Our ability to adequately provide funds to pay claims comes from our disciplined underwriting and pricing standards and the purchase of reinsurance to protect us against severe claims and catastrophic events. Effective October 1, 2011, we entered into reinsurance agreements with nonaffiliated reinsurers wherein we retain the first $0.5 million of each loss occurrence and the next $0.5 million of losses per occurrence are 50% reinsured. Losses in excess of $1.0 million per loss occurrence are fully reinsured through the program limit of $75.0 million per loss occurrence, subject to various deductibles and exclusions. The new reinsurance program is effective through September 30, 2012. Our reinsurance program that was effective October 1, 2010 to September 30, 2011 provided us with reinsurance protection for each loss occurrence in excess of $0.25 million, up to $100.0 million, subject to various deductibles and exclusions. Given industry and predecessor trends, we believe we are sufficiently capitalized to cover our retained losses.
Provisions in the four lower layer treaties (covering losses from $0.5 million to $10.0 million) in our 2008-2009 reinsurance program allowed us the ability, at our sole discretion, to commute the contracts within 24 months of expiration in return for a contingent profit commission calculated in accordance with terms specified in the contracts. In accordance with these provisions, we commuted the $5.0 million excess $5.0 million layer of this treaty in 2011 in return for a contingent profit commission of approximately $0.5 million. The three lower layers (from $0.5 million to $5.0 million) were not commuted. As of December 31, 2011, there were no ceded losses associated with the $5.0 million excess $5.0 million layer and it is not expected that developed losses that would otherwise be covered by reinsurance will exceed the contingent profit commission. The contingent profit commission was recorded as a reduction of loss and loss adjustment expenses.
SeaBright is a holding company with minimal unconsolidated revenue. As SeaBright pays stockholder dividends and has other capital needs in the future, we anticipate that it will be necessary for our insurance subsidiary to pay dividends to SeaBright. In August 2010, SBIC declared and paid its first such dividend to SeaBright in the amount of $5.8 million. The payment of such dividends will be regulated as previously described.
The following table identifies our contractual obligations by payment due period as of December 31, 2011:
As of December 31, 2011, we had 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.
We have grown significantly since we began operations and have entered into several new states that are not included in our predecessor’s historical data.
Key elements of the reforms as they relate to indemnity and medical benefits were as follows:
SB 899 required the Division of Workers’ Compensation (“DWC”) Administrative Director to adopt, on or before January 1, 2005, a new permanent disability rating schedule (“PDRS”) based in part on American Medical Association guidelines. Also, temporary disability was limited to a duration of two years. SB 899 also provided that, effective April 19, 2004, apportionment of disability for purposes of permanent disability determination must be based on causation.
Since inception, we have not needed to write-off any portion of our deferred acquisition costs. While we believe our estimate of anticipated loss and loss adjustment expenses as of December 31, 2011 was appropriate, if our estimate was 10% inadequate, our deferred acquisition costs as of that date would need to be reduced by approximately $9.4 million. We will continue to monitor the balance of deferred acquisition costs for recoverability. We expect that our deferred acquisition costs will decrease significantly in 2012 due to the adoption of FASB Accounting Standards Update (“ASU”) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.
For debt securities that are considered other-than-temporarily impaired (“OTTI”) and that the Company does not intend to sell and more likely than not would not be required to sell prior to recovery of the amortized cost basis, the Company recognizes OTTI losses in accordance with the provisions of the ASC Topic 325, Investments - Other. The amount of the OTTI loss is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between a security’s amortized cost basis and the present value of expected future cash flows discounted at the security’s effective interest rate. The amount due to all other factors is recognized in other comprehensive income.
The Company also seeks input from independent portfolio managers engaged by the Company to assist in the management and oversight of its investment portfolio. The Company and an independent portfolio manager engaged by the Company review such amounts for reasonableness in relation to the following considerations, among others: recent trades of a particular security; the Company’s independent observations of recent developments affecting the economy in general and certain issuers in particular; and fair values from other sources, such as statements from the Company’s custodial banks. When other evidence indicates a fair value that is significantly different from that provided by an independent pricing service, the Company may challenge the fair value and request further validation and support from the independent pricing service, which may result in a revised fair value from the independent pricing service. If the Company has independent evidence indicating that a security’s fair value is significantly different from the final value provided by an independent pricing service, it may adjust the fair value accordingly. The Company did not adjust any of the values it obtained from independent pricing services and used those values in developing the fair value measurements in the Company’s consolidated financial statements as of December 31, 2011 and 2010.