AMERISAFE INC - FORM 10-K - February 27, 2015

AMERISAFE INC - FORM 10-K - February 27, 2015

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AMERISAFE INC Reports

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EXCEL - IDEA: XBRL DOCUMENT - AMERISAFE INC	Financial_Report.xls
EX-31.2 - EX-31.2 - AMERISAFE INC	d838456dex312.htm
EX-21.1 - EX-21.1 - AMERISAFE INC	d838456dex211.htm
EX-31.1 - EX-31.1 - AMERISAFE INC	d838456dex311.htm
EX-24.1 - EX-24.1 - AMERISAFE INC	d838456dex241.htm
EX-23.1 - EX-23.1 - AMERISAFE INC	d838456dex231.htm
EX-10.30 - EX-10.30 - AMERISAFE INC	d838456dex1030.htm
EX-10.12 - EX-10.12 - AMERISAFE INC	d838456dex1012.htm
EX-10.31 - EX-10.31 - AMERISAFE INC	d838456dex1031.htm
EX-32.1 - EX-32.1 - AMERISAFE INC	d838456dex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

Commission File Number: 001-12251

AMERISAFE, INC.

(Exact Name of Registrant as Specified in Its Charter)


Texas		75-2069407
(State of Incorporation)		(I.R.S. Employer Identification Number)

2301 Highway 190 West, DeRidder, Louisiana		70634
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (337) 463-9052

Securities registered pursuant to Section 12(b) of the Act:


Title of Class		Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share		Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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):

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate market value of the voting common stock held by non-affiliates of the Registrant as of June 30, 2014 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $750.3 million, based upon the closing price of the shares on the NASDAQ Global Select Market on that date.

As of February 16, 2015, there were 18,920,186 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement relating to the 2015 Annual Meeting of Shareholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this report.

TABLE OF CONTENTS


		Page No.
PART I

	Forward-Looking Statements		1

Item 1	Business		2

Item 1A	Risk Factors		26

Item 1B	Unresolved Staff Comments		36

Item 2	Properties		36

Item 3	Legal Proceedings		36

Item 4	Mine Safety Disclosures		36

PART II

Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities		36

Item 6	Selected Financial Data		38

Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		40

Item 7A	Quantitative and Qualitative Disclosures About Market Risk		57

Item 8	Financial Statements and Supplementary Data		59

Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		105

Item 9A	Controls and Procedures		105

Item 9B	Other Information		107

PART III

Item 10	Directors, Executive Officers and Corporate Governance		107

Item 11	Executive Compensation		107

Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		107

Item 13	Certain Relationships and Related Transactions, and Director Independence		107

Item 14	Principal Accountant Fees and Services		107

PART IV

Item 15	Exhibits and Financial Statement Schedules		108

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934. You should not place undue reliance on these statements. These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and future events with respect to our business and the insurance industry in general. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “forecast,” “estimate,” “may,” “should,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements. 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:

•

increased competition on the basis of types of insurance offered, premium rates, coverage availability, payment terms, claims management, safety services, policy terms, overall financial strength, financial ratings and reputation;

•

the cyclical nature of the workers’ compensation insurance industry;

•

general economic conditions, including recession, inflation, performance of financial markets, interest rates, unemployment rates and fluctuating asset values;

•

greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than our underwriting, reserving or investment practices anticipate based on historical experience or industry data;

•

technology breaches or failures, including those resulting from a malicious cyber attack on the Company or its’ policyholders and medical providers;

•

adverse developments in economic, competitive or regulatory conditions within the workers’ compensation insurance industry;

•

decreased demand for our insurance;

•

changes in regulations, laws, rates, or rating factors applicable to the Company, its’ policyholders or the agencies that sell its’ insurance;

•

loss of the services of any of our senior management or other key employees;

•

changes in rating agency policies, practices or ratings;

•

changes in the availability, cost or quality of reinsurance and the failure of our reinsurers to pay claims in a timely manner or at all;

•

decreased level of business activity of our policyholders caused by decreased business activity generally, and in particular in the industries we target;

•

changes in legal theories of liability under our insurance policies;

•

developments in capital markets that adversely affect the performance of our investments;

•

the effects of U.S. involvement in hostilities with other countries and large-scale acts of terrorism, or the threat of hostilities or terrorist acts; and

•

other risks and uncertainties described from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”).

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements in this report, including under the caption “Risk Factors” in Item 1A of this report. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.

PART I

Item 1.

Business.

Overview

We are a specialty provider of workers’ compensation insurance focused on small to mid-sized employers engaged in hazardous industries, principally construction, trucking, manufacturing, oil and gas and agriculture. Since commencing operations in 1986, we have gained significant experience underwriting the complex workers’ compensation exposures inherent in these industries. We provide coverage to employers under state and federal workers’ compensation laws. These laws prescribe wage replacement and medical care benefits that employers are obligated to provide to their employees who are injured in the course and scope of their employment. Our workers’ compensation insurance policies provide benefits to injured employees for, among other things, temporary or permanent disability, death and medical and hospital expenses. The benefits payable and the duration of those benefits are set by state or federal law. The benefits vary by jurisdiction, the nature and severity of the injury and the wages of the employee. The employer, who is the policyholder, pays the premiums for coverage.

Hazardous industry employers tend to have less frequent but more severe claims as compared to employers in other industries due to the nature of their businesses. Injuries that occur are often severe in nature including death, dismemberment, paraplegia and quadriplegia. As a result, employers engaged in hazardous industries pay substantially higher than average rates for workers’ 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 policyholders. For example, our construction employers on average paid premium rates equal to $8.02 per $100 of payroll to obtain workers’ compensation coverage for all of their employees in 2014.

We employ a proactive, disciplined approach to underwriting employers and providing comprehensive services intended to lessen the overall incidence and cost of workplace injuries. We provide safety services at employers’ workplaces as a vital component of our underwriting process and to 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 premium audit services ensure that our policyholders pay the appropriate premiums required under the terms of their policies and enable us to monitor payroll patterns 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.

AMERISAFE, Inc. is an insurance holding company, incorporated in Texas in 1985. We began operations in 1986 by focusing on workers’ compensation insurance for logging contractors in the southeast United States. Beginning in 1994, we expanded our focus to include the other hazardous industries we serve today. Two of our three insurance subsidiaries, American Interstate Insurance Company and Silver Oak Casualty, are domesticated in Nebraska. Our other insurance subsidiary, American Interstate Insurance Company of Texas, is domiciled in Texas. All three insurance subsidiaries carry an A.M. Best rating of “A” (Excellent).

Competitive Advantages

We believe we have the following competitive advantages:

Focus on Hazardous Industries. We have extensive experience insuring employers engaged in hazardous industries and have a history of profitably underwriting these industries. Our specialized knowledge of these hazardous industries helps us better serve our policyholders, which leads to greater employer loyalty and policy retention. Our policy renewal rate on voluntary business that we elected to quote for renewal was 91.3% in 2014.

Focus on Small to Mid-Sized Employers. We believe large insurance companies generally do not target small to mid-sized employers in hazardous industries due to their smaller premium sizes, types of operations, mobile workforces and extensive service needs. We provide these employers enhanced services, including premium payment plans to better match premium payments with our policyholders’ payroll costs and cash flow.

Specialized Underwriting Expertise. Based on our 29-year history of insuring employers engaged in hazardous industries, we have developed industry specific risk analysis and rating tools that support our underwriters in risk selection and pricing. We are highly disciplined when quoting and binding new and renewal business. We do not delegate underwriting authority to agencies, marketers or to any other third parties that sell our insurance.

Comprehensive Safety Services. We provide proactive safety reviews of employers’ worksites, which are often located in rural areas. These safety reviews are a vital component of our underwriting process and also assist our policyholders in loss prevention, and encourage safer workplaces by deploying experienced field safety professionals, or FSPs, to our policyholders’ worksites. In 2014, 91.8% of our new voluntary business policyholders were subject to pre-quotation safety inspections. Additionally, we perform periodic on-site safety surveys of all of our voluntary business policyholders.

Proactive Claims Management. Our employees manage substantially all of our open claims in-house, utilizing intensive claims management practices that emphasize a personalized approach, as well as quality, cost-effective medical treatment. As of December 31, 2014, open indemnity claims per field case manager, or FCM, averaged 54 claims, which we believe is significantly less than the industry average. We also believe our claims management practices allow us to achieve a more favorable claim outcome, accelerate an employee’s return to work, lessen the likelihood of litigation and more rapidly close claims, all of which ultimately lead to lower overall claim costs.

Efficient Operating Platform. Through extensive cost management initiatives, we maintain one of the most efficient operations in the workers’ compensation industry. In 2014, our expense ratio was 22.6%. We believe that our expense ratio is substantially lower than that of our competitors, which gives us a greater opportunity to generate an underwriting profit.

Strategy

We intend to increase our book value and produce favorable returns on equity using the following strategies:

Focus on Underwriting Profitability. We intend to maintain our underwriting discipline throughout market cycles with the objective of remaining profitable. Our strategy is to focus on underwriting workers’ compensation insurance in hazardous industries and to maintain adequate rate levels commensurate with the risks we underwrite. We will also continue to strive for improved risk selection and pricing, as well as reduced frequency and severity of claims through comprehensive workplace safety reviews, effective medical cost containment measures and rapid closing of claims through personal, direct contact with our policyholders and their employees.

Increase Market Penetration. Based on data received from the National Association of Insurance Commissioners, the NAIC, we do not have more than 6.0% of the market share in any state we serve. As a result, we believe we have the opportunity to increase market penetration in each of the states in which we currently operate. Competition in our target markets is fragmented by state, employer size and industry. We believe that our specialized underwriting expertise and safety, claims and audit services position us to profitably increase our market share in our existing principal markets, with minimal increase in field service employees.

Prudent and Opportunistic Geographic Expansion. While we actively market our insurance in 30 states and the District of Columbia, 48.7% of our voluntary in-force premiums were generated in the six states where we derived 5.0% or more of our gross premiums written in 2014. We are licensed in an additional 17 states and the U.S. Virgin Islands. Our existing licenses and rate filings will expedite our ability to write policies in these markets when we decide it is prudent to do so.

Capitalize on Development of Information Technology System. We believe our underwriting and agency management system, GEAUX, along with our customized operational system, ICAMS, and the analytical data warehouse that ICAMS feeds, significantly enhance our ability to select risk, write profitable business and cost-effectively administer our billing, claims and audit functions.

Maintain Capital Strength. We plan to manage our capital to achieve our profitability goals while striving for optimal operating leverage for our insurance company subsidiaries. To accomplish this objective, we intend to maintain underwriting profitability throughout market cycles, optimize our use of reinsurance, deploy appropriate capital management tools and produce an appropriate risk adjusted return on our growing investment portfolio.

Industry

Overview. Workers’ compensation is a statutory system under which an employer is required to pay for its employees’ medical, disability, vocational rehabilitation and death benefit costs for work-related injuries or illnesses. Most employers satisfy this requirement by purchasing workers’ compensation insurance. The principal concept underlying workers’ compensation laws is that employees injured in the course and scope of their employment have only the legal remedies available under workers’ compensation laws and do not have any other recourse against their employer. An employer’s obligation to pay workers’ compensation does not depend on any negligence or wrongdoing on the part of the employer and exists even for injuries that result from the negligence or fault of another person, a co-employee, or, in most instances, the injured employee.

Workers’ compensation insurance policies generally provide that the insurance carrier will pay all benefits that the insured employer may become obligated to pay under applicable workers’ compensation laws. Each state has a regulatory and adjudicatory system that quantifies the level of wage replacement to be paid, determines the level of medical care required to be provided and the cost of temporary or permanent impairment and specifies the options in selecting medical providers available to the injured employee or the employer. These state laws generally require two types of benefits for injured employees: (1) medical benefits, which include expenses related to the diagnosis and treatment of the injury, as well as any required rehabilitation, and (2) indemnity payments, which consist of temporary wage replacement, permanent disability payments and death benefits to surviving family members. To fulfill these mandated financial obligations, virtually all employers are required to purchase workers’ compensation insurance or, if permitted by state law or approved by the U.S. Department of Labor, to self-insure. The employers may purchase workers’ compensation insurance from a private insurance carrier, a state-sanctioned assigned risk pool, or a self-insurance fund, which is an entity that allows employers to obtain workers’ compensation coverage on a pooled basis, typically subjecting each employer to joint and several liability for the entire fund.

Workers’ compensation was the fourth-largest property and casualty insurance line in the United States in 2013, according to the National Council on Compensation Insurance, Inc., the NCCI. Direct premiums written in 2013 for the workers’ compensation insurance industry were $53 billion, and direct premiums written for the property and casualty industry as a whole were $546 billion. According to the most recent market data reported by the NCCI, which is the official rating bureau in the majority of states in which we are licensed, total premiums reported for the specific occupational class codes for which we underwrite business were $14.0 billion.

Policyholders

As of December 31, 2014, we had more than 8,000 voluntary business policyholders with an average annual workers’ compensation policy written premium of $43,516. As of December 31, 2014, our ten largest voluntary business policyholders accounted for 2.7% of our in-force premiums. Our policy renewal rate on voluntary business that we elected to quote for renewal was 91.3% in 2014, 92.3% in 2013, and 91.5% in 2012.

In addition to our voluntary workers’ compensation business, we underwrite workers’ compensation policies for employers assigned to us and assume reinsurance premiums from mandatory pooling arrangements, in each case to fulfill our obligations under residual market programs implemented by the states in which we

operate. Our assigned risk business fulfills our statutory obligation to participate in residual market plans in four states. See “—Regulation—Residual Market Programs” below. For the year ended December 31, 2014, our assigned risk business accounted for 1.3% of our gross premiums written, and our assumed premiums from mandatory pooling arrangements accounted for 2.3% of our gross premiums written.

Targeted Industries

We provide workers’ compensation insurance primarily to employers in the following targeted hazardous industries:

Construction. Includes a broad range of operations such as highway and bridge construction, building and maintenance of pipeline and powerline networks, excavation, commercial construction, roofing, iron and steel erection, tower erection and numerous other specialized construction operations. In 2014, our average policy premium for voluntary workers’ compensation within the construction industry was $44,492, or $8.02 per $100 of payroll.

Trucking. Includes a broad spectrum of diverse operations including contract haulers, regional and local freight carriers, special equipment transporters and other trucking companies that conduct a variety of short- and long-haul operations. In 2014, our average policy premium for voluntary workers’ compensation within the trucking industry was $42,177, or $9.87 per $100 of payroll.

Manufacturing. Includes a diverse group of policyholders’ businesses such as the production of goods for use or sale using labor and machines, tools, chemical and biological processing or formulation. In 2014, our average policy premium for voluntary workers’ compensation within the manufacturing industry was $45,197, or $5.42 per $100 of payroll.

Oil and Gas. Includes various oil and gas activities including gathering, transportation, processing, production, and field service operations. In 2014, our average policy premium for voluntary workers’ compensation within the oil and gas industry was $51,205, or $5.61 per $100 of payroll.

Agriculture. Includes crop maintenance and harvesting, grain and produce operations, nursery operations, meat processing, and livestock feed and transportation. In 2014, our average policy premium for voluntary workers’ compensation within the agriculture industry was $29,034, or $6.43 per $100 of payroll.

Maritime. Includes ship building and repair, pier and marine construction, inter-coastal construction, and stevedoring. In 2014, our average policy premium for voluntary workers’ compensation within the maritime industry was $63,793, or $5.61 per $100 of payroll.

Logging. Includes tree harvesting operations ranging from labor intensive chainsaw felling and trimming to sophisticated mechanized operations using heavy equipment. In 2014, our average policy premium for voluntary workers’ compensation within the logging industry was $29,372, or $15.13 per $100 of payroll.

Our gross premiums are derived from:

•

Voluntary Business. Includes direct premiums from workers’ compensation insurance policies that we issue to employers who seek to purchase insurance directly from us and who we voluntarily agree to insure.

•

Assigned Risk Business. Includes direct premiums from workers’ compensation insurance policies that we issue to employers assigned to us under residual market programs implemented by some of the states in which we operate.

•

Assumed Premiums. Includes premiums from our participation in mandatory pooling arrangements under residual market programs implemented by some of the states in which we operate.

Gross premiums written during the years ended December 31, 2014, 2013 and 2012, and the allocation of those premiums among the hazardous industries we target are presented in the table below.


	Gross Premiums Written						Percentage of Gross Premiums Written
	2014		2013		2012		2014		2013		2012
	(in thousands)
Voluntary business:
Construction	$	166,360	$	153,110	$	132,776		42.2%		41.2%		40.4%
Trucking		69,520		71,565		70,294		17.7%		19.2%		21.4%
Manufacturing		28,239		27,122		22,792		7.2%		7.3%		6.9%
Oil and Gas		15,802		17,976		15,519		4.0%		4.8%		4.7%
Agriculture		15,426		15,563		17,204		3.9%		4.2%		5.3%
Maritime		11,413		10,883		9,493		2.9%		2.9%		2.9%
Logging		7,200		8,132		7,795		1.8%		2.2%		2.4%
Other		65,475		55,554		45,123		16.6%		14.9%		13.8%

Total voluntary business		379,435		359,905		320,996		96.3%		96.7%		97.8%

Assigned risk business		5,198		4,342		2,735		1.3%		1.2%		0.7%
Assumed premiums		9,186		7,930		5,092		2.4%		2.1%		1.5%

Total	$	393,819	$	372,177	$	328,823		100.0%		100.0%		100.0%

Geographic Distribution

We are licensed to provide workers’ compensation insurance in 47 states, the District of Columbia and the U.S. Virgin Islands. We operate on a geographically diverse basis with 12.0% or less of our gross premiums written in 2014 derived from any one state. The table below identifies, for the years ended December 31, 2014, 2013 and 2012, the states in which the percentage of our gross premiums written exceeded 3.0% for any of the three years presented.


	Percentage of Gross Premiums Written Year Ended December 31,
State	2014		2013		2012
Louisiana		12.0%		12.6%		11.1%
Georgia		10.2%		9.2%		8.5%
Pennsylvania		9.3%		9.2%		8.9%
Florida		6.2%		4.5%		3.5%
Illinois		5.6%		5.6%		5.9%
North Carolina		5.4%		6.1%		7.0%
Virginia		4.3%		4.6%		5.5%
Oklahoma		4.1%		4.8%		5.4%
Texas		4.0%		4.4%		4.2%
Minnesota		3.8%		3.3%		3.4%
South Carolina		3.2%		3.4%		3.2%
Alaska		3.1%		3.7%		3.3%
Mississippi		3.0%		2.7%		2.5%
Kansas		2.9%		2.8%		3.5%
Wisconsin		2.5%		2.4%		3.1%
Tennessee		2.3%		3.2%		3.5%

Total		81.9%		82.5%		82.5%

Sales and Marketing

We sell our workers’ compensation insurance through agencies. As of December 31, 2014, our insurance was sold through more than 3,300 independent agencies and our wholly-owned insurance agency subsidiary, Amerisafe General Agency, which is licensed in 27 states. We are selective in establishing and maintaining relationships with independent agencies. We seek to do business with those agencies that provide quality application flow from companies operating in our target industries and classes that are reasonably likely to accept our quotes. We compensate these agencies by paying a commission based on the premium collected from the policyholder. Our average commission rate for our independent agencies was 7.5% for the year ended December 31, 2014. We pay our insurance agency subsidiary a commission rate of 8.2%. Neither our independent agencies nor our insurance agency subsidiary has authority to underwrite or bind coverage. We do not pay contingent commissions.

As of December 31, 2014, independent agencies accounted for 95.7% of our voluntary in-force premiums. No single independent agency accounted for more than 1.0% of our voluntary in-force premiums at that date.

Underwriting

Our underwriting strategy is to focus on employers in certain hazardous industries that operate in those states where our underwriting efforts are the most profitable and efficient. We analyze each prospective policyholder on its own merits relative to known industry trends and statistical data. Our underwriting guidelines specify that we do not write workers’ compensation insurance for certain hazardous activities, including sub-surface mining and manufacturing of ammunition or fireworks.

Underwriting is a multi-step process that begins with the receipt of an application from one of our agencies. We initially review the application to confirm that the prospective policyholder meets certain established criteria, including that the prospective policy holder is engaged in one of our targeted hazardous industries and industry classes and operates in the states we target. If the application satisfies these criteria, the application is forwarded to our underwriting department for further review.

Our underwriting department reviews the application to determine if the application meets our underwriting criteria and whether all required information has been provided. If additional information is required, the underwriting department requests additional information from the agency submitting the application. This initial review process is generally completed within three days after the application is received by us. Once this initial review process is complete, our underwriting department requests that a pre-quotation safety inspection be performed in most cases. In 2014, 91.8% of our new voluntary business policyholders were inspected prior to our offering a premium quote.

After the pre-quotation safety inspection has been completed, our underwriting professionals review the results of the inspection to determine if a quote should be made and, if so, prepare the quote. The quote must be reviewed and approved by our underwriting department before the quote is delivered to the agency. All decisions by our underwriting department, including decisions to decline applications, are subject to review and approval by our management-level underwriters.

Our underwriting professionals participate in an incentive compensation program under which bonuses are paid quarterly based upon achieving premium underwriting volume and loss ratio targets. The determination of whether targets have been satisfied is made 30 months after the beginning of the relevant incentive compensation period.

Pricing

In the majority of states, workers’ compensation insurance rates are based upon published “loss costs.” Loss costs are derived from wage and loss data reported by insurers to the state’s statistical agent, which in most states is the NCCI. The state agent then promulgates loss costs for specific job descriptions or class codes.

Insurers file requests for adoption of a loss cost multiplier, or LCM, to be applied to the loss costs to support operating expenses and profit margins. In addition, most states allow pricing flexibility above and below the filed LCM, within certain limits.

We obtain approval of our rates, including our LCMs, from state regulatory authorities. To maintain rates at profitable levels, we regularly monitor and adjust our LCMs. The effective LCM for our voluntary business was 1.84 for policy year 2014, 1.79 for policy year 2013, and 1.64 for policy year 2012. If we are unable to charge rates in a particular state or industry to produce satisfactory results, we seek to control and reduce our premium volume in that state or industry and redeploy our capital in other states or industries that offer greater opportunity to earn an underwriting profit.

Safety

Our safety inspection process begins with a request from our underwriting department to perform a pre-quotation safety inspection. Our safety inspections focus on a prospective policyholder’s operations, loss exposures and existing safety controls to prevent potential losses. The factors considered in our inspection include employee experience, turnover, training, previous loss history and corrective actions, and workplace conditions, including equipment condition and, where appropriate, use of fall protection, respiratory protection or other safety devices. Our FSPs travel to employers’ worksites to perform these safety inspections. These initial inspections allow our underwriting professionals to make decisions on both insurability and pricing. In certain circumstances, we will agree to provide workers’ compensation insurance only if the employer agrees to implement and maintain the safety management practices that we recommend. In 2014, 91.8% of our new voluntary business policyholders were inspected prior to our offering a premium quote. The remaining voluntary business policyholders were not inspected prior to a premium quote for a variety of reasons, including small premium size or the fact that the policyholder was previously a policyholder subject to our safety inspections.

After an employer becomes a policyholder, we continue to emphasize workplace safety through periodic workplace visits, assisting the policyholder in designing and implementing enhanced safety management programs, providing safety-related information and conducting rigorous post-accident management. Generally, we may cancel or decline to renew an insurance policy if the policyholder does not implement or maintain reasonable safety management practices that we recommend.

Our FSPs participate in an incentive compensation program under which bonuses are paid semi-annually based upon an FSP’s production and their policyholders’ aggregate loss ratios. The results are measured 33 months after the inception of the subject policy period.

Claims

We have structured our claims operation to provide immediate, intensive and personal management of claims to guide injured employees through medical treatment, rehabilitation and recovery, with the primary goal of returning the injured employee to work as promptly as practicable. We seek to limit the number of claim disputes with injured employees through early intervention in the claims process. Where possible, we purchase annuities on longer life claims to close such claims, while still providing an appropriate level of benefits to injured employees. While we seek to promptly settle valid claims, we also aggressively defend against claims we consider to be non-meritorious.

Our FCMs are located in the geographic areas where our policyholders are based. We believe the presence of our FCMs in the field enhances our ability to guide an injured employee to the appropriate conclusion in a friendly, dignified and supportive manner. Our FCMs have broad authority to manage claims from occurrence of a workplace injury through resolution, including authority to retain many different medical providers at our expense. Such providers comprise not only our recommended medical providers, but also nurse case managers, independent medical examiners, vocational specialists, rehabilitation specialists and other specialty providers of medical services necessary to achieve a quality outcome.

Following notification of a workplace injury, an FCM will contact the policyholder, the injured employee and/or the treating physician to determine the nature and severity of the injury. If a serious injury occurs, the FCM will promptly visit the injured employee or the employee’s family members to discuss the benefits provided. The FCM will also visit the treating physician to discuss the proposed treatment plan. Our FCM assists the injured employee in receiving appropriate medical treatment and encourages the use of our recommended medical providers and facilities. For example, our FCM may suggest that a treating physician refer an injured worker to another physician or treatment facility that we believe has had positive outcomes for other workers with similar injuries. We actively monitor the number of open cases handled by a single FCM in order to maintain focus on each specific injured employee. As of December 31, 2014, we averaged 54 open indemnity claims per FCM, which we believe is significantly less than the industry average.

Locating our FCMs in the field also allows us to build professional relationships with local medical providers. In selecting medical providers, we rely, in part, on the recommendations of our FCMs who have developed professional relationships within their geographic areas. We also seek input from our policyholders and other contacts in the markets that we serve. While cost factors are considered in selecting medical providers, we consider the most important factor in the selection process to be the medical provider’s ability to achieve a quality outcome. We define quality outcome as the injured worker’s rapid, conclusive recovery and return to sustained, full capacity employment.

Premium Audits

We conduct premium audits on all of our voluntary business policyholders annually upon the expiration of each policy, including when the policy is renewed. The purpose of these audits is to verify that policyholders have accurately reported their payroll expenses and employee job classifications, and therefore, have paid us the premium required under the terms of their policies. In addition to annual audits, we selectively perform interim audits on certain classes of business if significant or unusual claims are filed or if the monthly reports submitted by a policyholder reflect a payroll pattern or other aberrations that cause underwriting, safety or fraud concerns. We also mitigate potential losses from under-reporting of premium or delinquent premium payment by collecting a deposit from the policyholder at the inception of the policy, typically representing 15% of the total estimated annual premium, which deposit can be utilized to offset losses from non-payment of premium.

Loss Reserves

We record reserves for estimated losses under insurance policies that we write and for loss adjustment expenses related to the investigation and settlement of policy 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 as of a given point in time.

In establishing our reserves, we review the results of analyses using actuarial methodologies that utilize historical loss data from our more than 29 years of underwriting workers’ compensation insurance. In evaluating the results of those analyses, our management also uses substantial judgment in considering other factors that are not considered in these actuarial analyses. These actuarial methodologies and subjective factors are described in more detail below. Our process and methodology for estimating reserves applies to both our voluntary and assigned risk business, but does not include our reserves for mandatory pooling arrangements. We record reserves for mandatory pooling arrangements as those reserves are reported to us by the pool administrators. We do not use loss discounting when we determine our reserves, which would involve recognizing the time value of money and offsetting estimates of future payments by future expected investment income.

When a claim is reported, we establish an initial case reserve for the estimated amount of our loss based on our estimate of the most likely outcome of the claim at that time. Generally, that case reserve is established within 14 days after the claim is reported and consists of anticipated medical costs, indemnity costs and specific adjustment expenses, which we refer to as defense and cost containment expenses, or DCC expenses. The most complex claims, involving severe injuries, may take a considerable period of time for us to establish a more precise estimate of the most likely outcome of the claim. At any point in time, the amount paid on a claim, plus

the reserve for future amounts to be paid, represents the estimated total cost of the claim, or the case incurred amount. The estimated amount of loss for a reported claim is based upon various factors, including:

•

type of loss;

•

severity of the injury or damage;

•

age and occupation of the injured employee;

•

estimated length of temporary disability;

•

anticipated permanent disability;

•

expected medical procedures, costs and duration;

•

our knowledge of the circumstances surrounding the claim;

•

insurance policy provisions related to the claim, including coverage;

•

jurisdiction of the occurrence; and

•

other benefits defined by applicable statute.

The case incurred amount varies over time due to uncertainties with respect to medical treatment and outcome, length and degree of disability, recurrence of injury, employment availability and wage levels and judicial determinations. As changes occur, the case incurred amount is adjusted. The initial estimate of the case incurred amount can vary significantly from the amount ultimately paid, especially in circumstances involving severe injuries with comprehensive medical treatment. Changes in case incurred amounts is an important component of our historical claim data.

In addition to case reserves, we establish reserves on an aggregate basis for loss and DCC expenses that have been incurred but not reported, or IBNR. Our IBNR reserves are also intended to provide for aggregate changes in case incurred amounts as well as the unpaid cost of recently reported claims for which an initial case reserve has not been established.

The third component of our reserves for loss and loss adjustment expenses is our adjusting and other reserve, or AO reserve. Our AO reserve covers primarily the estimated cost of administering claims and is established for the costs of future unallocated loss adjustment expenses for all reported and unreported claims.

The final component of our reserves for loss and loss adjustment expenses is the reserve for mandatory pooling arrangements. The mandatory pooling arrangement reserve includes the amount reported to us by the pool administrators.

In establishing reserves, we rely on the analysis of the more than 193,000 claims in our 29-year history. Using statistical analyses and actuarial methods, we estimate reserves based on historical patterns of case development, payment patterns, mix of business, premium rates charged, case reserving adequacy, operational changes, adjustment philosophy and severity and duration trends.

We review our reserves by industry and state on a quarterly basis. Individual open claims are reviewed more frequently and adjustments to case incurred amounts are made based on expected outcomes. The number of claims reported or occurring during a period, combined with a calculation of average case incurred amounts, and measured over time, provide the foundation for our reserve estimates. In establishing our reserve estimates, we use historical trends in claim reporting timeliness, frequency of claims in relation to earned premium or covered payroll, premium rate levels charged and case development patterns. However, the number of variables and judgments involved in establishing reserve estimates, combined with some random variation in loss development patterns, results in uncertainty regarding projected ultimate losses. As a result, our ultimate liability for loss and loss adjustment expenses may be more or less than our reserve estimate.

Our analysis of our historical data provides the factors we use in our statistical and actuarial analysis in estimating our loss and DCC expense reserve. These factors are primarily measures over time of claims reported,

average case incurred amounts, case development, duration, severity and payment patterns. However, these factors cannot be solely used as these factors do not take into consideration changes in business mix, claims management, regulatory issues, medical trends, medical inflation, employment and wage patterns, and other subjective factors. We use this combination of factors and subjective assumptions in the use of six well-accepted actuarial methods, as follows:

•

Paid Development Method—uses historical, cumulative paid loss patterns to derive estimated ultimate losses by accident year based upon the assumption that each accident year will develop to estimated ultimate cost in a manner that is analogous to prior years.

•

Paid Weighted Severity Method—multiplies estimated ultimate claims for each accident year by a weighted average, trended and developed severity. The ultimate claims estimate is based on paid claim count development. The selected severity for a given accident year is derived by giving some weight to all of the accident years in the experience history rather than treating each accident year independently.

•

Paid Loss Ratio Cape Cod Method—similar to the paid weighted severity method, except that on-level premiums replace estimated ultimate claims, based upon paid claim count development, and loss ratios replace selected severities. The selected ultimate loss ratio for a given accident year is derived by giving some weight to all of the accident years in the experience history rather than treating each accident year independently.

•

Incurred Development Method—uses historical, cumulative incurred loss patterns to derive estimated ultimate losses by accident year based upon the assumption that each accident year will develop to estimated ultimate cost in a manner that is analogous to prior years.

•

Incurred Weighted Severity Method—multiplies estimated ultimate claims for each accident year by a weighted average, trended and developed severity. The ultimate claims estimate is based on incurred claim count development. The selected severity for a given accident year is derived by giving some weight to all of the accident years in the experience history rather than treating each accident year independently.

•

Incurred Loss Ratio Cape Cod Method—similar to the incurred weighted severity method, except that on-level premiums replace estimated ultimate claims, based upon incurred claim count development, and loss ratios replace selected severities. The selected ultimate loss ratio for a given accident year is derived by giving some weight to all of the accident years in the experience history rather than treating each accident year independently.

These six methods are applied to both gross and net claims data. We then analyze the results and may emphasize or de-emphasize some or all of the outcomes to reflect our judgment of reasonableness in relation to supplementary information and operational and industry changes. These outcomes are then aggregated to produce a single weighted average point estimate that is the base estimate for loss and DCC expense reserves.

In determining the level of emphasis that may be placed on some or all of the methods, we review statistical information as to which methods are most appropriate, whether adjustments are appropriate within the particular methods, and if results produced by each method include inherent bias reflecting operational and industry changes. This supplementary information may include:

•

open and closed claim counts;

•

statistics related to open and closed claim count percentages;

•

claim closure rates;

•

changes in average case reserves and average loss and DCC expenses incurred on open claims;

•

reported and ultimate average case incurred changes;

•

reported and projected ultimate loss ratios; and

•

loss payment patterns.

In establishing our AO reserves, we review our past adjustment expenses in relation to paid claims as well as estimated future costs based on expected claims activity and duration.

The sum of our net loss and DCC expense reserve, our AO reserve and our reserve for mandatory pooling arrangements is our total net reserve for loss and loss adjustment expenses.

As of December 31, 2014, our best estimate of our ultimate liability for loss and loss adjustment expenses, net of amounts recoverable from reinsurers, was $628.3 million, which includes $14.3 million in reserves for mandatory pooling arrangements as reported by the pool administrators. The estimate of our ultimate liability was derived from the process and methodology described above, which relies on substantial judgment. There is inherent uncertainty in estimating our reserves for loss and loss adjustment expenses. It is possible that our actual loss and loss adjustment expenses incurred may vary significantly from our estimates. We view our estimate of loss and DCC expenses as the most significant component of our reserve for loss and loss adjustment expenses.

Additional information regarding our reserve for unpaid loss and loss adjustment expenses (“LAE”) as of December 31, 2014, 2013, and 2012 is set forth below:


	2014			2013			2012
	(in thousands)
Gross case loss and DCC reserves	$	514,874		$	473,019		$	431,356
AO reserves		18,572			17,187			15,736
Gross IBNR reserves		154,156			124,351			123,358

Gross unpaid loss, DCC and AO reserves		687,602			614,557			570,450
Reinsurance recoverables on unpaid loss and LAE		(59,334	)		(48,699	)		(55,190	)

Net unpaid loss, DCC and AO reserves	$	628,268		$	565,858		$	515,260

We performed sensitivity analyses to show how our net loss and DCC expense reserve, including IBNR, would be impacted by changes in certain critical assumptions. For our paid and incurred development methods, we varied both the cumulative paid and incurred loss development factors (LDFs) by plus and minus 30%, both individually and in combination with one another. The results of this sensitivity analysis, using December 31, 2014 data, are summarized below.


Change in Paid LDFs	Change in Incurred LDFs	Resultant Change in Net Loss and DCC Reserve
Change in Paid LDFs	Change in Incurred LDFs	Amount ($)	Percentage
		(in thousands)
+30 %	+30%	24,303	4.1%
+30 %	0%	5,505	0.9%
+30 %	–30%	(13,087)	(2.2%)
0 %	+30%	21,858	3.7%
0 %	–30%	(20,486)	(3.4%)
–30 %	+30%	27,997	4.7%
–30 %	0%	712	0.1%
–30 %	–30%	(24,810)	(4.2%)

For our paid and incurred weighted severity methods, we varied our year-end selected trend factor (for medical costs, defense costs, wage inflation, etc.) by plus and minus 50%. The results of this sensitivity analysis, using December 31, 2014 data, are summarized below.


Change in Severity Trend	Resultant Change in Net Loss and DCC Reserve
Change in Severity Trend	Amount ($)		Percentage
	(in thousands)
+50%		2,384		0.4%
–50%		(1,870)		(0.3%)

Reconciliation of Loss Reserves

The table below shows the reconciliation of loss reserves on a gross and net basis for the years ended December 31, 2014, 2013 and 2012, reflecting changes in losses incurred and paid losses.


	Year Ended December 31,
	2014			2013			2012
	(in thousands)
Balance, beginning of period	$	614,557		$	570,450		$	538,214
Less amounts recoverable from reinsurers on unpaid loss and loss adjustment expenses		48,699			55,190			60,937

Net balance, beginning of period		565,858			515,260			477,277

Add incurred related to:
Current accident year		268,633			241,584			222,393
Prior accident years		(23,717	)		(12,611	)		(2,490	)

Total incurred		244,916			228,973			219,903

Less paid related to:
Current accident year		52 ,848			51,169			50,423
Prior accident years		129,658			127,206			131,497

Total paid		182,506			178,375			181,920

Net balance, end of period		628,268			565,858			515,260

Add amounts recoverable from reinsurers on unpaid loss and loss adjustment expenses		59,334			48,699			55,190

Balance, end of period	$	687,602		$	614,557		$	570,450

Our gross reserves for loss and loss adjustment expenses of $687.6 million as of December 31, 2014 are expected to cover all unpaid loss and loss adjustment expenses as of that date. As of December 31, 2014, we had 5,511 open claims, with an average of $124,679 in unpaid loss and loss adjustment expenses per open claim. During the year ended December 31, 2014, 5,785 new claims were reported, and 5,565 claims were closed.

In 2014, our gross reserves increased to $687.6 million from $614.6 million at December 31, 2013. The increase in reserves was attributable to both the 2014 accident year and prior accident years. We also recognized $23.7 million of favorable development for prior accident years. As of December 31, 2013, we had 5,297 open claims, with an average of $116,020 in unpaid loss and loss adjustment expenses per open claim. During the year ended December 31, 2013, 5,620 new claims were reported, and 5,287 claims were closed.

In 2013, our gross reserves increased to $614.6 million from $570.5 million at December 31, 2012. The increase in reserves was attributable to both the 2013 accident year and prior accident years. There was also $12.6 million of favorable development for prior accident years. As of December 31, 2012, we had 4,964 open claims, with an average of $114,917 in unpaid loss and loss adjustment expenses per open claim. During the year ended December 31, 2012, 5,721 new claims were reported, and 5,941 claims were closed.

Loss Development

The table below shows the net loss development for business written each year from 2004 through 2014. The table reflects the changes in our loss and loss adjustment expense reserves in subsequent years from the prior loss estimates based on experience as of the end of each succeeding year on a GAAP basis.

The first line of the table shows, for the years indicated, our liability including the incurred but not reported loss and loss adjustment expenses as originally estimated, net of amounts recoverable from reinsurers. For

example, as of December 31, 2004, it was estimated that $243.3 million would be sufficient to settle all claims not already settled that had occurred on or prior to December 31, 2004, whether reported or unreported. The next section of the table sets forth the re-estimates in later years of incurred losses, including payments, for the years indicated. The next section of the table shows, by year, the cumulative amounts of loss and loss adjustment expense payments, net of amounts recoverable from reinsurers, as of the end of each succeeding year. For example, with respect to the net loss reserves of $243.3 million as of December 31, 2004, by December 31, 2014 (ten years later) $185.6 million had actually been paid in settlement of the claims that relate to liabilities as of December 31, 2004.

The “gross cumulative redundancy/(deficiency)” represents, as of December 31, 2014, the difference between the latest re-estimated liability and the amounts as originally estimated. A redundancy means that the original estimate was higher than the current estimate. A deficiency means that the current estimate is higher than the original estimate.

Analysis of Loss and Loss Adjustment Expense Reserve Development


	Year Ended December 31,
	2004		2005		2006		2007		2008		2009		2010		2011		2012		2013		2014
	(in thousands)
Reserve for loss and loss adjustment expenses, net of reinsurance recoverables	$	243,256	$	364,253	$	412,366	$	462,478	$	474,697	$	474,220	$	466,668	$	477,277	$	515,260	$	565,858	$	628,268
Net reserve estimated as of:
One year later		265,138		362,026		402,876		442,091		452,812		452,587		460,105		474,787		502,648		542,141
Two years later		262,601		361,181		372,520		416,758		427,794		422,697		454,479		462,650		478,931
Three years later		262,427		346,914		359,590		396,492		398,187		411,516		442,700		448,269
Four years later		256,790		339,849		348,596		371,599		387,525		402,003		429,269
Five years later		250,586		335,158		335,252		364,147		381,950		395,479
Six years later		247,798		325,714		331,390		361,720		377,158
Seven years later		239,886		323,695		330,367		358,630
Eight years later		238,650		322,620		328,133
Nine years later		239,268		320,520
Ten years later		238,292
Net cumulative redundancy (deficiency)	$	4,964	$	43,733	$	84,233	$	103,848	$	97,539	$	78,741	$	37,399	$	29,008	$	36,329	$	23,717
Cumulative amount of reserve paid, net of reserve recoveries, through:
One year later		40,514		110,369		105,408		116,631		121,619		117,555		125,884		131,497		127,205		129,658
Two years later		97,091		164,354		167,852		182,879		185,334		182,242		199,682		201,814		188,752
Three years later		124,785		201,393		203,502		217,137		222,249		223,726		240,196		237,170
Four years later		154,799		222,867		224,419		239,189		245,012		248,294		262,415
Five years later		167,092		237,699		235,931		251,941		261,323		261,653
Six years later		175,639		245,466		242,761		261,707		270,241
Seven years later		180,743		249,037		247,681		267,745
Eight years later		181,018		253,008		251,651
Nine years later		183,672		256,192
Ten years later		185,619
Net reserve— December 31	$	243,256	$	364,253	$	412,366	$	462,478	$	474,697	$	474,220	$	466,668	$	477,277	$	515,260	$	565,858	$	628,268
Reinsurance recoverables		189,624		120,232		106,810		74,925		56,596		60,435		65,536		60,937		55,190		48,699		59,334

Gross reserve—December 31	$	432,880	$	484,485	$	519,176	$	537,403	$	531,293	$	534,655	$	532,204	$	538,214	$	570,450	$	614,557	$	687,602

Net re-estimated reserve	$	239,268	$	322,620	$	330,367	$	361,720	$	381,950	$	402,003	$	442,700	$	462,650	$	502,648	$	542,141
Re-estimated reinsurance recoverables		191,584		127,564		121,826		92,071		76,966		59,832		57,466		55,025		50,563		54,024

Gross re-estimated reserve	$	430,852	$	450,184	$	452,193	$	453,791	$	458,916	$	461,835	$	500,166	$	517,675	$	553,211	$	596,165

Gross cumulative redundancy (deficiency)	$	2,028	$	34,301	$	66,983	$	83,612	$	72,377	$	72,820	$	32,038	$	20,539	$	17,239	$	18,392

Investments

We derive net investment income from our invested assets. As of December 31, 2014, the carrying value of our investment portfolio, including cash and cash equivalents, was $1.1 billion and the fair value of the portfolio was $1.1 billion.

Our board of directors has established an investment policy governing our investments, which is reviewed at least annually. The principal objectives of our investment portfolio are to preserve capital and surplus and to maintain appropriate liquidity for corporate requirements. Additional objectives are to support our A.M. Best rating and to maximize after-tax income and total return. Our investment policy establishes limitations and guidelines relating to, for example, asset allocation, diversification, credit ratings and duration. We periodically review our investment portfolio with the risk committee of our board of directors for compliance with the policy. Our investment portfolio is managed internally.

We classify the majority of our fixed maturity securities as “held-to-maturity.” We do not reflect any changes in fair value for these securities in our financial statements, unless such changes are deemed to be “other than temporary impairments,” in which case such impairments flow through our income statement within the category, “Net realized gains (losses) on investments.” The remainder of our fixed maturity securities and all of our equity securities are classified as “available-for-sale.” These investments are valued at fair value at the end of each period, with changes in fair value flowing through other comprehensive income. We generally seek to limit our holdings in equity securities to the lesser of 10% of the investment portfolio or 30% of shareholders’ equity, on a fair value basis.

See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Investments” for further information on the composition and results of our investment portfolio.

The table below shows the carrying values of various categories of securities held in our investment portfolio, the percentage of the total carrying value of our investment portfolio represented by each category and the effective interest rate for the year ended December 31, 2014 based on the carrying value of each category as of December 31, 2014:


	Carrying Value		Percentage of Portfolio		Effective Interest Rate
	(in thousands)
Fixed maturity securities—held-to-maturity:
State and political subdivisions	$	385,623		34.8%		3.5%
Corporate bonds		176,880		16.0%		1.5%
Commercial mortgage-backed securities		46,662		4.2%		4.7%
U.S. agency-based mortgage-backed securities		16,972		1.5%		5.1%
U.S. Treasury securities and obligations of U.S. Government agencies		10,697		1.0%		3.5%
Asset-backed securities		2,797		0.3%		3.7%

Total fixed maturity securities— held-to-maturity		639,631		57.8%		3.1%

Fixed maturity securities—available-for-sale:
State and political subdivisions		157,374		14.2%		3.5%
Corporate bonds		165,370		14.9%		1.6%
U.S. agency-based mortgage-backed securities		8,498		0.8%		3.2%

Total fixed maturity securities— available-for-sale		331,242		29.9%		2.5%

Equity securities		28		0.0%		0.0%
Other investments		11,748		1.1%		0.0%
Cash and cash equivalents		90,956		8.2%		0.1%
Short-term investments		33,684		3.0%		0.5%

Total investments, including cash and cash equivalents	$	1,107,289		100.0%		2.6%

As of December 31, 2014, our fixed maturity securities had a carrying value of $970.9 million, which represented 87.7% of the carrying value of our investments, including cash and cash equivalents. For the twelve months ended December 31, 2014, the pre-tax accounting investment yield of our investment portfolio was 2.6% per annum.

The gross unrealized gains and losses on, and the cost or amortized cost and fair value of, our investment portfolio as of December 31, 2014 are summarized as follows:


	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
Fixed maturity securities, held-to-maturity	$	639,631	$	25,404	$	(664	)	$	664,371
Fixed maturity securities, available-for-sale		327,004		7,732		(3,494	)		331,242
Equity securities, available-for-sale		—		28		—			28
Other investments, available-for-sale		10,000		1,748		—			11,748

Totals	$	976,635	$	34,912	$	(4,158	)	$	1,007,389

As of December 31, 2014, municipal bonds made up 49.0% of our investment portfolio, including cash and short-term investments. The largest concentration results from companies being allowed an investment credit against Louisiana premium taxes for varying levels of Louisiana assets. The table below summarizes the top five geographic exposures as of December 31, 2014.


	Carrying Value		Percentage of Municipal Portfolio			Percentage of Total Portfolio
	(in thousands)
Louisiana	$	127,115		23.4	%		11.5	%
Texas		99,554		18.3	%		9.0	%
Florida		52,991		9.8	%		4.8	%
Washington		36,697		6.8	%		3.3	%
Illinois		22,431		4.1	%		2.0	%
Other		204,209		37.6	%		18.4	%

	$	542,997		100.0	%		49.0	%

The table below summarizes the credit quality of our investment portfolio, excluding our equity holdings, as of December 31, 2014, as determined by the middle rating of Moody’s, Standard and Poor’s, and Fitch.


Credit Rating	Percentage of Total Carrying Value
“AAA”		33.4	%
“AA”		23.5	%
“A”		24.5	%
“BBB”		17.7	%
“BB and below”		0.7	%
“Unrated Securities”		0.2	%

Total		100.0	%

As of December 31, 2014, the average composite rating of our investment portfolio, excluding our equity holdings, was “AA-.”

The table below shows the composition of our fixed maturity securities by remaining time to maturity as of December 31, 2014.


Remaining Time to Maturity	As of December 31, 2014
Remaining Time to Maturity	Carrying Value		Percentage
	(in thousands)
Less than one year	$	172,344		17.8	%
One to five years		390,546		40.2	%
Five to ten years		112,978		11.6	%
More than ten years		220,076		22.7	%
U.S. agency-based mortgage-backed securities		25,470		2.6	%
Commercial mortgage-backed securities		46,662		4.8	%
Asset-backed securities		2,797		0.3	%

Total	$	970,873		100.0	%

Reinsurance

We purchase reinsurance to reduce our net liability on individual risks and claims and to protect against catastrophic losses. Reinsurance involves an insurance company transferring to, or ceding, a portion of the exposure on a risk to a reinsurer. The reinsurer assumes the exposure in return for a portion of our premium. The cost and limits of reinsurance we purchase can vary from year to year based upon the availability of quality reinsurance at an acceptable price and our desired level of retention. Retention refers to the amount of risk that we retain for our own account. Under excess of loss reinsurance, covered losses in excess of the retention level up to the limit of the program are paid by the reinsurer. Our excess of loss reinsurance is written in layers, in which our reinsurers accept a band of coverage up to a specified amount. Any liability exceeding the limit of the program reverts to us as the ceding company. Reinsurance does not legally discharge us from primary liability for the full amount due under our policies. However, our reinsurers are obligated to indemnify us to the extent of the coverage provided in our reinsurance agreements.

We believe reinsurance is critical to our business. Our reinsurance purchasing strategy is to protect against unforeseen and/or catastrophic loss activity that would adversely impact our income and capital base. We generally select financially strong reinsurers with an A.M. Best rating of “A–” (Excellent) or better at the time we enter into a reinsurance contract. In addition, to minimize our exposure to significant losses from reinsurer insolvencies, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk on a continual basis.

2015 Excess of Loss Reinsurance Treaty Program

Effective January 1, 2014, we entered into a new multi-year excess of loss reinsurance treaty program related to our voluntary and assigned risk business that applies to losses incurred between January 1, 2014 and the date on which the reinsurance agreements are terminated. Our reinsurance treaty program provides us with reinsurance coverage for each loss occurrence up to $70.0 million, subject to applicable limitations, deductibles, retentions and aggregate limits. The maximum loss occurrence involving a single claimant remains limited to a maximum of $10.0 million for that claimant, subject to applicable deductibles, retentions and aggregate limits.

We have 14 reinsurers participating in our reinsurance treaty program in 2015. Under certain circumstances, including a downgrade of a reinsurer’s A.M. Best rating to “B++” (Very Good) or below, such reinsurer may be required to provide us with security for amounts due under the terms of our reinsurance program. This security may take the form of, among other things, cash advances or letters of credit. If security is required because of a ratings downgrade, the form of security must be mutually agreed to between the reinsurer and us.

In the 2014 program, we raised our retention from $1.0 million to $2.0 million for each loss occurrence. In 2015, for each loss occurrence in excess of $2.0 million, our first layer of reinsurance provides coverage for

losses up to $10.0 million. This layer provides coverage in two parts. Before our reinsurers are obligated to reimburse us under this layer, we are subject to an annual aggregate deductible of 1.5% of subject earned premium under the first part of this coverage and 6.5% of subject earned premium under the second part of this coverage. The limit under the first part of this coverage is 5.0% of subject earned premium in any one year and 3.0% of subject earned premium in the aggregate for all three years covered by this layer. The limit under the second part of this coverage is 3.0% of subject earned premium for any one year and 1.5% of subject earned premium in the aggregate for the remaining two years in this layer.

At our option, we have the right to commute the reinsurers’ obligations under the agreement at any time after the end of the applicable term of the agreement. If we commute the reinsurers’ obligations, we are entitled to receive a portion of the premiums that were paid to the reinsurers prior to the effective dates of the applicable commutations, subject to certain adjustments provided in the agreement. This layer of reinsurance will expire on January 1, 2017.

A Catastrophe excess of loss layer affords coverage up to $60.0 million for each loss occurrence in excess of $10.0 million. This layer includes coverage for terrorism including the use and/or dispersal of nuclear, biological, chemical and radiological agents with an annual aggregate limit of $60.0 million. The aggregate limit for all other claims under this layer is $120.0 million. This layer expires on January 1, 2016.

The table below sets forth the reinsurers participating in our 2015 reinsurance program:


Reinsurer		A.M. Best Rating
Hannover Reinsurance (Ireland) Limited		A+
Allianz Risk Transfer AG (Bermuda)		A+
Arch Reinsurance Company		A+
Alterra Reinsurance USA Inc		A
Lloyd’s Syndicate 2003 SJC		A
Montpelier Reinsurance Limited		A
Munich Reinsurance America, Inc.		A+
Lloyd’s Syndicate 2987 BRT		A
Houston Casualty Company		A+
Lloyd’s Syndicate 1084 CSL		A
Lloyd’s Syndicate 3000 MKL		A
Lloyd’s Syndicate 1955 BAR		A
Lloyd’s Syndicate 4472 LIB		A
Minnesota Workers’ Compensation Reinsurance Association		NR

Due to the nature of reinsurance, we have recoverables from reinsurers that apply to accident years prior to 2014. The table below summarizes our amounts recoverable from reinsurers as of December 31, 2014.


Reinsurer	A.M. Best Rating	Amounts Recoverable as of December 31, 2014
		(in thousands)
Hannover Reinsurance (Ireland) Limited (1)	A+	$	27,387
Odyssey Reinsurance Company	A		13,523
Minnesota Workers’ Compensation Reinsurance Association (1)	NR		8,518
Tokio Millennium Re Ltd	A++		6,410
Clearwater Insurance Company	bbb		6,229
Finial Reinsurance	A-		5,124
SCOR Reinsurance Company	A		4,926
St. Paul Fire and Marine Insurance Company	A++		2,168
Lloyd’s Syndicate #2000/Harrington	A		1,225
Clearwater Select Insurance	bbb		1,218
American National Insurance Company	A		1,081
Allianz Risk Transfer AG (Bermuda) (1)	A+		1,023
Other	—		7,056

Total		$	85,888

(1)

Current participant in our 2015 reinsurance program.

Terrorism Reinsurance

The Terrorism Risk Insurance Act of 2002 (the “2002 Act”) was enacted in response to the events of September 11, 2001 and was extended by the Terrorism Risk Insurance Extension Act of 2005 (the “2005 Act”), the Terrorism Risk Insurance Program Reauthorization Act of 2007 (the “2007 Act”), and the Terrorism Risk Insurance Program Reauthorization Act of 2015 (the “2015 Act”). The 2002 Act, the 2005 Act, the 2007 Act and the 2015 Act were designed to ensure the availability of insurance coverage for losses resulting from certain acts of terrorism in the United States. The 2015 Act reauthorizes a federal program, established under the 2002 Act, extended by the 2005 Act and 2007 Act, and further extended the program through the end of 2020. This program provides federal reimbursement to insurance companies for a portion of their losses arising from certain acts of terrorism and requires insurance companies to offer coverage for these acts. The program applies to insured losses arising out of acts that are certified as “acts of terrorism” by the Secretary of the Treasury in concurrence with the Secretary of State and the Attorney General of the United States. In addition, the program does not provide any reimbursement for any portion of aggregate industry-wide insured losses from certified acts of terrorism that exceed $100.0 billion in any one year and is subject to certain other limitations and restrictions.

For insured losses in 2015, each insurance group is responsible for a statutory deductible under the 2015 Act that is equal to 20% of its direct earned property and casualty insurance premiums. For losses occurring in 2015, the U.S. Federal Government will reimburse 85% of an insurance group’s covered losses over the statutory deductible. The U.S. Federal Government reimbursement will decrease 1% each year until it is 80% in 2020. In addition, no federal reimbursement is available unless the aggregate insurance industry-wide losses from a certified act of terrorism exceed $100.0 million for any act of terrorism occurring in 2015 and increasing by $20.0 million each year until it is $200.0 million in 2020. However, there is no relief from the requirement under the 2015 Act that insurance companies offer coverage for certified acts of terrorism if those acts do not cause losses exceeding these threshold amounts and thus do not result in any federal reimbursement payments.

Under the 2015 Act, insurance companies must offer coverage for losses due to certified acts of terrorism in their workers’ compensation policies. Moreover, the workers’ compensation laws of the various states generally do not permit the exclusion of coverage for losses arising from acts of terrorism, including terrorism that involves the use of nuclear, biological, radioactive or chemical agents. In addition, state law prohibits us

from limiting our workers’ compensation insurance losses arising from any one catastrophe or any one claimant. We have reinsurance protection in our 2015 reinsurance treaty program that affords coverage for up to $70 million for losses arising from conventional terrorism. Amerisafe’s 2014 Catastrophe excess of loss layer for loss occurrences greater than $10 million also added coverage for losses caused by nuclear, biological, chemical and radiological attacks, subject to the deductibles, retentions, definitions and aggregate limits. This coverage was renewed for 2015.

Technology

We view our information systems as an integral part of our operations. We make substantial investments in improving our systems on an ongoing basis. We provide our field premium auditors, field safety professionals and field case managers with computer and communication equipment to efficiently complete services. We also deploy online solutions for our policyholders to enable timely and efficient premium payments and claims reporting, and for our agents to improve collaboration and exchange of data in the underwriting process. Our information technology employees perform end-user support, systems development, and infrastructure operation and maintenance with limited assistance from outside vendors.

Competition

The insurance industry, in general, is highly competitive and there is significant competition in the workers’ compensation segment of the industry. Competition in the insurance business is based on many factors, including premium rates, policy terms, coverage availability, claims management, safety services, payment terms, types of insurance offered, overall financial strength and financial ratings assigned by independent rating organizations, such as A.M. Best. Some of the insurers with which we compete have significantly greater financial, marketing and management resources than we do. We may also compete with new market entrants in the future.

We believe the workers’ compensation market for the hazardous industries we target is more fragmented and to some degree less competitive than other segments of the workers’ compensation market. Our competitors include other insurance companies, individual self-insured companies, state insurance pools and self-insurance funds. Overall, we estimate that more than 300 insurance companies participate in the workers’ compensation market. The insurance companies with which we compete vary by state and by the industries we target. These market conditions are also impacted by lower estimated loss costs adopted by a number of states in which we do business.

Our competitive advantages include our safety service and claims management practices, our A.M. Best rating and our ability to reduce claims through implementation of our work safety programs. In addition, we believe that our insurance is competitively priced and our premium rates are typically lower than those for policyholders assigned to the state insurance pools, allowing us to provide a viable alternative for policyholders in those pools.

Employees

As of December 31, 2014, we had 443 full-time employees and 2 part-time employees. None of our employees are subject to collective bargaining agreements. We believe that our employee relations are good.

Regulation

Holding Company Regulation

Nearly all states have enacted legislation that regulates insurance holding company systems. Each insurance company in a holding company system is required to register with the insurance supervisory agency of its state of domicile and furnish information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. Under these laws, the respective state insurance departments may examine us at any time, require

disclosure of material transactions and require prior notice of or approval for certain transactions. All transactions within a holding company system affecting an insurer must have fair and reasonable terms and are subject to other standards and requirements established by law and regulation.

Change of Control

The insurance holding company laws of nearly all states require advance approval by the respective state insurance departments of any change of control of an insurer. “Control” is generally presumed to exist through the direct or indirect ownership of 10% or more of the voting securities of a domestic insurance company or any entity that controls a domestic insurance company. In addition, insurance laws in many states contain provisions that require pre-notification to the insurance commissioners of a change of control of a non-domestic insurance company licensed in those states. Any future transactions that would constitute a change of control of American Interstate, Silver Oak Casualty or American Interstate of Texas, including a change of control of AMERISAFE, would generally require the party acquiring control to obtain the prior approval of the department of insurance in the state in which the insurance company being acquired is incorporated and may require pre-notification in the states where pre-notification provisions have been adopted. Obtaining these approvals may result in the material delay of, or deter, any such transaction.

These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of AMERISAFE, including through transactions, and in particular unsolicited transactions, that some or all of the shareholders of AMERISAFE might consider to be desirable.

State Insurance Regulation

Insurance companies are subject to regulation and supervision by the department of insurance in the state in which they are domiciled and, to a lesser extent, other states in which they conduct business. American Interstate and Silver Oak Casualty are primarily subject to regulation and supervision by the Nebraska Department of Insurance. American Interstate of Texas is primarily subject to regulation and supervision by the Texas Department of Insurance and Workers’ Compensation Commission. These state agencies have broad regulatory, supervisory and administrative powers, including among other things, the power to grant and revoke licenses to transact business, license agencies, set the standards of solvency to be met and maintained, determine the nature of, and limitations on, investments and dividends, approve policy forms and rates in some states, periodically examine financial statements, determine the form and content of required financial statements and periodically examine market conduct.

Detailed annual and quarterly financial statements and other reports are required to be filed with the state insurance departments in all states in which we are licensed to transact business. The financial statements of American Interstate, Silver Oak Casualty and American Interstate of Texas are subject to periodic examination by the department of insurance in each state in which they are licensed to do business.

In addition, many states have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For example, states may limit an insurer’s ability to cancel or not renew policies. Furthermore, certain states prohibit an insurer from withdrawing one or more lines of business from the state, except pursuant to a plan that is approved by the state insurance department. The state insurance department may disapprove a plan that may lead to market disruption. Laws and regulations that limit cancellation and non-renewal and that subject program withdrawals to prior approval requirements may restrict our ability to exit unprofitable markets.

Insurance agencies are also subject to regulation and supervision by the state insurance departments in the states in which they are licensed. Our wholly owned subsidiary, Amerisafe General Agency, Inc., is licensed as an insurance agent in 27 states and as a managing general insurance agency in 14 states. Amerisafe General Agency is domiciled in Louisiana and is primarily subject to regulation and supervision by the Louisiana Department of Insurance, which regulates the solicitation of insurance and the qualification and licensing of agents and agencies that may desire to conduct business in Louisiana.

State Insurance Department Examinations

We are subject to periodic examinations by state insurance departments in the states in which we operate. The Nebraska insurance department generally examines its domiciliary insurance companies every five years. The Texas insurance department generally conducts examinations of its domiciliary insurance companies on a triennial basis.

American Interstate Insurance Company and Silver Oak Casualty, Inc. underwent a Nebraska insurance department examination in 2014 that covered calendar years 2009 through 2013. American Interstate Insurance Company of Texas underwent an examination in 2014 that covered calendar years 2010 through 2013.

Guaranty Fund Assessments

In most of the states where we are licensed to transact business, there is a requirement that property and casualty insurers doing business in that state participate in a guaranty association, which is organized to pay contractual benefits owed under insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premium written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets.

Property and casualty insurance company insolvencies or failures may result in additional security fund assessments to us at some future date. At this time, we are unable to determine the impact, if any, such assessments may have on our financial position or results of operations. We have established liabilities for guaranty fund assessments with respect to insurers that are currently subject to insolvency proceedings.

Residual Market Programs

Many of the states in which we conduct business or intend to conduct business require that all licensed insurers participate in a program to provide workers’ compensation insurance to those employers who have not or cannot obtain coverage from a carrier on a negotiated basis. The level of required participation in such programs is generally determined by calculating the volume of our voluntary business in that state as a percentage of all voluntary business in that state by all insurers. The resulting factor is the proportion of premium we must accept as a percentage of all of premiums in policies included in that state’s residual market program.

Companies generally can fulfill their residual market obligations by either issuing insurance policies to employers assigned to them, or participating in a reinsurance pool where the results of all policies provided through the pool are shared by the participating companies. We utilize both methods, depending on management’s evaluation of the most cost-efficient method to adopt in each state that allows a choice of assigned risk or participation in a pooling arrangement. In 2014, we had assigned risks in four states: Alabama, Alaska, North Carolina and Virginia.

Second Injury Funds

A number of states operate trust funds that reimburse insurers and employers for claims paid to injured employees for aggravation of prior conditions or injuries. The state-managed trust funds are funded through assessments against insurers and self-insurers providing workers’ compensation coverage in the applicable state. Our recoveries from state-managed trust funds for the years ended December 31, 2014, 2013 and 2012 were $6.8 million, $6.0 million and $3.9 million, respectively. Our cash paid for assessments to state-managed trust funds for the years ended December 31, 2014, 2013 and 2012 was $1.9 million, $2.3 million and $2.2 million, respectively. We accrue for second injury funds relative to historical paid amounts.

Dividend Limitations

Under Nebraska law, without the prior approval of the Nebraska Director of Insurance, American Interstate and Silver Oak Casualty cannot pay dividends to their shareholder that exceed the greater of (a) 10% of statutory

surplus as of the previous year end or (b) or statutory net income, excluding realized investment gains, for the preceding 12-month period. However, net income from the previous two calendar years may be carried forward to the extent that it has not already been paid out as dividends. Further, under Texas law, without the prior approval of the Texas Commissioner of Insurance, American Interstate of Texas cannot pay dividends to its shareholder in excess of the greater of (x) 10% of statutory surplus, or (y) statutory net income, for the preceding 12-month period.

Federal Law and Regulations

For the year ended December 31, 2014, we derived 2.7% of our voluntary in-force premiums from employers engaged in the maritime industry. As a provider of workers’ compensation insurance for employers engaged in the maritime industry, we are subject to the United States Longshore and Harbor Workers’ Compensation Act, or the USL&H Act, and the Merchant Marine Act of 1920, or Jones Act. We are also subject to regulations related to the USL&H Act and the Jones Act.

The USL&H Act, which is administered by the U.S. Department of Labor, generally covers exposures on the navigable waters of the United States and in adjoining waterfront areas, including exposures resulting from stevedoring. The USL&H Act requires employers to provide medical benefits, compensation for lost wages, and rehabilitation services to longshoremen, harbor workers and other maritime workers who may suffer injury, disability or death during the course and scope of their employment. The Department of Labor has the authority to require us to make deposits to serve as collateral for losses incurred under the USL&H Act.

The Jones Act is a federal law, the maritime employer provisions of which provide injured offshore workers, or seamen, with a remedy against their employers for injuries arising from negligent acts of the employer or co-workers during the course of employment on a ship or vessel.

Privacy Regulations

In 1999, Congress enacted the Gramm-Leach-Bliley Act, which, among other things, protects consumers from the unauthorized dissemination of certain personal information. Subsequently, a majority of states have implemented additional regulations to address privacy issues. These laws and regulations apply to all financial institutions, including insurance companies, and require us to maintain appropriate policies and procedures for managing and protecting certain personal information of our policyholders and to fully disclose our privacy practices to our policyholders. We may also be exposed to future privacy laws and regulations, which could impose additional costs and impact our results of operations or financial condition. In 2000, the National Association of Insurance Commissioners, or the NAIC, adopted the Privacy of Consumer Financial and Health Information Model Regulation, which assisted states in promulgating regulations to comply with the Gramm-Leach-Bliley Act. In 2002, to further facilitate the implementation of the Gramm-Leach-Bliley Act, the NAIC adopted the Standards for Safeguarding Customer Information Model Regulation. Several states have now adopted similar provisions regarding the safeguarding of policyholder information. We have established policies and procedures intended to ensure that we are in compliance with the Gramm-Leach-Bliley related privacy requirements.

Federal and State Legislative and Regulatory Changes

From time to time, various regulatory and legislative changes have been proposed in the insurance industry. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. We are unable to predict whether any of these laws and regulations will be adopted, the form in which any such laws and regulations would be adopted or the effect, if any, these developments would have on our operations and financial condition.

For information on the Terrorism Risk Act, see “—Reinsurance—Terrorism Reinsurance.”

The National Association of Insurance Commissioners

The NAIC is a group formed by state insurance commissioners to discuss issues and formulate policy with respect to regulation, reporting and accounting of insurance companies. Although the NAIC has no legislative authority and insurance companies are at all times subject to the laws of their respective domiciliary states and, to a lesser extent, other states in which they conduct business, the NAIC is influential in determining the form in which such laws are enacted. Model insurance laws, regulations and guidelines, which we refer to as the Model Laws, have been promulgated by the NAIC as a minimum standard by which state regulatory systems and regulations are measured. Adoption of state laws that provide for substantially similar regulations to those described in the Model Laws is a requirement for accreditation by the NAIC. The NAIC provides authoritative guidance to insurance regulators on statutory accounting issues by promulgating and updating a codified set of statutory accounting practices in its Accounting Practices and Procedures manual. The Nebraska and Texas legislatures have adopted these codified statutory accounting practices.

Under Nebraska law, American Interstate and Silver Oak Casualty are each required to maintain minimum capital and surplus of $2.0 million. Under Texas law, American Interstate of Texas is required to maintain minimum capital and surplus of $5.0 million. Property and casualty insurance companies are also subject to certain risk-based capital requirements by the NAIC. Under those requirements, the amount of capital and surplus maintained by a property and casualty insurance company is determined based on the various risk factors related to it. As of December 31, 2014, American Interstate, Silver Oak Casualty, and American Interstate of Texas exceeded the minimum risk-based capital requirements.

The key financial ratios of the NAIC’s Insurance Regulatory Information System, or IRIS, which ratios were developed to assist insurance departments in overseeing the financial condition of insurance companies, are reviewed by experienced financial examiners of the NAIC and state insurance departments to select those companies that merit highest priority in the allocation of the regulators’ resources. IRIS identifies 13 industry ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer’s business.

The 2014 IRIS results for American Interstate Insurance Company, Silver Oak Casualty and American Interstate Insurance Company of Texas were within expected values for 12 of the 13 ratios. The investment yield ratios were outside the expected range by seven tenths of one percent, five tenths of one percent and six tenths of one percent, respectively. This occurred because current low interest rates affected the reinvestment rate for our investment portfolio.

Statutory Accounting Principles

Statutory accounting principles, or SAP, are a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s surplus as regards to policyholders. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.

Generally accepted accounting principles, or GAAP, are concerned with a company’s solvency, but are also concerned with other financial measurements, principally income and cash flows. Accordingly, GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP as compared to SAP.

Statutory accounting principles established by the NAIC and adopted in part by Nebraska and Texas insurance regulators, determine, among other things, the amount of statutory surplus and statutory net income of American Interstate, Silver Oak Casualty and American Interstate of Texas and thus determine, in part, the amount of funds that are available to pay dividends to AMERISAFE.

Website Information

Our corporate website is located at www.amerisafe.com. Our Annual Report on Form 10-K, annual proxy statement and related proxy card will be made available on our website at the same time they are mailed to shareholders. Our quarterly reports on Form 10-Q, periodic reports on Form 8-K and amendments to those reports that we file or furnish pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through our website, free of charge, as soon as reasonably practicable after they have been electronically filed or furnished to the Securities and Exchange Commission, or the SEC. Our website also provides access to reports filed by our directors, executive officers and certain significant shareholders pursuant to Section 16 of the Securities Exchange Act of 1934. In addition, our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Policy Regarding Communications with the Board of Directors, Policy Regarding Shareholder Recommended Director Candidates, and charters for the standing committees of our board of directors are available on our website as well as other shareholder communications. The information on our website is not incorporated by reference into this report. In addition, the SEC maintains a website, www.sec.gov, which contains reports, proxy and information statements and other information that we file electronically with the SEC.

Executive Officers of the Registrant

The table below sets forth information about our executive officers and key employees as of February 26, 2015.


Name	Age	Position
*Executive Officers*
C. Allen Bradley, Jr.	63	Chairman and Chief Executive Officer
G. Janelle Frost	44	President and Chief Operating Officer
Vincent J. Gagliano	42	Executive Vice President and Chief Technology Officer
Brendan D. Gau	40	Executive Vice President and Chief Investment Officer
Michael F. Grasher	50	Executive Vice President and Chief Financial Officer

*Key Employees*
Kelly R. Goins	49	Senior Vice President, Underwriting Operations
Leon J. Lagneaux	63	Senior Vice President, Safety Operations
Henry O. Lestage, IV	54	Senior Vice President, Claims Operations
Kathryn H. Shirley	49	Senior Vice President, General Counsel and Secretary

C. Allen Bradley, Jr. has served as Chairman of our board of directors since October 2005, our Chief Executive Officer since December 2003 and as a Director since June 2003. From November 2002 to August 2010 he served as President and from November 2002 until December 2003 he served as our Chief Operating Officer. Since joining our company in 1994, Mr. Bradley has had principal responsibility for the management of our underwriting operations (December 2000 through June 2005) and safety services (September 2000 through November 2002) and has served as our General Counsel (September 1997 through December 2003) and Secretary (September 1997 through November 2002). Prior to joining our company, he was engaged in the private practice of law.

G. Janelle Frost has served as our President since September 2013 and our Chief Operating Officer since May 2013. From November 2008 to April 2013 she served as our Executive Vice President and Chief Financial Officer. Prior to becoming Chief Financial Officer, Ms. Frost served as Controller from May 2004 to November 2008 and Vice President from May 2006 to November 2008. She has been employed with our company since 1992 and served as Assistant Vice President from May 2004 to May 2006 and Deputy Controller from 1998 to April 2004.

Vincent J. Gagliano has served as our Executive Vice President and Chief Technology Officer since January 2013. He has been employed with our company since 2001. He previously served as Senior Vice President of Information Technology, Senior Business Analyst, Director of Business Intelligence, Assistant Vice President of Business Intelligence, and Vice President, Operations Analysis.

Brendan D. Gau has served as our Executive Vice President and Chief Investment Officer since June 2009. Prior to joining our company, Mr. Gau was employed by AIM Capital Management, where he held the positions of Financial Analyst, Portfolio Analyst and Senior Portfolio Manager from 1996 until 2009.

Michael F. Grasher has served as Executive Vice President and Chief Financial Officer since May 2013 when he joined our Company. From February 2012 to April 2013 he was employed by Fortegra Financial Corporation as Senior Vice President in charge of Capital Markets and Investor Relations. From 2004 through January 2012 he was a Managing Director, Senior Equity Research Analyst for Piper Jaffray, Inc. covering the property-casualty industry.

Kelly R. Goins has served as our Senior Vice President, Underwriting Operations since March 2005. She has been employed with our company since 1986. She previously served as Vice President, Underwriting Operations from 2000 until March 2005.

Leon J. Lagneaux has served as our Senior Vice President, Safety Operations since March 2005. He has been employed with our company since 1994. He previously served as Vice President, Safety Operations from 1999 until March 2005.

Henry O. Lestage, IV has served as our Senior Vice President, Claims Operations since September 2000. He has been employed with our company since 1987. He previously served as Vice President, Claims Operations from 1998 until 2000.

Kathryn H. Shirley has served as Senior Vice President, General Counsel and Secretary since May 2012 when she joined our company. From 2009 through May 2012 she practiced law at Christian & Small LLP. From 2000 until 2008 she was employed as an Insurance Regulatory Compliance Manager with United Investors Life Insurance Company and Liberty National Life Insurance Company, subsidiaries of Torchmark Corporation.

Item 1A. Risk Factors.

In evaluating our company, the factors described below should be considered carefully. The occurrence of one or more of these events could significantly and adversely affect our business, prospects, financial condition, results of operations and cash flows.

Risks Related to Our Business

If we do not appropriately establish our premium rates, our results of operations will be adversely affected.

In general, the premium rates for our insurance policies are established when coverage is initiated and, therefore, before all of the underlying costs are known. Like other workers’ compensation insurance companies, we rely on estimates and assumptions in setting our premium rates. Establishing adequate rates is necessary to generate sufficient revenue to offset losses, loss adjustment expenses and other underwriting expenses, and to earn an underwriting profit. If we fail to accurately assess the risks that we assume, we may fail to charge adequate premium rates to cover our losses and expenses, which could reduce our net income and cause us to become unprofitable. For example, when initiating coverage on a policyholder, we estimate future claims expense based, in part, on prior claims information provided by the policyholder’s previous insurance carriers. If this prior claims information is not accurate, we may underprice our policy by using claims estimates that are too low. As a result, our actual costs for providing insurance coverage to our policyholders may be significantly higher than our premiums. In order to set premium rates appropriately, we must:

•

collect and properly analyze a substantial volume of data;

•

develop, test and apply appropriate rating formulae;

•

closely monitor and timely recognize changes in trends; and

•

project both frequency and severity of losses with reasonable accuracy.

We must also implement our pricing accurately in accordance with our assumptions. Our ability to undertake these efforts successfully, and as a result set premium rates accurately, is subject to a number of risks and uncertainties, principally:

•

insufficient reliable data;

•

incorrect or incomplete analysis of available data;

•

uncertainties generally inherent in estimates and assumptions;

•

the complexity inherent in implementing appropriate rating formulae or other pricing methodologies;

•

costs of ongoing medical treatment;

•

uncertainties inherent in accurately estimating retention, investment yields, and the duration of our liability for loss and loss adjustment expenses; and

•

unanticipated court decisions, legislation or regulatory action.

Consequently, we could set our premium rates too low, which would negatively affect our results of operations and our profitability, or we could set our premium rates too high, which could reduce our competitiveness and lead to lower revenues.

We operate in a highly competitive industry and may lack the financial resources to compete effectively.

There is significant competition in the workers’ compensation insurance industry. We believe that our competition in the hazardous industries we target is fragmented and not dominated by one or more competitors. We compete with other insurance companies, state insurance pools and self-insurance funds. Many of our existing and potential competitors are significantly larger and possess greater financial, marketing and management resources than we do. Moreover, a number of these competitors offer other types of insurance in addition to workers’ compensation and can provide insurance nationwide.

We offer workers’ compensation insurance. We have no current plans to focus our efforts on offering other types of insurance. As a result, negative developments in the economic, competitive or regulatory conditions affecting the workers’ compensation insurance industry could have an adverse effect on our financial condition and results of operations. Negative developments in the workers’ compensation insurance industry could have a greater effect on insurance companies that do not sell multiple types of insurance.

We compete on the basis of many factors, including coverage availability, claims management, safety services, payment terms, premium rates, policy terms, types of insurance offered, overall financial strength, financial ratings and reputation. If any of our competitors offer premium rates, policy terms or types of insurance that are more competitive than ours, we could lose market share. No assurance can be given that we will maintain our current competitive position in the markets in which we currently operate or that we will establish a competitive position in new markets into which we may expand.

The workers’ compensation insurance industry is cyclical in nature, which may affect our overall financial performance.

The financial performance of the workers’ compensation insurance industry has historically fluctuated with periods of lower premium rates and excess underwriting capacity resulting from increased competition followed by periods of higher premium rates and reduced underwriting capacity resulting from decreased competition. Although the financial performance of an individual insurance company is dependent on its own specific business characteristics, the profitability of most workers’ compensation insurance companies generally tends to follow this cyclical market pattern. Following a number of years of decreasing loss costs and excessive competition, the market transitioned into a period of higher premium rates and a less competitive marketplace. Because this market cyclicality is due in large part to the actions of our competitors and general economic factors, we cannot predict the timing or duration of changes in the market cycle. We expect these cyclical patterns will cause our revenues and net income to fluctuate, which may cause the price of our common stock to be more volatile.

Technology breaches or failures, including those resulting from a malicious cyber attack on us or our policyholders and medical providers, could disrupt or otherwise negatively impact our business.

We rely on information technology systems to process, transmit, store and protect the electronic information, financial data and proprietary models that are critical to our business. Furthermore, a significant portion of the communications between our employees, our policyholders and medical providers depend on information technology and electronic information exchange. Like all companies, our information technology systems are vulnerable to data breaches, interruptions or failures due to events that may be beyond our control, including natural disasters, theft, terrorist attacks, computer viruses, hackers and general technology failures.

We have established and implemented security measures, controls and procedures in an effort to safeguard our information technology systems and to prevent unauthorized access to these systems and any data processed and/or stored in these systems. Despite these safeguards, disruptions to and breaches of our information technology systems are possible and may negatively impact our business.

Although we have experienced no known or threatened cases involving unauthorized access to our information technology systems and data or unauthorized appropriation of such data to date, we have no assurance that such technology breaches will not occur in the future.

Current economic conditions could adversely affect our financial condition and results of operations.

The economic recovery from the recession of 2008-2010 has been sluggish. We anticipate continued modest growth in the economy during 2015. Negative trends in business investment, consumer confidence and spending, the significant declines and volatility of the capital markets, the availability of credit and the rate of unemployment can adversely affect our business. A continuation of the current economic environment could further adversely impact our growth and profitability. Although we continue to closely monitor market conditions, we cannot predict future conditions or their impact on our premium volume, the value of our investment portfolio and our financial performance. As a result of these existing economic conditions, we could experience future decreases in business activity and incur additional realized and unrealized losses in our investment portfolio, both of which could adversely affect our financial condition and results of operations.

In addition, certain actions taken by the U.S. government to stimulate the economy and stabilize the financial markets have directly impacted the property and casualty insurance industry and our competitors. Additional measures in this regard could negatively impact our financial condition and the competitive landscape.

Our loss reserves are based on estimates and may be inadequate to cover our actual losses.

We record reserves for estimated losses under insurance policies 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.

Our pre-tax income for any period is impacted by establishing reserves for new claims as well as changes in estimates for previously reported losses. Our focus on writing workers’ compensation insurance for employers engaged in hazardous industries results in our experiencing fewer, but more severe, claims. The ultimate cost of resolving severe claims is difficult to predict, particularly in the period shortly after the injury occurs. 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 data can be impacted by external forces, principally frequency and severity of unreported claims, length of time to achieve ultimate settlement of claims, inflation in 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 there are unfavorable changes affecting our assumptions, our reserves may need to be increased. When a reserve estimate is increased, the change decreases pre-tax income by a corresponding amount.

The effects of emerging claims and coverage issues on our business are uncertain.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until after we have issued insurance policies that are affected by the changes. As a result, the full extent of our liability under an insurance policy may not be known until many years after the policy is issued. For example, medical costs associated with permanent and partial disabilities may increase more rapidly or be higher than we currently expect. Changes of this nature may expose us to higher claims than we anticipated when we wrote the underlying policy.

Our business is dependent on the efforts of our executive officers because of their industry expertise, knowledge of our markets and relationships with the independent agencies that sell our insurance.

Our success is dependent on the efforts of our executive officers because of their industry expertise, knowledge of our markets and relationships with our independent agencies. We have entered into employment agreements with each of our executive officers. Those agreements expire in March 2015 except for Mr. Gau’s agreement which expires June 2015 and Mr. Gagliano’s agreement which expires January 2016, in each case, unless extended. Should any of our executive officers cease working for us, we may be unable to find acceptable replacements with comparable skills and experience in the workers’ compensation insurance industry and the hazardous industries that we target. As a result, our operations may be disrupted and our business may be adversely affected. We do not currently maintain life insurance policies with respect to our executive officers.

An inability to effectively manage our operations could make it difficult for us to compete and could affect our ability to operate profitably.

Our continuing strategy includes expanding in our existing markets, entering new geographic markets and further developing our agency relationships. Our strategy is subject to various risks, including risks associated with our ability to:

•

profitably increase our business in existing markets;

•

identify profitable new geographic markets for entry;

•

attract and retain qualified personnel for expanded operations;

•

identify, recruit and integrate new independent agencies; and

•

augment our internal operations and systems as we expand our business.

Because we are subject to extensive state and federal regulation, legislative changes may negatively impact our business.

We are subject to extensive regulation by the Nebraska Department of Insurance and the insurance regulatory agencies of other states in which we are licensed and, to a lesser extent, federal regulation. State agencies have broad regulatory powers designed primarily to protect policyholders and their employees, and not our shareholders. Regulations vary from state to state, but typically address:

•

standards of solvency, including risk-based capital measurements;

•

restrictions on the nature, quality and concentration of our investments;

•

restrictions on the terms of the insurance policies we offer;

•

restrictions on the way our premium rates are established and the premium rates we may charge;

•

required reserves for unearned premiums and loss and loss adjustment expenses;

•

standards for appointing general agencies;

•

limitations on transactions with affiliates;

•

restrictions on mergers and acquisitions;

•

restrictions on the ability of our insurance company subsidiaries to pay dividends to AMERISAFE;

•

certain required methods of accounting; and

•

potential assessments for state guaranty funds, second injury funds and other mandatory pooling arrangements.

We may be unable to comply fully with the wide variety of applicable laws and regulations that are continually undergoing revision. In addition, we follow practices based on our interpretations of laws and regulations that we believe are generally followed by our industry. These practices may be different from interpretations of insurance regulatory agencies. As a result, insurance regulatory agencies could preclude us from conducting some or all of our activities or otherwise penalize us. For example, in order to enforce applicable laws and regulations or to protect policyholders, insurance regulatory agencies have relatively broad discretion to impose a variety of sanctions, including examinations, corrective orders, suspension, revocation or denial of licenses, and the takeover of one or more of our insurance subsidiaries. The extensive regulation of our business may increase the cost of our insurance and may limit our ability to obtain premium rate increases or to take other actions to increase our profitability.

If we cannot sustain our relationships with independent agencies, we may be unable to operate profitably.

We market a substantial portion of our workers’ compensation insurance through independent agencies. As of December 31, 2014, independent agencies produced 95.7% of our voluntary in-force premiums. No independent agency accounted for more than 1.0% of our voluntary in-force premiums at that date. Independent agencies are not obligated to promote our insurance and may sell insurance offered by our competitors. As a result, our continued profitability depends, in part, on the marketing efforts of our independent agencies and on our ability to offer workers’ compensation insurance and maintain financial strength ratings that meet the requirements of our independent agencies and their policyholders.

A decline in the level of business activity of our policyholders, particularly those engaged in the construction, trucking, manufacturing and agricultural industries, could negatively affect our earnings and profitability.

In 2014, 75.8% of our gross premiums written were derived from policyholders in the construction, trucking, manufacturing, oil and gas and agriculture industries. Because premium rates are calculated, in general, as a percentage of a policyholder’s payroll expense, premiums fluctuate depending upon the level of business activity and number of employees of our policyholders. As a result, our gross premiums written are primarily dependent upon economic conditions in the construction, trucking, manufacturing and agricultural industries and upon economic conditions generally.

As an insurance holding company, AMERISAFE is dependent on the results of operations of its insurance subsidiaries, and our Company’s ability to pay dividends depends on the regulatory and financial capacity of its subsidiaries to pay dividends to AMERISAFE.

AMERISAFE is a holding company that transacts business through its operating subsidiaries, including American Interstate Insurance Company. AMERISAFE’s primary assets are the capital stock of these operating subsidiaries. The ability of AMERISAFE to pay dividends to our shareholders depends upon the surplus and earnings of our subsidiaries and their ability to pay dividends to AMERISAFE. Payment of dividends by our insurance subsidiaries is restricted by state insurance laws, including laws establishing minimum solvency and liquidity thresholds, and could be subject to contractual restrictions in the future, including those imposed by indebtedness we may incur in the future. As a result, AMERISAFE may not be able to receive dividends from its insurance subsidiaries and may not receive dividends in amounts necessary to pay dividends on our capital stock.

A downgrade in our A.M. Best rating would likely reduce the amount of business we are able to write.

Rating agencies evaluate insurance companies based on their ability to pay claims. We are currently assigned a group letter rating of “A” (Excellent) from A.M. Best, which is the rating agency that we believe has the most influence on our business. This rating is assigned to companies that, in the opinion of A.M. Best, have demonstrated an excellent overall performance when compared to industry standards. A.M. Best considers “A” rated companies to have an excellent ability to meet their ongoing obligations to policyholders. The ratings of A.M. Best are subject to periodic review using, among other things, proprietary capital adequacy models, and are subject to revision or withdrawal at any time. A.M. Best ratings are directed toward the concerns of policyholders and insurance agencies and are not intended for the protection of investors or as a recommendation to buy, hold or sell securities. Our competitive position relative to other companies is determined in part by our A.M. Best rating. Any downgrade in our rating would likely adversely affect our business through the loss of certain existing and potential policyholders and the loss of relationships with certain independent agencies.

A downgrade in the A.M. Best rating of one or more of our significant reinsurers could adversely affect our financial condition.

Our financial condition could be adversely affected if the A.M. Best rating of one or more of our significant reinsurers is downgraded. For example, our A.M. Best rating may be downgraded if our amounts recoverable from a reinsurer are significant and the A.M. Best rating of that reinsurer is downgraded. If one of our reinsurers suffers a rating downgrade, we may consider various options to lessen the impact on our financial condition, including commutation, novation and the use of letters of credit to secure amounts recoverable from reinsurers. However, these options may result in losses to our company, and there can be no assurance that we could implement any of these options.

If we are unable to obtain reinsurance on favorable terms, our ability to write policies could be adversely affected.

We purchase reinsurance to protect us from the impact of large losses. Reinsurance is an arrangement in which an insurance company, called the ceding company, transfers insurance risk by sharing premiums with another insurance company, called the reinsurer. Conversely, the reinsurer receives or assumes reinsurance from the ceding company. Our 2015 reinsurance program provides us with reinsurance coverage for each loss occurrence up to $70.0 million, subject to applicable limitations, deductibles, retentions and aggregate limits. However, for any loss occurrence involving only one claimant, our reinsurance coverage is limited to $10.0 million, subject to applicable deductibles, retentions and aggregate limits. In 2014, we raised our retention from $1.0 million to $2.0 million for each loss occurrence. Losses in the layer between $2.0 million and $10.0 million are ceded to a multi-year reinsurance cover with an aggregate annual deductible of approximately $6.2 million and an aggregate limit of coverage of approximately $33.3 million for 2015.

The availability, amount, and cost of reinsurance are subject to market conditions and our experience with insured losses. As a result, any material changes in market conditions or our loss experience could adversely affect our financial performance.

If any of our current reinsurers were to terminate participation in our reinsurance treaty program, we could be exposed to an increased risk of loss.

When our reinsurance treaty program is terminated and we enter into a new program, any decrease in the amount of reinsurance at the time we enter into a new program, whether caused by the existence of more restrictive terms and conditions or decreased availability, will also increase our risk of loss and, as a result, could adversely affect our business, financial condition and results of operations. We currently have 14 reinsurers participating in our reinsurance treaty program, and we believe that this is a sufficient number of reinsurers to provide us with the reinsurance coverage we require. However, it is possible that one or more of our current reinsurers could terminate participation in our program. In addition, we may terminate the participation of one or more of our reinsurers under certain circumstances as permitted by the terms of our reinsurance agreements. In

any of these events, if our reinsurance broker is unable to reallocate the terminated reinsurance among the remaining reinsurers in the program, it could take a significant period of time to identify and negotiate agreements with one or more replacement reinsurers. During this period, we would be exposed to an increased risk of loss, the extent of which would depend on the coverage previously provided by the terminated reinsurance.

We may not be able to recover amounts due from our reinsurers, which would adversely affect our financial condition.

Reinsurance does not discharge our obligations under the insurance policies we write. We remain liable to our policyholders even if we are unable to make recoveries that we are entitled to receive under our reinsurance contracts. As a result, we are subject to credit risk with respect to our reinsurers. Losses are recovered from our reinsurers as claims are paid. In long-term workers’ compensation claims, the creditworthiness of our reinsurers may change before we recover amounts to which we are entitled. Therefore, if a reinsurer is unable to meet any of its obligations to us, we would be responsible for all claims and claim settlement expenses for which we would have otherwise received payment from the reinsurer.

As of December 31, 2014, we had $85.9 million of recoverables from reinsurers. Of this amount, $38.1 million was unsecured. As of December 31, 2014, our largest recoverable from reinsurers included $27.4 million from Hannover Reinsurance (Ireland) Limited, $13.5 million from Odyssey America Reinsurance and and $8.5 million from Minnesota Workers’ Compensation Reinsurance Association. No reinsurance recoverable due at December 31, 2014 was over ninety days old. If we are unable to collect amounts recoverable from our reinsurers, our financial condition would be adversely impacted.

Assessments and premium surcharges for state guaranty funds, second injury funds and other mandatory pooling arrangements may reduce our profitability.

Most states require insurance companies licensed to do business in their state to participate in guaranty funds, which require the insurance companies to bear a portion of the unfunded obligations of impaired, insolvent or failed insurance companies. These obligations are funded by assessments, most of which are expected to continue in the future. State guaranty associations levy assessments, up to prescribed limits, on all member insurance companies in the state based on their proportionate share of premiums written in the lines of business in which the impaired, insolvent or failed insurance companies are engaged. See “Business—Regulation” in Item 1 of this report. Accordingly, the assessments levied on us may increase as we increase our written premium. Some states also have laws that establish second injury funds to reimburse insurers and employers for claims paid to injured employees for aggravation of prior conditions or injuries. These funds are supported by either assessments or premium surcharges based on case incurred losses.

In addition, as a condition to conducting business in some states, insurance companies are required to participate in residual market programs to provide insurance to those employers who cannot procure coverage from an insurance carrier on a negotiated basis. Insurance companies generally can fulfill their residual market obligations by, among other things, participating in a reinsurance pool where the results of all policies provided through the pool are shared by the participating insurance companies. Although we price our insurance to account for obligations we may have under these pooling arrangements, we may not be successful in estimating our liability for these obligations. Accordingly, mandatory pooling arrangements may cause a decrease in our profits.

At December 31, 2014, we participated in mandatory pooling arrangements in 20 states and the District of Columbia. As we write policies in new states that have mandatory pooling arrangements, we will be required to participate in additional pooling arrangements. Further, the impairment, insolvency or failure of other insurance companies in these pooling arrangements would likely increase the liability for other members in the pool. The effect of assessments and premium surcharges or changes in them could reduce our profitability in any given period or limit our ability to grow our business.

If we are unable to realize our investment objectives, our financial condition and results of operations may be adversely affected.

Investment income is an important component of our net income. As of December 31, 2014, our investment portfolio, including cash and cash equivalents, had a carrying value of $1.1 billion. For the year ended December 31, 2014 we had $27.2 million of net investment income. Our investment portfolio is managed under investment guidelines approved by our board of directors, and is made up predominately of fixed maturity securities and cash and cash equivalents. Although our investment guidelines emphasize capital preservation and liquidity, our investments are subject to a variety of risks, including risks related to general economic conditions, interest rate fluctuations, market illiquidity and market volatility. General economic conditions may be adversely affected by U.S. involvement in hostilities with other countries and large-scale acts of terrorism, or the threat of hostilities or terrorist acts.

Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Changes in interest rates could have an adverse effect on the value of our investment portfolio and future investment income. The unprecedented low interest rates will continue to have an adverse effect on our investment income. Additionally, changes in interest rates can expose us to prepayment risks on mortgage-backed securities included in our investment portfolio.

Similarly, during periods of market disruption, including periods of rapidly widening credit spreads or illiquidity, the fair values of certain of our fixed maturity securities, such as asset-backed and commercial mortgage-backed securities, could be deemed to be other-than-temporarily impaired, even though we have the intent not to sell these securities and it is not more likely than not that we will be required to sell these securities. Further, rapidly changing and unprecedented equity market conditions could materially impact the valuation of the equity securities as reported within our consolidated financial statements and the period-to-period changes in value could vary significantly.

These and other factors affect the capital markets and, consequently, the value of our investment portfolio and our future investment income. Any significant decline in our investment income would adversely affect our revenues and net income.

We may require additional capital in the future, which may not be available to us or may be available only on unfavorable terms.

Our future capital requirements will depend on many factors, including state regulatory requirements, the financial stability of our reinsurers and our ability to write new business and establish premium rates sufficient to cover our estimated claims. We may need to raise additional capital or curtail our growth if the capital of our insurance subsidiaries is insufficient to support future operating requirements and/or cover claims. If we had to raise additional capital, equity or debt financing might not be available to us or might be available only on terms that are not favorable. Future equity offerings could be dilutive to our shareholders and the equity securities issued in any offering may have rights, preferences and privileges senior to our common stock.

If we cannot obtain adequate capital on favorable terms or at all, we may be unable to support future growth or operating requirements and, as a result, our business, financial condition or results of operations could be adversely affected.

We may have exposure to losses from terrorism for which we are required by law to provide coverage.

When writing workers’ compensation insurance policies, we are required by law to provide workers’ compensation benefits for losses arising from acts of terrorism. The impact of any terrorist act is unpredictable, and the ultimate impact on us would depend upon the nature, extent, location and timing of such an act. Our 2015 reinsurance treaty program affords limited coverage for up to $70.0 million for losses arising from terrorism, subject to applicable deductibles, retentions, definitions and aggregate limits.

Notwithstanding the protection provided by reinsurance and the Terrorism Risk Insurance Program Extension Act of 2015 (TRIPRA of 2015), the risk of severe losses to us from acts of terrorism has not been eliminated because our reinsurance treaty program includes various sub-limits and exclusions limiting our reinsurers’ obligation to cover losses caused by acts of terrorism. Accordingly, events constituting acts of terrorism may not be covered by, or may exceed the capacity of, our reinsurance and could adversely affect our business and financial condition. In addition, the TRIPRA of 2015 is set to expire on December 31, 2020. If this law is not extended or replaced by legislation affording a similar level of protection to the insurance industry against insured losses arising out of acts of terrorism, reinsurance for losses arising from terrorism may be unavailable or prohibitively expensive, and we may be further exposed to losses arising from acts of terrorism.

Risks Related to Our Common Stock

Our revenues and results of operations may fluctuate as a result of factors beyond our control, which fluctuation may cause the price of our common stock to be volatile.

The revenues and results of operations of our insurance subsidiaries historically have been subject to significant fluctuations and uncertainties. Our profitability can be affected significantly by:

•

rising levels of claims costs, including medical and prescription drug costs, that we cannot anticipate at the time we establish our premium rates;

•

fluctuations in interest rates, inflationary or deflationary pressures and other changes in the investment environment that affect returns on our invested assets;

•

changes in the frequency or severity of claims;

•

the financial stability of our reinsurers and changes in the level of reinsurance capacity and our capital capacity;

•

new types of claims and new or changing judicial interpretations relating to the scope of liabilities of insurance companies;

•

volatile and unpredictable developments, including man-made, weather-related and other natural catastrophes or terrorist attacks; and

•

price competition.

If our revenues and results of operations fluctuate as a result of one or more of these factors, the price of our common stock may become more volatile.

Provisions of our articles of incorporation and bylaws and the laws of the states of Texas and Nebraska could impede an attempt to replace or remove our directors or otherwise effect a change of control of our company, which could diminish the value of our common stock.

Our articles of incorporation and bylaws contain provisions that may make it more difficult for shareholders to replace or remove directors even if the shareholders consider it beneficial to do so. In addition, these provisions could delay or prevent a change of control of our company that shareholders might consider favorable. Our articles of incorporation and bylaws contain the following provisions that could have an anti-takeover effect:

•

election of our directors is classified, meaning that the members of only one of three classes of our directors are elected each year;

•

shareholders have limited ability to call shareholder meetings and to bring business before a meeting of shareholders;

•

shareholders may not act by written consent, unless the consent is unanimous; and

•

our board of directors may authorize the issuance of preferred stock with such rights, preferences and privileges as the board deems appropriate.

These provisions may make it difficult for shareholders to replace management and could have the effect of discouraging a future takeover attempt that is not approved by our board of directors, but which individual shareholders might consider favorable.

We are incorporated in Texas. Under the Texas Business Organizations Code, our ability to enter into a business combination with an affiliated shareholder is limited.

In addition, two of our three insurance company subsidiaries, American Interstate and Silver Oak Casualty, are incorporated in Nebraska and the other, American Interstate of Texas, is incorporated in Texas. Under Nebraska and Texas insurance law, advance approval by the state insurance department is required for any change of control of an insurer. “Control” is presumed to exist through the direct or indirect ownership of 10% or more of the voting securities of a domestic insurance company or any entity that controls a domestic insurance company. Obtaining these approvals may result in the material delay of, or deter, any transaction that would result in a change of control.

The trading price of our common stock may decline.

The trading price of our common stock may decline for many reasons, some of which are beyond our control, including, among others:

•

our results of operations;

•

changes in expectations as to our future results of operations, including financial estimates and projections by securities analysts and investors;

•

results of operations that vary from those expected by securities analysts and investors;

•

developments in the healthcare or insurance industries;

•

current and expected economic conditions;

•

changes in laws and regulations;

•

announcements of claims against us by third parties; and

•

future issuances or sales of our common stock.

In addition, the stock market experiences significant volatility from time to time that is often unrelated to the operating performance of companies whose shares are traded. These market fluctuations could adversely affect the trading price of our common stock, regardless of our actual operating performance.

Securities analysts may discontinue coverage of our common stock or may issue negative reports, which may adversely affect the trading price of our common stock.

There is no assurance that securities analysts will continue to cover our company. If securities analysts do not cover our company, this lack of coverage may adversely affect the trading price of our common stock. The trading market for our common stock relies in part on the research and reports that securities analysts publish about us or our business. If one or more of the analysts who cover our company downgrades our common stock, the trading price of our common stock may decline rapidly. If one or more of these analysts ceases to cover our company, we could lose visibility in the market, which, in turn, could also cause the trading price of our common stock to decline.

Future sales of our common stock may affect the trading price of our common stock and the future exercise of options may lower our stock price.

We cannot predict what effect, if any, future sales of our common stock, or the availability of shares for future sale, will have on the trading price of our common stock. Sales of a substantial number of shares of our common stock in the public market, or the perception that such sales could occur, may adversely affect the

trading price of our common stock and may make it more difficult for you to sell your shares at a time and price that you determine appropriate. As of February 16, 2015, there were 18,920,186 shares of our common stock outstanding. As of that date, there were also outstanding options exercisable to purchase 259,583 shares of our common stock.

Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

We own our principal business office which has approximately 60,000 square foot of office space together with a warehouse facility with 3,200 square foot located in DeRidder, Louisiana. AIIC and SOCI lease their corporate headquarters which has approximately 3,500 square foot of office space located in Omaha, Nebraska. The Company leases space at other locations for certain of our service and claims representatives, none of which are material.

Item 3.

Legal Proceedings.

In the ordinary course of our business, we are involved in the adjudication of claims resulting from workplace injuries. We are not involved presently in any legal or administrative proceedings that we believe are likely to have a materially adverse effect on our business, financial condition or results of operations.

Item 4.

Mine Safety Disclosures

None.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

Market Information and Holders

Our common stock is traded on the NASDAQ Global Select Market under the symbol “AMSF.” As of February 16, 2015, there were 26 holders of record of our common stock.

The table below sets forth the reported high and low sales prices of our common stock as quoted on the NASDAQ during each quarter for the last two fiscal years.


	High		Low
2013
First Quarter	$	36.15	$	27.62
Second Quarter	$	35.70	$	31.34
Third Quarter	$	38.86	$	32.28
Fourth Quarter	$	44.47	$	34.04
2014
First Quarter	$	45.95	$	38.41
Second Quarter	$	45.07	$	35.73
Third Quarter	$	42.22	$	35.15
Fourth Quarter	$	44.29	$	38.54

Dividend Policy

In 2013, the Company paid a quarterly cash dividend of $0.08 per share. In 2014, the Company paid a quarterly dividend of $0.12 share. In addition, the Company paid two extraordinary cash dividends of $0.50 and $1.00 per share in 2014.

On February 24, 2015 the Company declared a regular quarterly cash dividend of $0.15 per share payable on March 27, 2015 to shareholders of record on March 13, 2015.

The Board intends to continue to consider the payment of a regular cash dividend each calendar quarter. On an annualized basis, the cash dividend is expected to be $0.60 per share in 2015.

AMERISAFE is a holding company and has no direct operations. Our ability to pay dividends in the future depends on the ability of our operating subsidiaries to pay dividends to us. Our insurance company subsidiaries are regulated insurance companies and therefore are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. See “Business—Regulation—Dividend Limitations.” in Item 1 of this report.

Our existing revolving credit agreement contains covenants that restrict our ability to pay dividends on our common stock. See “Liquidity and Capital Resources.” in Item 7 of this report.

Description of Capital Stock

AMERISAFE is authorized to issue 60,000,000 shares of capital stock, consisting of:

•

10,000,000 shares of preferred stock, par value $0.01 per share; and

•

50,000,000 shares of common stock, par value $0.01 per share.

As of February 16, 2015, 18,920,186 shares of common stock were outstanding. As of that date, there were no other shares of our capital stock outstanding.

Share Repurchases

The Board of Directors initially authorized the Company’s share repurchase program in February 2010. In October 2011, 2012, 2013 and 2014 the Board reauthorized this program. Unless reauthorized, the program will expire on December 31, 2015. Since inception we have repurchased a total of 1,258,250 shares of our outstanding common stock for $22.4 million. The Company had $25.0 million available for future purchases at December 31, 2014 under this program. There were no share repurchases in 2014. The purchases will continue to be affected from time to time depending upon market conditions and subject to applicable regulatory considerations. It is anticipated that future purchases will be funded from available capital.

Item 6.

Selected Financial Data.

The following tables summarize certain selected financial data that should be read in conjunction with our audited financial statements and accompanying notes thereto for the year ended December 31, 2014 included in this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


	Year Ended December 31,
	2014			2013			2012			2011			2010
	(in thousands, except share and per share data)
Income Statement Data
Gross premiums written	$	393,819		$	372,177		$	328,823		$	272,101		$	228,424
Ceded premiums written		(13,793	)		(18,425	)		(16,305	)		(13,881	)		(20,549	)

Net premiums written	$	380,026		$	353,752		$	312,518		$	258,220		$	207,875

Net premiums earned	$	375,747		$	329,983		$	290,689		$	251,015		$	218,881
Net investment income		27,214			27,029			27,018			26,340			26,242
Net realized gains (losses) on investments		697			(1,211	)		2,979			2,228			2,449
Fee and other income		361			534			562			1,080			584

Total revenues		404,019			356,335			321,248			280,663			248,156

Loss and loss adjustment expenses incurred		244,916			228,973			219,903			189,706			157,388
Underwriting and certain other operating costs (1)		32,573			18,951			18,450			22,404			6,409
Commissions		27,872			25,303			22,144			18,507			16,350
Salaries and benefits		24,518			22,862			20,839			19,914			21,405
Interest expense		—			—			566			1,311			1,548
Policyholder dividends		391			1,042			2,203			1,464			834

Total expenses		330,270			297,131			284,105			253,306			203,934

Income before taxes		73,749			59,204			37,143			27,357			44,222
Income tax expense		20,083			15,567			7,790			3,176			9,702

Net income		53,666			43,637			29,353			24,181			34,520
Redemption premium		—			—			—			—			—
Less allocated income to participating securities		—			142			22			14			17

Net income available to common shareholders	$	53,666		$	43,495		$	29,331		$	24,167		$	34,503

Portion allocable to common shareholders		100.0%			100.0%			100.0%			100.0%			100.0%
Net income allocable to common shareholders	$	53,666		$	43,495		$	29,331		$	24,167		$	34,503

Diluted earnings per common share equivalent	$	2.84		$	2.32		$	1.58		$	1.29		$	1.81
Weighted average common shares		18,646,128			18,373,033			18,166,261			18,249,583			18,635,634
Stock options and performance shares		282,376			375,776			408,930			443,128			467,364

Diluted weighted average of common share equivalents outstanding		18,928,504			18,748,809			18,575,191			18,692,711			19,102,998


	Year Ended December 31,
	2014		2013		2012		2011		2010
	(in thousands, except share and per share data)

Selected Insurance Ratios
Current accident year loss ratio (2)		71.5%		73.2%		76.5%		78.2%		81.8%
Prior accident year loss ratio (3)		(6.3)%		(3.8)%		(0.9)%		(2.6)%		(9.9)%

Net loss ratio		65.2%		69.4%		75.6%		75.6%		71.9%
Net underwriting expense ratio (4)		22.6%		20.3%		21.1%		24.2%		20.2%
Net dividend ratio (5)		0.1%		0.3%		0.8%		0.6%		0.4%

Net combined ratio (6)		87.9%		90.0%		97.5%		100.4%		92.5%


	As of December 31,
	2014		2013		2012		2011		2010
	(in thousands)
Balance Sheet Data
Cash and cash equivalents	$	90,956	$	123,077	$	92,676	$	45,536	$	60,966
Investments		1,016,333		878,775		808,116		805,974		765,537
Amounts recoverable from reinsurers		85,888		75,326		101,352		96,212		95,133
Premiums receivable, net		178,917		171,579		141,950		121,223		122,618
Deferred income taxes		31,231		33,645		29,521		30,048		29,629
Deferred policy acquisition costs		19,649		19,171		18,419		16,578		15,137
Total assets		1,457,220		1,329,001		1,220,946		1,143,973		1,113,516
Reserves for loss and loss adjustment expenses		687,602		614,557		570,450		538,214		532,204
Unearned premiums		168,576		164,296		140,528		118,699		111,494
Insurance-related assessments		29,315		25,428		22,244		19,071		16,464
Debt		—		—		—		25,780		36,090
Shareholders’ equity		446,968		416,814		381,222		349,437		328,721

(1)	Includes policy acquisition expenses and other general and administrative expenses, excluding commissions and salaries and benefits, related to insurance operations and corporate operating expenses.

(2)	The current accident year loss ratio is calculated by dividing loss and loss adjustment expenses incurred for the current accident year by the current year’s net premiums earned.

(3)	The prior accident year loss ratio is calculated by dividing the change in loss and loss adjustment expenses incurred for prior accident years by the current year’s net premiums earned.

(4)	The net underwriting expense ratio is calculated by dividing underwriting and certain other operating costs, commissions and salaries, and benefits by the current year’s net premiums earned.

(5)	The net dividend ratio is calculated by dividing policyholder dividends by the current year’s net premiums earned.

(6)	The net combined ratio is the sum of the net loss ratio, the net underwriting expense ratio and the net dividend ratio.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included in Item 8 of this report. This discussion includes forward-looking statements that are subject to risks, uncertainties and other factors described in Item 1A of this report. These factors could cause our actual results in 2015 and beyond to differ materially from those expressed in, or implied by, those forward-looking statements.

Overview

AMERISAFE is a holding company that markets and underwrites workers’ compensation insurance through its insurance subsidiaries. Workers’ 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, manufacturing, oil and gas and agriculture. Employers engaged in hazardous industries pay substantially higher than average rates for workers’ 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’ 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 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 for our shareholders.

We actively market our insurance in 30 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 17 states and the U.S. Virgin Islands.

Two of the key financial measures that we use to evaluate our performance are return on average equity and growth in book value per share. We calculate return on average equity by dividing annual net income by the average of annual shareholders’ equity. Our return on average equity was 12.4% in 2014, 10.9% in 2013 and 8.0% in 2012. We calculate book value per share by dividing ending shareholders’ equity by the number of common shares outstanding. Our book value per share was $23.65 at December 31, 2014, $22.41 at December 31, 2013 and $20.88 at December 31, 2012.

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 other lines of business that pay claims more quickly. From December 31, 2009 to December 31, 2014, our investment portfolio, including cash and cash equivalents, increased from $800.5 million to $1.1 billion and produced net investment income of $27.2 million in 2014, $27.0 million in 2013 and $27.0 million in 2012.

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 2015 includes 14 reinsurers that provide coverage to us in excess of a certain specified loss amount, or retention level. Our 2015 reinsurance program provides us with reinsurance coverage for each loss occurrence up to $70.0 million, subject to limitations, applicable deductibles, retentions and aggregate limits. However, for any loss occurrence involving only one claimant, our reinsurance coverage is limited to $10.0 million for any single claimant, subject to applicable deductibles, retentions and aggregate limits. In 2014, we raised our retention from $1.0 million to $2.0 million

for each loss occurrence. Losses in the layer between $2.0 million and $10.0 million are ceded to a multi-year reinsurance cover with an aggregate annual deductible of approximately $6.2 million and an aggregate limit of coverage of approximately $33.3 million for 2015. As losses are incurred and recorded, we record amounts recoverable from reinsurers for the portion of the losses ceded to our reinsurers.

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’ compensation claims as there are for other forms of insurance. Therefore, estimating reserves for workers’ 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.

Our focus on providing workers’ compensation insurance to employers engaged in hazardous industries results in our receiving relatively fewer but more severe claims than many other workers’ compensation insurance companies. Severe claims, which we define as claims having an estimated ultimate cost of more than $1.0 million, usually have a material effect on each accident year’s loss reserves (and our reported results of operations) as a 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 higher severity, lower frequency business, our reserve for loss and loss adjustment expenses may have greater volatility than other workers’ compensation insurance companies.

For example, for the five-year period ended December 31, 2014 we had recorded 42 severe claims, or an average of 8 severe claims per year for accident years 2010 through 2014. The number of severe claims reported in any one accident year as of December 31, 2014 ranged from a low of 6 in 2011 to a high of 10 in 2010, 2013 and 2014. The average reported case severity for these claims ranged from $1.3 million for the 2010 accident year to $2.9 million for the 2013 accident year. For the five accident years, the case incurred for these severe claims accounted for an average of 6.2 percentage points of our overall loss and loss adjustment expense, or LAE, ratio, measured at December 31, 2014.

Further, the ultimate cost of severe claims is more difficult to estimate, principally due to uncertainties as to 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 reserve for a severe claim reported early in the year may be more accurate than the case reserve established for a severe claim reported late in the year.

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 and utilization. However, changes in per average claim case incurred loss and loss adjustment expenses can also be affected by frequency of severe claims in the applicable accident years.

As more fully described in “Business—Loss Reserves” in Item 1 of this report, the estimate for loss and loss adjustment expenses is established based upon management’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 its reserve estimate.

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 unreported claims, length of time to achieve ultimate settlement of claims, utilization, inflation in 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 the changes occurred, with increases in our reserves resulting in decreases in our earnings.

Our gross reserves for loss and loss adjustment expenses at December 31, 2014, 2013 and 2012 were $687.6 million, $614.6 million and $570.5 million, respectively. As a percentage of gross reserves at year end, IBNR represented 22.4% in 2014, 20.2% in 2013 and 21.6% in 2012.

In 2014, we decreased our estimates for prior year loss reserves by $23.7 million. In 2013, we decreased our estimates for prior year loss reserves by $12.6 million. In 2012, we decreased our estimates for prior year loss reserves by $2.5 million.

The workers’ 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 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 is characterized by increased competition that results in lower premium rates, expanded policy coverage terms, and higher commissions paid to agencies. Our strategy is to focus on maintaining underwriting profitability throughout the cycle.

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 “Business—Loss Reserves” in Item 1 of this report.

Principal Revenue and Expense Items

Our revenues consist primarily of the following:

Net Premiums Earned. Net premiums earned is the earned portion of our net premiums written. Net premiums written is equal to gross premiums written less premiums ceded to reinsurers. Gross premiums written includes the estimated annual premiums from each insurance policy we write in our voluntary and assigned risk businesses during a reporting period based on the policy effective date or the date the policy is bound, whichever is later.

Premiums are earned on a daily pro rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums and are earned in subsequent periods over the remaining term of the policy. Our insurance policies typically have a term of one year. Thus, for a one-year policy written on July 1, 2014 for an employer with constant payroll during the term of the policy, we would earn half of the premiums in 2014 and the other half in 2015. On a monthly basis, we also recognize net premiums earned from mandatory pooling arrangements.

We estimate the annual premiums to be paid by our policyholders when we issue the policies and record those amounts on our balance sheet as premiums receivable. We conduct premium audits on all of our voluntary business policyholders annually, upon the expiration of each policy, including when the policy is renewed. The purpose of these audits is to verify that policyholders have accurately reported their payroll expenses and employee job classifications, and therefore have paid us the premium required under the terms of the policies. The difference between the estimated premium and the ultimate premium is referred to as “earned but unbilled” premium, or EBUB premium. EBUB premium can be higher or lower than the estimated premium. EBUB premium is subject to significant variability and can either increase or decrease earned premium based upon several factors, including changes in premium growth, industry mix and economic conditions. Due to the timing of audits and other adjustments, the ultimate premium earned is generally not determined for several months after the expiration of the policy.

We review the estimate of EBUB premiums on a quarterly basis using historical data and applying various assumptions based on the current market, and we record an adjustment to premium, related losses, and expenses as warranted.

Net Investment Income and Net Realized Gains and Losses on Investments. We invest our statutory surplus funds and the funds supporting our insurance liabilities in fixed maturity, equity securities and alternative investments. In addition, a portion of these funds are held in cash and cash equivalents to pay current claims. Our net investment income includes interest and dividends earned on our invested assets, amortization of premiums and discounts on our fixed-maturity securities and returns on our other investments. We assess the performance of our investment portfolio using a standard tax equivalent yield metric. Investment income that is tax-exempt is increased by our marginal federal tax rate of 35% to express yield on tax-exempt securities on the same basis as taxable securities. Net realized gains and losses on our investments are reported separately from our net investment income. Net realized gains occur when our investment securities are sold for more than their costs or amortized costs, as applicable. Net realized losses occur when our investment securities are sold for less than their costs or amortized costs, as applicable, or are written down as a result of other-than-temporary impairment. We classify the majority of our fixed maturity securities as held-to-maturity. We also have some fixed-maturity securities classified as available-for-sale, as are our equity securities and other investments. Net unrealized gains or losses on our securities classified as available-for-sale are reported separately within accumulated other comprehensive income on our balance sheet.

Fee and Other Income. We recognize commission income earned on policies issued by other carriers that are sold by our wholly owned insurance agency subsidiary as the related services are performed. We also recognize a small portion of interest income from mandatory pooling arrangements in which we participate.

Our expenses consist primarily of the following:

Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses incurred represents our largest expense item and, for any given reporting period, includes estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending, and administering claims. These expenses fluctuate based on the amount and types of risks we insure. We record loss and loss adjustment expenses related to estimates of future claim payments based on case-by-case valuations and statistical analyses. We seek to establish all reserves at the most likely ultimate exposure based on our historical claims experience. It is typical for our more serious claims to take several years to settle and we revise our estimates as we receive additional information about the condition of the injured employees. Our ability to estimate loss and loss adjustment expenses accurately at the time of pricing our insurance policies is a critical factor in our profitability.

Underwriting and Certain Other Operating Costs. Underwriting and certain other operating costs are those expenses that we incur to underwrite and maintain the insurance policies we issue. These expenses include state and local premium taxes and fees and other operating costs, offset by commissions we receive from reinsurers under our reinsurance treaty programs. We pay state and local taxes, licenses and fees, assessments, and contributions to state workers’ compensation security funds based on premiums. In addition, other operating costs include general and administrative expenses, excluding commissions and salaries and benefits, incurred at both the insurance company and corporate level.

Commissions. We pay commissions to our subsidiary insurance agency and to the independent agencies that sell our insurance based on premiums collected from policyholders.

Salaries and Benefits. We pay salaries and provide benefits to our employees.

Policyholder Dividends. In limited circumstances, we pay dividends to policyholders in particular states as an underwriting incentive.

Interest Expense. Interest expense represents amounts we incur on our outstanding indebtedness at the then-applicable interest rate.

Income Tax Expense. We incur federal, state, and local income tax expense.

Critical Accounting Policies

Understanding our accounting policies is key to understanding our financial statements. Management considers some of these policies to be very important to the presentation of our financial results because they require us to make significant estimates and assumptions. These estimates and assumptions affect the reported amounts of our assets, liabilities, revenues and expenses and related disclosures. Some of the estimates result from judgments that can be subjective and complex and, consequently, actual results in future periods might differ from these estimates.

Management believes that the most critical accounting policies relate to the reporting of reserves for loss and loss adjustment expenses, including losses that have occurred but have not been reported prior to the reporting date, amounts recoverable from reinsurers, premiums receivable, assessments, deferred policy acquisition costs, deferred income taxes, the impairment of investment securities and share-based compensation.

The following is a description of our critical accounting policies.

Reserves for Loss and Loss Adjustment Expenses. We record reserves for estimated losses under insurance policies that we write and for loss adjustment expenses, which include defense and cost containment, or DCC, and adjusting and other, or AO expenses, related to the investigation and settlement of policy 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.

Our reserves for loss and DCC expenses are estimated using case-by-case valuations based on our estimate of the most likely outcome of the claim at that time. In addition to these case reserves, we establish reserves on an aggregate basis that have been incurred but not reported, or IBNR. Our IBNR reserves are also intended to provide for aggregate changes in case incurred amounts as well as for recently reported claims which an initial case reserve has not been established. The third component of our reserves for loss and loss adjustment expenses is our AO reserve. Our AO reserve is established for those future claims administration costs that cannot be allocated directly to individual claims. The final component of our reserves for loss and loss adjustment expenses is the reserve for mandatory pooling arrangements.

In establishing our reserves, we review the results of analyses using actuarial methods that utilize historical loss data from our more than 29 years of underwriting workers’ compensation insurance. The actuarial analysis of our historical data provides the factors we use in estimating our loss reserves. These factors are primarily measures over time of the number of claims paid and reported, average paid and incurred claim amounts, claim closure rates and claim payment patterns. In evaluating the results of our analyses, management also uses substantial judgment in considering other factors that are not considered in these actuarial analyses, including changes in business mix, claims management, regulatory issues, medical trends, employment and wage patterns, insurance policy coverage interpretations, judicial determinations and other subjective factors. Due to the inherent uncertainty associated with these estimates, and the cost of incurred but unreported claims, our actual liabilities may vary significantly from our original estimates.

On a quarterly basis, we review our reserves for loss and loss adjustment expenses to determine whether adjustments are required. Any resulting adjustments are included in the results for the current period. In establishing our reserves, we do not use loss discounting, which would involve recognizing the time value of money and offsetting estimates of future payments by future expected investment income. Additional information regarding our reserves for loss and loss adjustment expenses and the actuarial method and other factors used in establishing these reserves can be found under the caption “Business—Loss Reserves” in Item 1 of this report.

Amounts Recoverable from Reinsurers. Amounts recoverable from reinsurers represent the portion of our paid and unpaid loss and loss adjustment expenses that are assumed by reinsurers and related commissions due

from reinsurers. These amounts are separately reported on our balance sheet as assets and do not reduce our reserves for loss and loss adjustment expenses because reinsurance does not relieve us of liability to our policyholders. We are required to pay claims even if a reinsurer fails to pay us under the terms of a reinsurance contract. We calculate amounts recoverable from reinsurers based on our estimates of the underlying loss and loss adjustment expenses, as well as the terms and conditions of our reinsurance contracts, which could be subject to interpretation. In addition, we bear credit risk with respect to our reinsurers, which can be significant because some of the unpaid loss and loss adjustment expenses for which we have reinsurance coverage remain outstanding for extended periods of time.

Premiums Receivable. Premiums receivable represents premium-related balances due from our policyholders based on annual premiums for policies written, including surcharges and deposits and adjustments for premium audits, endorsements, cancellations, cash transactions and charge offs. The balance is shown net of the allowance for doubtful accounts and includes an estimate for EBUB. The EBUB estimate is subject to significant variability and can either increase or decrease premiums receivable and earned premiums based upon several factors, including changes in premium growth, industry mix and economic conditions. EBUB assumptions include historical development factors, current economic outlook and current trends in particular sectors of our business.

Assessments. We are subject to various assessments and premium surcharges related to our insurance activities, including assessments and premium surcharges for state guaranty funds and second injury funds. Our accrual is based on historical assessments as well as updated assessment rates. Assessments based on premiums are recorded as an expense as premiums are earned and generally paid one year after the calendar year in which the policies are written. Assessments based on losses are recorded as an expense as losses are incurred and are generally paid within one year of the calendar year in which the claims are paid by us. State guaranty fund assessments are used by state insurance oversight agencies to pay claims of policyholders of impaired, insolvent or failed insurance companies and the operating expenses of those agencies. Second injury funds are used by states to reimburse insurers and employers for claims paid to injured employees for aggravation of prior conditions or injuries. In some states, these assessments and premium surcharges may be partially recovered through a reduction in future premium taxes.

Deferred Policy Acquisition Costs. We defer commission expenses, premium taxes and certain marketing, sales, underwriting and safety costs that vary with and primarily relate to the acquisition of insurance policies. These acquisition costs are capitalized and charged to expense ratably as premiums are earned. In calculating deferred policy acquisition costs, these costs are limited to their estimated realizable value, which gives effect to the premiums to be earned, anticipated losses and settlement expenses and certain other costs we expect to incur as the premiums are earned, less related net investment income. Judgments as to the ultimate recoverability of these deferred policy acquisition costs are highly dependent upon estimated future profitability of unearned premiums. If the unearned premiums were less than our expected claims and expenses after considering investment income, we would reduce the deferred costs.

Deferred Income Taxes. We use the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities resulting from a tax rate change impacts our net income or loss in the reporting period that includes the enactment date of the tax rate change.

In assessing whether our deferred tax assets will be realized, management considers whether it is more likely than not that we will generate future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. If necessary, we establish a valuation allowance to reduce the deferred tax assets to the amounts that are more likely than not to be realized.

Impairment of Investment Securities. Impairment of an investment security results in a reduction of the carrying value of the security and the realization of a loss when the fair value of the security declines below our cost or amortized cost, as applicable, for the security, and the impairment is deemed to be other-than-temporary. We regularly review our investment portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of specific investments. We consider various factors in determining if a decline in the fair value of an individual security is other-than-temporary. Some of the factors we consider include:

•

any reduction or elimination of preferred stock dividends, or nonpayment of scheduled principal or interest payments;

•

the financial condition and near-term prospects of the issuer of the applicable security, including any specific events that may affect its operations or earnings;

•

how long and by how much the fair value of the security has been below its cost or amortized cost;

•

any downgrades of the security by a rating agency;

•

our intent not to sell the security for a sufficient time period for it to recover its value;

•

the likelihood of being forced to sell the security before the recovery of its value; and

•

an evaluation as to whether there are any credit losses on debt securities.

Share-Based Compensation. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718, Compensation-Stock Compensation, we recognize compensation costs for stock option awards over the applicable vesting periods.

Results of Operations

The table below summarizes certain operating results and key measures we use in monitoring and evaluating our operations.


	Year Ended December 31,
	2014			2013			2012
	(in thousands)
Income Statement Data
Gross premiums written	$	393,819		$	372,177		$	328,823
Ceded premiums written		(13,793	)		(18,425	)		(16,305	)

Net premiums written	$	380,026		$	353,752		$	312,518

Net premiums earned	$	375,747		$	329,983		$	290,689
Net investment income		27,214			27,029			27,018
Net realized gains (losses) on investments		697			(1,211	)		2,979
Fee and other income		361			534			562

Total revenues		404,019			356,335			321,248

Loss and loss adjustment expenses incurred		244,916			228,973			219,903
Underwriting and certain other operating costs (1)		32,573			18,951			18,450
Commissions		27,872			25,303			22,144
Salaries and benefits		24,518			22,862			20,839
Interest expense		—			—			566
Policyholder dividends		391			1,042			2,203

Total expenses		330,270			297,131			284,105

Income before taxes		73,749			59,204			37,143
Income tax expense		20,083			15,567			7,790

Net income	$	53,666		$	43,637		$	29,353

Selected Insurance Ratios
Current accident year loss ratio (2)		71.5	%		73.2	%		76.5	%
Prior accident year loss ratio (3)		(6.3	)%		(3.8	)%		(0.9	)%

Net loss ratio		65.2	%		69.4	%		75.6	%
Net underwriting expense ratio (4)		22.6	%		20.3	%		21.1	%
Net dividend ratio (5)		0.1	%		0.3	%		0.8	%

Net combined ratio (6)		87.9	%		90.0	%		97.5	%


	As of December 31,
	2014		2013		2012
	(in thousands)
Balance Sheet Data
Cash and cash equivalents	$	90,956	$	123,077	$	92,676
Investments		1,016,333		878,775		808,116
Amounts recoverable from reinsurers		85,888		75,326		101,352
Premiums receivable, net		178,917		171,579		141,950
Deferred income taxes		31,231		33,645		29,521
Deferred policy acquisition costs		19,649		19,171		18,419
Total assets		1,457,220		1,329,001		1,220,946
Reserves for loss and loss adjustment expenses		687,602		614,557		570,450
Unearned premiums		168,576		164,296		140,528
Insurance-related assessments		29,315		25,428		22,244
Debt		—		—		—
Shareholders’ equity		446,968		416,814		381,222

(1)

Includes policy acquisition expenses, and other general and administrative expenses, excluding commissions and salaries and benefits, related to insurance operations and corporate operating expenses.

(2)

The current accident year loss ratio is calculated by dividing loss and loss adjustment expenses incurred for the current accident year by the current year’s net premiums earned.

(3)

The prior accident year loss ratio is calculated by dividing the change in loss and loss adjustment expenses incurred for prior accident years by the current year’s net premiums earned.

(4)

The net underwriting expense ratio is calculated by dividing underwriting and certain other operating costs, commissions and salaries, and benefits by the current year’s net premiums earned.

(5)

The net dividend ratio is calculated by dividing policyholder dividends by the current year’s net premiums earned.

(6)

The net combined ratio is the sum of the net loss ratio, the net underwriting expense ratio and the net dividend ratio.

Overview of Operating Results

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Gross Premiums Written. Gross premiums written for 2014 were $393.8 million, compared to $372.2 million for 2013, an increase of 5.8%. The increase was attributable to a $16.3 million increase in annual premiums on voluntary policies written during the period, a $1.3 million increase in premiums from mandatory pooling arrangements, and a $0.8 million increase in direct assigned risk premiums and a $3.3 million increase in premiums resulting from payroll audits and related premium adjustments. Related premium adjustments in 2014 include a $0.9 million increase in “earned but unbilled”, or EBUB, premium.

Net Premiums Written. Net premiums written for 2014 were $380.0 million, compared to $353.8 million for 2013, an increase of 7.4%. The increase was primarily attributable to the increase in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 3.5% for 2014 compared to 5.3% for 2013.

Net Premiums Earned. Net premiums earned for 2014 were $375.7 million, compared to $330.0 million for 2013, an increase of 13.9%. The increase was attributable to the increase in net premiums written.

Net Investment Income. Net investment income in 2014 was $27.2 million, an increase of 0.7% from the $27.0 million reported in 2013. The pre-tax investment yield on our investment portfolio was 2.6% per annum for 2014 and 2.8% for 2013. The tax-equivalent yield on our investment portfolio was 3.5% per annum for 2014, compared to 3.9% per annum for 2013. The tax-equivalent yield is calculated using the effective interest rate and a 35% marginal tax rate. Average invested assets, including cash and cash equivalents, increased 12.7%, from an average of $944.4 million for 2013 to an average of $1,064.4 million for 2014.

Net Realized Gains (Losses) on Investments. Net realized gains on investments in 2014 totaled $0.7 million, compared to a loss of $1.2 million in 2013. In 2014, net realized gains of $0.9 million resulted from gains from called fixed maturity securities, the sale of equity securities and the sale of fixed maturity securities from the available-for-sale portfolio. These gains were partially offset by a realized loss of $0.2 million from an other-than-temporary impairment of a fixed maturity security. In 2013, net realized losses of $2.2 million resulted from other-than-temporary impairments on four equity securities. These losses were offset by realized gains of $1.0 million in 2013 resulting from gains from called fixed maturity securities, the sale of equity securities and the sale of fixed maturity securities from the available-for-sale portfolio.

Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled $244.9 million for 2014, compared to $229.0 million for 2013, an increase of $15.9 million, or 7.0%. The current accident year losses and LAE incurred were $268.6 million, or 71.5% of net premiums earned, compared to $241.6 million, or 73.2% of net premiums earned for 2013. We recorded favorable prior accident year development of $23.7 million in 2014, compared to $12.6 million in 2013. This is further discussed below in “Prior Year Development.” Our net loss ratio was 65.2% for 2014 and 69.4% for 2013.

Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for 2014 were $85.0 million, compared to $67.1 million for 2013, an increase of 26.6%. This increase was primarily due to a $9.3 million decrease in experience-rated commissions, a $2.6 million increase in commission expense, a $1.7 million decrease in ceding commission, a $0.8 million increase in insurance related assessments, a $1.0 million increase in bad debt expense and a $0.3 million increase in mandatory pooling arrangement fees. Offsetting these increases were a $0.2 million decrease in taxes and fees. Our underwriting expense ratio increased to 22.6% in 2014 from 20.3% in 2013.

Income tax expense. Income tax expense for 2014 was $20.1 million, compared to $15.6 million for 2013. The increase was primarily attributable to an increase in pre-tax income, from $59.2 million for 2013 to $73.7 million for 2014. The effective tax rate also increased to 27.2% for 2014, compared to 26.3% for 2013. This increase is due to the changing mix of taxable income versus non-taxable income.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Gross Premiums Written. Gross premiums written for 2013 were $372.2 million, compared to $328.8 million for 2012, an increase of 13.2%. The increase was attributable to a $46.9 million increase in annual premiums on voluntary policies written during the period, a $2.8 million increase in premiums from mandatory pooling arrangements and a $0.9 million increase in direct assigned risk premiums offset by a $7.4 million decrease in premiums resulting from payroll audits and related premium adjustments. Related premium adjustments in 2013 include a $1.3 million increase in “earned but unbilled”, or EBUB, premium.

Net Premiums Written. Net premiums written for 2013 were $353.8 million, compared to $312.5 million for 2012, an increase of 13.2%. The increase was primarily attributable to the increase in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 5.3% for 2013 and 2012.

Net Premiums Earned. Net premiums earned for 2013 were $330.0 million, compared to $290.7 million for 2012, an increase of 13.5%. The increase was attributable to the increase in net premiums written, offset by an increase in unearned premiums.

Net Investment Income. Net investment income in 2013 was $27.0 million, in-line with the $27.0 million reported in 2012. The pre-tax investment yield on our investment portfolio was 2.8% per annum for 2013 and 3.1% for 2012. The tax-equivalent yield on our investment portfolio was 3.9% per annum for 2013, compared to 4.3% per annum for 2012. The tax-equivalent yield is calculated using the effective interest rate and a 35% marginal tax rate. Average invested assets, including cash and cash equivalents, increased 7.6%, from an average of $877.6 million for 2012 to an average of $944.4 million for 2013. During 2013, we invested $10 million in a limited partnership, which we account for under the equity method. The carrying value of this investment was $10.6 million at December 31, 2013.

Net Realized Gains (Losses) on Investments. Net realized losses on investments in 2013 totaled $1.2 million, compared to a gain of $3.0 million in 2012. Net realized losses of $2.2 million resulted from other-than-temporary impairments on four equity securities. These losses were offset by realized gains of $1.0 million in 2013 resulting from gains from called fixed maturity securities, the sale of equity securities and the sale of fixed maturity securities from the available-for-sale portfolio. Net realized gains in 2012 primarily resulted from $2.4 million in gains from called fixed-maturity securities and the sale of certain equity and fixed-maturity securities from the available-for-sale portfolio. These gains in 2012 were offset by an other-than-temporary impairment of $0.2 million on one asset-backed security from our held-to-maturity portfolio.

Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled $229.0 million for 2013, compared to $219.9 million for 2012, an increase of $9.1 million, or 4.1%. The current accident year losses and LAE incurred were $241.6 million, or 73.2% of net premiums earned, compared to $222.4 million, or 76.5% of net premiums earned for 2012. We recorded favorable prior accident year development of $12.6 million in 2013, compared to $2.5 million in 2012. This is further discussed below in “Prior Year Development.” Our net loss ratio was 69.4% for 2013 and 75.6% for 2012.

Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for 2013 were $67.1 million, compared to $61.4 million for 2012, an increase of 9.3%. This increase was primarily due to a $3.2 million increase in commission expense, a $0.6 million increase in insurance related assessments and a $0.8 million increase in mandatory pooling arrangement fees. Offsetting these increases were a $2.0 million decrease in bad debt expense, a $0.3 million decrease in taxes and fees, a $1.8 million increase in experience-rated commissions and a $0.5 million increase in ceding commission which serve to decrease the cost of our reinsurance. Our underwriting expense ratio decreased to 20.3% in 2013 from 21.1% in 2012.

Interest expense. There was no interest expense for 2013 compared to $0.6 million for 2012. The Company retired all of its debt in August 2012.

Income tax expense. Income tax expense for 2013 was $15.6 million, compared to $7.8 million for 2012. The increase was primarily attributable to an increase in pre-tax income, from $37.1 million for 2012 to $59.2 million for 2013. The effective tax rate also increased to 26.3% for 2013, compared to 21.0% for 2012. This increase is due to the changing mix of taxable income versus non-taxable income.

Prior Year Development

The Company recorded favorable prior accident year loss and loss adjustment expense development of $23.7 million in calendar year 2014, $12.6 million in calendar year 2013 and $2.5 million in calendar year 2012. The table below sets forth the favorable or unfavorable development for accident years 2009 through 2013 and, collectively, all accident years prior to 2009.


	Favorable/(Unfavorable) Development for Year Ended December 31,
	2014		2013		2012
	(in millions)
2013	$	—	$	—	$	—
2012		9.3		0.5		—
2011		1.0		0.4		(3.1	)
2010		6.9		2.3		(5.6	)
2009		1.7		3.9		0.5
Prior to 2009		4.8		5.5		10.7

Total net development	$	23.7	$	12.6	$	2.5

The table below sets forth the number of open claims as of December 31, 2014, 2013 and 2012, and the numbers of claims reported and closed during the years then ended.


	Twelve Months Ended December 31,
	2014			2013			2012
Open claims at beginning of period		5,297			4,964			5,184
Claims reported		5,785			5,620			5,721
Claims closed		(5,567	)		(5,287	)		(5,941	)

Open claims at end of period		5,515			5,297			4,964

At December 31, 2014, our incurred amounts for certain accident years, particularly 2012 and 2010, developed more favorably than management previously expected. The assumptions we used in establishing our reserves for these accident years were based on our historical claims data. However, as of December 31, 2014, actual results for these accident years have been better than our assumptions would have predicted. We do not presently intend to modify our assumptions for establishing reserves in light of recent results. However, if actual results for current and future accident years are consistent with, or different than, our results in these recent accident years, our historical claims data will reflect this change and, over time, will impact the reserves we establish for future claims.

Our reserves for loss and loss adjustment expenses are inherently uncertain and our focus on providing workers’ compensation insurance to employers engaged in hazardous industries results in our receiving relatively fewer but more severe claims than many other workers’ compensation insurance companies. As a result of this focus on higher severity, lower frequency business, our reserve for loss and loss adjustment expenses may have greater volatility than other workers’ compensation insurance companies. For additional information, see “Business—Loss Reserves.”

Liquidity and Capital Resources

Our principal sources of operating funds are premiums, investment income, and proceeds from maturities of investments. Our primary uses of operating funds include payments for claims and operating expenses. We pay claims and operating expenses using cash flow from operations and invest our excess cash in fixed maturity, equity securities and other investments. We expect that our projected cash flow from operations will provide us sufficient liquidity to fund future operations, including payment of claims and operating expenses and other holding company expenses, for at least the next 18 months.

We forecast claim payments based on our historical trends. We seek to manage the funding of claim payments by actively managing available cash and forecasting cash flows on a short- and long-term basis. Cash payments, net of reinsurance, for claims were $182.5 million in 2014, $178.4 million in 2013 and $181.9 million in 2012. We fund claim payments out of cash flow from operations, principally premiums, net of amounts ceded to our reinsurers, and net investment income. Our investment portfolio has increased from $800.5 million at December 31, 2009 to $1.1 billion at December 31, 2014.

As discussed above under “Overview,” we purchase reinsurance to protect us against severe claims and catastrophic events. Based on our estimates of future claims, we believe we are sufficiently capitalized to satisfy the deductibles and retentions in our 2015 reinsurance program. We reevaluate our reinsurance program at least annually, taking into consideration a number of factors, including cost of reinsurance, our liquidity requirements, operating leverage and coverage terms.

Even if we maintain our existing retention levels, if the cost of reinsurance increases, our cash flow from operations would decrease as we would cede a greater portion of our written premiums to our reinsurers. Conversely, our cash flow from operations would increase if the cost of reinsurance declined relative to our retention.

Net cash provided by operating activities was $140.4 million in 2014, as compared to $128.9 million in 2013, and $81.0 million in 2012. Major components of cash provided by operating activities in 2014 were net premiums collected of $373.1 million and investment income collected of $42.1 million, offset in-part by claim payments of $183.7 million, $71.7 million of operating expenditures, federal taxes paid of $19.9 million and dividends to policyholders paid of $1.1 million.

Major components of cash provided by operating activities in 2013 were net premiums collected of $325.0 million and investment income collected of $39.5 million, offset in-part by claim payments of $177.7 million, $46.4 million of operating expenditures, federal taxes paid of $14.5 million and dividends to policyholders paid of $1.6 million.

Major components of cash provided by operating activities in 2012 were net premiums collected of $290.6 million and investment income collected of $36.3 million, offset in-part by claim payments of $183.6 million, $56.1 million of operating expenditures, federal taxes paid of $7.4 million and dividends to policyholders paid of $1.6 million.

Net cash used in investing activities was $141.0 million in 2014, as compared to $97.0 million in 2013 and $9.3 million in 2012. In 2014, major components of net cash used in investing activities included investment purchases of $455.2 million and net purchases of furniture, fixtures and equipment of $1.0 million, offset by proceeds from sales and maturities of investment of investments of $315.2 million. In 2013, major components of net cash used in investing activities included investment purchases of $355.6 million and net purchases of furniture, fixtures and equipment of $1.1 million, offset by proceeds from sales and maturities of investments of $259.8 million. In 2012, major components of net cash used in investing activities included investment purchases of $267.7 million and net purchases of furniture, fixtures and equipment of $1.2 million, offset by proceeds from sales and maturities of investments of $259.6 million.

Net cash used in financing activities was $31.6 million in 2014, as compared to net cash used in financing activities of $1.5 million in 2013 and net cash used in financing activities of $24.6 million in 2012. Major components of cash provided in financing activities in 2014 included $2.7 million of proceeds from the exercise of stock options and $2.8 million of tax benefit from share-based compensation, offset by cash used for dividends paid to shareholders of $37.1 million. Major components of cash provided in financing activities in 2013 included $2.3 million of proceeds from the exercise of stock options and $2.0 million of tax benefit from share-based compensation, offset by cash used for dividends paid to shareholders of $5.9 million. Major components of cash used in financing activities in 2012 included $25.8 million for the redemption of subordinated debt securities, $0.8 million of proceeds from the exercise of stock options and $0.4 million of tax benefit from share-based compensation.

In 2012, the Company redeemed all $25.8 million of subordinated notes from the Amerisafe Capital Trust II (“ACT II”) and the related trust was canceled.

In October 2007, the Company entered into an agreement providing for a line of credit in the maximum amount of $20.0 million with Frost Bank, NA. The agreement expired in October 2010. The Company renewed this agreement in the fourth quarter 2010 for an additional three years to mature in December of 2013. Under the agreement, advances may be made either in the form of loans or letters of credit. Borrowings under the agreement accrue at interest rates based upon prime rate or LIBOR. The Company paid a fee of 0.375% on the unused portion of the loan in arrears quarterly for a fee of $75,000 annually, assuming the line of credit remains unused during the calendar year. In December of 2013, the Company renewed the agreement providing for a line of credit up to $20.0 million, expiring in December 2016. Under the agreement, the Company will pay a fee of 0.25% on the unused portion of the loan in arrears quarterly for a fee of $50,000 annually. The line of credit is unsecured. At December 31, 2014, there were no outstanding borrowings.

The Board of Directors initially authorized the Company’s share repurchase program in February 2010. In October 2011, 2012 2013 and 2014 the Board reauthorized this program. As of December 31, 2014, we had repurchased a total of 1,258,250 shares of our outstanding common stock for $22.4 million. The Company had

$25.0 million available for future purchases at December 31, 2014 under this program. There were no share repurchases in 2014, 2013 or 2012. The purchases will continue to be effected from time to time depending upon market conditions and subject to applicable regulatory considerations. It is anticipated that future purchases will be funded from available capital.

AMERISAFE is a holding company that transacts business through its operating subsidiaries, including American Interstate, Silver Oak Casualty and American Interstate of Texas. AMERISAFE’s primary assets are the capital stock of these insurance subsidiaries. The ability of AMERISAFE to fund its operations depends upon the surplus and earnings of its subsidiaries and their ability to pay dividends to AMERISAFE. Payment of dividends by our insurance subsidiaries is restricted by state insurance laws, including laws establishing minimum solvency and liquidity thresholds. Based upon the prescribed calculation, the insurance subsidiaries could pay to AMERISAFE dividends of up to $37.8 million in 2015 without seeking regulatory approval. See “Business—Regulation—Dividend Limitations” in Item 1 of this report.

On February 24, 2015 the Company declared a regular quarterly cash dividend of $0.15 per share payable on March 27, 2015 to shareholders of record on March 13, 2015.

The Board intends to continue to consider the payment of a regular cash dividend each calendar quarter. On an annualized basis, the cash dividend is expected to be $0.60 per share in 2015.

Investment Portfolio

The principal objectives of our investment portfolio are to preserve capital and surplus and to maintain appropriate liquidity for corporate requirements. Additional objectives are to support our A.M. Best rating of “A” (Excellent) and to maximize after-tax income and total return. We presently expect to maintain sufficient liquidity from funds generated by operations to meet our anticipated insurance obligations and operating and capital expenditure needs. Excess funds from operations will be invested in accordance with our investment policy and statutory requirements.

We allocate our portfolio into four categories: cash and cash equivalents, short term investments, fixed maturity securities and equity securities. Cash and cash equivalents include cash on deposit, money market funds and municipal securities, corporate securities and certificates of deposit with an original maturity of less than 90 days. Short-term investments include municipal securities, corporate securities and certificates of deposit with an original maturity greater than 90 days but less than one year. Our fixed maturity securities include obligations of the U.S. Treasury or U.S. agencies, obligations of states and their subdivisions, U.S. Dollar-denominated obligations of the U.S. or Canadian corporations, U.S. agency-based mortgage-backed securities, commercial mortgage-backed securities and asset-backed securities.

Under Nebraska and Texas law, as applicable, each of American Interstate, Silver Oak Casualty and American Interstate of Texas is required to invest only in securities that are either interest-bearing, interest-accruing or eligible for dividends, and must limit its investment in the securities of any single issuer, other than direct obligations of the United States, to five percent of the insurance company’s assets. As of December 31, 2014, we were in compliance with these requirements.

We employ diversification policies and balance investment credit risk and related underwriting risks to minimize our total potential exposure to any one business sector or security.

As of December 31, 2014, our investment portfolio, including cash and cash equivalents, totaled $1.1 billion, an increase of 10.5% from December 31, 2013. The majority of our fixed maturity securities are classified as held-to-maturity, as defined by FASB ASC Topic 320, Investments-Debt and Equity Securities. As

such, the reported value of those securities is equal to their amortized cost, and is not impacted by changing interest rates. The remainder of our fixed maturity securities and all of our equity securities are classified as available-for-sale and reported at fair value.

On January 1, 2008, we adopted FASB ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As disclosed in Note 19 of the financial statements, our securities available-for-sale are classified using Level 1, 2 and 3 inputs. We did not elect the fair value option prescribed under FASB ASC Topic 825, Financial Instruments, for any financial assets or financial liabilities in 2013 or 2014.

The composition of our investment portfolio, including cash and cash equivalents, as of December 31, 2014 is shown in the following table.


	Carrying Value		Percentage of Portfolio		Effective Interest Rate
	(in thousands)
Fixed maturity securities—held-to-maturity:
State and political subdivisions	$	385,623		34.8%		3.5	%
Corporate bonds		176,880		16.0%		1.5	%
Commercial mortgage-backed securities		46,662		4.2%		4.7	%
U.S. agency-based mortgage-backed securities		16,972		1.5%		5.1	%
U.S. Treasury securities and obligations of U.S. Government agencies		10,697		1.0%		3.5	%
Asset-backed securities		2,797		0.3%		3.7	%

Total fixed maturity securities—held-to-maturity		639,631		57.8%		3.1	%

Fixed maturity securities—available-for-sale:
State and political subdivisions		157,374		14.2%		3.5	%
Corporate bonds		165,370		14.9%		1.6	%
U.S. agency-based mortgage-backed securities		8,498		0.8%		3.2	%

Total fixed maturity securities—available-for-sale		331,242		29.9%		2.5	%

Equity securities		28		0.0%		0.0	%
Other investments		11,748		1.1%		0.0	%
Cash and cash equivalents		90,956		8.2%		0.1	%
Short-term investments		33,684		3.0%		0.5	%

Total Investments, including cash and cash equivalents	$	1,107,289		100.0%		2.6	%

For our securities classified as available-for-sale, the securities are “marked to market” as of the end of each calendar quarter. As of that date, unrealized gains and losses are recorded against Accumulated Other Comprehensive Income (Loss), except when such securities are deemed to be other-than-temporarily impaired. For our securities classified as held-to-maturity, unrealized gains and losses are not recorded in the financial statements until realized or until a decline in fair value, below amortized cost, is deemed to be other-than-temporary.

We regularly review our investment portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of our investments. We consider various factors in determining if a decline in the fair value of an individual security is other-than-temporary. The key factors we consider are:

•

any reduction or elimination of preferred stock dividends, or nonpayment of scheduled principal or interest payments;

•

the financial condition and near-term prospects of the issuer of the applicable security, including any specific events that may affect its operations or earnings;

•

how long and by how much the fair value of the security has been below its cost or amortized cost;

•

any downgrades of the security by a rating agency;

•

our intent not to sell the security for a sufficient time period for it to recover its value;

•

the likelihood of being forced to sell the security before the recovery of its value; and

•

an evaluation as to whether there are any credit losses on debt securities.

The following table summarizes the fair value of, and the amount of, unrealized losses on our investment securities, segregated by the time period each security has been in a continuous unrealized loss position as of December 31, 2014 and 2013:


	Less Than Twelve Months					Twelve Months or Longer
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
December 31, 2014:
Fixed maturity securities	$	260,769	$	(1,069	)	$	19,766	$	(3,089	)
Equity securities		—		—			—		—
December 31, 2013:
Fixed maturity securities	$	201,887	$	(6,812	)	$	9,752	$	(2,994	)
Equity securities		5,205		(567	)		—		—

We reviewed all securities with unrealized losses in accordance with the impairment policy described above. The Company expects to hold these investments in equity securities for a reasonable period of time sufficient for a recovery of fair value. We determined that the unrealized losses in the fixed maturity securities portfolio related primarily to changes in market interest rates since the date of purchase, current conditions in the capital markets and the impact of those conditions on market liquidity and prices generally, and the transfer of the investments from the available-for-sale classification to the held-to-maturity classification in January 2004. We expect to recover the carrying value of these securities as it is not more likely than not that we will be required to sell the security before the recovery of its amortized cost basis. In addition, none of the unrealized losses on debt securities are considered credit losses.

During 2014, the Company impaired securities totaling $0.2 million related to a fixed maturity security. The impairment charge is included in “Net realized gains (losses) on investments” for 2014. We impaired the security due a downgrade of the security and the amount of the accumulated unrealized loss.

During 2013, the Company impaired securities totaling $2.2 million related to four equity securities. The impairment charge is included in “Net realized gains (losses) on investments” for 2013. We impaired the securities due to the amount of the accumulated unrealized loss positions, the amount of time in those loss positions and management’s revised outlook on those securities.

There were no impairment charges in 2012.

The pre-tax investment yield on our investment portfolio was 2.6% per annum during the twelve months ended December 31, 2014, compared to 2.8% per annum during the same period in 2013.

Contractual Obligations and Commitments

We manage risk on certain long-duration claims by settling these claims through the purchase of annuities from unaffiliated life insurance companies. In the event these companies are unable to meet their obligations under these annuity contracts, we could be liable to the claimants, but our reinsurers remain obligated to

indemnify us for all or part of these obligations in accordance with the terms of our reinsurance contracts. As of December 31, 2014, the present value of these annuities was $94.6 million, as estimated by our annuity providers. Substantially all of the annuities are issued or guaranteed by life insurance companies that have an A.M. Best rating of “A” (Excellent) or better. For additional information, see Note 17 to our consolidated financial statements in Item 8 of this report.

We lease equipment and office space under noncancelable operating leases. Future minimum lease payments at December 31, 2014, were as follows:


Year	Future Minimum Lease Payments
	(in thousands)
2015	$	140
2016		121
2017		98
2018		67
2019		6
2020		—

	$	432

Rental expense was $0.2 million in 2014, 2013 and 2012.

The table below provides information with respect to our contractual obligations as of December 31, 2014.


Contractual Obligations			Payment Due By Period
Contractual Obligations	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
					(in thousands)
Loss and loss adjustment expenses (1)	$	687,602	$	239,973	$	290,856	$	73,573	$	83,200
Loss-based insurance assessments (2)		13,725		4,790		5,805		1,469		1,661
Capital lease obligations		106		38		68		—		—
Operating lease obligations		432		140		286		6		—
Purchase obligations		487		175		312		—		—

Total	$	702,352	$	245,116	$	297,327	$	75,048	$	84,861

(1)

The loss and loss adjustment expense payments due by period in the table above are based upon the loss and loss adjustment expense estimates as of December 31, 2014 and actuarial estimates of expected payout patterns and are not contractual liabilities as to a time certain. Our contractual liability is to provide benefits under the policy. As a result, our calculation of loss and loss adjustment expense payments due by period is subject to the same uncertainties associated with determining the level of loss and loss adjustment expenses generally and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our loss and loss adjustment expense process, see “Business—Loss Reserves” in Item 1 of this report. Actual payments of loss and loss adjustment expenses by period will vary, perhaps materially, from the amounts shown in the table above to the extent that current estimates of loss and loss adjustment expenses vary from actual ultimate claims amounts and as a result of variations between expected and actual payout patterns. See “Risk Factors— Risks Related to Our Business—Our loss reserves are based on estimates and may be inadequate to cover our actual losses” in Item 1A of this report for a discussion of the uncertainties associated with estimating loss and loss adjustment expenses.

(2)

We are subject to various annual assessments imposed by certain of the states in which we write insurance policies. These assessments are generally based upon the amount of premiums written or losses paid during the applicable year. Assessments based on premiums are generally paid within one year after the calendar year in which the policies are written, while assessments based on losses are generally paid within one year after calendar year in which the loss is paid. When we establish a reserve for loss and loss

adjustment expenses for a reported claim, we accrue our obligation to pay any applicable assessments. If settlement of the claim is to be paid out over more than one year, our obligation to pay any related loss-based assessments extends for the same period of time. Because our reserves for loss and loss adjustment expenses are based on estimates, our accruals for loss-based insurance assessments are also based on estimates. Actual payments of loss and loss adjustment expenses may differ, perhaps materially, from our reserves. Accordingly, our actual loss-based insurance assessments may vary, perhaps materially, from our accruals.

Off-Balance Sheet Arrangements

We have 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.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are credit risk, interest rate risk, and equity price risk. We currently have no exposure to foreign currency risk.

Credit Risk

Credit risk is the potential loss arising principally from adverse changes in the financial condition of the issuers of our fixed maturity securities and the financial condition of our reinsurers.

We address the credit risk related to the issuers of our fixed maturity securities by primarily investing in fixed maturity securities that are rated as investment grade by one or more of Moody’s, Standard & Poor’s or Fitch. We also independently monitor the financial condition of all issuers of our fixed maturity securities. To limit our risk exposure, we employ diversification policies that limit our credit exposure to any single issuer or business sector.

We are also subject to credit risk with respect to our reinsurers. Although our reinsurers are obligated to reimburse us to the extent we cede risk to them, we are ultimately liable to our policyholders on all risks we have reinsured. As a result, reinsurance contracts do not limit our ultimate obligations to pay claims and, in some cases, we might not be able to collect amounts recoverable from our reinsurers. We address this credit risk by initially selecting reinsurers with an A.M. Best rating of “A-” (Excellent) or better and by performing, along with our reinsurance broker, periodic credit reviews of our reinsurers. If one of our reinsurers suffers a credit downgrade, we may consider various options to lessen the risk of asset impairment, including commutation, novation or letters of credit. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in Item 7 of this report.

Interest Rate Risk

Interest rate risk is the risk that we may incur losses due to adverse changes in interest rates. As of December 31, 2014, we had fixed maturity securities with a fair value of $995.6 million and a carrying value of $970.9 million. These securities are all subject to interest rate risk, but because we classify the majority of our fixed maturity securities as held-to-maturity, changes in fair values have a small effect on the carrying value of our portfolio. We manage our exposure to interest rate risk with respect to these securities by investing in a portfolio of securities with moderate effective duration. At December 31, 2014, the effective duration of the total investment portfolio, including cash and short term investments, was 2.9 years. Given the current low interest rate environment, the risk to the portfolio from higher rates exceeds the potential benefit to the portfolio from lower rates. Should we experience a large rise in interest rates, the effect on the carrying value of our portfolio could be substantial.

The table below summarizes the interest rate risk associated with our fixed maturity securities by illustrating the sensitivity of the fair value and carrying value of our fixed maturity securities as of December 31, 2014 to selected hypothetical changes in interest rates, and the associated impact on our shareholders’ equity.


Hypothetical Change in Interest Rates	Fair Value		Estimated Change in Fair Value			Carrying Value		Estimated Change in Carrying Value			Hypothetical Percentage Increase (Decrease) in Shareholders’ Equity
200 basis point increase	$	928,304	$	(67,309	)	$	939,819	$	(31,054	)		(6.9)%
100 basis point increase		962,787		(32,826	)		955,678		(15,196	)		(3.4)%
No change		995,613		—			970,873		—			—
100 basis point decrease		1,024,901		29,288			984,465		13,591			3.0%
200 basis point decrease		1,041,565		45,951			993,151		22,278			5.0%

Equity Price Risk

Equity price risk is the risk that we may incur losses due to adverse changes in the market prices of the equity securities we hold in our investment portfolio. We classify our portfolio of equity securities as available-for-sale and carry these securities on our balance sheet at fair value. Accordingly, adverse changes in the market prices of our equity securities result in a decrease in the value of our total assets and shareholders’ equity. In order to minimize our exposure to equity price risk, we independently monitor the financial condition of our equity securities, and diversify our investments. In addition, we limit the percentage of equity securities held in our investment portfolio to the lesser of 10% of the investment portfolio or 30% of shareholders’ equity. As of December 31, 2014, the equity securities in our investment portfolio had a fair value of $0.03 million, representing 0.0% of shareholders’ equity on that date. See “Business—Investments” in Item 1 of this report.

Item 8. Financial Statements and Supplementary Data.


	Page
Audited Financial Statements as of December 31, 2014 and 2013 and for the three years in the period ended December 31, 2014:
Report of Independent Registered Public Accounting Firm		60
Consolidated Balance Sheets		61
Consolidated Statements of Income		62
Consolidated Statements of Comprehensive Income		63
Consolidated Statements of Changes in Shareholders’ Equity		64
Consolidated Statements of Cash Flows		65
Notes to Consolidated Financial Statements		66
Financial Statement Schedules:
Schedule II. Condensed Financial Information of Registrant		101
Schedule VI. Supplemental Information Concerning Property-Casualty Insurance Operations		104
Schedules I, III, IV and V are not applicable and have been omitted.

Report of Independent Registered Public Accounting Firm

The Board of Directors and shareholders of AMERISAFE, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of AMERISAFE, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2014. Our audits also include the financial statement schedules listed in the Index at Item 15. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AMERISAFE, Inc. and Subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AMERISAFE, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

New Orleans, Louisiana

February 27, 2015

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	December 31,
	2014			2013
Assets
Investments:
Fixed maturity securities—held-to-maturity, at amortized cost (fair value $664,371 and $561,179 in 2014 and 2013, respectively)	$	639,631		$	536,583
Fixed maturity securities—available-for-sale, at fair value (cost $327,004 and $244,409 in 2014 and 2013, respectively)	$	331,242		$	237,877
Equity securities—available-for-sale, at fair value (cost $0 and $9,482 in 2014 and 2013, respectively)		28			9,302
Short-term investments		33,684			84,422
Other investments		11,748			10,591

Total investments		1,016,333			878,775
Cash and cash equivalents		90,956			123,077
Amounts recoverable from reinsurers		85,888			75,326
Premiums receivable, net of allowance		178,917			171,579
Deferred income taxes		31,231			33,645
Accrued interest receivable		11,637			11,242
Property and equipment, net		7,240			7,549
Deferred policy acquisition costs		19,649			19,171
Federal income tax recoverable		1,082			—
Other assets		14,287			8,637

Total assets	$	1,457,220		$	1,329,001

Liabilities and shareholders’ equity
Liabilities:
Reserves for loss and loss adjustment expenses	$	687,602		$	614,557
Unearned premiums		168,576			164,296
Reinsurance premiums payable		843			607
Amounts held for others		42,827			35,739
Policyholder deposits		48,722			44,620
Insurance-related assessments		29,315			25,428
Accounts payable and other liabilities		30,110			26,940
Payable for investments purchased		2,257			—

Total liabilities		1,010,252			912,187
Shareholders’ equity:
Common stock:
Voting—$0.01 par value authorized shares—50,000,000 in 2014 and 2013; 20,155,936 and 19,855,430 shares issued and 18,897,686 and 18,597,180 shares outstanding in 2014 and 2013, respectively		201			198
Additional paid-in capital		199,138			192,537
Treasury stock at cost (1,258,250 shares in 2014 and 2013)		(22,370	)		(22,370	)
Accumulated earnings		267,189			250,744
Accumulated other comprehensive income (loss), net		2,810			(4,295	)

Total shareholders’ equity		446,968			416,814

Total liabilities and shareholders’ equity	$	1,457,220		$	1,329,001

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share data)


	Year Ended December 31,
	2014		2013			2012
Revenues
Premiums earned	$	375,747	$	329,983		$	290,689
Net investment income		27,214		27,029			27,018
Net realized gains (losses) on investments		697		(1,211	)		2,979
Fee and other income		361		534			562

Total revenues		404,019		356,335			321,248
Expenses
Loss and loss adjustment expenses incurred		244,916		228,973			219,903
Underwriting and certain other operating costs		32,573		18,951			18,450
Commissions		27,872		25,303			22,144
Salaries and benefits		24,518		22,862			20,839
Interest expense		—		—			566
Policyholder dividends		391		1,042			2,203

Total expenses		330,270		297,131			284,105

Income before income taxes		73,749		59,204			37,143
Income tax expense		20,083		15,567			7,790

Net income		53,666		43,637			29,353

Net income available to common shareholders	$	53,666	$	43,495		$	29,331

Earnings per share
Basic	$	2.88	$	2.37		$	1.62

Diluted	$	2.84	$	2.32		$	1.58

Shares used in computing earnings per share
Basic		18,646,128		18,373,033			18,166,261

Diluted		18,928,504		18,748,809			18,575,191

Extraordinary cash dividends declared per common share	$	1.50	$	—		$	—

Cash dividends declared per common share	$	0.48	$	0.32		$	—

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)


	Year Ended December 31,
	2014		2013			2012
Net income	$	53,666	$	43,637		$	29,353
Other comprehensive income:
Unrealized gain (loss) on securities, net of tax		7,105		(7,274	)		764

Comprehensive income	$	60,771	$	36,363		$	30,117

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands, except share data)


	Common Stock				Treasury Stock						Additional Paid-In Capital					Accumulated Other Comprehensive Income (Loss)			Total
	Shares		Amount		Shares			Amounts			Additional Paid-In Capital		Accumulated Earnings						Total
Balance at December 31, 2011		19,408,512	$	194		(1,258,250	)	$	(22,370	)	$	185,734	$	183,664		$	2,215		$	349,437
Comprehensive income:
Net income		—		—		—			—			—		29,353			—			29,353
Other comprehensive income:
Change in unrealized gains, net of tax		—		—		—			—			—		—			764			764

Comprehensive income		—		—		—			—			—		—			—			30,117
Common stock issued upon exercise of options		86,800		1		—			—			780		—			—			781
Restricted common stock issued		18,164		—		—			—			240		—			—			240
Share-based compensation		—		—		—			—			226		—			—			226
Tax benefit of share-based compensation		—		—		—			—			421		—			—			421

Balance at December 31, 2012		19,513,476	$	195		(1,258,250	)	$	(22,370	)	$	187,401	$	213,017		$	2,979		$	381,222

Comprehensive income:
Net income		—		—		—			—			—		43,637			—			43,637
Other comprehensive income:
Change in unrealized losses, net of tax		—		—		—			—			—		—			(7,274	)		(7,274	)

Comprehensive income		—		—		—			—			—		—			—			36,363
Common stock issued upon exercise of options		256,300		3		—			—			2,341		—			—			2,344
Restricted common stock issued		85,654		—		—			—			557		—			—			557
Share-based compensation		—		—		—			—			214		—			—			214
Tax benefit of share-based compensation		—		—		—			—			2,024		—			—			2,024
Dividends to shareholders		—		—		—			—			—		(5,910	)		—			(5,910	)

Balance at December 31, 2013		19,855,430	$	198		(1,258,250	)	$	(22,370	)	$	192,537	$	250,744		$	(4,295	)	$	416,814

Comprehensive income:
Net income		—		—		—			—			—		53,666			—			53,666
Other comprehensive income:
Change in unrealized gains, net of tax		—		—		—			—			—		—			7,105			7,105

Comprehensive income		—		—		—			—			—		—			—			60,771
Common stock issued upon exercise of options		294,165		3		—			—			2,671		—			—			2,674
Restricted common stock issued		6,341		—		—			—			—		—			—			—
Share-based compensation		—		—		—			—			1,089		—			—			1,089
Tax benefit of share-based compensation		—		—		—			—			2,841		—			—			2,841
Dividends to shareholders		—		—		—			—			—		(37,221	)		—			(37,221	)

Balance at December 31, 2014		20,155,936	$	201		(1,258,250	)	$	(22,370	)	$	199,138	$	267,189		$	2,810		$	446,968

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Year Ended December 31,
	2014			2013			2012
Operating activities
Net income	$	53,666		$	43,637		$	29,353
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,298			1,300			1,112
Net amortization/accretion of investments		15,243			13,350			10,151
Deferred income taxes		(1,412	)		(207	)		115
Net realized (gains) losses on investments		(697	)		1,211			(2,979	)
Loss on sale of asset		—			2			1
Share-based compensation		1,519			1,409			641
Changes in operating assets and liabilities:
Premiums receivable, net		(7,338	)		(29,629	)		(20,727	)
Accrued interest receivable		(395	)		(850	)		(872	)
Deferred policy acquisition costs		(478	)		(752	)		(1,841	)
Other assets		(7,889	)		1,581			445
Reserve for loss and loss adjustment expenses		73,045			44,107			32,236
Unearned premiums		4,280			23,768			21,829
Reinsurance balances		(10,326	)		26,177			(5,910	)
Amounts held for others and policyholder deposits		11,190			238			12,912
Accounts payable and other liabilities		8,734			3,561			4,582

Net cash provided by operating activities		140,440			128,903			81,048
Investing activities
Purchases of investments held-to-maturity		(225,285	)		(77,868	)		(79,042	)
Purchases of investments available-for-sale		(149,956	)		(135,798	)		(92,751	)
Purchases of short-term investments		(79,957	)		(131,981	)		(95,954	)
Purchases of other invested assets		—			(10,000	)		—
Proceeds from maturities of investments held-to-maturity		114,601			117,750			134,994
Proceeds from sales and maturities of investments available-for-sale		72,535			29,099			52,514
Proceeds from sales and maturities of short-term investments		128,043			112,978			72,105
Purchases of property and equipment		(989	)		(1,140	)		(1,196	)

Net cash used in investing activities		(141,008	)		(96,960	)		(9,330	)
Financing activities
Proceeds from stock option exercises		2,674			2,344			781
Tax benefit from share-based payments		2,841			2,024			421
Redemption of subordinated debt securities		—			—			(25,780	)
Dividends to shareholders		(37,068	)		(5,910	)		—

Net cash used in financing activities		(31,553	)		(1,542	)		(24,578	)

Change in cash and cash equivalents		(32,121	)		30,401			47,140
Cash and cash equivalents at beginning of year		123,077			92,676			45,536

Cash and cash equivalents at end of year	$	90,956		$	123,077		$	92,676

Supplemental disclosure of cash flow information
Interest paid	$	—		$	—		$	686

Income taxes paid	$	19,926		$	12,512		$	7,004

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

1.	Summary of Significant Accounting Policies

Organization

AMERISAFE, Inc. is an insurance holding company incorporated in the state of Texas. The accompanying consolidated financial statements include the accounts of AMERISAFE and its subsidiaries: American Interstate Insurance Company (“AIIC”) and its insurance subsidiaries, Silver Oak Casualty, Inc. (“SOCI”) and American Interstate Insurance Company of Texas (“AIICTX”), Amerisafe Risk Services, Inc. (“RISK”) and Amerisafe General Agency, Inc. (“AGAI”). AIIC and SOCI are property and casualty insurance companies organized under the laws of the state of Nebraska. In 2013, AIIC and SOCI were re-domesticated to Nebraska from Louisiana. AIICTX is a property and casualty insurance company organized under the laws of the state of Texas. RISK, a wholly owned subsidiary of the Company, is a claims and safety service company servicing only affiliated insurance companies. AGAI, a wholly owned subsidiary of the Company, is a general agent for the Company. AGAI sells insurance, which is underwritten by AIIC, SOCI and AIICTX, as well as by nonaffiliated insurance carriers. The assets and operations of AGAI are not significant to that of the consolidated entity.

The terms “AMERISAFE,” the “Company,” “we,” “us” or “our” refer to AMERISAFE, Inc. and its consolidated subsidiaries, as the context requires.

The Company provides workers’ compensation insurance for companies primarily in special trade groups, including construction, trucking, manufacturing, oil and gas and agriculture. Assets and revenues of AIIC represent at least 95% of comparable consolidated amounts of the Company for each of 2014, 2013 and 2012.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation.

Investments

The Company has the ability and positive intent to hold certain investments until maturity. Therefore, fixed maturity securities classified as held-to-maturity are recorded at amortized cost. Equity securities and fixed maturity securities classified as available-for-sale are recorded at fair value. Temporary changes in the fair value of these securities are reported in shareholders’ equity as a component of other comprehensive income, net of deferred income taxes.

Investment income is recognized as it is earned. The discount or premium on fixed maturity securities is amortized using the “constant yield” method. Anticipated prepayments, where applicable, are considered when determining the amortization of premiums or discounts. Realized investment gains and losses are determined using the specific identification method.

The Company regularly reviews the fair value of its investments. Impairment of an investment security results in a reduction of the carrying value of the security and the realization of a loss when the fair value of the

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

security declines below the cost or amortized cost, as applicable, for the security and the impairment is deemed to be other-than-temporary. The Company regularly reviews its investment portfolio to evaluate the existence of other-than-temporary declines in the fair value of investments. The Company considers various factors in determining if a decline in the fair value of an individual security is other-than-temporary, including but not limited to a reduction or interruption in scheduled cash flows, the financial condition of the issuer, how long and by how much the fair value has been below amortized cost, losses due to credit concerns, downgrades and the Company’s intent to sell or ability to hold the security.

Other-than-temporary impairment losses on equity securities are recognized in net income and are measured as the difference between cost and fair value. Impairment losses on fixed maturities are recognized in the financial statements depending on the facts and circumstances related to the specific security. If we intend to sell a security or it is more likely than not that we would be required to sell a security before the recovery of its amortized cost, less any current period credit loss, an other-than-temporary impairment would be recognized in net income for the difference between amortized cost and fair value. If we do not expect to recover the amortized cost basis, we do not plan to sell the security and if it is not more likely than not that we would be required to sell a security before the recovery of its amortized cost, less any current period credit loss, the recognition of the other-than-temporary impairment is bifurcated. The credit loss portion would be recognized in net income and the noncredit loss portion in other comprehensive income.

Cash and Cash Equivalents

Cash equivalents include short-term money market funds and corporate bonds with an original maturity of three months or less.

Short-Term Investments

Short-term investments include municipal securities, corporate bonds and certificates of deposit with an original maturity greater than three months but less than one year.

Other Investments

Other investments consist of a limited partnership (“LP”) interest that is accounted for under the equity method valued using the net asset value provided by the general partner of the LP, which approximates the fair value of the interest. The LP’s objective is to generate absolute returns by investing long and short in publicly-traded global securities. Redemptions are allowed monthly following a sixty day notice with no lock up periods. The Company has no unfunded commitments related to the LP.

Premiums Receivable

Premiums receivable consist primarily of premium-related balances due from policyholders. The Company considers premiums receivable as past due based on the payment terms of the underlying policy. The balance is shown net of the allowance for doubtful accounts. Receivables due from insureds are charged off when a determination has been made by management that a specific balance will not be collected. An estimate of amounts that are likely to be charged off is established as an allowance for doubtful accounts as of the balance sheet date. The estimate is primarily comprised of specific balances that are considered probable to be charged off after all collection efforts have ceased, as well as historical trends and an analysis of the aging of the receivables.

Property and Equipment

The Company’s property and equipment, including certain costs incurred to develop or obtain software for internal use, are stated at cost less accumulated depreciation. Depreciation is calculated primarily by the straight-line method over the estimated useful lives of the respective assets, generally 39 years for buildings and three to seven years for all other fixed assets.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

Deferred Policy Acquisition Costs

The direct costs of successfully acquiring and renewing business are capitalized to the extent recoverable and are amortized over the effective period of the related insurance policies in proportion to premium revenue earned. These capitalized costs consist mainly of sales commissions, premium taxes and other underwriting costs. The Company evaluates deferred policy acquisition costs for recoverability by comparing the unearned premiums to the estimated total expected claim costs and related expenses, offset by anticipated investment income. The Company would reduce the deferred costs if the unearned premiums were less than expected claims and expenses after considering investment income, and report any adjustments in amortization of deferred policy acquisition costs. There were no adjustments necessary in 2014, 2013 or 2012.

Reserves for Loss and Loss Adjustment Expenses

Reserves for loss and loss adjustment expenses represent the estimated ultimate cost of all reported and unreported losses incurred through December 31. The Company does not discount loss and loss adjustment expense reserves. The reserves for loss and loss adjustment expenses are estimated using individual case-basis valuations, statistical analyses and estimates based upon experience for unreported claims and their associated loss and loss adjustment expenses. Such estimates may be more or less than the amounts ultimately paid when the claims are settled. The estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in these estimates, management believes that the reserves for loss and loss adjustment expenses are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known. Any adjustments are included in current operations.

Subrogation recoverables, as well as deductible recoverables from policyholders, are estimated using individual case-basis valuations and aggregate estimates. Deductibles that are recoverable from policyholders and other recoverables from state funds decrease the liability for loss and loss adjustment expenses.

The Company funds its obligations under certain settled claims where the payment pattern and ultimate cost are fixed and determinable on an individual claim basis through the purchase of annuities. These annuities are purchased from unaffiliated carriers and name the claimant as payee. The cost of purchasing the annuity is recorded as paid loss and loss adjustment expenses. To the extent the annuity funds estimated future claims, reserves for loss and loss adjustment expense are reduced.

Premium Revenue

Premiums on workers’ compensation insurance are based on actual payroll costs or production during the policy term and are normally billed monthly in arrears or annually. However, the Company generally requires a deposit at the inception of a policy.

Premium revenue is earned on a pro rata basis over periods covered by the policies. The reserve for unearned premiums on these policies is computed on a daily pro rata basis.

The Company estimates the annual premiums to be paid by its policyholders when the Company issues the policies and records those amounts on the balance sheet as premiums receivable. The Company conducts premium audits on all of its voluntary business policyholders annually, upon the expiration of each policy, including when the policy is renewed. The purpose of these audits is to verify that policyholders have accurately reported their payroll expenses and employee job classifications, and therefore have paid the Company the premium required under the terms of the policies. The difference between the estimated premium and the ultimate premium is referred to as “earned but unbilled” premium, or EBUB premium. EBUB premium can be higher or lower than the estimated premium. EBUB premium is subject to significant variability and can either

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

increase or decrease earned premium based upon several factors, including changes in premium growth, industry mix and economic conditions. Due to the timing of audits and other adjustments, ultimate premium earned is generally not determined for several months after the expiration of the policy.

The Company estimates EBUB premiums on a quarterly basis using historical data and applying various assumptions based on the current market and records an adjustment to premium, related losses, and expenses as warranted.

Reinsurance

Reinsurance premiums, losses and allocated loss adjustment expenses are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts.

Amounts recoverable from reinsurers include balances currently owed to the Company for losses and allocated loss adjustment expenses that have been paid to policyholders, amounts that are currently reserved for and will be recoverable once the related expense has been paid and experience-rated commissions recoverable upon commutation.

Upon management’s determination that an amount due from a reinsurer is uncollectible due to the reinsurer’s insolvency or other matters, the amount is written off.

Ceding commissions are earned from certain reinsurance companies and are intended to reimburse the Company for policy acquisition costs related to those premiums ceded to the reinsurers. Ceding commission income is recognized over the effective period of the related insurance policies in proportion to premium revenue earned and is reflected as a reduction in underwriting and certain other operating costs.

Experience-rated commissions are earned from certain reinsurance companies based on the financial results of the applicable risks ceded to the reinsurers. These commission revenues on reinsurance contracts are recognized during the related reinsurance treaty period and are based on the same assumptions used for recording loss and allocated loss adjustment expenses. These commissions are reflected as a reduction in underwriting and certain other operating costs and are adjusted as necessary as experience develops or new information becomes known. Any such adjustments are included in current operations. Experience-rated commissions had no impact on underwriting and certain other operating costs in 2014 compared to a reduction of $9.3 million in 2013 and $11.1million in 2012.

Fee and Other Income

The Company recognizes income related to commissions earned by AGAI as the related services are performed.

Advertising

All advertising expenditures incurred by the Company are charged to expense in the period to which they relate and are included in underwriting and certain other operating costs in the consolidated statements of income. Total advertising expenses incurred were $0.5 million in 2014, $0.5 million in 2013 and $0.4 million in 2012.

Income Taxes

The Company accounts for income taxes using the liability method. The provision for income taxes has two components, amounts currently payable or receivable and deferred amounts. Deferred income tax assets and liabilities are recognized for the differences between the financial statement carrying amounts of existing assets

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company considers deferred tax assets to be recoverable if it is probable that the related tax losses can be offset by future taxable income. The Company includes reversal of existing temporary differences, tax planning strategies available and future operating income in this assessment. To the extent the deferred tax assets exceed the amount expected to be recovered in future years, the Company records a valuation allowance for the amount determined unrecoverable.

Insurance-Related Assessments

Insurance-related assessments are accrued in the period in which they have been incurred. The Company is subject to a variety of assessments related to insurance commerce, including those by state guaranty funds and workers’ compensation second-injury funds. State guaranty fund assessments are used by state insurance oversight agencies to cover losses of policyholders of insolvent or rehabilitated insurance companies and for the operating expenses of such agencies. The Company has a premium tax benefit accrued of $4.0 million and $3.6 million as of December 31, 2014 and 2013, respectively, for mandatory assessments that may be recovered through a reduction in future premium taxes in certain states. Assessments based on premiums are generally paid one year after the calendar year in which the premium is written, while assessments based on losses are generally paid within one year of the calendar year in which the loss is paid.

Policyholder Dividends

The Company writes certain policies for which the policyholder may participate in favorable claims experience through a dividend. An estimated provision for workers’ compensation policyholders’ dividends is accrued as the related premiums are earned. Dividends do not become a fixed liability unless and until declared by the respective Boards of Directors of AMERISAFE’s insurance subsidiaries. The dividend to which a policyholder may be entitled is set forth in the policy and is related to the amount of losses sustained under the policy. Dividends are calculated after the policy expiration. The Company is able to estimate the policyholder dividend liability because the Company has information regarding the underlying loss experience of the policies written with dividend provisions and can estimate future dividend payments from the policy terms.

Earnings Per Share

The Company computes earnings per share (EPS) in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share. Additionally, during 2013, the Company applied the “two-class method” in computing basic and diluted earnings per share as a result of the participating unvested common shares which contained nonforfeitable rights to dividends during this period. As of January 1, 2014, the Company no longer has participating unvested common shares which contain nonforfeitable rights to dividends and now applies the treasury stock method in computing basic and diluted earnings per share.

Under the two-class method, net income available to common and participating common shareholders is reduced by the amount of dividends declared in the current period and by the contractual amount of dividends that must be paid for the current period related to the Company’s common and participating common shares. Participating common shares include unvested share-based payment awards that contain nonforfeitable rights to dividends, whether paid or unpaid. Any remaining undistributed earnings are allocated to the common and participating common shareholders to the extent that each security shares in earnings as if all of the earnings for

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

the period had been distributed. The amount of earnings allocable to each security is divided by the number of outstanding shares of the security to which the earnings are allocated to determine the EPS for the security. In a period of loss, no losses are allocated to the participating common shareholders. Instead, all such losses are allocated to the common shareholders.

Basic EPS is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. The diluted EPS calculation includes potential common shares assumed issued under the treasury stock method, which reflects the potential dilution that would occur if any outstanding options or warrants were exercised or restricted stock becomes vested, and includes the “if converted” method for participating securities if the effect is dilutive. We determine diluted EPS as the more dilutive result of either the treasury method or the two-class method.

Share-Based Compensation

The Company recognizes the impact of its share-based compensation in accordance with FASB ASC Topic 718, Compensation-Stock Compensation. All share-based grants are recognized as compensation expense over the vesting period. The target value of long-term incentive awards are recognized as compensation over the performance period.

2.	Investments

Short-term investments held at December 31, 2014 include $32.7 million of corporate bonds and certificates of deposit of $1.0 million. Short-term investments held at December 31, 2013 include $82.7 million of corporate bonds, certificates of deposits of $0.9 million and $0.8 million of municipal securities. All certificates of deposits are fully insured by the Federal Deposit Insurance Corporation.

Amerisafe holds investments in a LP, accounted for under the equity method. The carrying value of this investment is $11.7 million at December 31, 2014.

The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as held-to-maturity at December 31, 2014 are summarized as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
States and political subdivisions	$	385,623	$	20,100	$	(58)	$	405,665
Corporate bonds		176,880		374		(520)		176,734
Commercial mortgage-backed securities		46,662		1,867		—		48,529
U.S. agency-based mortgage-backed securities		16,972		1,702		(2)		18,672
U.S. Treasury securities and obligations of U.S. Government agencies		10,697		1,097		(2)		11,792
Asset-backed securities		2,797		264		(82)		2,979

Totals	$	639,631	$	25,404	$	(664)	$	664,371

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

The gross unrealized gains and losses on, and the cost or amortized cost and fair value of, those investments classified as available-for-sale at December 31, 2014 are summarized as follows:


	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
Fixed maturity:
States and political subdivisions	$	151,744	$	7,302	$	(1,672)	$	157,374
Corporate bonds		165,412		428		(470)		165,370
U.S. agency-based mortgage-backed securities		9,848		2		(1,352)		8,498

Total fixed maturity		327,004		7,732		(3,494)		331,242
Other investments		10,000		1,748		—		11,748
Equity securities		—		28		—		28

Totals	$	337,004	$	9,508	$	(3,494)	$	343,018

The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as held-to-maturity at December 31, 2013 are summarized as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
States and political subdivisions	$	381,674	$	18,634	$	(1,153)	$	399,155
Corporate bonds		67,423		861		(41)		68,243
Commercial mortgage-backed securities		50,813		3,431		—		54,244
U.S. agency-based mortgage-backed securities		21,775		1,790		—		23,565
U.S. Treasury securities and obligations of U.S. Government agencies		11,514		1,002		—		12,516
Asset-backed securities		3,384		216		(144)		3,456

Totals	$	536,583	$	25,934	$	(1,338)	$	561,179

The gross unrealized gains and losses on, and the cost or amortized cost and fair value of, those investments classified as available-for-sale at December 31, 2013 are summarized as follows:


	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
Fixed maturity:
States and political subdivisions	$	154,024	$	1,491	$	(5,140)	$	150,375
Corporate bonds		80,344		445		(361)		80,428
U.S. agency-based mortgage-backed securities		10,041		—		(2,967)		7,074

Total fixed maturity		244,409		1,936		(8,468)		237,877
Other investments		10,000		591		—		10,591
Equity securities		9,482		387		(567)		9,302

Totals	$	263,891	$	2,914	$	(9,035)	$	257,770

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

A summary of the amortized cost and fair value of investments in fixed maturity securities, classified as held-to-maturity at December 31, 2014, by contractual maturity, is as follows:


	Amortized Cost		Fair Value
	(in thousands)
Maturity:
Within one year	$	120,896	$	121,909
After one year through five years		262,486		271,332
After five years through ten years		102,703		110,139
After ten years		87,115		90,811
U.S. agency-based mortgage-backed securities		16,972		18,672
Commercial mortgage-backed securities		46,662		48,529
Asset-backed securities		2,797		2,979

Totals	$	639,631	$	664,371

A summary of the amortized cost and fair value of investments in fixed maturity securities, classified as available-for-sale at December 31, 2014, by contractual maturity, is as follows:


	Amortized Cost		Fair Value
	(in thousands)
Maturity:
Within one year	$	51,403	$	51,448
After one year through five years		127,842		128,060
After five years through ten years		10,056		10,275
After ten years		127,855		132,961
U.S. agency-based mortgage-backed securities		9,848		8,498

Totals	$	327,004	$	331,242

Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.

At December 31, 2014, there were $19.8 million of held-to-maturity investments on deposit with regulatory agencies of states in which the Company does business.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

A summary of the Company’s realized gains and losses on sales, calls or redemptions of investments for 2014, 2013 and 2012 is as follows:


	Fixed Maturity Securities Available for Sale			Equity Securities			Other		Total
	(in thousands)
Year ended December 31, 2014
Proceeds from sales	$	768		$	9,780		$	—	$	10,548

Gross realized investment gains	$	1		$	749		$	—	$	750
Gross realized investment (losses)		—			(451	)		—		(451	)

Net realized investment gains		1			298			—		299
Impairments		(222	)		—			—		(222	)
Other, including gains on calls and redemptions		244			—			376		620

Net realized investment gains	$	23		$	298		$	376	$	697

Year ended December 31, 2013
Proceeds from sales	$	2,090		$	8,900		$	—	$	10,990

Gross realized investment gains	$	90		$	1,264		$	—	$	1,354
Gross realized investment (losses)		—			(471	)		—		(471	)

Net realized investment gains		90			793			—		883
Impairments		—			(2,229	)		—		(2,229	)
Other, including gains on calls and redemptions		38			—			97		135

Net realized investment gains (losses)	$	128		$	(1,436	)	$	97	$	(1,211	)

Year ended December 31, 2012
Proceeds from sales	$	22,363		$	10,777		$	—	$	33,140

Gross realized investment gains	$	1,555		$	1,186		$	—	$	2,741
Gross realized investment (losses)		—			—			—		—

Net realized investment gains		1,555			1,186			—		2,741
Other, including gains on calls and redemptions		15			—			223		238

Net realized investment gains	$	1,570		$	1,186		$	223	$	2,979

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

Major categories of the Company’s net investment income are summarized as follows:


	Year Ended December 31,
	2014			2013			2012
	(in thousands)
Gross investment income:
Fixed maturity securities	$	26,622		$	26,422		$	27,167
Short-term investments and cash and cash equivalents		426			634			489
Equity securities		232			543			446
Other investments		1,611			803			—

Total gross investment income		28,891			28,402			28,102
Investment expenses		(1,677	)		(1,373	)		(1,084	)

Net investment income	$	27,214		$	27,029		$	27,018

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

The following table summarizes the fair value and gross unrealized losses on securities, aggregated by major investment category and length of time that the individual securities have been in a continuous unrealized loss position:


	Less Than 12 Months				12 Months or Greater				Total
	Fair Value of Investments with Unrealized Losses		Gross Unrealized Losses		Fair Value of Investments with Unrealized Losses		Gross Unrealized Losses		Fair Value of Investments with Unrealized Losses		Gross Unrealized Losses
	(in thousands)
December 31, 2014
Held-to-Maturity
Fixed maturity securities:
Corporate bonds	$	129,788	$	520	$	—	$	—	$	129,788	$	520
States and political subdivisions		16,896		58		—		—		16,896		58
U.S. Treasury securities and obligations of U.S. Government agencies		3,385		2		—		—		3,385		2
U.S. agency-based mortgage-backed securities		78		2		—		—		78		2
Asset-backed securities		—		—		1,662		82		1,662		82

Total held-to-maturity securities		150,147		582		1,662		82		151,809		664


Available-for Sale
Fixed maturity securities:
Corporate bonds	$	106,185	$	470	$	—	$	—	$	106,185	$	470
States and political subdivisions		3,810		6		10,347		1,666		14,157		1,672
U.S. agency-based mortgage-backed securities		627		11		7,757		1,341		8,384		1,352

Total available-for-sale securities		110,622		487		18,104		3,007		128,726		3,494

Total	$	260,769	$	1,069	$	19,766	$	3,089	$	280,535	$	4,158

December 31, 2013
Held-to-Maturity
Fixed maturity securities:
Corporate bonds	$	14,090	$	41	$	—	$	—	$	14,090	$	41
States and political subdivisions		54,895		1,147		311		6		55,206		1,153
Asset-backed securities		—		—		1,916		144		1,916		144

Total held-to-maturity securities		68,985		1,188		2,227		150		71,212		1,338


Available-for Sale
Fixed maturity securities:
Corporate bonds	$	29,691	$	361	$	—	$	—	$	29,691	$	361
States and political subdivisions		101,908		4,798		1,753		342		103,661		5,140
U.S. agency-based mortgage-backed securities		1,303		465		5,772		2,502		7,075		2,967
Equity securities		5,205		567		—		—		5,205		567

Total available-for-sale securities		138,107		6,191		7,525		2,844		145,632		9,035

Total	$	207,092	$	7,379	$	9,752	$	2,994	$	216,844	$	10,373

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

At December 31, 2014, the Company held 174 individual fixed maturity securities that were in an unrealized loss position, of which 19 were in a continuous unrealized loss position for longer than 12 months.

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 our investments. The Company considers various factors in determining if a decline in the fair value of an individual security is other-than-temporary. The key factors considered are:

•

any reduction or elimination of dividends, or nonpayment of scheduled principal or interest payments;

•

the financial condition and near-term prospects of the issuer of the applicable security, including any specific events that may affect its operations or earnings;

•

how long and by how much the fair value of the security has been below its cost or amortized cost;

•

any downgrades of the security by a rating agency;

•

our intent not to sell the security for a sufficient time period for it to recover its value;

•

the likelihood of being forced to sell the security before the recovery of its value; and

•

an evaluation as to whether there are any credit losses on debt securities.

The Company reviewed all securities with unrealized losses in accordance with the impairment policy described above. The Company expects to hold investments in equity securities for a reasonable period of time sufficient for a recovery of fair value. With the exception of one security deemed to be other-than-temporarily impaired, the Company determined that the unrealized losses in the fixed maturity securities portfolio related primarily to changes in market interest rates since the date of purchase, current conditions in the capital markets and the impact of those conditions on market liquidity and prices generally, and the transfer of the investments from the available-for-sale classification to the held-to-maturity classification in January 2004. We expect to recover the carrying value of these securities as it is not more likely than not that we will be required to sell the security before the recovery of its amortized cost basis.

In 2014, the Company impaired a fixed maturity security in the amount of $0.2 million. The impairment charge is included in “Net realized gains (losses) on investments” for 2014. We impaired the security due to a downgrade of the security and the amount of the accumulated unrealized loss.

In 2014, the Company exercised a change of control put on a held-to-maturity security. The security held a net carrying value of $2.1 million at the execution of the put option and resulted in a realized loss of $58,000. The issuer experienced a significant downgrade in credit after being acquired by an entity that funded the acquisition primarily through additional borrowings.

3.	Premiums Receivable

Premiums receivable consist primarily of premium-related balances due from policyholders. The balance is shown net of the allowance for doubtful accounts. The components of premiums receivable are shown below:


	December 31,
	2014			2013
	(in thousands)
Premiums receivable	$	184,128		$	177,037
Allowance for doubtful accounts		(5,211	)		(5,458	)

Premiums receivable, net	$	178,917		$	171,579

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

The following summarizes the activity in the allowance for doubtful accounts:


	December 31,
	2014			2013			2012
	(in thousands)
Balance, beginning of year	$	5,458		$	6,424		$	5,573
Provision for bad debts (1)		673			52			2,230
Write-offs		(920	)		(1,018	)		(1,379	)

Balance, end of year	$	5,211		$	5,458		$	6,424


(1) Includes a one-time adjustment of $1.7 million in 2013 as a result of a change in accounting estimate of uncollectible accounts based on historical experience.

Included in premiums receivable at December 31, 2014, 2013 and 2012 is the Company’s estimate for EBUB premium of $5.2 million, $4.3 million and $3.0 million, respectively.

4.	Deferred Policy Acquisition Costs

Deferred policy acquisition costs represent those costs that are incremental and directly related to the successful acquisition of new or renewal of existing insurance contracts. We defer incremental costs that result directly from, and are essential to, the acquisition or renewal of an insurance contract.

We also defer a portion of employee total compensation costs directly related to time spent performing specific acquisition or renewal activities.

These costs are deferred and expensed over the life of the related policies. Major categories of the Company’s deferred policy acquisition costs are summarized as follows:


	December 31,
	2014		2013
	(in thousands)
Agents’ commissions	$	15,351	$	15,511
Premium taxes		3,100		2,526
Deferred underwriting expenses		1,198		1,134

Total deferred policy acquisition costs	$	19,649	$	19,171

The following summarizes the activity in the deferred policy acquisition costs:


	Year Ended December 31,
	2014			2013			2012
	(in thousands)
Balance, beginning of year	$	19,171		$	18,419		$	16,578
Policy acquisition costs deferred		44,295			41,278			40,961
Amortization expense during the year		(43,817	)		(40,526	)		(39,120	)

Balance, end of year	$	19,649		$	19,171		$	18,419

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

5.	Property and Equipment

Property and equipment consist of the following:


	December 31,
	2014			2013
	(in thousands)
Land and office building	$	7,758		$	7,749
Furniture and equipment		6,593			6,653
Software		9,875			9,615
Automobiles		73			81

		24,299			24,098
Accumulated depreciation		(17,059	)		(16,549	)

Property and equipment, net	$	7,240		$	7,549

Furniture and equipment included property held under capital leases of $0.1 million at December 31, 2014. Accumulated depreciation includes $49,000 that is related to these properties at December 31, 2014. The capital lease obligations related to these properties are included in accounts payable and other liabilities. The Company had no capital lease obligations at December 31, 2013.

Future minimum lease payments related to the capital lease obligations are detailed below (in thousands):


2015	$	38
2016		39
2017		29

Present value of net minimum lease payments	$	106

6.	Reinsurance

The Company cedes certain premiums and losses to various reinsurers under quota share and excess-of-loss treaties. These reinsurance arrangements provide for greater diversification of business, allow management to control exposure to potential losses arising from large risks, and provide additional capacity for growth. Ceded reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. To minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers on a continual basis. The effect of reinsurance on premiums written and earned in 2014, 2013 and 2012 was as follows:


	2014 Premiums						2013 Premiums						2012 Premiums
	Written			Earned			Written			Earned			Written			Earned
	(in thousands)
Gross	$	393,819		$	389,540		$	372,177		$	348,408		$	328,823		$	306,994
Ceded		(13,793	)		(13,793	)		(18,425	)		(18,425	)		(16,305	)		(16,305	)

Net premiums	$	380,026		$	375,747		$	353,752		$	329,983		$	312,518		$	290,689

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

The amounts recoverable from reinsurers consist of the following:


	December 31,
	2014		2013
	(in thousands)
Unpaid losses recoverable:
Case basis	$	34,196	$	31,850
Incurred but not reported		25,138		16,849
Paid losses recoverable		424		497
Experience-rated commissions recoverable		26,130		26,130

Total	$	85,888	$	75,326

Amounts recoverable from reinsurers consists of ceded case reserves, ceded incurred but not reported (“IBNR”) reserves, paid losses recoverable and experience-rated commissions recoverable. Ceded case and ceded IBNR reserves represent the portion of gross loss and loss adjustment expense liabilities that are recoverable under reinsurance agreements, but are not yet due from reinsurers. Paid losses recoverable are receivables currently due from reinsurers for ceded paid losses. The Company considers paid losses recoverable outstanding for more than 90 days to be past due. At December 31, 2014, there were no paid losses recoverable past due. Experience-rated commissions recoverable represents earned commission from certain reinsurance companies based on the financial results of the applicable risks ceded to the reinsurers.

In 2013, the Company returned previous recoveries of $2.3 million due to a single closed claim. Excluding this impact, the Company received reinsurance recoveries of $1.5 million in 2014, $2.1 million in 2013 and $5.3 million in 2012.

At December 31, 2014, unsecured reinsurance recoverables from reinsurers that exceeded 1.5% of statutory surplus of the Company’s insurance subsidiary are shown below (in thousands). The A.M. Best Company rating for the reinsurer is shown parenthetically.


Hannover Reinsurance (Ireland) Limited (A+)	$	27,387
Odyssey America Reinsurance Corporation (A)		13,523
Minnesota Workers’ Compensation Reinsurance Association (NR)		8,518
Tokio Millenium Reinsurance Limited (A++)		6,410
Clearwater Insurance Company (bbb)		6,229
Other reinsurers		23,821

Total reinsurance recoverables		85,888
Letters of credit and funds held		(47,833	)

Total unsecured reinsurance recoverables	$	38,055

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

7.	Income Taxes

The Company’s deferred income tax assets and liabilities are as follows:


	December 31,
	2014			2013
	(in thousands)
Deferred income tax assets:
Discounting of net unpaid loss and loss adjustment expenses	$	17,952		$	17,493
Unearned premiums		14,788			14,008
Accrued expenses and other		4,306			4,336
State income tax		591			—
Accrued policyholder dividends		438			684
Impaired securities		80			874
Accrued insurance-related assessments		4,804			3,989

Total deferred tax assets		42,959			41,384
Deferred income tax liabilities:
Deferred policy acquisition costs		(8,815	)		(7,937	)
Unrealized gain (loss) on securities available-for-sale		(1,513	)		2,313
Property and equipment and other		(331	)		(266	)
Salvage and subrogation		(289	)		(288	)
Guaranty fund related items		(780	)		(1,561	)

Total deferred income tax liabilities		(11,728	)		(7,739	)

Net deferred income taxes	$	31,231		$	33,645

The components of consolidated income tax expense (benefit) are as follows:


	Year Ended December 31,
	2014			2013			2012
	(in thousands)
Current:
Federal	$	20,811		$	15,270		$	7,373
State		684			504			302

		21,495			15,774			7,675
Deferred:
Federal		(821	)		(207	)		115
State		(591	)		—			—

		(1,412	)		(207	)		115

Total	$	20,083		$	15,567		$	7,790

In 2012, 2013 and 2014, the Company made no adjustment to the valuation allowance. As of December 31, 2014, there is no valuation allowance.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

Income tax expense from operations is different from the amount computed by applying the U.S. federal income tax statutory rate of 35% to income before income taxes as follows:


	Year Ended December 31,
	2014			2013			2012
	(in thousands)
Income tax computed at federal statutory tax rate	$	25,812		$	20,721		$	13,000
Tax-exempt interest, net		(5,620	)		(5,458	)		(5,333	)
State income tax		(146	)		504			302
Dividends received deduction		(60	)		(113	)		(79	)
Other		97			(87	)		(100	)

	$	20,083		$	15,567		$	7,790

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There were no uncertain tax positions as of December 31, 2014, 2013 and 2012.

Tax years 2009 through 2014 are subject to examination by the federal and state taxing authorities. In April 2012, the Company was notified by the Internal Revenue Service that the examination for tax year 2009 had been completed, but remains subject to state taxing authorities.

8.	Line of Credit

In October 2007, the Company entered into an agreement providing for a line of credit in the maximum amount of $20.0 million with Frost Bank, NA. The agreement expired in October 2010. The Company renewed this agreement in the fourth quarter 2010 for an additional three years to mature in December 2013. In the fourth quarter 2013, the Company renewed this agreement for an additional three years to mature in December 2016. Under the agreement, advances may be made either in the form of loans or letters of credit. Borrowings under the agreement accrue at interest rates based upon prime rate or LIBOR. Under the agreement, the Company will pay a fee of 0.25% on the unused portion of the loan in arrears quarterly for a fee of $50,000 annually, assuming the line of credit is not used during the calendar year. The line of credit is unsecured. No borrowings or letters of credit were outstanding under the line of credit arrangement at December 31, 2014 or 2013.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

9.	Loss and Loss Adjustment Expenses

The following table provides a reconciliation of the beginning and ending reserve balances, net of related amounts recoverable from reinsurers, for 2014, 2013 and 2012:


	Year Ended December 31,
	2014			2013			2012
	(in thousands)
Balance, beginning of period	$	614,557		$	570,450		$	538,214
Less amounts recoverable from reinsurers on unpaid loss and loss adjustment expenses		48,699			55,190			60,937

Net balance, beginning of period		565,858			515,260			477,277
Add incurred related to:
Current accident year		268,633			241,584			222,393
Prior accident years		(23,717	)		(12,611	)		(2,490	)

Total incurred		244,916			228,973			219,903
Less paid related to:
Current accident year		52,848			51,169			50,423
Prior accident years		129,658			127,206			131,497

Total paid		182,506			178,375			181,920

Net balance, end of period		628,268			565,858			515,260
Add amounts recoverable from reinsurers on unpaid loss and loss adjustment expenses		59,334			48,699			55,190

Balance, end of period	$	687,602		$	614,557		$	570,450

The foregoing reconciliation reflects favorable development of the net reserves at December 31, 2014, 2013, and 2012. The favorable development reduced loss and loss adjustment expense incurred by $23.7 million in 2014 driven primarily by accident years 2012, 2010 and 2009 of $9.3 million, $6.9 million and $1.7 million, respectively. In 2013 and 2012, the Company recorded favorable development of $12.6 million and $2.5 million, respectively. The revisions to the Company’s reserves reflect new information gained by claims adjusters in the normal course of adjusting claims and is reflected in the financial statements when the information becomes available. It is typical for more serious claims to take several years or longer to settle and the Company continually revises estimates as more information about claimants’ medical conditions and potential disability becomes known and the claims get closer to being settled.

Reserves established for workers’ compensation insurance have included the exposure to occupational disease or accidents related to asbestos or environmental claims. The exposure to asbestos claims emanate from the direct sale of workers’ compensation insurance. These claims resulted from industry workers who were exposed to tremolite asbestos dust and electricians and carpenters who were exposed to products that contained asbestos. There has been no known exposure to asbestos claims arising from assumed business. The emergence of these claims is slow and highly unpredictable. The Company estimates full impact of the asbestos exposure by establishing full case basis reserves on all known losses. Reserves for losses incurred but not reported (IBNR) include a provision for development of reserves on reported losses. Reserves are established for loss adjustment expenses (LAE) associated with these case and IBNR loss reserves.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

The following table details our exposures to various asbestos related claims:


	Year Ended December 31,
	2014			2013			2012
	(in thousands)
Reserves for loss and LAE at beginning of year	$	219		$	167		$	—
Incurred losses and LAE during the current year		882			53			168
Loss and LAE payments		(282	)		(1	)		(1	)

Reserves for loss and LAE at end of year	$	819		$	219		$	167

The Company has historically written general liability coverages that are reported in other liability lines of business. These coverages may be associated with the property and casualty’s industry exposure to environmental claims. However, the Company has not been notified by any insured for which exposure exists due to these types of claims. Company management believes potential exposure to environmental claims to be remote. Therefore, the Company has no loss or loss adjustment expense reserves for such liabilities.

The anticipated effect of inflation is implicitly considered when estimating liabilities for loss and loss adjustment expenses. Average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions and general economic trends. These anticipated trends are monitored based on actual development and are modified if necessary.

10.

Statutory Accounting and Regulatory Requirements

The Company’s insurance subsidiaries file financial statements prepared in accordance with statutory accounting principles prescribed or permitted by the insurance regulatory authorities of the states in which the subsidiaries are domiciled. Statutory-basis shareholders’ capital and surplus at December 31, 2014, 2013 and 2012 of the directly owned insurance subsidiary, AIIC, and the combined statutory-basis net income and realized investment gains for all AMERISAFE’s insurance subsidiaries for the three years in the period ended December 31, 2014, were as follows (in thousands):


	2014		2013			2012
Capital and surplus	$	377,742	$	354,293		$	323,932
Net income		50,205		44,751			31,059
Realized investment gains (losses)		693		(1,214	)		2,958

Property and casualty insurance companies are subject to certain risk-based capital (“RBC”) requirements specified by the National Association of Insurance Commissioners. Under these requirements, a target minimum amount of capital and surplus maintained by a property/casualty insurance company is determined based on the various risk factors related to it. At December 31, 2014, the capital and surplus of AIIC and its subsidiaries exceeded the minimum RBC requirement.

Pursuant to regulatory requirements, AIIC cannot pay dividends to the Company in excess of the lesser of 10% of statutory surplus, or statutory net income, excluding realized investment gains, for the preceding 12-month period, without the prior approval of the Nebraska Director of Insurance. However, for purposes of this dividend calculation, net income from the previous two calendar years may be carried forward to the extent that it has not already been paid out as dividends. AIIC paid $25.0 million in dividends to the Company in 2014, $15.0 million in 2013 and $21.0 million in 2012. Based upon the dividend limitation described above, AIIC could pay to the Company dividends of up to $37.8 million in 2015 without seeking regulatory approval.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

11.

Capital Stock

Common Stock

The Company is authorized to issue 50,000,000 shares of common stock, par value $0.01 per share. At December 31, 2014, there were 20,155,936 shares of common stock issued and 18,897,686 shares outstanding.

Preferred Stock

Shareholders approved an amended Certificate of Formation for the Company on June 15, 2010 under which the Company is authorized to issue 10,000,000 shares of preferred stock, par value $0.01 per share. At December 31, 2014, there were no shares of preferred stock outstanding.

12.

Stock Options and Restricted Stock

2005 Incentive Plan

The AMERISAFE 2005 Equity Incentive Plan (the “2005 Incentive Plan”) is administered by the Compensation Committee of the Board and is designed to provide incentive compensation to executive officers and other key management personnel. The 2005 Incentive Plan permits awards in the form of incentive stock options, as defined in Section 422(b) of the Internal Revenue Code of 1986, non-qualified stock options, restricted shares of common stock and restricted stock units. In connection with the approval of the 2012 Equity and Incentive Compensation Plan by the Company’s shareholders, no further awards will be made under the 2005 Equity Incentive Plan.

Stock options granted under the 2005 Incentive Plan have an exercise price of not less than 100% of the fair value of the common stock on the date of grant. However, any stock options granted to holders of more than 10% of the Company’s voting stock will have an exercise price of not less than 110% of the fair value of the common stock on the date of grant. Stock option grants are exercisable, subject to vesting requirements determined by the Compensation Committee, for periods of up to ten years from the date of grant, except for any grants to holders of more than 10% of the Company’s voting stock, which will have exercise periods limited to a maximum of five years. Stock options generally expire 90 days after the cessation of an optionee’s service as an employee. However, in the case of an optionee’s death or disability, the unexercised portion of a stock option remains exercisable for up to one year after the optionee’s death or disability. Stock options granted under the 2005 Incentive Plan are not transferable, except by will or the laws of descent and distribution.

The Company uses the Black-Scholes-Merton option pricing model to estimate the fair value of each option on the date of grant. The expected terms of options are developed by considering the Company’s historical attrition rate for those employees at the officer level, who are eligible to receive options. Further, the Company aggregates individual awards into homogenous groups based upon grant date. Expected volatility is estimated using daily historical volatility for six companies within the property and casualty insurance sector. The Company believes that historical volatility of this peer group is currently the best estimate of expected volatility of the market price of the Company’s common shares. The dividend yield was assumed to be zero as the Company did not pay cash dividends until 2013. The risk-free interest rate is the yield on the grant date of U.S. Treasury zero coupon securities with a maturity comparable to the expected term of the options.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

The following table summarizes information about the stock options outstanding under the 2005 Incentive Plan at December 31, 2012, 2013 and 2014:


	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in years)
Outstanding at January 1, 2012		919,348			10.37		5.5
Granted		—			—		—
Exercised		(86,800	)		9.00		—
Canceled, forfeited, or expired		—			—		—

Outstanding at December 31, 2012		832,548			10.51		4.6

Exercisable at December 31, 2012		779,948			10.08		4.4

Outstanding at January 1, 2013		832,548			10.51		4.6
Granted		—			—		—
Exercised		(256,300	)		9.00		—
Canceled, forfeited, or expired		—			—		—

Outstanding at December 31, 2013		576,248			11.12		3.8

Exercisable at December 31, 2013		557,448			10.91		3.7

Outstanding at January 1, 2014		576,248			11.12		3.8
Granted		—			—		—
Exercised		(294,165	)		9.09		—
Canceled, forfeited, or expired		—			—		—

Outstanding at December 31, 2014		282,083			11.30		3.6

Exercisable at December 31, 2014		282,083			11.30		3.6


	2014		2013		2012
			(in thousands)
Cash received from option exercises	$	2,674	$	2,344	$	781
Total tax benefits realized for tax deductions from options exercised		2,797		2,002		405
Total intrinsic value of options exercised		9,145		6,654		1,468
Grant date fair value of options vested		144		226		310
Aggregate intrinsic value of vested options outstanding		8,763		17,467		13,393

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

The following table summarizes information about the restricted stock outstanding under the 2005 Incentive Plan at December 31, 2014:


	Shares			Weighted-Average Grant-Date Fair Value per Share
Nonvested balance at January 1, 2012		—			—
Granted		8,000			27.47
Vested		—			—
Forfeited		—			—

Nonvested balance at December 31, 2012		8,000			27.47

Granted		—			—
Vested		(1,600	)		27.47
Forfeited		—			—

Nonvested balance at December 31, 2013		6,400			27.47

Granted		—			—
Vested		(800	)		27.35
Forfeited		(3,200	)		27.59

Nonvested balance at December 31, 2014		2,400			27.35

The Company recognized compensation expense of $0.3 million in 2014 and 2013 and $0.2 million in 2012, related to awards made under the 2005 Incentive Plan. Total tax benefits realized for tax deductions from vesting of restricted stock in 2014 and 2013 were $38,000, and $4,000, respectively.

2010 Restricted Stock Plan

In 2010, the Company’s shareholders approved an amendment to the AMERISAFE Non-Employee Director Restricted Stock Plan (the “2010 Restricted Stock Plan”). The Plan is administered by the Compensation Committee of the Board and provides for the automatic grant of restricted stock awards to non-employee directors of the Company. Awards to non-employee directors are generally subject to terms including non-transferability, immediate vesting upon death or total disability of a director, forfeiture of unvested shares upon termination of service by a director and acceleration of vesting upon a change of control of the Company. The maximum number of shares of common stock that may be issued pursuant to restricted stock awards under the 2010 Restricted Stock Plan is 100,000 shares, subject to the authority of the Board to adjust this amount in the event of a merger, consolidation, reorganization, stock split, combination of shares, recapitalization or similar transaction affecting the common stock. At December 31, 2014, there were 33,186 shares of common stock available for future awards under the 2010 Restricted Stock Plan.

Under the 2010 Restricted Stock Plan, each non-employee director is automatically granted a restricted stock award for a number of shares equal to $30,000 divided by the closing price of the Company’s common stock on the date of the annual meeting of shareholders at which the non-employee director is elected or is continuing as a member of the Board. Each restricted stock award vests on the date of the next annual meeting of shareholders following the date of grant, subject to the continued service of the non-employee director.

As of December 31, 2014, there were 5,229 shares of restricted stock outstanding under the 2010 Restricted Stock Plan, all of which will vest on the date of the annual meeting of shareholders in 2015.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

The following table summarizes information about the restricted stock outstanding under the 2010 Restricted Stock Plan at December 31, 2014:


	Shares			Weighted-Average Grant-Date Fair Value per Share
Nonvested balance at January 1, 2012		9,513			22.06
Granted		7,833			26.79
Vested		(9,513	)		22.06
Forfeited		—			—

Nonvested balance at December 31, 2012		7,833			26.79

Granted		5,376			33.47
Vested		(7,833	)		26.79
Forfeited		—			—

Nonvested balance at December 31, 2013		5,376			33.47

Granted		5,229			37,27
Vested		(5,376	)		33.47
Forfeited		—			—

Nonvested balance at December 31, 2014		5,229			37.27

The Company recognized compensation expense of $0.2 million in 2014, 2013 and 2012 related to the 2010 Restricted Stock Plan. Total tax benefits realized for tax deductions from vesting of restricted stock in 2014, 2013 and 2012 were $7,000, $18,000 and $16,000, respectively.

2012 Equity and Incentive Compensation Plan

In 2012, the Company’s shareholders approved the AMERISAFE 2012 Equity and Incentive Compensation Plan (the “2012 Incentive Plan”). The 2012 Incentive Plan is administered by the Compensation Committee of the Board and is designed to attract, retain and motivate non-employee directors, officers, key employees and consultants by providing incentives for superior performance. The 2012 Incentive Plan authorizes the grant of equity-based compensation in the form of option rights, appreciation rights, restricted shares, restricted stock units, cash incentive awards, performance shares and units, and other types of awards.

A maximum of 500,000 shares of common stock may be issued or transferred upon the exercise of option rights or appreciation rights, as restricted shares and released from substantial risk of forfeiture, in payment of restricted stock units, in payment of performance shares or performance units that have been earned, as awards of shares of common stock to non-employee directors, as other awards granted under the 2012 Incentive Plan, or in payment of dividend equivalents paid with respect to awards made under the plan subject to adjustment in the event of a merger, stock dividend, stock split or similar event, which may be original issue shares or treasury shares or a combination of the two.

In 2014, 4,312 shares of restricted stock were granted under the 2012 Incentive Plan, which will vest through 2017. In 2013, 80,278 shares of restricted stock were granted under the 2012 Incentive Plan, which will vest through 2020. At December 31, 2014, there were 413,079 shares of common stock available for future awards under the 2012 Incentive Plan.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

The following table summarizes information about the restricted stock outstanding under the 2012 Incentive Plan at December 31, 2014:


	Shares			Weighted-Average Grant-Date Fair Value per Share
Nonvested balance at January 1, 2012		—			—
Granted		2,331			26.79
Vested		—			—
Forfeited		—			—

Nonvested balance at December 31, 2012		2,331			26.79

Granted		80,278			34.14
Vested		—			—
Forfeited		—			—

Nonvested balance at December 31, 2013		82,609			33.93

Granted		4,312			43.83
Vested		(14,000	)		33.58
Forfeited		—			—

Nonvested balance at December 31, 2014		72,921			34.59

The Company recognized compensation expense of $0.6 million, $0.3 million and $12,000 in 2014, 2013 and 2012, respectively, related to share-based grants. The Company recognized compensation expense of $0.4 million, $0.6 million and $0.2 million in 2014, 2013 and 2012, respectively, related to long-term incentive awards under the 2012 Incentive Plan. The long-term incentive award is a liability award.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

13.

Earnings Per Share

Diluted earnings per share includes common shares assumed issued under the “treasury stock method,” which reflects the potential dilution that would occur if any outstanding options are exercised. Diluted earnings per share also includes the “if converted” method for participating securities if the result is dilutive. Diluted EPS is calculated as the more dilutive result of either the treasury method or the two-class method.

The calculation of basic and diluted EPS for the years ended December 31, 2014, 2013 and 2012 are presented below.


	For the Year Ended December 31,
	2014		2013		2012
	(in thousands, except earnings per share amounts)
Basic EPS:
Net income, as reported	$	53,666	$	43,637	$	29,353
Less allocated income to participating securities		—		142		22

Net income available to common shareholders – basic	$	53,666	$	43,495	$	29,331

Basic weighted-average common shares		18,646		18,373		18,166
Basic earnings per share	$	2.88	$	2.37	$	1.62

Diluted EPS:
Net income available to common shareholders - diluted	$	53,666	$	43,495	$	29,331

Diluted weighted average common shares:
Weighted average common shares		18,646		18,373		18,166
Stock options and performance shares		282		376		409

Diluted weighted average common shares		18,928		18,749		18,575
Diluted earnings per common share	$	2.84	$	2.32	$	1.58

The table below sets forth the reconciliation of the weighted average shares used for the basic and diluted EPS calculation. Under the two-class method, unvested stock options, and out-of-money vested stock options are not considered to be participating securities.


	Years Ended
	2014		2013		2012
Basic weighted average common shares		18,646,128		18,373,033		18,166,261
Add: Other common shares eligible for common dividends:
Weighted average restricted shares and stock options (including tax benefit component)		282,376		375,776		408,930

Diluted weighted average common shares		18,928,504		18,748,809		18,575,191

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

14.

Comprehensive Income and Accumulated Other Comprehensive Income (Loss)

Comprehensive income includes net income plus unrealized gains/losses on our available-for-sale investment securities, net of tax. In reporting comprehensive income on a net basis in the statement of income, we used a 35% tax rate. The following table illustrates the changes in the balance of each component of accumulated other comprehensive income (loss) for each period presented in the financial statements.


	Year Ended December 31,
	2014			2013			2012
	(in thousands)
Beginning balance	$	(4,295	)	$	2,979		$	2,215
Other comprehensive income (loss) before reclassification		6,558			(7,525	)		1,552
Amounts reclassified from accumulated other comprehensive income (loss)		547			251			(788	)

Net current period other comprehensive income (loss)		7,105			(7,274	)		764

Ending balance	$	2,810		$	(4,295	)	$	2,979

The sale or other-than-temporary impairment (OTTI) of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive income (loss) to current period net income. The effects of reclassifications out of accumulated other comprehensive income (loss) by the respective line items of net income are presented in the following table.


Component of Accumulated Other Comprehensive Income (Loss)	Year Ended December 31,								Affected line item in the statement of income
	2014			2013		2012
				(in thousands)
Unrealized gains (losses) on available-for-sale securities	$	(825	)	$	30	$	1,211		Net realized gains/(losses) on investments
Other-than-temporary impairment		(16	)		(416)		—		Net realized gains/(losses) on investments

		(841	)		(386)		1,211		Income before income taxes
		294			135		(423	)	Income tax expense

	$	(547	)	$	(251)	$	788		Net income

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014


	Pre-Tax Amount			Tax Expense			Net-of-Tax Amount
	(in thousands)
December 31, 2014
Unrealized gain on securities:
Unrealized gain on available-for-sale securities	$	10,133		$	3,546		$	6,587
Change in unrealized losses on fixed maturity securities with OTTI		17			6			11
Less amortization of differences between fair value and amortized cost for fixed maturity security transfer		(44	)		(15	)		(29	)
Reclassification adjustment for gains realized in net income		825			289			536

Net unrealized gain		10,931			3,826			7,105

Other comprehensive income	$	10,931		$	3,826		$	7,105


December 31, 2013
Unrealized loss on securities:
Unrealized loss on available-for-sale securities	$	(11,504	)	$	(4,027	)	$	(7,477	)
Change in unrealized losses on fixed maturity securities with OTTI		2			1			1
Change in unrealized losses on equity securities with OTTI		416			146			270
Less amortization of differences between fair value and amortized cost for fixed maturity security transfer		(75	)		(26	)		(49	)
Reclassification adjustment for gains realized in net income		(30	)		(11	)		(19	)

Net unrealized loss		(11,191	)		(3,917	)		(7,274	)

Other comprehensive income	$	(11,191	)	$	(3,917	)	$	(7,274	)


December 31, 2012
Unrealized gain (loss) on securities:
Unrealized gain on available-for-sale securities	$	2,555		$	894		$	1,661
Change in unrealized losses on fixed maturity securities with OTTI		1			—			1
Less amortization of differences between fair value and amortized cost for fixed maturity security transfer		(101	)		(35	)		(66	)
Reclassification adjustment for gains realized in net income		(1,279	)		(447	)		(832	)

Net unrealized gain		1,176			412			764

Other comprehensive income	$	1,176		$	412		$	764

15.

Employee Benefit Plan

The Company’s 401(k) benefit plan is available to all employees. The Company matches up to 2% of employee compensation for participating employees, subject to certain limitations. Employees are fully vested in employer contributions to this plan after five years. Company contributions to this plan were $0.4 million in 2014, $0.3 million in 2013 and $0.3 million in 2012.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

16.

Commitments and Contingencies

The Company is a party to various legal actions arising principally from claims made under insurance policies and contracts. Those actions are considered by the Company in estimating reserves for loss and loss adjustment expenses. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

The Company provides workers’ compensation insurance in several states that maintain second-injury funds. Incurred losses on qualifying claims that exceed certain amounts may be recovered from these state funds. There is no assurance that the applicable states will continue to provide funding under these programs.

The Company manages risk on certain long-duration claims by settling these claims through the purchase of annuities from unaffiliated carriers. In the event these carriers are unable to meet their obligations under these contracts, the Company could be liable to the claimants. The following table summarizes (in thousands) the fair value of the annuities at December 31, 2014, that the Company has purchased to satisfy its obligations. The A.M. Best Company rating is shown parenthetically.


Life Insurance Company	Statement Value of Annuities Exceeding 1% of Statutory Surplus
Metropolitan Life Insurance Company (A+)		15,451
American General Life Insurance (A)	$	15,432
Pacific Life and Annuity Company (A+)		15,306
New York Life Insurance Company (A++)		12,131
John Hancock Life Insurance Company USA (A+)		7,854
Athene Annuity and Life Assurance Company (B++)		6,543
Liberty Life Assurance Company of Boston (A)		4,020
Other		17,824

	$	94,561

Substantially all of the annuities are issued or guaranteed by life insurance companies that have an A.M. Best Company rating of “A” (Excellent) or better.

The Company leases equipment and office space under noncancelable operating leases. At December 31, 2014, future minimum lease payments are as follows (in thousands):


2015	$	140
2016		121
2017		98
2018		67
2019		6

	$	432

Rental expense was $0.2 million in 2014, 2013 and 2012.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

17.

Concentration of Operations

The Company derives its revenues almost entirely from its operations in the workers’ compensation insurance line of business. Total net premiums earned for the different lines of business are shown below:


	2014				2013					2012
	Dollars		Percent		Dollars			Percent		Dollars		Percent
	(Dollars in thousands)
Workers’ compensation	$	375,746		100.0%	$	329,986			100.0%	$	290,538		99.9%
General liability		1		0.0%		(3	)		0.0%		151		0.1%

Total net premiums earned	$	375,747		100.0%	$	329,983			100.0%	$	290,689		100.0%

Net premiums earned during 2014, 2013 and 2012 for the top ten states in 2014 and all others are shown below:


	2014					2013					2012
	Dollars		Percent			Dollars		Percent			Dollars		Percent
	(Dollars in thousands)
Louisiana	$	47,643		12.7	%	$	42,110		12.8	%	$	31,134		10.7%
Georgia		36,761		9.8			30,096		9.1			25,033		8.6
Pennsylvania		35,488		9.4			28,880		8.8			24,480		8.4
North Carolina		20,872		5.6			21,019		6.4			20,036		6.9
Florida		20,691		5.5			12,950		3.9			9,180		3.2
Illinois		20,606		5.5			18,445		5.6			18,119		6.2
Virginia		16,764		4.5			15,751		4.8			16,144		5.6
Oklahoma		16,599		4.4			17,473		5.3			16,157		5.6
Texas		14,846		4.0			14,949		4.5			11,687		4.0
Minnesota		13,159		3.5			10,470		3.2			10,094		3.5
All others		132,318		35.1			117,840		35.6			108,625		37.3

Total net premiums earned	$	375,747		100.0	%	$	329,983		100.0	%	$	290,689		100.0%

18.

Fair Values of Financial Instruments

The Company determines fair value amounts for financial instruments using available third-party market information. When such information is not available, the Company determines the fair value amounts using appropriate valuation methodologies. Nonfinancial instruments such as real estate, property and equipment, deferred policy acquisition costs, deferred income taxes and loss and loss adjustment expense reserves are excluded from the fair value disclosure.

Cash and Cash Equivalents—The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair values.

Investments—The fair values for fixed maturity and equity securities are based on quoted market prices where available. For those securities not actively traded, fair values were obtained from a third-party investment manager.

Short Term Investments—The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair value.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

Other Investments— Other investments consist of LP interests valued using the net asset value provided by the general partner of the LP, which approximates the fair value of the interest. The LP’s objective is to generate absolute returns by investing long and short in publicly-traded global securities. Redemptions are allowed monthly following a sixty day notice with no lock up periods. The Company has no unfunded commitments related to the LP. This investment is characterized as a Level 3 asset in the fair value hierarchy.

The following table summarizes the carrying or reported values and corresponding fair values for financial instruments:


	December 31,
	2014				2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Assets:
Fixed maturity securities—held to maturity	$	639,631	$	664,371	$	536,583	$	561,179
Fixed maturity securities—available for sale		331,242		331,242		237,877		237,877
Equity securities		28		28		9,302		9,302
Cash and cash equivalents		90,956		90,956		123,077		123,077
Short-term investments		33,684		33,684		84,422		84,422
Other investments		11,748		11,748		10,591		10,591

The Company carries available-for-sale securities at fair value in our consolidated financial statements and determines fair value measurements and disclosure in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures.

The Company determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard defines fair value, describes three levels of inputs that may be used to measure fair value, and expands disclosures about fair value measurements.

Fair value is defined in ASC Topic 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is the price to sell an asset or transfer a liability and, therefore, represents an exit price, not an entry price. Fair value is the exit price in the principal market (or, if lacking a principal market, the most advantageous market) in which the reporting entity would transact. Fair value is a market-based measurement, not an entity-specific measurement, and, as such, is determined based on the assumptions that market participants would use in pricing the asset or liability. The exit price objective of a fair value measurement applies regardless of the reporting entity’s intent and/or ability to sell the asset or transfer the liability at the measurement date.

ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset, also known as current replacement cost. Valuation techniques used to measure fair value are to be consistently applied.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

In ASC Topic 820, inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable:

•

Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity.

•

Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

Valuation techniques used to measure fair value are intended to maximize the use of observable inputs and minimize the use of unobservable inputs. ASC Topic 820 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:

•

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

•

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data.

•

Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are to be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters.

The fair values of the Company’s investments are based upon prices provided by an independent pricing service. The Company has reviewed these prices for reasonableness and has not adjusted any prices received from the independent provider. Securities reported at fair value utilizing Level 1 inputs represent assets whose fair value is determined based upon observable unadjusted quoted market prices for identical assets in active markets. Level 2 securities represent assets whose fair value is determined using observable market information such as previous day trade prices, quotes from less active markets or quoted prices of securities with similar characteristics. There were no transfers between Level 1 and Level 2 during the year ended December 31, 2014.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 and 2013 are as follows:


	December 31, 2014
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(in thousands)
Financial instruments carried at fair value, classified as part of:
Other investments	$	—	$	—	$	11,748	$	11,748
Securities available for sale—equity:
Domestic common stock		28		—		—		28
Securities available for sale—fixed maturity:
States and political subdivisions		—		157,374		—		157,374
U.S. agency-based mortgage-backed securities		—		8,498		—		8,498
Corporate bonds		—		165,370		—		165,370

Total available for sale—fixed maturity	$	—	$	331,242	$	—	$	331,242

Total available for sale	$	28	$	331,242	$	11,748	$	343,018


	December 31, 2013
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(in thousands)
Financial instruments carried at fair value, classified as part of:
Other investments	$	—	$	—	$	10,591	$	10,591
Securities available for sale—equity
Domestic common stock		9,302		—		—		9,302
Securities available for sale—fixed maturity
States and political subdivisions		—		150,375		—		150,375
U.S. agency-based mortgage-backed securities		—		7,074		—		7,074
Corporate bonds		—		80,428		—		80,428

Total available for sale—fixed maturity	$	—	$	237,877	$	—	$	237,877

Total available for sale	$	9,302	$	237,877	$	10,591	$	257,770

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

Assets and liabilities measured at amortized cost as of December 31, 2014 and 2013 are as follows:


	December 31, 2014
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(in thousands)
Securities held-to-maturity—fixed maturity:
States and political subdivisions	$	—	$	405,665	$	—	$	405,665
Corporate bonds		—		176,734		—		176,734
Commercial mortgage-backed securities		—		48,529		—		48,529
U.S. agency-based mortgage-backed securities		—		18,672		—		18,672
U.S. Treasury securities		11,792		—		—		11,792
Asset-backed securities		—		2,979		—		2,979

Total held-to-maturity	$	11,792	$	652,579	$	—	$	664,371


	December 31, 2013
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(in thousands)
Securities held-to-maturity—fixed maturity:
States and political subdivisions	$	—	$	399,155	$	—	$	399,155
Corporate bonds		—		68,243		—		68,243
Commercial mortgage-backed securities		—		54,244		—		54,244
U.S. agency-based mortgage-backed securities		—		23,565		—		23,565
U.S. Treasury securities		6,602		—		—		6,602
Obligations of the U.S. Government agencies		—		5,914		—		5,914
Asset-backed securities		—		3,456		—		3,456

Total held-to-maturity	$	6,602	$	554,577	$	—	$	561,179

The following table presents summary information regarding changes in the fair value of assets measured at fair value using Level 3 input.


	December 31, 2014		December 31, 2013
	(in thousands)
Balance at beginning of year	$	10,591	$	—
Purchases		—		10,000
Total gains unrealized (included in earnings as part of net investment income)		1,157		591

Balance at end of year	$	11,748	$	10,591

The purchase reported on the Level 3 table above is related to an interest in a limited partnership.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

At December 31, 2014, the Company held two securities measured at fair value on a nonrecurring basis due to a recognized impairment of $0.3 million. The securities are valued using Level 2 inputs and had a value of $0.4 million at December 31, 2014.

19.

Quarterly Financial Data (Unaudited)

The following table represents unaudited quarterly financial data for the years ended December 31, 2014 and 2013.


	Three Months Ended
	March 31		June 30			September 30			December 31
	(in thousands, except per share amounts)
2014
Premiums earned	$	89,233	$	93,516		$	95,928		$	97,070
Net investment income		6,708		6,845			6,495			7,166
Net realized gains (losses) on investments		101		232			(152	)		516
Total revenues		96,173		100,624			102,336			104,886
Income before income taxes		13,404		17,061			19,348			23,936
Net income		10,549		12,773			13,479			16,865
Net income available to common shareholders		10,549		12,773			13,479			16,865
Earnings per share:
Basic		0.57		0.69			0.72			0.90
Diluted		0.56		0.68			0.71			0.89
Comprehensive income		13,789		15,789			13,596			17,597
Extraordinary cash dividends declared per common share	$	0.50	$	—		$	—		$	1.00
Cash dividends declared per common share	$	0.12	$	0.12		$	0.12		$	0.12

2013
Premiums earned	$	79,709	$	81,983		$	81,596		$	86,695
Net investment income		6,670		6,649			6,947			6,763
Net realized gains (losses) on investments		24		(1,291	)		(654	)		710
Total revenues		86,512		87,511			88,003			94,309
Income before income taxes		11,080		10,647			12,447			25,030
Net income		8,851		7,644			9,699			17,443
Net income available to common shareholders		8,836		7,618			9,673			17,364
Earnings per share:
Basic		0.48		0.42			0.53			0.94
Diluted		0.47		0.41			0.52			0.92
Comprehensive income		8,306		3,584			8,654			15,819
Cash dividends declared per common share	$	0.08	$	0.08		$	0.08		$	0.08

20.

Capital Management

The Company’s Board of Directors initiated a share repurchase program in February 2011. In October 2012, 2013 and 2014 the Board reauthorized this program with a new limit of $25.0 million. Unless reauthorized, the program will expire on December 31, 2015. Since beginning of this plan, the Company has repurchased a total of 1,258,250 shares for $22.4 million, or an average price of $17.78, including commissions.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

In 2013, the Company’s Board of Directors initiated a quarterly dividend. During 2014, the Company’s Board of Directors declared a quarterly dividend of $0.12 per share compared to $0.08 per share in 2013. The Company declared extraordinary dividends totaling $1.50 per share in 2014. There were no extraordinary dividends declared in 2013.

21.

Subsequent Events

On February 11, 2015, the Company was notified of an adverse verdict against its subsidiary, American Interstate Insurance Company, related to a 2009 workers’ compensation claim in the State of Iowa. The verdict was for $25.3 million, of which $0.3 million was actual damages and $25.0 million was punitive damages. For the fourth quarter of 2014, the Company recognized an additional $0.3 million in reserves related to this claim. As of December 31, 2014, the Company’s total reserve for the claim was $2.7 million. The Company presently believes that this reserve amount, together with its reinsurance coverage, is adequate to satisfy this claim. American Interstate will appeal this verdict.

On February 24, 2015 the Company declared a regular quarterly cash dividend of $0.15 per share payable on March 27, 2015 to shareholders of record on March 13, 2015. In 2014, the Company paid a quarterly cash dividend of $0.12 per share.

The Board intends to continue to consider the payment of a regular cash dividend each calendar quarter. On an annualized basis, the cash dividend is expected to be $0.60 per share.

100

Schedule II. Condensed Financial Information of Registrant

AMERISAFE, INC.

CONDENSED BALANCE SHEETS


	December 31,
	2014			2013
	(in thousands)
Assets
Investments:
Short-term investments	$	250		$	248
Fixed-maturity securities—available-for-sale, at fair value		—			965
Other investments		11,748			10,591
Investment in subsidiaries		387,954			352,193

Total investments		399,952			363,997
Cash and cash equivalents		43,585			47,726
Deferred income taxes		1,001			1,383
Notes receivable from subsidiaries		(1	)		1,805
Property and equipment, net		2,070			2,181
Other assets		4,992			556

	$	451,599		$	417,648

Liabilities, redeemable preferred stock and shareholders’ equity
Liabilities:
Accounts payable and other liabilities	$	3,853		$	834
Notes payable to subsidiaries		778			—

Total liabilities		4,631			834
Shareholders’ equity (net of Treasury stock of $22,370 at December 31, 2014 and 2013)		446,968			416,814

	$	451,599		$	417,648

101

Schedule II. Condensed Financial Information of Registrant – (Continued)

AMERISAFE, INC.

CONDENSED STATEMENTS OF INCOME


	Year Ended December 31,
	2014			2013			2012
	(in thousands)
Revenues
Net investment income	$	1,541		$	1,051		$	571
Fee and other income		5,368			5,453			4,765

Total revenues		6,909			6,504			5,336

Expenses
Other operating costs		6,909			6,504			4,770
Interest expense		—			—			566

Total expenses		6,909			6,504			5,336

Income (loss) before income taxes and equity in earnings of subsidiaries		—			—			—
Income tax expense (benefit)		(13	)		6			(9	)

Gain (loss) before equity in earnings of subsidiaries		13			(6	)		9
Equity in net income of subsidiaries		53,653			43,643			29,344

Net income	$	53,666		$	43,637		$	29,353

102

Schedule II. Condensed Financial Information of Registrant – (Continued)

AMERISAFE, INC.

CONDENSED STATEMENTS OF CASH FLOWS


	Year Ended December 31,
	2014			2013			2012
	(in thousands)
Operating activities
Net cash (used in) provided by operating activities	$	2,161		$	1,829		$	5,149

Investing activities
Purchases of investments		(1,462	)		(10,248	)		(23,361	)
Proceeds from sales of investments		2,404			11,674			39,537
Purchases of property and equipment		(691	)		(779	)		(842	)
Dividends from subsidiary		25,000			15,000			21,000

Net cash provided by investing activities		25,251			15,647			36,334


Financing activities
Proceeds from stock option exercises		2,674			2,344			781
Tax benefit from share-based payments		2,841			2,024			421
Redemption of Subordinated Debt Security		—			—			(25,780	)
Dividends to shareholders		(37,068	)		(5,910	)		—

Net cash used in financing activities		(31,553	)		(1,542	)		(24,578	)

Change in cash and cash equivalents		(4,141	)		15,934			16,905
Cash and cash equivalents at beginning of year		47,726			31,792			14,887

Cash and cash equivalents at end of year	$	43,585		$	47,726		$	31,792

103

Schedule VI. Supplemental Information Concerning Property—Casualty Insurance Operations

AMERISAFE, INC. AND SUBSIDIARIES


	Deferred Policy Acquisition Cost		Reserves for Unpaid Loss and Loss Adjustment Expense		Unearned Premium		Earned Premium		Net Investment Income		Loss and LAE Related to Current Period		Loss and LAE Related to Prior Periods		Amortization of Deferred Policy Acquisition Costs		Paid Claims and Claim Adjustment Expenses		Net Premiums Written
	(in thousands)
2014	$	19,649	$	687,602	$	168,576	$	375,747	$	27,214	$	268,633	$	(23,717)	$	(43,817)	$	182,506	$	380,026
2013		19,171		614,557		164,296		329,983		27,029		241,584		(12,611)		(40,526)		178,375		353,752
2012		18,419		570,450		140,528		290,689		27,018		222,393		(2,490)		(39,120)		181,920		312,518

104

Item 9. Changes

in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item

9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance 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. We note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving the stated goals under all potential future conditions.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. Our internal control over financial reporting is a process designed under the supervision of our chief executive officer and our chief financial officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles.

Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on management’s assessment under the framework in Internal Control—Integrated Framework, our management has concluded that our internal control over financial reporting was effective as of December 31, 2014.

Our independent registered public accounting firm, Ernst & Young LLP, has audited the effectiveness of internal controls over financial reporting, as stated in their report included herein.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting during the fourth quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Controls

Because of their limitations, management does not expect that our disclosure controls and our internal controls over financial reporting will prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate. Any control system, no matter how well designed and operated, is based upon certain assumptions and can only provide reasonable, not absolute assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to errors or fraud will not occur or that all control issues and instances of fraud, if any within the Company, have been detected.

105

Report of Independent Registered Public Accounting Firm

The Board of Directors and shareholders of AMERISAFE, Inc. and Subsidiaries

We have audited AMERISAFE, Inc. and Subsidiaries internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). AMERISAFE, Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, AMERISAFE, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of AMERISAFE, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014 of AMERISAFE, Inc. and Subsidiaries and our report dated February 27, 2015, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

New Orleans, Louisiana

February 27, 2015

106

Item 9B. Other

Information.

None.

PART III

Item 10. Directors,

Executive Officers and Corporate Governance.

The information required by Item 10 with respect to our executive officers and key employees is included in Part I of this report.

The information required by Item 10 with respect to our directors is incorporated by reference to the information included under the caption “Election of Directors” in our Proxy Statement for the 2015 Annual Meeting of Shareholders. We plan to file such Proxy Statement within 120 days after December 31, 2014, the end of our fiscal year.

The information required by Item 10 with respect to compliance with Section 16 of the Exchange Act is incorporated by reference to the information included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the 2015 Annual Meeting of Shareholders.

The information required by Item 10 with respect to our audit committee and our audit committee financial expert is incorporated by reference to the information included under the caption “The Board, Its Committees and Its Compensation—Audit Committee” in our Proxy Statement for the 2015 Annual Meeting of Shareholders.

The information required by Item 10 with respect to our code of business conduct and ethics for executive and financial officers and directors is posted on our website at www.amerisafe.com in the Investor Relations section under “Governance—Code of Conduct.” We will post information regarding any amendment to, or waiver from, our code of business conduct and ethics on our website in the Investor Relations section under Corporate Governance.

Item 11. Executive

Compensation.

The information required by Item 11 is incorporated by reference to the information included under the captions “Executive Compensation,” “The Board, Its Committees, and Its Compensation—Director Compensation,” “Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis” and “Compensation Committee Report” in our Proxy Statement for the 2015 Annual Meeting of Shareholders.

Item 12. Security

Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by Item 12 is incorporated by reference to the information included under the captions “Security Ownership of Management and Certain Beneficial Holders” and “Equity Compensation Plan Information” in our Proxy Statement for the 2015 Annual Meeting of Shareholders.

Item 13. Certain

Relationships and Related Transactions, and Director Independence.

The information required by Item 13 with respect to certain relationships and related transactions is incorporated by reference to the information included under the caption “Executive Compensation—Certain Relationships and Related Transactions” in our Proxy Statement for the 2015 Annual Meeting of Shareholders.

The information required by Item 13 with respect to director independence is incorporated by reference to the information included under the caption “The Board, Its Committees and Its Compensation—Director Independence” in our Proxy Statement for the 2015 Annual Meeting of Shareholders.

Item 14. Principal

Accountant Fees and Services.

The information required by Item 14 with respect to the fees and services of Ernst & Young LLP, our independent registered public accounting firm, and the audit committee’s pre-approved policies and procedures, are incorporated by reference to the information included under the caption “Independent Public Accountants” in our Proxy Statement for the 2015 Annual Meeting of Shareholders.

107

PART IV

Item 15.

Exhibits and Financial Statement Schedules.

The following consolidated financial statements and schedules are filed in Item 8 of Part II of this report:


	Page
Financial Statements:
Report of Independent Registered Public Accounting Firm		60
Consolidated Balance Sheets		61
Consolidated Statements of Income		62
Consolidated Statements of Changes in Comprehensive Income		63
Consolidated Statements of Changes in Shareholders’ Equity		64
Consolidated Statements of Cash Flows		65
Notes to Consolidated Financial Statements		66

Financial Statement Schedules:
Schedule II. Condensed Financial Information of Registrant		101
Schedule VI. Supplemental Information Concerning Property-Casualty Insurance Operations		104
(Schedules I, III, IV and V are not applicable and have been omitted.)


Exhibits:

3.1		Amended and Restated Certificate of Formation of AMERISAFE, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed August 6, 2010)

3.2		Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed August 6, 2010)

10.1*		Amended and Restated Employment Agreement, dated March 22, 2012 by and between the Company and C. Allen Bradley, Jr. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 28, 2012)

10.2*		Amended and Restated Employment Agreement, dated March 22, 2012 by and between the Company and Craig P. Leach (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed March 28, 2012)

10.3*		Amended and Restated Employment Agreement, dated March 22, 2012 by and between the Company and G. Janelle Frost (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed March 28, 2012).

10.4*		Amended and Restated Employment Agreement, dated March 22, 2012 by and between the Company and Brendan Gau (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed March 28, 2012)

10.5*		Employment Agreement, dated January 15, 2013 by and between the Company and Vincent J. Gagliano (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K filed March 6, 2013)

10.6*		Employment Agreement dated April 1, 2013 by and between the Company and Geoffrey R. Banta (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed May 3, 2013)

10.7*		Employment Agreement effective as of May 1, 2013 by and between the Company and Michael Grasher (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed May 3, 2013)

10.8*		Consulting Agreement dated June 5, 2014 between the Company and Craig P. Leach (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed August 1, 2014)

108


Exhibits:

10.9*		AMERISAFE, Inc. 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1, Amendment No. 3 (File No. 333-127133), filed October 31, 2005)

10.10*		Form of Non-Qualified Stock Option Award Agreement for the AMERISAFE, Inc. 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1, Amendment No. 3 (File No. 333-127133), filed October 31, 2005)

10.11*		AMERISAFE, Inc. 2012 Equity and Incentive Compensation Plan (incorporated by reference to Appendix A to the Company’s Proxy Statement on Schedule 14A filed April 27, 2012)

10.12*		Form of 2012 Equity and Incentive Compensation Plan Long-Term Incentive Award Agreement

10.13*		AMERISAFE, Inc. 2010 Restated Non-Employee Director Restricted Stock Plan (incorporated by reference to Appendix B to the Company’s Definitive Form 14A filed April 26, 2010)

10.14*		Form of 2012 Equity and Incentive Compensation Plan Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K filed February 28, 2014)

10.15*		Form of Restricted Stock Award Agreement for the AMERISAFE, Inc. 2010 Restated Non-Employee Director Restricted Stock Plan (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K filed February 28, 2014)

10.16*		Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 6, 2010)

10.17*		AMERISAFE, Inc. Management Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 29, 2008).

10.18*		Form of Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K filed February 28, 2014)

10.19		Second Casualty Excess of Loss Reinsurance Contract, effective as of January 1, 2008, issued to the Company by the reinsurers and named therein (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed February 15, 2008)

10.20		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2008, issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed February 15, 2008)

10.21		Second Casualty Excess of Loss Reinsurance Agreement, effective as of January 1, 2009 issued to the Company by Hannover Reinsurance (Ireland) Limited (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K, filed March 9, 2009)

10.22		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2009 issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K, filed March 9, 2009)

10.23		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2010 issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K, filed March 7, 2011)

10.24		First Casualty Excess of Loss Reinsurance Contract, effective as of January 1, 2011, issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K, filed March 7, 2011)

10.25		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2011, issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K, filed March 7, 2011)

109


Exhibits:
10.26		Second Casualty Excess of Loss Reinsurance Agreement, effective as of January 1, 2012 issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K filed March 9, 2012)

10.27		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2012, issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K filed March 9, 2012)

10.28		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2013, issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K filed March 6, 2013)

10.29		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2014, issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.32 to the Company’s Quarterly Report on Form 10-Q filed May 2, 2014)

10.30		Casualty Excess of Loss Reinsurance Contract, effective as of January 1, 2014, issue to the Company by the reinsurers named therein

10.31		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2015, issue to the Company by the reinsurers named therein

21.1		Subsidiaries of the Company

23.1		Consent of Ernst & Young LLP

24.1		Powers of Attorney for our directors and certain executive officers

31.1		Certification of C. Allen Bradley filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Michael Grasher filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of C. Allen Bradley and Michael Grasher filed pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*	Management contract, compensatory plan or arrangement

110

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on February 27, 2015.


AMERISAFE, INC.

By:		/S/ C. ALLEN BRADLEY, JR.
		C. Allen Bradley, Jr.
		Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 24, 2015.


/s/ C. ALLEN BRADLEY, JR. C. Allen Bradley, Jr.		Chairman, Chief Executive Officer and Director (Principal Executive Officer)

/s/ Michael Grasher Michael Grasher		Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

* Philip A. Garcia		Director

* Jared A. Morris		Director

* Millard E. Morris		Director

* Daniel Phillips		Director

* Randall Roach		Director

* Austin P. Young, III		Director

* Michael Brown		Director

Kathryn H. Shirley, by signing her name hereto, does hereby sign this Annual Report on Form 10-K on behalf of the above-named directors of AMERISAFE, Inc. on this 24th day of February 2015, pursuant to powers of attorney executed on behalf of such directors and contemporaneously filed with the Securities and Exchange Commission.


*By:		/s/ Kathryn H. Shirley
		Kathryn H. Shirley, Attorney-in-Fact

111

EXHIBIT INDEX


Exhibits:
3.1		Amended and Restated Certificate of Formation of AMERISAFE, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed August 6, 2010)

3.2		Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed August 6, 2010)

10.1*		Amended and Restated Employment Agreement, dated March 22, 2012 by and between the Company and C. Allen Bradley, Jr. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 28, 2012)

10.2*		Amended and Restated Employment Agreement, dated March 22, 2012 by and between the Company and Craig P. Leach (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed March 28, 2012)

10.3*		Amended and Restated Employment Agreement, dated March 22, 2012 by and between the Company and G. Janelle Frost (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed March 28, 2012).

10.4*		Amended and Restated Employment Agreement, dated March 22, 2012 by and between the Company and Brendan Gau (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed March 28, 2012)

10.5*		Employment Agreement, dated January 15, 2013 by and between the Company and Vincent J. Gagliano (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K filed March 6, 2013)

10.6*		Employment Agreement dated April 1, 2013 by and between the Company and Geoffrey R. Banta (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed May 3, 2013)

10.7*		Employment Agreement effective as of May 1, 2013 by and between the Company and Michael Grasher (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed May 3, 2013)

10.8*		Consulting Agreement dated June 5, 2014 between the Company and Craig P. Leach (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed August 1, 2014)

10.9*		AMERISAFE, Inc. 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1, Amendment No. 3 (File No. 333-127133), filed October 31, 2005)

10.10*		Form of Non-Qualified Stock Option Award Agreement for the AMERISAFE, Inc. 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1, Amendment No. 3 (File No. 333-127133), filed October 31, 2005)

10.11*		AMERISAFE, Inc. 2012 Equity and Incentive Compensation Plan (incorporated by reference to Appendix A to the Company’s Proxy Statement on Schedule 14A filed April 27, 2012)

10.12*		Form of 2012 Equity and Incentive Compensation Plan Long-Term Incentive Award Agreement

10.13*		AMERISAFE, Inc. 2010 Restated Non-Employee Director Restricted Stock Plan (incorporated by reference to Appendix B to the Company’s Definitive Form 14A filed April 26, 2010)

10.14*		Form of 2012 Equity and Incentive Compensation Plan Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K filed February 28, 2014)


Exhibits:
10.15*		Form of Restricted Stock Award Agreement for the AMERISAFE, Inc. 2010 Restated Non-Employee Director Restricted Stock Plan (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K filed February 28, 2014)

10.16*		Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 6, 2010)

10.17*		AMERISAFE, Inc. Management Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 29, 2008).

10.18*		Form of Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K filed February 28, 2014)

10.19		Second Casualty Excess of Loss Reinsurance Contract, effective as of January 1, 2008, issued to the Company by the reinsurers and named therein (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed February 15, 2008)

10.20		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2008, issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed February 15, 2008)

10.21		Second Casualty Excess of Loss Reinsurance Agreement, effective as of January 1, 2009 issued to the Company by Hannover Reinsurance (Ireland) Limited (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K, filed March 9, 2009)

10.22		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2009 issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K, filed March 9, 2009)

10.23		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2010 issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K, filed March 7, 2011)

10.24		First Casualty Excess of Loss Reinsurance Contract, effective as of January 1, 2011, issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K, filed March 7, 2011)

10.25		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2011, issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K, filed March 7, 2011)

10.26		Second Casualty Excess of Loss Reinsurance Agreement, effective as of January 1, 2012 issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K filed March 9, 2012)

10.27		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2012, issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K filed March 9, 2012)

10.28		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2013, issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K filed March 6, 2013)

10.29		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2014, issued to the Company by the reinsurers named therein (incorporated by reference to Exhibit 10.32 to the Company’s Quarterly Report on Form 10-Q filed May 2, 2014)

10.30		Casualty Excess of Loss Reinsurance Contract, effective as of January 1, 2014, issue to the Company by the reinsurers named therein


Exhibits:
10.31		Casualty Catastrophe Excess of Loss Reinsurance Contract, effective as of January 1, 2015, issue to the Company by the reinsurers named therein

21.1		Subsidiaries of the Company

23.1		Consent of Ernst & Young LLP

24.1		Powers of Attorney for our directors and certain executive officers

31.1		Certification of C. Allen Bradley filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Michael Grasher filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of C. Allen Bradley and Michael Grasher filed pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*	Management contract, compensatory plan or arrangement

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