Seabright Insurance Holdings Inc. is an insurance holding company whose wholly owned subsidiary SeaBright Insurance Company operates as a specialty provider of multi-jurisdictional workers' compensation insurance. SeaBright Insurance Company distributes its products through selected independent insurance brokers and through its in-house wholesale broker affiliate PointSure Insurance Services. SEABRIGHT INSURANCE HOLDINGS INC has a market cap of $195.8 million; its shares were traded at around $9.15 with a P/E ratio of 5.26 and P/S ratio of 0.73. Highlight of Business Operations: In February of 2009 the California Workers’ Compensation Appeals Board (the “WCAB”) rendered an en banc decision on a series of cases, commonly referred to as Almarez, Guzman and Ogilvie, that could have a material impact on the value of permanent disability awards. The en banc decision led to considerable comment and debate in the Workers’ Compensation community. Given this, the WCAB subsequently granted a petition for reconsideration on the subject cases, allowing interested parties until May 1, 2009 to provide input via anamicus curiae brief. The WCAB could take several months to review the amicus briefs before rendering a final opinion. In the interim, the WCAB has stated that the February 2009 en banc decision is final until they issue an opinion on the reconsideration. Approximately 6% of the pending advisory pure premium filed increase of 23.7% discussed above is attributed to these two decisions.
As discussed in the previous section, there are a number of variables that can impact, individually or in combination, the adequacy of our loss and loss adjustment expense liabilities. While the actuarial methods employed factor in amounts for these circumstances, the loss reserves may prove to be inadequate despite the actuarial methods used. Several examples are provided below to highlight the potential variability present in our loss reserves. Each of these examples represents scenarios that are reasonably likely to occur over time. For example, there may be a number of claims where the unpaid loss and loss adjustment expense associated with future medical treatment proves to be inadequate because the injured workers do not respond to medical treatment as expected by the claims examiner. If we assume this affects 10% of the open claims and, on average, the unpaid loss and loss adjustment expenses on these claims are 20% inadequate, this would result in our unpaid loss and loss adjustment expense liability being inadequate by approximately $6.2 million, or 2.0%, as of March 31, 2009. Another example is claim inflation. Claim inflation can result from medical cost inflation or wage inflation. As discussed above, the actuarial methods employed include an amount for claim inflation based on historical experience. We assume that the historical effect of this factor, which is embedded in our experience and industry experience, is representative of future effects for claim inflation. To the extent that the historical factors, and the actuarial methods utilized, are inadequate to recognize future inflationary trends, our unpaid loss and loss adjustment expense liabilities may be inadequate. If our estimate of future medical trend is two percentage points inadequate (e.g., if we estimate a 9% annual trend and the actual trend is 11%), our unpaid loss and loss adjustment expense liability could be inadequate. The amount of the inadequacy would depend on the mix of medical and indemnity payments and the length of time until the claims are paid. For example, if we assume that 50% of the unpaid loss and loss adjustment expense is associated with medical payments and an average payout period of 5 years, our unpaid loss and loss adjustment expense liabilities would be inadequate by approximately $15.4 million on a pre-tax basis, or 5%,
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