Sally Beauty Supply 2011 Annual Report Download - page 81

Retention of Risk
Employee Health Insurance Liability
We maintain a largely self-funded program for healthcare benefits for employees who meet certain
eligibility requirements. We cover the majority of expenses associated with these benefits, other than
payroll deductions and out-of pocket expenses paid by the employees. Payments for healthcare benefits
below specified amounts (currently $350,000 per individual per year) are self-insured by us. We base our
estimate of ultimate liability on trends in claim payment history, historical trends in claims incurred but not
yet reported, and other components such as expected increases in medical costs, projected premium costs
and the number of plan participants. We review our liability on a regular basis and adjust our accruals
accordingly. As of September 30, 2011 and 2010, we accrued an estimated liability relating to employee
health insurance of $6.3 million and $6.0 million, respectively.
Changes in facts and circumstances may lead to a change in the estimated liability due to revisions of the
estimated ultimate costs of our employee healthcare benefits. Estimates of medical costs and trends in
claims are some of the key factors used by our management in determining our employee health insurance
liability. This liability could be significantly affected if actual results differ from management’s
expectations. A 10% increase or decrease in our employee health insurance liability at September 30, 2011
would impact net earnings by approximately $0.4 million, net of income tax.
Workers’ Compensation Liability, General Liability and Automobile and Property Liability
We maintain a large deductible insurance plan for workers’ compensation liability, general liability and
automobile and property liability loss exposures. We base our estimates of the ultimate liability on an
actuarial analysis performed by an independent third-party actuary. We review our liability on a regular
basis and adjust our accruals accordingly. As of September 30, 2011 and 2010, our balance sheet included
an estimated liability related to the deductible and retention limits of approximately $26.2 million and
$22.8 million, respectively.
Changes in facts and circumstances may lead to a change in the estimated liability due to revisions of the
estimated ultimate costs that affect our workers’ compensation, general liability and automobile and
property liability insurance coverage. Changes in estimates occur over time due to such factors as claims
incidence and severity of injury or damages. Our liabilities could be significantly affected if actual results
differ from management’s expectations or actuarial analyses. A 10% increase or decrease in our workers’
compensation liability, general liability and automobile and property liability at September 30, 2011 would
impact net earnings by approximately $1.7 million, net of income tax.
The change in the self-insurance liability was as follows (in thousands):
Fiscal Year Ended
September 30,
2011 2010
Balance at beginning of period ........................ $30,286 $ 26,920
Self-insurance expense .............................. 64,001 62,440
Self-insurance liability of businesses acquired .............. 532 —
Payments, net of employee contributions ................. (60,731) (59,074)
Balance at end of period ............................ $34,088 $ 30,286
Income Taxes
We record income tax provisions in our consolidated financial statements based on an estimation of
current income tax liabilities. The development of these provisions requires judgments about tax issues,
potential outcomes and timing. If we prevail in tax matters for which provisions have been established or
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