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SeaBright Holdings, Inc.

Q2 2010 Earnings Call

July 28, 2010; 04:30 pm ET


John Pasqualetto - Chairman, President & Chief Executive Officer

Richard Gergasko - Chief Operating Officer

Scott Maw - Senior Vice President & Chief Financial Officer

M. Philip Romney - Vice President - Finance, Chief Accounting Officer, Assistant Secretary


Mike Grasher - Piper Jaffray

Bijan Moazami - FBR Capital Markets

Michael Nannizzi - Oppenheimer

Robert Paun - Sidoti & Co.

Dustin Brumbaugh - Ragen MacKenzie

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Good afternoon ladies and gentlemen and welcome to SeaBright Holdings second quarter 2010 earnings conference call. At this time all participants have been placed in a listen-only mode. Following formal remarks the call will be open to questions.

It is now my pleasure to introduce the host of today’s call M. Philip Romney, Vice President of Finance and Principal Accounting Officer for SeaBright Holdings. Please go ahead sir.

Philip Romney

Thank you Cynthia and welcome to SeaBright second quarter 2010 conference call. Joining me on the call today are John Pasqualetto, Chairman, President and Chief Executive Officer; Richard Gergasko, Chief Operating Officer; and Scott Maw, Senior Vice President and Chief Financial Officer.

Before I turn the call over to John for opening remarks, I’d like to remind you that statements made during this conference call that are not based on historical facts are forward-looking statements. These statements are made in reliance on the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks.

SeaBright’s future results may differ materially from those anticipated and discussed in forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the press release issued today and in SeaBright’s filings with the SEC. We refer you to these sources for additional information.

I’d also like to point out that remarks made during the conference call are based on information and understandings that are believed to be accurate as of today’s date, July 27, 2010. This call is the property of SeaBright Insurance Holdings, Inc. Any distribution, transmission, broadcast or rebroadcast in any form without the expressed written consent of the company is prohibited.

With those announcements complete, I give you John Pasqualetto. John.

John Pasqualetto

Thank you, Phil. Good afternoon and welcome to today’s call. Before turning the call over to Rich and Scott for a review of our operating and financial results, I’d like to provide some comments about SeaBright’s overall performance for the second quarter, the dynamics behind them and the actions we have instituted to improve future quarters.

At the close of the market today we issued a Q2 earnings release, reporting an uncharacteristic operating loss for SeaBright. Clearly, it is important that we explain why SeaBright took such decisive action during the second quarter to strengthen our reserves by $30.6 million, most of which was related to California and accident year 2009, reflecting loss experience from the other states.

Not only are we currently encountering adverse development for 2007 through 2009, but we believe the pattern will continue into 2010. Recognizing these emerging trends, we have chosen to significantly bolster our IBNR reserves to reflect our ultimate clam cost. While no one can guarantee that SeaBright won’t require additional reserve strengthening, we have chosen the course of action to fully address the situation.

This action was not taken lightly. In addition to our regularly scheduled, quarterly internal actuary review and the routine valuation by our retained independent actuary, we saw the involvement of the second independent firm. We added as a resource the second outside firm to increase our confidence in the overall conclusions and to fully reflect our best judgment on our needed reserve balances.

Our reserve strengthening was cased by California Worker’s Compensation environment, currently threatened by a combination of increased medical cost trends and a prolonged economic downturn in the state, manifested best by its persistent double-digit unemployment.

This presents challenges for SeaBright, as well as the entire industry. As we have stated in the past, SeaBright worked diligently to underwrite any profit. When each of the policies were originally written, pricing was based upon our experience and the information we had at that time, supported by the past historical development trends.

We have been successful in achieving rate increases in California. To recap, we’ve increased rates by 8.3% in Q3 of ‘09, 11.2% in Q4 of ‘09, 10.5% in Q1, 2010 and 12.8% in Q2, 2010. The average rate increase for all California policies renewing over the past 12 months was plus 10.7.

Despite these positive changes, earnings information indicates we will need to raise rates in the future, but we ought to keep pace with the rising loss cost trends in that State. You may have seen our press release yesterday announcing that we filed another California rate increase of 15.3% that incorporates our most recently loss data. Although the frequency of claims has decreased during recent years, the industry is experiencing unbroken upward trend in claim severity, specifically related to greater medical costs and extended case duration.

In a more normal economy employers actively support early return to work programs that manage their workers comp expense, but in leaner times employees become less diligent in these efforts and are less motivated to offer light duty employment. Sometimes workers don’t have a job to return to because of downsizing, insufficient project for contractors with a small pipeline and similar recessionary factors.

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