Effective July 10, 1998, we entered into a contract with Kohlberg Kravis Roberts & Co. L.P. (“KKR”) for management, consulting and certain other services to be provided to us by KKR. Pursuant to the KKR contract, we pay KKR an annual fee of $500,000 and reimburse KKR for all reasonable expenses they incur. The KKR contract continues in effect from year to year unless KKR agrees with us to amend or terminate the contract. We have included purchase obligations of $500,000 with respect to the KKR contract under each of the columns, including “2012 or Later.” Nevertheless, it is possible that our payments under the KKR contract could extend beyond 2012.
To determine quarterly point estimates of IBNR losses and DCC, our actuarial staff selects one or more generally accepted actuarial loss and LAE reserving estimation methodologies that generally fall into the following categories:
We employ various statistical processes to estimate our loss and LAE reserves. Our actuarial staff performs quarterly analyses on over 150 unique, homogenous data subsets to produce estimates of the aggregate unpaid losses and LAE. We analyze the data separately (1) for each of the 22 states in which we write business, (2) for each type of coverage group written, (3) by the program in which the business is written and (4) by accident quarter. We apply one or more detailed actuarial estimation methodologies with respect to each of these data subsets to establish separate point estimates for IBNR losses, for A&O and for DCC. We make individualized key assumptions with respect to each separate point estimate. We then aggregate all of the separate point estimates to develop our best estimate of our overall loss and LAE reserves. See the disclosure above under the heading “Loss and LAE Reserve Estimates.”
The mix of our loss and LAE reserves changes constantly by state, program, coverage group, and accident quarter. Further, aggregated data relating to any of our key assumptions is not homogeneous. As explained above under the heading “Establishing Loss and LAE Reserve Estimates”:
engage the necessary outside consultants to perform such functions and support the model because we do not employ the personnel necessary to perform these functions.
In order to determine the impact of each individual key assumption underlying each of the point estimates that comprise our aggregate loss and LAE reserve estimates, we would need to perform a Monte Carlo simulation for each such assumption with respect to all data subsets simultaneously. The impact of our key assumptions is not limited to individual states, coverage groups, programs, or accident quarters. We utilize our key assumptions independently with respect to each separate data subset companywide.
Effective January 1, 2006, we adopted SFAS No. 123R, “Share- Based Payments (revised 2004)”(“SFAS 123R”). Among its provisions, SFAS 123R requires us to recognize compensation expense for equity awards over the vesting period based on their grant-date fair value. Prior to the adoption of SFAS 123R, we utilized the intrinsic-value based method of accounting under APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, we measured compensation cost for stock options awarded as the excess, if any, of the fair value of our stock at the date of the grant over the amount an employee was required to pay to acquire the stock.
In connection with our adoption of SFAS 123R, we also adopted FASB Staff Position No. 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” (“FSP 123(R)-3”), which provides a practical transition election related to accounting for the tax effects of share-based payment awards to employees. We elected the alternative simplified method provided for within FSP 123(R)-3 for calculating the pool of excess tax benefits available to absorb tax deficiencies (“APIC pool”) recognized subsequent to the adoption of SFAS 123R.