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<SEC-DOCUMENT>0000950134-07-019955.txt : 20071119
<SEC-HEADER>0000950134-07-019955.hdr.sgml : 20071119
<ACCEPTANCE-DATETIME>20070913200432
<PRIVATE-TO-PUBLIC>
ACCESSION NUMBER:		0000950134-07-019955
CONFORMED SUBMISSION TYPE:	CORRESP
PUBLIC DOCUMENT COUNT:		1
FILED AS OF DATE:		20070913

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


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">&#091;AMERISAFE LETTERHEAD&#093;
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">September&nbsp;13, 2007
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 align="left" style="margin-top: 12pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; background: transparent; color: #000000">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD></TD>
</TR>
<TR valign="top">
    <TD nowrap align="left">Re:</TD>
    <TD>&nbsp;</TD>
    <TD>AMERISAFE, Inc.<br>
Form&nbsp;10-K for Fiscal Year Ended December&nbsp;31, 2006<br>
Filed on March&nbsp;5, 2007<br>
File No.&nbsp;001-12251
<DIV style="width: 35%; border-bottom: 1px solid #000000; font-size: 1px">&nbsp;</DIV></TD>
</TR>
</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Dear Ms.&nbsp;Ignat:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to our telephone conversation on August&nbsp;27, 2007, and the subsequent discussion
between you and our counsel on September&nbsp;10, 2007, we understand that the Staff has requested
additional information regarding the Company&#146;s responses set forth in its letter dated August&nbsp;21,
2007. Further, in our discussion, the Staff provided a supplemental comment. That supplemental
comment is set forth below in bold type, followed by our response.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Supplemental Comment:</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%"><B>Revise the Company&#146;s proposed disclosure set forth in its August&nbsp;21st letter to
discuss management&#146;s policy for adjusting expenses to an amount different from the
amount of the current trend. Describe the method management used in 2006 and the
extent it was subjective versus objective. Also, identify the amount of the
adjustment and the specific underlying reason management thinks the adjustment was
necessary.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%"><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;
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">As previously stated in our August&nbsp;21st letter, 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
</DIV>

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<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>
September&nbsp;13, 2007<BR>
Page 2

</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">historical trends and its assumptions based on those trends, and did not establish
lower reserves for the 2006 accident year in response to reported case incurred
amounts that were lower than historical trends and management&#146;s assumptions would
have predicted. As shown on page 50 of the 2006 Form 10-K, the current accident year
loss ratio for 2006 was 67.4%, compared to 71.0% in 2005, primarily reflecting fewer
total claims and fewer severe claims in 2006 than in 2005.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">As we discussed with the Staff, we are unclear as to the portion of the supplement
comment requesting information with respect to the extent the method was &#147;subjective
versus objective.&#148; As stated in the 2006 Form 10-K, the aggregate reserve for gross
loss and loss adjustment expenses represents the Company&#146;s <I>estimate </I>of all reported
and unreported loss and loss adjustment expenses incurred and unpaid at any given
point in time. Establishing this estimate requires management to evaluate not only
claims made in the current period, but developments with respect to all open claims
for all prior periods. As disclosed, the aggregate reserve will change as claims are
paid, as new claims are reported and as new information becomes available that
affects the estimate (either higher or lower) with respect to open claims. In
establishing these reserves, management evaluates historical data and uses
substantial judgment.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">The additional disclosure included in Annex A briefly summarizes the method used by
management in 2006 to establish reserves. (This method is described in more detail
under the caption &#147;Business&#151;Loss Reserves&#148; in Item&nbsp;1 of the 2006 Form 10-K (pages 12
through 16).) This methodology is consistent with the method used by the Company&#146;s
management in prior years to establish reserves. Management does not have a policy
for adjusting expenses to an amount different from the amount of the current trend.
Management establishes reserves in an amount representing its estimate of the
ultimate cost of all claims. Further, management does not use actuarial computations
to establish reserves. As noted on pages 13 through 15 of the 2006 Form 10-K, the
Company uses six actuarial methods, each of which has inherent biases in their design
that are more or less predictive in their use. As noted in the proposed disclosure,
management considers these actuarial analyses in evaluating the reasonableness of the
reserves management has established.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">Further, the Company does not consider historical data for any one year, including
the current year, to constitute a &#147;trend.&#148; As noted in the proposed disclosure,
establishing the ultimate cost of severe claims is difficult, and the estimate can
change significantly as more information becomes available. As also noted in the
proposed disclosure, the estimate for recent claims can vary significantly as
additional information becomes available regarding these claims.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">As noted in Annex A, 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. At December&nbsp;31, 2006, per claim case incurred loss and
loss adjustment expenses for 2006 was lower than we would have expected based on
historical trends. By trend, we mean data observed over a period of years, and
</DIV>

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<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>
September&nbsp;13, 2007<BR>
Page 3

</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 4%">reviewing the data to include not only the per claim amount set at the end of each
year, but how the claims developed subsequent to the date the per claim amounts were
initially established. As disclosed in Annex A, management believed that losses in
2006 were likely to develop in a manner substantially consistent with historical
data. As a result, in establishing the aggregate reserve for loss and loss
adjustment expenses for 2006, management established IBNR to more closely reflect
historical trends in per claim loss and loss adjustment expenses.
</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>

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<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 valign="top" align="left">&nbsp;</TD>
    <TD colspan="3" align="left">Very truly yours,<BR>
<BR>
<BR>
AMERISAFE, Inc.<BR>
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">/s/ Geoffrey R. Banta<br>
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">Geoffrey R. Banta&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">Executive Vice President
and 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="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="left" valign="top">cc:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">C. Allen Bradley</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Todd Walker</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">AMERISAFE, Inc.</DIV></TD>
</TR>

<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">James E. O&#146;Bannon, Jones Day</DIV></TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Peter Cangany, Ernst &#038; Young LLP</DIV></TD>
</TR>
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</TABLE>
</DIV>



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<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 31 states 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>

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<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. In addition, there are no policy limits on the
liability for workers&#146; compensation claims as there are for other forms of insurance. Therefore,
estimating reserves for workers&#146; compensation claims may be more uncertain than estimating reserves
for other types of insurance claims with shorter or more definite periods between occurrence of the
claim and final determination of the loss and with policy limits on liability for claim amounts.
</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 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>

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<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 an 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 established IBNR reserves for 2006 to more closely reflect
historical trends in per claim loss and loss adjustment expenses.
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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As more fully described in &#147;Business &#151; Loss Reserves&#148; in Item&nbsp;1 of this report, the estimate
for loss and loss adjustment expenses is established based upon management&#146;s analysis of historical
data, and factors and trends derived from that data, including claims reported, average claim
amount incurred, case development, duration, severity and payment patterns, as well as subjective
assumptions. This analysis includes reviews of case reserves for individual open severe claims in
the current and prior years. Management reviews the outcomes from actuarial analyses to confirm
the reasonableness of the reserve estimate.
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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our gross reserves for loss and loss adjustment expenses at December&nbsp;31, 2006, 2005 and 2004
were $519.2&nbsp;million, $484.5&nbsp;million and $432.9&nbsp;million. As a percentage of gross reserves at year
end, IBNR represented 24.0% in 2006, 17.3 % in 2005, and 17.2% in 2004.
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<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.
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<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.
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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For additional information regarding our loss reserves and the analyses and methodologies used
by management to establish these reserves, see the information under the caption &#147;Business &#151; Loss
Reserves&#148; in Item&nbsp;1 of this report.
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