312	2,145
Compensation cost on restricted shares of common stock	952	1,368
Compensation cost on stock options	156	183
Net realized gain on investments	(7,973)	(298)
Deferred income tax expense (benefit)	58	(430)
Changes in certain assets and liabilities:
Unpaid loss and loss adjustment expense	1,964	6,058
Federal income tax recoverable	9,959	4,467
Reinsurance recoverables, net of reinsurance withheld	(2,391)	(8,213)
Unearned premiums, net of deferred premiums and premiums receivable	5,528	830
Other assets and other liabilities	504	2,431
Net cash provided by operating activities	19,347	7,576
Cash flows from investing activities:
Purchases of investments	(154,711)	(45,936)
Sales of investments	144,929	36,893
Maturities and redemption of investments	20,297	12,005
Purchases of property and equipment	(339)	(367)
Net cash provided by investing activities	10,176	2,595
Cash flows from financing activities:
Stockholder dividends paid	(1,116)	(1,101)
Surrender of stock in connection with restricted stock vesting	(613)	(830)
Net cash used in financing activities	(1,729)	(1,931)
Net increase in cash and cash equivalents	27,794	8,240
Cash and cash equivalents at beginning of period	28,503	15,958
Cash and cash equivalents at end of period	56,297	24,198
Supplemental disclosures:
Interest paid on surplus notes	137	131
Federal income taxes recovered	(7,018)	(4,470)
Accrual for unsettled purchases of investments	11,523
Receivable from sale of investments	$ 7,617

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Note 5 - Reinsurance

3 Months Ended

Mar. 31, 2012

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 set forth in Note 8 to the Company's consolidated financial statements as of and for the year ended December 31, 2011 in Part II, Item 8 of the Company's Annual Report on Form 10-K filed with the SEC on March 5, 2012.