-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
 MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
 TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
 J2GF7Ugxlz/42f0rIyhaBhxrl0za5uKVGH8QMTxBYWUL3Gu2o/sEkESNuss89pTw
 PlytWZwm2KEQoblOx6E0mw==

<SEC-DOCUMENT>0000950134-07-018638.txt : 20071119
<SEC-HEADER>0000950134-07-018638.hdr.sgml : 20071119
<ACCEPTANCE-DATETIME>20070821143732
<PRIVATE-TO-PUBLIC>
ACCESSION NUMBER:		0000950134-07-018638
CONFORMED SUBMISSION TYPE:	CORRESP
PUBLIC DOCUMENT COUNT:		1
FILED AS OF DATE:		20070821

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			AMERISAFE INC
		CENTRAL INDEX KEY:			0001018979
		STANDARD INDUSTRIAL CLASSIFICATION:	FIRE, MARINE & CASUALTY INSURANCE [6331]
		IRS NUMBER:				752069407
		STATE OF INCORPORATION:			TX
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		CORRESP

	BUSINESS ADDRESS:	
		STREET 1:		2301 HIGHWAY 190 WEST
		CITY:			DERIDDER
		STATE:			LA
		ZIP:			70634
		BUSINESS PHONE:		337-463-9052

	MAIL ADDRESS:	
		STREET 1:		2301 HIGHWAY 190 WEST
		CITY:			DERIDDER
		STATE:			LA
		ZIP:			70634
</SEC-HEADER>
<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.htm
<TEXT>
<HTML>
<HEAD>
<TITLE>corresp</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">&#091;AMERISAFE LETTERHEAD&#093;
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">August&nbsp;21, 2007
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 30pt">Ms.&nbsp;Ibolya Ignat<BR>
Securities and Exchange Commission<BR>
Division of Corporation Finance<BR>
100 F Street, N.E.<BR>
Mail Stop 6010<BR>
Washington, D.C. 20549
</DIV>

<DIV style="margin-top: 18pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="8%">&nbsp;</TD>
    <TD width="3%" nowrap align="left">Re:&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD nowrap>AMERISAFE, Inc.<BR>
Form 10-K for Fiscal Year Ended December&nbsp;31, 2006<BR>
Filed on March&nbsp;5, 2007<BR>
File No.&nbsp;001-12251</TD>
    <TD width="50%">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 2px; color: #000000; background: transparent">
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD width="50%">&nbsp;</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 18pt">Dear Ms.&nbsp;Ignat:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to our phone conversation on July&nbsp;26, 2007, it is my understanding that the Staff has
requested additional information regarding the Company&#146;s responses to the second and third bullet
points of Comment No.&nbsp;2 in the Staff&#146;s letter dated June&nbsp;22, 2007. This letter responds to that
supplemental request.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Comment No.&nbsp;2, Second Bullet Point:</B></TD>
</TR>
</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&nbsp;</B></TD>
    <TD width="1%"><B>&nbsp;</B></TD>
    <TD><B>Discuss how management has adjusted each of the key assumptions used in calculating
the current year reserves given their historical changes or given current trends
observed. This discussion should show the link between what has happened to the key
assumptions in the past to what management is currently using as its key
assumptions.</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><I>&nbsp;</I></TD>
    <TD width="1%"><I>&nbsp;</I></TD>
    <TD><I>Response: </I>In response to the Staff&#146;s comment to provide responses in a
disclosure-type format, attached to this letter as Annex A are proposed additions to
the existing disclosure in the Company&#146;s 2006 Form 10-K under the caption
&#147;Management&#146;s Discussion and Analysis of Financial Condition and Results of
Operations &#151; Overview.&#148;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>As evidenced by this additional disclosure, management did not adjust its
assumptions in calculating current year reserves given historical changes or current
trends observed. As expressly stated in the additional disclosure included in Annex
A, the Company established its 2006 reserves in a manner substantially consistent
with historical trends and its assumptions, and did not establish lower reserves for
the 2006 accident year in response to reported case incurred amounts</TD>
</TR>
</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->&nbsp;<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Ms.&nbsp;Ibolya Ignat<BR>
Securities and Exchange Commission<BR>
August&nbsp;21, 2007<BR>
Page 2<BR>
&nbsp;

</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>that were lower than what historical trends and management&#146;s assumptions would have
predicted.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>As noted throughout the Company&#146;s 2006 Form 10-K and reemphasized in the disclosure
set forth on Annex A, the Company focuses on insuring employers engaged in hazardous
industries, a segment of the workers&#146; compensation insurance market that results in
the Company reporting relatively fewer but more severe claims. Based on the
Company&#146;s 21-year history of operating in this segment of the workers&#146; compensation
market, management believes that lower frequency, higher severity business has the
potential for greater volatility in its loss and loss adjustment expenses in any
accident year. Accordingly, the Company&#146;s management evaluates actuarial analyses,
Company operating statistics and industry data, and uses substantial judgment in
establishing loss reserves.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Comment No.&nbsp;2, Third Bullet Point:</B></TD>
</TR>
</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><FONT face="Wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Explicitly identify and discuss key assumptions as of December&nbsp;31, 2006 that are
premised on future emergence that are inconsistent with historical loss reserve
development patterns and explain why these assumptions are now appropriate given the
inconsistency identified.</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><I>&nbsp;</I></TD>
    <TD width="1%"><I>&nbsp;</I></TD>
    <TD><I>Response: </I>As noted in the additional disclosure set forth in Annex A, the Company
has included what management believes is a key assumption in evaluating the adequacy
of current accident year loss and loss adjustment expenses.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Further, as indicated in our response to the Staff in the letter dated July&nbsp;16, 2007
and the response above to the second bullet point of Comment No.&nbsp;2, the Company does
not believe that any key assumptions as of December&nbsp;31, 2006 that are premised on
future emergence were inconsistent with historical loss reserve development
patterns. For 2006, management established reserves in a manner substantially
consistent with the Company&#146;s historical loss reserve development pattern.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Finally, for clarification, this response to the second and third bullet points of
Comment No.&nbsp;2 and the related additional disclosures in Annex A are in addition to,
and not in substitution for, the additional disclosure set forth in our letter to
the Staff dated July&nbsp;16, 2007 and the annexes to that letter.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->-2-<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Ms.&nbsp;Ibolya Ignat<BR>
Securities and Exchange Commission<BR>
August&nbsp;21, 2007<BR>
Page 3<BR>
&nbsp;

</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">* * * * *
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company hereby acknowledges that:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the Company is responsible for the adequacy and accuracy of the disclosure
in the filings;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>staff comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the filing; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws of
the United States.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If you have any questions regarding this filing, please do not hesitate to contact me at (337)
463-9052 (facsimile: (337)&nbsp;463-7298), or our counsel, James E. O&#146;Bannon at (214)&nbsp;969-3766
(facsimile: (214)&nbsp;969-5100).
</DIV>

<TABLE width="100%" border="0" cellspacing="0" cellpadding="0" style="font-size: 10pt">
<TR>
    <TD width="48%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>
<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left">Very truly yours,<BR><BR>AMERISAFE, Inc.<BR><BR></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" style="border-bottom: 1px solid #000000" align="left">/s/&nbsp;&nbsp;Geoffrey R. Banta</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left">Geoffrey R. Banta&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left">Executive Vice President and<BR>Chief Financial Officer&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
</TABLE>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="97%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">CC:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">C. Allen Bradley</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Todd Walker</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;AMERISAFE, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">James E. O&#146;Bannon</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Jones Day</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Peter Cangany</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Ernst &#038; Young LLP</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->-3-<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="right" style="font-size: 10pt; margin-top: 12pt"><U><B>ANNEX A</B></U>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Overview</B>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;AMERISAFE is a holding company that markets and underwrites workers&#146; compensation insurance
through its subsidiaries. Workers&#146; compensation insurance covers statutorily prescribed benefits
that employers are obligated to provide to their employees who are injured in the course and scope
of their employment. Our business strategy is focused on providing this coverage to small to
mid-sized employers engaged in hazardous industries, principally construction, trucking and
logging. Employers engaged in hazardous industries pay substantially higher than average rates for
workers&#146; compensation insurance compared to employers in other industries, as measured per payroll
dollar. The higher premium rates are due to the nature of the work performed and the inherent
workplace danger of our target employers. Hazardous industry employers also tend to have less
frequent but more severe claims as compared to employers in other industries due to the nature of
their businesses. We provide proactive safety reviews of employers&#146; workplaces. These safety
reviews are a vital component of our underwriting process and also promote safer workplaces. We
utilize intensive claims management practices that we believe permit us to reduce the overall cost
of our claims. In addition, our audit services ensure that our policyholders pay the appropriate
premiums required under the terms of their policies and enable us to monitor payroll patterns or
aberrations that cause underwriting, safety or fraud concerns. We believe that the higher premiums
typically paid by our policyholders, together with our disciplined underwriting and safety, claims
and audit services, provide us with the opportunity to earn attractive returns on equity.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We actively market our insurance in 31states and the District of Columbia through independent
agencies, as well as through our wholly owned insurance agency subsidiary. We are also licensed in
an additional 14 states and the U.S. Virgin Islands.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;One of the key financial measures that we use to evaluate our operating performance is return
on average equity. We calculate return on average equity by dividing net income by the average of
shareholders&#146; equity plus redeemable preferred stock. Our return on average equity was 22.6% in
2006, 5.0% in 2005, and 10.8% in 2004. Our overall financial objective is to produce a return on
equity of at least 15% over the long-term while maintaining optimal operating leverage in our
insurance subsidiaries that is commensurate with our A.M. Best rating. For 2007, we anticipate
producing a combined ratio of 95% or lower. Our combined ratio was 92.4% in 2006, 104.2% in 2005
and 99.5% in 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Investment income is an important element of our net income. Because the period of time
between our receipt of premiums and the ultimate settlement of claims is often several years or
longer, we are able to invest cash from premiums for significant periods of time. As a result, we
are able to generate more investment income from our premiums as compared to insurance companies
that operate in many other lines of business. From December&nbsp;31, 2002 to December&nbsp;31, 2006, our
investment portfolio, including cash and cash equivalents, increased from $250.0&nbsp;million to $665.5
million and produced net investment income of $25.4&nbsp;million in 2006, $16.9&nbsp;million in 2005 and
$12.2&nbsp;million in 2004. In the third quarter of 2005, we received $61.3&nbsp;million from one of our
reinsurers pursuant to a commutation agreement. In the fourth quarter of 2005 we completed our
initial public offering, and we retained $53.0&nbsp;million of the net proceeds from the offering. Of
the net proceeds we retained, we contributed $45.0&nbsp;million to our insurance subsidiaries. The
remaining $8.0&nbsp;million will be used to make additional capital contributions to our insurance
company subsidiaries as necessary to supplement our anticipated growth and for general corporate
purposes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The use of reinsurance is an important component of our business strategy. We purchase
reinsurance to protect us from the impact of large losses. Our reinsurance program for 2007
includes 16 reinsurers that provide coverage to us in excess of a certain specified loss amount, or
retention level. Under our reinsurance program, we pay our reinsurers a percentage of our gross
premiums earned and, in turn, the reinsurers assume an allocated portion of losses for the accident
year. Our 2007 reinsurance program provides us with reinsurance coverage for each loss occurrence
up to $50.0&nbsp;million, subject to applicable deductibles, retentions and aggregate limits. However,
our reinsurance coverage is limited to $10.0&nbsp;million for any single claimant for the first four
layers and $5.0&nbsp;million for any single claimant for the fifth layer, subject to applicable
deductibles, retentions and aggregate limits. We retain the first $2.0&nbsp;million of each loss and
are subject to an annual aggregate deductible of approximately $6.0&nbsp;million for losses between $2.0
million and $5.0&nbsp;million before our reinsurers are obligated to reimburse us. The aggregate limit
for all claims for losses between $2.0&nbsp;million and 5.0&nbsp;million is approximately
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->1<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">$51.0&nbsp;million. As losses are incurred and recorded, we record amounts recoverable from
reinsurers for the portion of the losses ceded to our reinsurers.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We retain a significant amount of losses under our reinsurance programs. Based, in part, on
the cost of reinsurance, we have increased our retention level in each of the past five years. In
2002, our retention level was $500,000. In 2003, we increased our retention to $500,000 plus 20%
of each loss occurrence between $500,000 and $5.0&nbsp;million. In 2004, we further increased our
retention level to $1.0&nbsp;million. In addition, for losses between $1.0&nbsp;million and $2.0&nbsp;million, we
had an annual aggregate deductible of $300,000 and, after we satisfied the deductible, retained 10%
of each loss occurrence. For losses between $2.0&nbsp;million and $5.0&nbsp;million, we had an annual
aggregate deductible of $1.3&nbsp;million and, after we satisfied the deductible, retained 20% of each
loss occurrence. In 2005, we continued to retain the first $1.0&nbsp;million of each loss occurrence.
However, for losses between $1.0&nbsp;million and $5.0&nbsp;million, we increased our annual aggregate
deductible to $5.6&nbsp;million and, after we satisfied the deductible, retained 10% of each loss
occurrence. In 2006, we retained the first $1.0&nbsp;million of each loss and were subject to an annual
aggregate deductible of $15.4&nbsp;million for losses between $1.0&nbsp;million and $2.0&nbsp;million before our
reinsurers were obligated to reimburse us. After the deductible was satisfied, we retained 25.0%
of each loss between $1.0&nbsp;million and $2.0&nbsp;million. The aggregate limit for all claims for losses
between $1.0&nbsp;million and $2.0&nbsp;million was $5.4&nbsp;million. We were subject to an annual aggregate
deductible of $7.7&nbsp;million for losses between $2.0&nbsp;million and $5.0&nbsp;million before our reinsurers
were obligated to reimburse us. The aggregate limit for all claims for losses between $2.0&nbsp;million
and $5.0&nbsp;million was $39.0&nbsp;million. As a result of increases in our retention levels and
collections from our reinsurers in the normal course of business, our amounts recoverable from
reinsurers decreased from $122.6&nbsp;million at December&nbsp;31, 2005 to $109.6&nbsp;million at December&nbsp;31,
2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our most significant balance sheet liability is our reserve for loss and loss adjustment
expenses. We record reserves for estimated losses under insurance policies that we write and for
loss adjustment expenses related to the investigation and settlement of claims. Our reserves for
loss and loss adjustment expenses represent the estimated cost of all reported and unreported loss
and loss adjustment expenses incurred and unpaid at any given point in time based on known facts
and circumstances. Reserves are based on estimates of the most likely ultimate cost of individual
claims. These estimates are inherently uncertain.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our focus on providing workers&#146; compensation insurance to employers engaged in hazardous
industries results in our receiving relatively fewer but more severe claims than many other
workers&#146; compensation insurance companies. Severe claims, which we define as claims having an
estimated ultimate cost of more than $500,000, have a material effect on our current accident year
loss reserves (and our reported results of operations) as the result of both the number of severe
claims reported in any year and the timing of claims in the year. As a result of our focus on
lower frequency, higher severity business, our reserve for loss and loss adjustment expenses may
have greater volatility than other workers&#146; compensation insurance companies.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For example, in 2002 through 2006, we received 125 severe claims, or an average of 25 severe
claims per year. However, the number of severe claims reported in any one year in this five-year
period ranged from a low of 18 in 2003 to a high of 37 in 2005. More importantly, the reported
frequency of severe claims per million dollars in gross earned premium over this same five-year
period ranged from a high of 0.133 in 2005 to a low of 0.069 in 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Further, the ultimate cost of severe claims is more difficult to estimate, principally due to
the uncertainty of medical treatment and outcome and the length and degree of disability. Because
of these uncertainties, the estimate of the ultimate cost of severe claims can vary significantly
as more information becomes available. As a result, at year end, the case incurred reserve for a
severe claim reported early in the year may be more accurate than the case incurred at year end
reserve established for a severe claim reported late in the year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A key assumption used by management in establishing loss reserves is that average per claim
case incurred loss and loss adjustment expenses will increase year over year. We believe this
increase primarily reflects medical and wage inflation. However, changes in per claim case
incurred loss and loss adjustment expenses can be significantly affected by claims severity and
claims frequency in any year.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->2<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2006, our per claim case incurred loss and loss adjustment expenses for 2006
was lower than what we would have expected based on historical trends. In evaluating this
information, management considered, among other things, the fewer number of severe claims reported
in 2006 as well as the fact that more of the 2006 claims had been reported later in the year.
Based on their evaluation of our historical loss data and operating statistics, management believed
that losses in 2006 were likely to develop in a manner substantially consistent with historical
data. Accordingly, management increased IBNR reserves for 2006 to more closely reflect historical
trends in per case incurred loss and loss adjustment expenses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As described above, substantial judgment is required to determine the relevance of our
historical experience and industry information under current facts and circumstances. The
interpretation of this historical and industry data can be impacted by external forces, principally
frequency and severity of future claims, length of time to achieve ultimate settlement of claims,
inflation of medical costs and wages, insurance policy coverage interpretations, jury
determinations and legislative changes. Accordingly, our reserves may prove to be inadequate to
cover our actual losses. If we change our estimates, these changes would be reflected in our
results of operations during the period in which they are made, with increases in our reserves
resulting in decreases in our earnings.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2006, we decreased our estimates for prior year loss reserves by $2.2&nbsp;million, which
increased net income by $1.4&nbsp;million. We increased our estimates for prior year loss reserves by
$8.7&nbsp;million in 2005 and $13.4&nbsp;million in 2004. We also recorded a $13.2&nbsp;million loss in
connection with a commutation agreement with Converium in 2005. These increased estimates and the
commutation decreased our net income by $14.2&nbsp;million in 2005 and $8.7&nbsp;million in 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The workers&#146; compensation insurance industry is cyclical in nature and influenced by many
factors, including price competition, medical cost increases, natural and man-made disasters,
changes in interest rates, changes in state laws and regulations and general economic conditions.
A hard market cycle in our industry is characterized by decreased competition that results in
higher premium rates, more restrictive policy coverage terms and lower commissions paid to
agencies. In contrast, a soft market cycle is characterized by increased competition that results
in lower premium rates, expanded policy coverage terms and higher commissions paid to agencies. We
currently believe that the workers&#146; compensation insurance industry is slowly transitioning to a
more competitive market environment. Our strategy across market cycles is to maintain underwriting
profitability, deploy capital judiciously, manage our expenses and focus on underserved markets
within our target industries that we believe will provide opportunities for greater returns.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->3<!-- /Folio -->
</DIV>

</BODY>
</HTML>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
