ITEM 1. BUSINESS
Overview
Headquartered in Cincinnati, Ohio, DCP Holding Company, doing business as the Dental Care Plus Group (“DCPG” or the “Company”), offers to employer groups of all sizes health maintenance organization (“HMO”), participating provider organization (“PPO”) and indemnity plans for dental care services and vision benefit plans. In 2015, the Company offered low cost dental PPO plans to individuals and small groups on the federally facilitated market exchanges in Ohio and Indiana (“the Ohio and Indiana exchanges”) and individual dental HMO and dental PPO plans in Ohio and Kentucky. As of December 31, 2015, we had approximately 326,000 members in our dental benefit plans and approximately 36,200 members in our vision benefit plans. We market our products through a network of independent brokers and consultants.
We had approximately 2,800 dentists participating in our dental HMO network, approximately 3,000 dentists participating in our DentaSelect dental PPO network and approximately 2,100 in our Balanced Value dental PPO network at December 31, 2015. The Company has a network access agreement with a national dental network management company that has one of the largest networks of dentists under contract in the United States. With this network access agreement, our Company dental PPO members now have access to approximately 2,500 additional dentists in our operating territories and approximately 44,200 additional dentists throughout the United States. The Company also has a network access arrangement with a national dental administration company for the dental PPO plans that it offered on the Ohio exchange in 2015. With this network access arrangement, Ohio exchange members have access to approximately 1,600 dentists in Ohio. In addition, the Company also has a network access arrangement with a network access company in Indiana for the dental PPO plans that it offered on the Indiana exchange in 2015. With this network access arrangement, Indiana exchange members have access to approximately 1,000 dentists in Indiana.
DCP Holding Company is the parent holding company, which includes wholly-owned subsidiaries Dental Care Plus, Inc., or Dental Care Plus, an Ohio corporation, Insurance Associates Plus, Inc., or Insurance Associates Plus, an Ohio corporation, and Adenta, Inc., or Adenta, a Kentucky corporation. A majority of our Redeemable Common Shares are owned by 516 dentists who also participate in one or more of our networks.
As an Ohio-domiciled insurance company dually licensed as a life and health insurer and a specialty health insuring corporation, Dental Care Plus is able to underwrite dental indemnity, dental PPO, dental HMO, and vision benefit products as well as other life and health oriented products.
Business Segments
We manage our business with four reportable segments: fully-insured dental HMO and indemnity (“dental HMO/IND”), fully-insured dental PPO, self-insured dental, and corporate, all other. Corporate, all other consists of revenue associated with our dental PPO and vision products underwritten by third-party insurance carriers and certain corporate activities.
The results of our fully-insured dental HMO and indemnity, fully-insured dental PPO and self-insured dental segments are measured by gross profit, which is premium revenue less healthcare services expense. We do not allocate insurance expenses, investment and other income, interest expense, or other assets or liabilities to our fully-insured dental and self-insured dental segments. These items are retained in our corporate, all other segment. Our segments do not share overhead costs and assets. See footnote 17 to our consolidated financial statements for financial information regarding our segments.
Managed Dental Benefits Market
The following table shows the estimated 2014 and 2013 dental enrollment statistics for the United States:
Source: NADP & Delta Dental Association Joint Dental Benefits Report, November 2015 and September 2014
According to the National Association of Dental Plans (“NADP”), in 2014 approximately 204.6 million persons residing in the United States were covered by some form of dental benefit through employer-sponsored group plans, other group or individual plans, or publicly funded dental coverage. These enrolled members represent approximately 64% of the U.S. population. This enrollment level represents an increase of approximately 6.9% from the estimated 2013 enrollment level of 191.5 million persons. This enrollment increase is primarily due to a 4.2% increase in publicly funded dental enrollment and in part due to a slight increase in commercial dental enrollment in 2014 resulting from increases in the dental PPO product category, offset by decreases in the dental HMO, dental EPO, dental Indemnity, discount dental and direct reimbursement product categories. Dental PPO product enrollment as a percentage of total commercial enrollment increased to 81.6% of total commercial enrollment in 2014. In 2014, some participating companies reported their enrollment as unassigned in an effort to protect the confidentiality of their enrollment data. As a result, comparisons to prior years are not as valid as those in previous reports.
The following table shows the estimated 2014 and 2013 dental enrollment statistics for Ohio and Kentucky, the two primary states in which we had group dental business:
Source: NADP & Delta Dental Association Joint Dental Benefits Reports dated November 2015 and September 2014
According to the NADP, total dental HMO enrollment in Ohio increased 7.8% in 2014 compared to 2013, whereas dental HMO enrollment in the United States decreased by approximately 3.6%. Total dental EPO enrollment in Ohio decreased by 17.3% in 2014 compared to 2013, compared to the national dental EPO decrease of 43.1%. Total dental PPO enrollment in Ohio increased by 1.0% in 2014 compared to 2013, compared to the national dental PPO increase of 4.7%. In Ohio, total dental indemnity enrollment increased by 7.0%, whereas national dental indemnity enrollment decreased by approximately 8.3%. Total discount dental enrollment in Ohio decreased by 26.0%, whereas total discount dental enrollment in the United States decreased more, by 34.9%. Total direct reimbursement dental enrollment in Ohio remained consistent between 2013 and 2014, whereas national direct reimbursement enrollment decreased by approximately 59.5%. Medicaid / State Children’s Health Insurance Program (“SCHIP”) dental enrollment in Ohio decreased by 58.3% in 2014 compared to 2013, compared to the national Medicaid / SCHIP dental enrollment increase of 4.2%. Other publicly funded dental enrollment in Ohio decreased by 59.5% in 2014 compared to 2013, compared to the national other publicly funded dental enrollment decrease of 17.1%.
Total dental HMO enrollment in Kentucky increased 67.0% in 2014 compared to 2013, while dental HMO enrollment in the United States decreased by approximately 3.6%. Total dental PPO enrollment in Kentucky increased by 3.5% in 2014 compared to 2013, which represents a smaller percentage increase than the national dental PPO increase of 4.7%. In Kentucky, total dental indemnity enrollment decreased by 5.9%, compared to a decrease in national dental indemnity enrollment of 8.3%. Total discount dental enrollment in Kentucky decreased by 34.0%, whereas total discount dental enrollment in the United States decreased by 34.9%. Total direct reimbursement dental enrollment in Kentucky remained consistent between 2013 and 2014, whereas national direct reimbursement enrollment decreased by approximately 59.5%. Medicaid / SCHIP dental enrollment in Kentucky increased by 165.2% in 2014 compared to 2013, compared to the national Medicaid / SCHIP dental enrollment increase of 4.2%. Other publicly funded dental enrollment in Kentucky decreased by 81.3% in 2014 compared to 2013, compared to the national other publicly funded dental enrollment decrease of 17.1%.
Our Products
The following table presents our product membership, premiums and administrative services only (“ASO”) fees in our respective business segments for the three years ended December 31:
(1)
Self-insured dental premium revenue or premium equivalent revenue is based on the gross amount of claims incurred by self-insured members and is recognized as revenue when those claims are paid.
(2)
Self-insured ASO fees are the administrative fees we charge to self-insured employers to manage their provider network and to process and pay claims. ASO fees are recognized as revenue when they are earned.
(3)
Other product fees are marketing and administrative fees we charge to third party insurance carriers that underwrite our vision benefit plan and one of our dental indemnity benefit plans.
Our dental enrollment increased 6.2% in 2015 compared to 2014 and increased by 5.1% in 2014 compared to 2013.
Our products primarily consist of dental HMO, dental indemnity and dental PPO plans, with fully-insured products constituting 69.8% of our total premium revenues for 2015. Substantially all of our products are marketed to employer groups through insurance brokers and consultants. In addition, our individual dental products are marketed on our website, sometimes with the assistance of insurance brokers, and our exchange dental products are marketed on the government’s website at healthcare.gov. Our business model allows us to offer dental benefit products including broad networks of participating dentists while at the same time promoting the use of private practice fee-for-service dentistry, a primary interest of our participating dentists. The dental benefit products we offer currently vary depending on geographic markets. Our ability to offer either a dental indemnity plan or dental PPO plan has had a positive impact on our membership growth.
We currently market our group dental products to employers in Ohio, Kentucky and Indiana. Our products may be offered to employer groups as “bundles,” where the subscribers are offered a combination of dental HMO, dental PPO and dental indemnity options, with various employer contribution strategies as determined by the employer. Individuals may become subscribers of our group dental plans through their employers and qualified family members of these subscribers become members through such individuals. Employers may pay for all or part of the premiums, and make payroll deductions for any premiums payable by the employees.
In 2015, we offered fully insured individual and small group dental PPO plans on the Ohio and Indiana exchanges. This new business is included in our fully insured dental PPO segment. In 2015, we offered fully insured individual dental HMO and dental PPO plans in Ohio and Kentucky. This new business is included in our fully insured dental HMO and fully insured dental PPO segments.
Fully-Insured Dental HMO and Indemnity
Our fully-insured dental HMO/IND products segment includes our Dental Care Plus dental HMO and our DentaPremier dental indemnity products.
Dental Care Plus- Under our group dental HMO, premiums are paid to Dental Care Plus by the employer, and members receive access to our HMO network. Plan designs range from full premium payouts by the employer to shared contributions of varying proportions by the employer and its employees to full payment by the employees. There are no waiting periods and there is no balance billing in our fully-insured dental HMO; however, it includes cost-sharing with the member, through premium contributions, co-payments and annual deductibles. Under our individual dental HMO, premiums are paid to Dental Care Plus by the individual subscriber, and the subscriber and their dependents receive access to our HMO network. Dental Care Plus offers a limited number of plan designs to the individual market. For the year ended December 31, 2015, fully-insured dental HMO premiums totaled approximately $47.9 million, or 48.7% of our total premiums and ASO fees.
DentaPremier- We offer DentaPremier, our dental indemnity product underwritten by Dental Care Plus, to employers who participate in our Dental Care Plus HMO fully-insured and self-insured plans with out-of-area members or members that require complete freedom of provider access. Employers and their participating employees typically share the cost of premiums in various contribution proportions. Members are responsible for paying annual deductible amounts, co-payments and balance billings. Premium rates for DentaPremier are generally higher than premium rates for our dental HMO and PPO products. When the DentaPremier product was introduced in 2003, the product was underwritten by a third party insurance carrier. As of December 31, 2015, approximately 96% of these dental indemnity members have been transitioned to Dental Care Plus insurance policies. For the year ended December 31, 2015, fully-insured dental indemnity premiums totaled approximately $1.5 million, or 1.6% of our total premiums and ASO fees.
Fully-Insured Dental PPO
Our fully-insured dental PPO product segment includes our DentaSelect, DentaTrust and DentaSpan dental PPO products.
DentaSelect- Our dental PPO product, DentaSelect, is underwritten and administered by Dental Care Plus. DentaSelect members have access to our proprietary PPO networks and the national dentist network with which we have contracted. In addition, DentaSelect members have out-of-network benefits. DentaSelect includes some elements of managed health care; however, it includes more cost-sharing with the member. Employers and their participating employees typically share the cost of premiums in various contribution proportions.
DentaTrust and DentaSpan- Our individual dental PPO product for the Ohio and Indiana exchanges, DentaTrust, and our small group dental PPO product for the Ohio and Indiana exchanges, DentaSpan, are underwritten by Dental Care Plus and administered by two independent third party administrators (“TPAs”). Pediatric members under the age of 19 have pediatric oral health benefits that meet the requirements of the Affordable Care Act (“ACA”). Adult members have benefits that are subject to waiting periods on basic dental services and major dental services. In addition, all DentaTrust and DentaSpan members have out-of-network benefits.
For the year ended December 31, 2015, fully-insured dental PPO premiums totaled approximately $19.2 million, or 19.5% of our total premiums and ASO fees.
Self-Insured Dental
Our self-insured dental segment includes our ASO dental HMO, dental PPO and dental indemnity products, which we offer through Dental Care Plus to employers who self-insure their employee dental plans. These employers pay all claims from network dentists according to our fee schedules. In the case of our dental PPO and dental indemnity products, employers pay claims from non-network dentists based on a maximum allowed fee schedule. We provide administrative and claims processing services, benefit plan design, and access to our provider networks for an administrative fee, generally to self-insured groups. These products are offered only to employer groups that have chosen to bear the claims risk for the dental benefits of employees and their family members. Self-insured employers retain the risk of financing all of the cost of dental benefits. For the year ended December 31, 2015, self-insured revenue totaled approximately $28.9 million, or 29.5% of our total premiums and ASO fees.
Corporate, All Other
We offer dental PPO, dental indemnity and vision PPO benefit plans that are underwritten by third-party insurance carriers that are included in our corporate, all other segment. Our subsidiary, Insurance Associates Plus, is an insurance agency licensed in Ohio, Kentucky and Indiana that markets our third-party dental PPO and vision benefit products. Insurance Associates Plus earns commissions and administrative fees based on members enrolled in the dental PPO and vision benefit plans. Our vision benefit PPO product, Vision Care Plus, is underwritten by a third-party insurance carrier and administered by an independent TPA. Members can access both network and out-of-network vision care providers and are subject to fixed co-payments and benefit limits. Premium cost is typically shared by employers and their participating employees in various contribution proportions.
The commission and administrative fee revenue that we earned related to the dental PPO, dental indemnity and vision benefit product lines underwritten by third-party insurance carriers aggregated $683,000, or less than 1% of total premiums and ASO fees, for the year ended December 31, 2015.
Seasonality of Dental Service Utilization
Based on our healthcare services expense on a per member per month (“PMPM”) basis that adjusts the quarterly healthcare services expense for membership volume changes, our dental plan members have historically used their dental plan benefits according to a seasonal pattern. In 2013, our quarterly healthcare services expense was slightly above average in the first quarter, lower than average in the second quarter, significantly higher than average in the third quarter and lowest in the fourth quarter. In 2014, our quarterly healthcare services expense was above average in the first quarter, slightly below average in the second quarter, higher than average in the third quarter and lowest in the fourth quarter. In 2015, our quarterly healthcare services expense was above average in the first quarter, slightly above average in the second quarter, above average in the third quarter and lowest in the fourth quarter. The following table shows these trends in tabular form:
Claims are generally higher in the first quarter because a significant portion of our employer-sponsored benefits reset on January 1. The third quarter claim level is generally higher primarily due to the high level of dental services used in July and August by student members prior to returning to school. Use of dental services is typically lowest in the fourth quarter due to the holiday season and the fact that a portion of our members have already reached their maximum annual benefit level for the year.
Business Strategy
Our objective is to become one of the leading providers of dental benefits in the Midwest. Our strategy is to continue increasing membership in all of our plans by gaining new employer group customers, acquiring other similar dental plans, adding more participating dentists to our provider networks and increasing our product offerings. We intend to further develop the use of dental PPO products as a means to grow membership sufficient to recruit dentists into our dental provider networks.
Our Dental Care Plus HMO plans offer both the broad provider access ordinarily attributed to a dental PPO and the utilization review and cost control features of a dental HMO. The combination of a large provider network, competitive pricing and renewal practices, and an emphasis on outstanding customer service have allowed us to effectively compete with dental PPOs. Because we are primarily owned by dentists who participate in our Dental Care Plus networks, and our dentists are reimbursed on a fee-for-service basis, we often have a competitive advantage in recruiting and retaining dentists for our networks.
Effective January 1, 2014, we began offering low cost dental PPO plans on the Ohio Exchange. These dental PPO plans include the pediatric oral health benefit that is one of the essential health benefits required by the ACA. The family plans also include dental coverage for adults. On January 1, 2015, we began offering these exchange certified dental PPO plans on the Indiana Exchange and on January 1, 2016 we began offering these exchange certified dental PPO plans on the federally facilitated exchanges in Pennsylvania, Georgia and Tennessee (the “Pennsylvania, Georgia and Tennessee Exchanges”). We are planning to offer these dental PPO plans in additional states in 2017 and beyond.
In the fourth quarter of 2014, we launched our individual dental HMO plans in southwestern Ohio. In 2015, we offered individual dental HMO and PPO plans in Ohio and in Kentucky. We are planning to offer our individual dental PPO plans in additional states in 2016 and beyond.
Membership Retention- Employers generally contract with our dental plans for a period of one year. Continuous marketing and sales efforts are made to obtain contract renewals on an annual basis. The ability to obtain contract renewals depends on our premium rates, competitive bids received by employers from our competitors, and employee satisfaction with our plans, among other factors. The cost of replacing lost members is higher than retaining members. Accordingly, membership retention is a primary focus of our marketing efforts. We strive for consistent employer and broker contracts and fair, justified renewal pricing in order to increase retention rates. Due to these membership retention efforts, we achieved a retention rate of approximately 98.4% in 2015, compared to retention rates of 96.2% and 95.7% in 2014 and 2013, respectively.
Group Billing and Collection- We dedicate significant resources to achieving prompt and accurate billing for premiums, reimbursement for self-insured claims and ASO fees. We also have a structured process for monitoring and collecting our accounts receivable.
Customer Service- We provide customer service to employer group administrators, members, and dentists. Customer service representatives respond promptly to employer, member and provider staff inquiries regarding member identification cards, benefit determinations, eligibility, benefit verification and claims payments. We strive to answer questions in one phone call. We monitor key customer service statistics in order to maintain positive customer relationships with all constituencies.
Information Technology- Our dental plan administration system allows us to easily adapt to benefit changes sought by employer groups. Our system also allows for increased efficiencies and cost savings in the functional areas of group marketing, enrollment, billing, collections, cash application, claims adjudication and claims payment by reducing manual processing and facilitating the development of electronic membership enrollment, group billing, payment and automated cash application. With this system, we have a high percentage of claims that can be electronically loaded and adjudicated. We are also focused on the importance of data integrity, security, ease of data extraction, and interfacing with banks, clearinghouses, and other business partners.
Dentist Networks
Our networks are important to the success of our dental HMO and dental PPO plans. We maintain dental networks comprised of dentists who have contracted with our subsidiaries. As of December 31, 2015, we had provider contracts with 2,794 dentists operating out of 5,839 dentist office locations in our dental HMO network. Of these participating dentist office locations, there are 3,289 in Ohio, 1,956 in Kentucky, 508 in Indiana, and 86 in other states. Of the 2,794 participating dentists, 516 are shareholders who each own one or more Class A or Class B voting Redeemable Common Shares. As of December 31, 2015, we had provider contracts with 3,031 dentists operating out of 6,520 dentist office locations in our DentaSelect dental PPO network. Of these participating dentist office locations, there are 3,890 in Ohio, 1,989 in Kentucky, 523 in Indiana, and 118 in other states. As of December 31, 2015, we had provider contracts with 2,100 dentists operating out of 5,114 dentist office locations in our new Balanced Value dental PPO network. Of these participating dentist office locations, there are 2,944 in Ohio, 1,570 in Kentucky, 507 in Indiana, and 93 in other states. We actively recruit dentist providers in each of our markets. In some instances, we identify expansion area counties where additional providers are needed and locate dentists in these expansion area counties by reviewing state dental licensure records. In other cases, new employer group customers request that we recruit specific dentists to which their employees desire access.
Before a dentist can become a participating provider, we engage in extensive due diligence on the dentist’s professional licenses, training and experience, and malpractice history. The dentist must also be recommended by our Clinical Affairs Committee consisting of experienced dentists who represent various dental specialties and some of who are also members of our Board of Directors (the “Board”).
Our provider contracts require that participating dentists participate in periodic fee surveys for the purpose of establishing our fee schedules, to participate in and be bound by our utilization review and credentialing plans (see “Utilization Control and Quality Assurance Policies” below), to maintain a state license in good standing to practice dentistry, to maintain professional liability insurance coverage in amounts determined by our Clinical Affairs Committee, and to maintain patient records in a confidential manner. Our provider contracts are for a term of one year and are automatically renewed for successive one year periods unless a written termination notice is given by either party on 30 days’ notice.
Participating dentists are reimbursed for services provided to members of our dental plans on a “fee-for-service” basis based on maximum allowable fee schedules we have developed or the actual fee charged by the dentist, whichever is less. In most cases, our reimbursement to our participating providers for covered dental services under the dental HMO and the dental PPO are subject to a 10% withhold by us. The amounts withheld are not retained in a separate fund and we have no obligation to pay any portion of the amounts withheld to the providers.
The Company has a network access agreement with a national dental network management company that has one of the largest networks of dentists under contract in the United States. With this network access agreement, Dental Care Plus dental PPO members have access to approximately 2,500 additional dentists in our operating territories and approximately 44,200 additional dentists throughout the United States. The Company also has a network access arrangement with a national dental administration company for the dental PPO plans that we offered on the Ohio exchange in 2015. With this network access arrangement, our Ohio exchange members have access to approximately 1,600 dentists in Ohio. We also entered into a network access arrangement with a regional dental network company for the dental PPO plans that we offered on the Indiana exchange in 2015. With this network access arrangement, our Indiana exchange members have access to approximately 1,000 dentists in Indiana.
Employees
At December 31, 2015, we had 88 employees. We have no collective bargaining agreements with any unions and believe that our overall relations with our employees are good.
Insurance Brokers and Consultants
Many of our employer groups and individual customers are represented by insurance brokers and consultants who assist these customers in the design and purchase of health care products. We generally pay brokers a commission based on premiums collected, with commissions varying by market and premium volume, pursuant to our standard broker agreement. In addition to commissions based directly on premium volume for sales to particular customers, we also have programs that pay brokers and agents on other criteria. These include commission bonuses based on sales that attain certain levels or involve particular products. During 2015, approximately 56% of our business was generated by five independent brokers, one of which was responsible for generating approximately 18% of our total premium revenue.
Utilization Control and Quality Assurance Policies
Utilization control and quality assurance policies are essential to our success. Our benefits structure limits the frequency of various procedures in order to control utilization of dental care by members of our fully-insured and self-insured dental plans.
Each dentist in our networks is obligated to adhere to our utilization review program. Non-compliance or continued deviations from the utilization review program will result in sanctions against a dentist. Such sanctions may include probation, suspension or expulsion as a participating dentist, and may also affect the dentist’s ability to receive compensation from the plan for services provided to members. We believe that a stringent utilization review program is necessary to provide adequate cost containment and quality care.
Our Board appoints a committee of dentists to determine that the utilization review program is being adhered to and updated as appropriate. The Clinical Affairs Committee is charged with reviewing service patterns of providers and requests for pretreatment estimates that do not clearly meet Company standards.
The Clinical Affairs Committee is also charged with retrospective review of covered services provided by dentists to determine whether the frequency and nature of the services are in compliance with standards adopted by the Clinical Affairs Committee. The Clinical Affairs Committee may recommend that the participating agreement of a dentist who is not in compliance with these standards be terminated, suspended or not renewed, or that benefits paid to the provider for particular services rendered by him or her be reduced.
Credentialing
We have a dedicated provider relations department that communicates with network dentists and performs credentialing and re-credentialing of each participating dentist. The Clinical Affairs Committee also has oversight over the credentialing of new dentist providers that apply to be participating providers in our provider networks. This committee oversees the periodic re-credentialing of dentist providers already in one or more of our existing provider networks and evaluates whether a dentist should be terminated from one or more of the provider networks if an action is filed against the dentist with a state dental board or other regulatory agency or the provider loses his/her medical malpractice insurance coverage due to an adverse claim. The Clinical Affairs Committee is also charged in part with determining whether all participating dentists maintain good standing with regulatory agencies. The recommendations of the Clinical Affairs Committee are forwarded to our Board for consideration and appropriate action.
The national dental network management companies with which we have a network access agreement perform credentialing and re-credentialing of each of their participating dentists according to accepted industry standards.
Risk Management
We assess risks that may affect the Company’s financial results, operational capability, delivery of service and products to employer groups and plan members, and other significant risks. We evaluate industry trends, information technology changes and our operating efficiencies and results. We perform ongoing risk assessments and implement various measures to manage and mitigate identified risks. The Board has delegated responsibility for risk oversight to the Audit Committee. Quarterly, the Audit Committee reviews the Company’s risk assessment and discusses with Company management, significant financial and non-financial risks (see Item 1A
ITEM 1A. RISK FACTORS
If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected, and the value of our shares could decline. The risks and uncertainties described below are those that we currently believe may materially affect our Company.
Adverse changes in economic conditions could adversely affect the Company’s business and results of operations.
Any adverse changes in the market conditions could adversely affect our customers. As a result, our employer group customers may seek to control their employee benefit costs including their dental plan benefits, which may lead to limited rate increases, fewer new sales and the loss of some dental plan membership. These factors may affect the Company’s revenue in the short-term.
Our ability to achieve our performance objectives could be affected by changes in the financial, credit and capital markets.
We invest premiums received from policyholders and other available cash to generate investment income and capital appreciation, while also maintaining sufficient liquidity to pay covered claims and operating expenses, and service our debt obligations. Investment income is an important component of our revenues and net income. The ability to increase investment income and generate longer-term growth in book value is affected by factors beyond our control, such as inflation, economic growth, interest rates, world political conditions, changes in laws and regulations, market events leading to credit constriction, and other unpredictable events. These events may adversely affect the economy generally and could cause our investment income or the value of securities we own to decrease. A significant decline in our investment income could have an adverse effect on our net income and on our shareholders’ equity. For example, a significant increase in the general level of interest rates could lead to falling bond values. For more detailed discussion of risks associated with our investments, please refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk.
Our business is highly concentrated in a limited geographic area and adverse economic conditions within the markets in which we do business could impair or reverse our growth trends and have a negative effect on our premium revenue and net income.
The operations of our subsidiaries have concentrated premium revenue in the Southwestern Ohio, Central Ohio, Northern Kentucky and Southern Kentucky markets, although our primary operations are in Southwestern Ohio. A prolonged regional economic downturn could cause employers to stop offering dental coverage as an employee benefit or elect to offer dental on a voluntary, employee-funded basis as a means to reduce their operating costs. A decrease in employer groups offering dental coverage on an employer sponsored basis could lead to a decrease in our membership, premium revenue and net income.
Our business is dependent upon a limited number of customers, and the loss of any one such customer could result in a loss of substantial premium revenue.
During 2015, approximately 10% of our total revenue was generated by four fully-insured employer groups and approximately 11% of our total revenue was generated by two self-insured employer groups. If our relationship with any one of these employers were to terminate, our dental membership and the related premium revenue would decrease, which could lead to lower net income.
A small number of independent brokers source a substantial portion of our business, and the loss of any one such broker could result in a loss of substantial premium revenue.
During 2015, approximately 56% of our business was generated by five independent brokers, one of which was responsible for generating approximately 18% of our total premium revenue. If our relationship with any of these brokers were to terminate, our premium revenue could decrease materially.
Because our premiums are fixed by contract, we are unable to increase our premiums during the contract term if our claims costs exceed our estimates due to higher than expected dental services utilization.
Dental services utilization by members of our fully-insured dental plans may be higher than expected, resulting in higher than anticipated healthcare services expense and a reduction in our net income. Dental costs are subject to a high rate of inflation due to many factors, including new higher priced technologies and dental procedures, new dental service techniques and therapies, an aging population, the tort liability system and government regulations. If our claims costs exceed our estimates, we will be unable to adjust the premiums we receive under our current contracts, which may result in a decrease in our net income.
Our customers’ decisions to transition from a fully-insured to a self-insured dental plan or from a self-insured to a fully-insured dental plan could result in lower gross margins and increased costs.
In recent years, a number of fully-insured dental members shifted to our self-insured dental products. Additionally, a number of self-insured members shifted to our fully-insured dental products. If our customers continue to shift from a fully-insured dental product to a self-insured dental product, our dental gross margin may decrease. If our customers shift from a self-insured dental product to a fully-insured dental product, our capital and surplus requirements will increase. In both instances, we may incur significant transitioning costs.
The financial strength rating assigned to Dental Care Plus may be downgraded, which could result in a loss of employer groups and insurance brokers, which may, in turn, cause our premium revenue to decline.
A.M. Best assigns a rating to companies that have, in their opinion, an ability to meet their ongoing obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions. In July 2015, A.M. Best affirmed our B+ (Good) rating. In July 2014, A.M. Best upgraded our rating to B+ (Good) with a stable outlook. In July 2013, A.M. Best affirmed our B (Fair) rating. In June 2012, A.M. Best upgraded our rating from B- (Fair) to B (Fair). Prior to June 2012, Our B- (Fair) rating was annually affirmed in each year from 2006 through 2011. Our A.M. Best rating is a measure of our financial strength relative to other insurance companies and is not a recommendation to buy, sell or hold securities. The rating assigned by A.M. Best Company is based, in part, on the ratio of our fully-insured premium revenue to our statutory capital and surplus. If Dental Care Plus continues to experience growth in its fully-insured premium revenue but does not retain enough of its earnings or obtain new sources of capital, the rating assigned to Dental Care Plus may be downgraded. If a downgrade were to occur, employer groups may decline to renew their annual or multi-year contract with us, and insurance brokers may refuse to market our dental products. In addition, a downgrade may make it difficult for us to contract with new employer groups and new brokers. The loss of existing employer groups, and the loss of insurance brokers may lead to a loss of premium revenue.
If we fail to maintain contracts with an adequate number of dentists, it may be difficult to attract and retain employer groups, which may lead to a loss of premium revenue.
Our business strategy is dependent to a large extent upon our continued maintenance of our dentist networks. Generally, our participating provider contracts allow either party to terminate on limited notice (generally 30 days prior to annual renewal). If we are unable to continue to establish and maintain contracts with an adequate number of dentists in our networks, employer groups may not renew their contracts with us and it may be difficult to attract new employer groups, which may lead to a loss of premium revenue.
We encounter significant competition that may limit our ability to increase or maintain membership in the markets we serve, which may harm our growth and our operating results.
We operate in a highly competitive environment. We compete for employer groups principally on the basis of the size, location and quality of our provider networks, premium rates, benefits provided, quality of service and reputation. A number of these competitive elements are partially dependent upon and can be positively affected by financial resources available to a dental plan. Many other organizations with which we compete have substantially greater financial, and other, resources than we do. For example, our competitors include Delta Dental of Ohio, which has an A.M. Best rating of A (Excellent) and Delta Dental of Kentucky, which has an A.M. Best rating of A- (Excellent). We also compete with the dental divisions of the medical insurance carriers in our markets, such as Humana Dental Insurance Company, which has an A.M. Best rating of A- (Excellent) and Anthem Blue Cross Life and Health Insurance Company, which has an A.M. Best rating of A (Excellent). In addition, we compete with national insurance carriers such as Metropolitan Life Insurance Company and Guardian Life Insurance Company of America, which have A.M. Best ratings of A+ (Superior) and A++ (Superior), respectively. Given the higher ratings and financial strength of many of our competitors, we may encounter difficulty in increasing or maintaining our dental membership in the future.
Health insurance companies will continue to offer premium concessions if employer groups sign up for both their medical plan and their dental plan, which could result in the loss of employer groups and a decrease in our premium revenue.
Many of the health insurance companies that operate in the Ohio, Kentucky and Indiana markets offer both medical plans and dental plans to employer groups. If these companies offer a premium concession on the medical plan to an employer group that signs up for their dental plan as well, employer groups may decide to purchase the bundled medical and dental plans to save money on their medical premium. As a result, we could experience significant loss of premium revenues.
We are subject to substantial federal government regulation. New laws or regulations, changes in existing laws or regulations and changes in public policy could adversely affect the markets for our products and our profitability.
Public Policy - It is not possible to predict with certainty the effect of fundamental public policy changes that could adversely affect the Company. On March 23, 2010, President Obama signed comprehensive healthcare reform, the Patient Protection and Affordable Care Act (“ACA”) into law. Provisions of the ACA will continue to become effective at various dates over the next several years. Also the provisions of this legislation may change over the course of the next one to four years as its various provisions are modified or implemented. Thus far, in the states in which we operate, the provisions of the ACA have been inconsistently implemented which makes it difficult for a stand-alone dental plan to enroll and retain membership. In accordance with the provisions of the ACA of 2010, effective January 1, 2014, the federal government imposed an annual assessment on all U.S. health insurers of approximately $8 billion in 2014. This annual assessment will increase each year and is expected to be $14.3 billion in 2018. This annual assessment is allocated to individual health insurers based on the ratio of the insurer’s net premiums written during the preceding calendar year to the total health insurance premiums for any U.S. risk premium written for that same year. Our annual assessment for 2015 was approximately $518,000. We also incurred additional TPA expenses for our on-exchange dental PPO plans. Additional changes in public policy could materially affect our profitability and cash flow, our ability to retain or grow our business and our financial position even if we correctly predict their occurrence. Finally, we are unable to predict how the cost to employers of complying with this law will affect decisions those employers make with respect to offering dental and/or vision benefits to employees.
HIPAA - The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) authorized the U.S. Department of Health and Human Services (“HHS”) to adopt a series of regulations designed to simplify the exchange of information electronically between health plans and health care providers and to promote efficiency within the health care industry, as well as to protect the confidentiality and security of individually identifiable health information. Pursuant to this authority, HHS has adopted a series of regulations which are applicable to “Covered Entities,” which include health care providers, health plans and health care clearinghouses (collectively the “HIPAA Regulations”). Failing to comply with these HIPAA Regulations could result in significant civil penalties.
ARRA - The American Recovery and Reinvestment Act of 2009 (“ARRA”) contained several changes to the privacy and security rules under HIPAA. These changes are contained in the Health Information Technology for Economic and Clinical Health Act (the “HITECH” Act) provisions of the ARRA, and apply to all entities subject to the HIPAA privacy rules, including group health plans sponsored by employers. First, the HITECH Act makes several provisions of the HIPAA privacy and security rules directly applicable to the business associates of a group health plan. In addition, the HITECH Act contains notification rules that apply when there is a breach of the privacy rules due to an improper disclosure of unsecured protected health information (“PHI”). Generally, if a covered entity such as a group health plan discovers that an improper disclosure of unsecured PHI has occurred, the covered entity must notify the affected individuals whose PHI was breached. Covered entities must also notify the Department of Health and Human Services (“HHS”) of breaches and, if a breach affects more than 500 residents of a state or jurisdiction, the covered entity must provide notice of the breach to a prominent media outlet serving the state or jurisdiction. In addition, a business associate must notify a covered entity when it discovers a breach of unsecured PHI. Failing to comply with the breach notification rules could result in significant civil penalties.
GLBA- The Financial Services Modernization Act of 1999 (the “Gramm-Leach-Bliley Act,” or “GLBA”) contains privacy provisions and introduced new controls over the use of an individual’s nonpublic personal data by financial institutions, including insurance companies, insurance agents and brokers licensed by state insurance regulatory authorities. The privacy provisions of GLBA that became effective in July 2001 require a financial institution to provide written notice of its privacy practices to all of its customers. In addition, a financial institution is required to provide its customers with an opportunity to opt out of certain uses of their non-public personal information. Failing to comply with GLBA Regulations could result in significant civil penalties.
If we fail to comply with applicable privacy and security laws, regulations and standards, including with respect to third-party service providers that utilize sensitive personal information on our behalf, or if we fail to address emerging security threats or detect and prevent privacy and security incidents, our business, reputation, financial position and cash flows could be materially and adversely affected.
Our business is heavily regulated by the states in which we do business, and our failure to comply with regulatory requirements could lead to a loss of our authority to do business in such states.
Our business is subject to substantial government regulation, principally under the insurance laws of Ohio, Kentucky and Indiana. We will also become subject to the insurance laws and regulations of other states in which our subsidiaries may in the future conduct business. These laws, which vary from state to state, generally require our subsidiaries to be licensed by the relevant state insurance department. With respect to our fully-insured dental products, these laws and regulations also establish operational, financial and other requirements. Dental Care Plus is currently required to maintain a minimum capital and surplus of approximately $2.5 million according to the regulations for the state of Ohio. The ability of Dental Care Plus to maintain such minimum required capital and surplus is directly dependent on the ability of Dental Care Plus to maintain a profitable business. Dental Care Plus operates in states that regulate its payment of dividends and debt service on inter-company loans, as well as other inter-company cash transfers and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid by Dental Care Plus, without prior approval by state regulatory authorities, is limited based on statutory income and statutory capital and surplus. Failure to maintain compliance with the minimum required capital and surplus of each state could result in Dental Care Plus becoming subject to supervision by the Ohio, Kentucky, Indiana, Pennsylvania, Georgia and Tennessee insurance regulatory agencies, and could further result in the suspension or revocation of Dental Care Plus’s Certificate of Authority in Ohio, Kentucky, Indiana, Pennsylvania, Georgia and Tennessee, monetary penalties, or the rehabilitation or liquidation of Dental Care Plus.
Due to the restrictions on the eligible owners of our common shares, we are limited in how we can raise capital to support the continued growth of our business.
At the present time, the only eligible owners of our Class A common shares and Class B common shares are dentists, employees and members of the Board of Directors. As of January 2014, non-dentist individuals are eligible owners of our Class C voting common shares (with a limitation on the number of Class C shares that may be outstanding at any time as a percentage of Class A and Class B shares). We are able to offer non-voting preferred shares to institutional investors, but there are a limited number of institutional investors that will invest their capital with the Company without voting shares or some other means to have formal influence over the direction of the Company. Given the restriction on eligible owners of our common shares, we may not be successful in raising new capital, which would result in our need to retain our earnings, and this may limit our ability to continue our consistent trend of premium growth.
As a result of the aging and retirements of our dentist shareholders, we anticipate requests to redeem an increasing number of common shares each year resulting in a reduction in the level or amount of the redeemable common shares on our consolidated balance sheet.
As of December 31, 2015, approximately 282 of our network dentist shareholders were 60 years old or older and these shareholders owned, in the aggregate, 4,708 of our Class A and Class B Redeemable Common Shares. Pursuant to the Company’s Second Amended and Restated Code of Regulations (the “Code of Regulations”), retiring dentists have the right to require the Company to repurchase such dentist’s common shares on the terms contained in the Code of Regulations. Generally, we will be required to purchase the shares for a price equal to the book value of his or her common shares at the time of the redemption request and the repurchase will typically occur within thirteen months of the date the request is made. However, the Code of Regulations provides for other payment terms and timing in certain circumstances. We will need to fund these anticipated increased shareholder redemptions by retaining earnings or raising additional capital.
A decrease in the working capital and liquidity of our business may have an adverse effect on our ability to meet debt service requirements.
If the working capital of our business were to decrease significantly due to an increase in accounts receivable, the loss of a significant number of employer groups or a period of continuing operating losses, we may be forced to liquidate portfolio investments in order to meet debt service requirements resulting in a reduction of our investment income and could result in a material reduction in our capital and surplus balance. If the accounts receivable balances from certain employer groups are greater than 90 days past due, these accounts receivable become non-admitted assets for statutory accounting purposes, leading to a decrease in our statutory basis capital and surplus balance. If our statutory-basis capital and surplus is lowered materially, the Ohio Department of Insurance may commence adverse regulatory action against us, ranging from requesting corrective action to assuming control of Dental Care Plus, and A.M. Best may consider lowering our financial strength rating.
Managing technology initiatives and meeting data security requirements are significant challenges.
We necessarily collect, use and hold data concerning individuals and businesses with whom we have a relationship. Threats to data security, including unauthorized access and cyber-attacks, rapidly emerge and change, exposing us to additional costs for protection or remediation and competing time constraints to secure our data in accordance with customer expectations and statutory and regulatory requirements.
While we take all reasonable measures to keep our systems and data secure, it is difficult or impossible to defend against every risk being posed by changing technologies as well as criminals intent on committing cyber-crime. Increasing sophistication of cyber-criminals and terrorists make keeping up with new threats difficult and could result in a breach. We could also experience a breach by intentional or negligent conduct on the part of associates or other internal sources. Our systems may become vulnerable to damage or disruption due to circumstances beyond our control, such as from catastrophic events, power anomalies or outages, natural disasters, network failures, and viruses and malware.
A breach of our security that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs, and reputational damage.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None
ITEM 2.
ITEM 2. PROPERTIES
We currently maintain our principal place of business at 100 Crowne Point Place, Sharonville, Ohio 45241, which we own. We occupy approximately 80% of this property. The remaining amount, approximately 20%, is leased to a third-party tenant. We believe that our existing facility is adequate to support our business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings that we believe would, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Redeemable Common Shares
There is no established public trading market for the Class A, Class B or Class C Redeemable Common Shares. In addition, there are significant restrictions contained in the Company’s Code of Regulations on the ability to transfer the Class A, Class B and Class C Redeemable Common Shares.
Holders
As of December 31, 2015, there were 516 holders of Class A Redeemable Common Shares, 549 holders of Class B Redeemable Common Shares and 23 holders of Class C Redeemable Common Shares.
Dividend Policy
On February 10, 2016, our Board of Directors declared a $40.47 per share dividend for all holders of Class A, Class B and Class C redeemable common shares of record on February 10, 2016, to be paid on March 25, 2016. With the dividend, the holders of restricted share units will receive an equivalent share based dividend.
See Item 12 under PART III for securities authorized for issuance under equity compensation plans.
Recent sales of unregistered securities
In the fourth quarter of 2015, we sold 247 Class B Redeemable Common Shares and 80 Class C Redeemable Common Shares with an average price per share of $1,015.66.
Performance of Redeemable Common Shares
Pursuant to our Code of Regulations, the Company’s Redeemable Common Shares are sold and repurchased by the Company at book value. The book value of a Company Redeemable Common Share was $1,012, $997, $894, $815, and $687 at December 31, 2015, 2014, 2013, 2012, and 2011, respectively.
Purchases of Equity Securities
We repurchased and retired 5 Class A Redeemable Common Shares and 67 Class B Redeemable Common Shares during the three months ended December 31, 2015, as follows:
(a) Repurchased from shareholder in accordance with the Company’s obligations under its Code of Regulations.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information for the Company and its subsidiaries for the years indicated. The financial information should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this report.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Headquartered in Cincinnati, Ohio, the Dental Care Plus Group offers to employer groups of all sizes dental HMO, dental PPO, dental indemnity and vision PPO benefit plans and related services. The Company also offers low cost dental PPO plans to individuals and small groups on the Ohio and Indiana exchanges and individual dental HMO and individual dental PPO plans in Ohio and Kentucky. As of December 31, 2015, we had approximately 362,200 members in our dental and vision benefit programs with approximately 2,800 dentists participating in our dental HMO network, approximately 3,000 dentists participating in our DentaSelect dental PPO network and approximately 2,100 in our Balanced Value dental PPO network. The Company has a network access agreement with a national dental network management company that has one of the largest PPO networks of dentists under contract in the United States. With this network access agreement, our dental PPO members have access to approximately 2,500 additional dentists in Ohio and Indiana and approximately 44,200 additional dentists throughout the United States. The Company also has other network access arrangements for the dental PPO plans that it offers on the Ohio and Indiana exchanges. With these network access arrangements, Dental Care Plus exchange members have access to approximately 1,600 and 1,000 dentists in Ohio and Indiana, respectively.
We manage our business with four reportable segments: fully-insured dental HMO and indemnity (“dental HMO/IND”), fully-insured dental PPO, self-insured dental, and corporate, all other. Self-insured dental consists of the self-insured dental HMO, self-insured dental PPO and self-insured dental indemnity products. Corporate, all other primarily consists of revenue associated with our dental and vision products underwritten by third-party insurance carriers and certain other corporate activities.
The results of our fully-insured dental HMO/IND, fully-insured dental PPO and self-insured dental segments are measured by gross profit. We do not measure the gross profit of our corporate, all other segment. We do not allocate investment and other income, insurance expenses, assets or liabilities to our segments because these measures are not used to analyze the segments. Our segments do not share overhead costs or assets. We do, however, measure the contributions of each of our fully-insured and self-insured segments to costs retained in our corporate, all other segment.
Profitability Strategy
Our strategy focuses on providing solutions to employers to manage the rising cost of dental care by leveraging our growing networks of participating dentists and deploying a variety of products that give employer groups and members options that meet their needs. We strive to provide excellent customer service to our employer groups, members, insurance brokers and dentists. Additionally, we have increased the diversification of our membership base, not only through our newer products, but also by entering new geographic territories.
In our markets, there has been limited growth in recent years in the number of individuals enrolled in dental benefit plans. However, there has been a shift of membership out of the more expensive dental indemnity products into the dental PPO products that offer both less expensive in-network benefits and out-of-network benefits. At the same time, members have migrated away from dental HMO products with very limited provider networks. While these dental HMO products are the least expensive, employers and members have focused their attention on the dental PPO products that offer broad provider access with the cost control associated within a contracted provider network for the in-network portion of the dental services rendered. Prior to the advent of the ACA, there was limited growth in the number of individuals enrolled in dental benefit plans. Beginning in 2014, there has been a significant increase in publicly funded dental membership that was the result of the expansion of Medicaid in certain states and the dental membership associated with state-based insurance exchanges across the country.
In our original eight county service area, our non-exclusive dental HMO provider network includes approximately 95% of the dental providers in the market. This area, which we refer to as our original eight county service area, includes Butler, Clermont, Hamilton and Warren counties in Ohio, and Boone, Campbell, Kenton and Pendleton counties in Kentucky. In that market our dental HMO provides the broad provider access of a dental PPO along with effective utilization and cost control features. Because of the broad provider network and our professional support services to employers, our fully-insured dental HMO is priced higher than other dental HMOs and has premium rates more equivalent to competitor dental PPOs.
We have experienced steady growth in membership and revenue in our dental products during the last five years. We attribute this growth to our broad provider networks, competitive premium rates for our fully-insured business and ASO fees for our self-insured business, and our commitment to providing outstanding customer service to all of our constituencies (employer groups, members, insurance brokers, and dentists).
Historically, healthcare services expense has generally increased for both the fully-insured dental segment and the self-insured dental segment. We continue to review and adjust our provider fee schedules where appropriate. Other important factors that have an impact on our profitability are both the competitive pricing environment and market conditions. With respect to pricing, there is a tradeoff between sustaining or increasing underwriting margins versus increasing enrollment. With respect to market conditions, economies of scale have an impact on our administrative overhead. As a result of a decline in preference for more closely managed dental HMO products, dental costs have become increasingly comparable among our larger competitors. Product design and consumer involvement have become more important drivers of dental services consumption, and administrative expense efficiency is becoming a more significant driver of margin sustainability. Consequently, we continually evaluate our administrative expense structure and attempt to realize administrative expense savings principally through technology improvements.
Highlights
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We had net income of approximately $958,000 for the year ended December 31, 2015 compared to net income of approximately $1,341,000 for the year ended December 31, 2014. The decrease in net income is primarily the result of higher insurance expense of approximately $1,751,000, in 2015, offset by an increase in gross margin of approximately $1,337,000. Our ratio of insurance expense to total premium revenue (“insurance expense ratio”) increased to 20.4% in 2015 from 19.9% in 2014.
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Our ratio of healthcare services expense to premium revenue (“loss ratio”) remained constant at 78.0% in 2015 and 2014. The fully-insured dental HMO/IND and fully-insured dental PPO segments together represent approximately 69.8% of our total dental business.
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Our dental and vision products grew by approximately 26,300 members, or 7.8%, from 335,900 members at December 31, 2014 to 362,200 members at December 31, 2015. This membership increase from December 31, 2014 is due to an increase in fully-insured dental HMO/IND membership of approximately 3,000 members, an increase in fully-insured dental PPO membership of approximately 9,700 members, an increase in self-insured dental membership of approximately 6,300 members and an increase in corporate, all other membership of approximately 7,300 members.
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In March 2015, we paid a dividend of $39.86 per share to shareholders of record for all Redeemable Common Shares. We also paid a dividend of $35.77 per share in March 2014 to holders of our Redeemable Common Shares.
Comparison of Results of Operations for 2015 and 2014
The following table shows membership totals and revenues and expenses for our four business segments for the years ended December 31, 2015 and 2014 (dollars in thousands):
Summary
Net income was approximately $958,000 and $1,341,000 for 2015 and 2014, respectively. This decrease in net income is primarily the result of an increase in insurance expense of approximately $1,751,000 in 2015. Our ratio of insurance expense to total premium revenue (“insurance expense ratio”) increased to 20.4% in 2015 from 19.9% in 2014.
Membership
Our fully-insured dental HMO/IND membership increased by approximately 3,000 in 2015. This membership increase is primarily attributable to an increase in fully-insured dental HMO membership resulting from new sales of approximately 6,500 members in the Cincinnati and Northern Kentucky markets during 2015. An increase of approximately 2,300 is due to an increase of new sales of our individual dental HMO product. These increases were offset by the loss of approximately 5,800 members due to employer groups that did not renew with the Company or reduced employee counts of retained employer groups. Some of our fully-insured dental HMO membership losses were the result of employer groups moving to medical carriers to take advantage of medical/dental package savings.
Our fully-insured dental PPO membership increased by approximately 9,700 members in 2015. This membership increase is due to new sales in the Dayton and Central Ohio markets and the Southern Kentucky market of approximately 11,600 members during 2015, offset by the loss of approximately 3,200 members with employer groups that did not renew with the Company or reduced employee counts of retained employer groups in these markets. The remaining increase of approximately 1,300 members is due to the new sales on individual and on exchange dental PPO products in 2015.
Our self-insured dental membership increased by approximately 6,300 members in 2015. This increase is due to both the addition of new self-insured dental HMO and dental PPO employer groups in the Southwest Ohio and Northern Kentucky markets, and an increase in membership of existing employer groups in the last twelve months.
Our corporate, all other membership increased by approximately 7,300 members in 2015. The increase is due to increased membership in our vision plan.
Revenue
Fully-insured dental HMO/IND premium increased approximately $1,510,000 in 2015 compared to 2014. Fully-insured dental HMO/IND premium rates negotiated with employer groups at their renewals resulted in an increase of approximately $499,000 in fully-insured dental HMO/IND premium revenue. An increase in fully-insured dental HMO/IND membership in 2015 resulted in an increase in fully-insured dental HMO/IND premiums of approximately $1,011,000. The membership increase is the result of new fully-insured employer group business as well as an increase in the fully-insured individual product membership. The fully-insured dental HMO/IND segment represented approximately 50.3% of our total dental business in 2015.
Fully-insured dental PPO premium increased approximately $2,739,000 in 2015 compared to 2014. Fully-insured dental PPO premium rates negotiated with employer groups at their renewals resulted in an increase of approximately $386,000 in fully-insured dental PPO premium revenue. An increase in fully-insured PPO group membership in the 2015 period resulted in an increase in fully-insured dental PPO premiums of approximately $2,353,000. The increase in membership is the result of an increase in fully-insured dental PPO group membership as well as an increase in fully-insured on-exchange dental PPO membership. The fully-insured dental PPO segment represents approximately 19.5% of our total dental business.
Total self-insured revenue increased approximately $2,017,000 in 2015 compared to 2014. Self-insured dental revenue increased by approximately $1,956,000 due to new self-insured sales and an increase in membership for existing employer groups. Self-insured revenue increased by approximately $587,000 due to an increase in the self-insured claims revenue on a per member per month basis. Self-insured ASO fees increased due to those membership increases, offset by a slight decrease in self-insured administrative fee rates on a per member per month basis. The self-insured dental segment represented approximately 29.5% of our total dental business in 2015. The self-insured segment revenue has two components:
Self-Insured Claim Revenue - Self-insured claim revenue increased approximately $1,956,000, or 7.6%. Self-insured claim revenue increased by approximately $1,358,000 due to new self-insured sales. Also, self-insured claim revenue increased by approximately $598,000 primarily due to an increase in the self-insured claim revenue on a per member per month basis as a result of a 1.5% dental fee schedule increase effective January 1, 2015.
Self-Insured ASO Fees - Self-insured ASO fees increased approximately $61,000, or 4.5%. Approximately $72,000 of this increase is attributable to self-insured product sales and an increase in membership for existing employer groups, offset by approximately $11,000 due to a decrease in average self-insured ASO fee rates for 2015 compared to 2014.
Corporate, all other premium revenue is primarily derived from the non-DCP dental indemnity product, dental PPO product and vision product underwritten by third party insurance carriers. In the aggregate, corporate, all other premium revenue increased by approximately $59,000, or 9.5%, to $683,000 in 2015 from $624,000 in 2014.
Investment Income
Investment income increased approximately $30,000, or 13.5%, to $252,000 in 2015 from $222,000 in 2014. This increase is the result of the increased amount of funds that were invested in both medium duration investment and non-investment grade corporate bonds and short duration investment grade corporate bonds with higher yields during 2015.
Other Income and Realized (Losses) Gains on Investments, Net
Other income and realized (losses) gains on investments decreased approximately $89,000 or 96.7% to $3,000 in 2015 from $92,000 in 2014. This decrease is primarily the result of realized losses due to the impairment of six corporate bonds in 2015. We concluded that the decrease in the market values of these assets had resulted in other-than temporary impairments.
Healthcare Services Expenses
Fully-insured dental HMO/IND healthcare services expense increased by $1,351,000, or 3.7%. This increase is attributable to an increase in fully-insured dental HMO/IND healthcare services expense on a per member per month basis of approximately $592,000, or 1.6%, in 2015 for both existing and new fully-insured dental HMO/IND membership. Fully-insured dental HMO/IND healthcare services expense increased by approximately $551,000 due to the fee schedule increases effective January 1, 2015 and by approximately $41,000 due to an increase in dental service utilization level by our fully-insured dental HMO/IND members in 2015 compared to 2014. This increase in fully-insured dental HMO/IND healthcare services expense is also the result of an increase of approximately $759,000, or 2.1%, due to an increase in fully-insured dental HMO/IND member months of 2.0% in 2015 compared to 2014.
Fully-insured dental PPO healthcare services expense increased by $1,723,000, or 13.6%. This increase was primarily the result of an increase of approximately $1,810,000 related to the increase in fully-insured group and individual dental PPO membership. This increase in fully-insured dental PPO healthcare member volume change was offset to an overall decrease of approximately $87,000 due to a decrease in claims expense on a PMPM basis. Lower dental service utilization resulted in a decrease of approximately $303,000 offset by an increase in healthcare service expense of approximately $216,000 due to the fee schedule increases effective January 1, 2015.
Self-insured healthcare services expense increased by approximately $1,914,000, or 8.3%, in 2015. An increase of 5.3% in self-insured member month volume in 2015 compared to 2014 resulted in an increase in self-insured healthcare services expense of approximately $1,225,000. Self-insured dental healthcare services expense increased by approximately $364,000 due to the fee schedule increases effective January 1, 2015. The remaining increase in self-insured claims expense of approximately $325,000 is due to an increase in dental service utilization level by our self-insured members in 2015 compared to 2014.
Corporate, all other healthcare services expense is not recognized by the Company due to the fact that our other dental indemnity, dental PPO and vision PPO products are underwritten by third party insurance carriers.
Insurance Expenses
Consolidated insurance expenses increased approximately $1,751,000 in 2015. Total insurance expenses as a percentage of total premium revenue, or the insurance expense ratio, was 20.4% for 2015, increasing 0.5% from the 2014 ratio of 19.9%. Salaries and wages increased by approximately $517,000 in 2015. Commissions expense increased approximately $297,000, due to the increase in total premium revenue in 2015 compared to 2014. Other insurance expense increased by approximately $937,000 due to an increase in expenses related to the launch of the individual dental PPO and dental HMO products in Ohio as well as the development of the on exchange dental PPO products for Georgia, Tennessee and Pennsylvania for 2016.
Income Taxes
Our effective tax rate for 2015 was 45.5% compared to the 39.8% effective tax rate in 2014. The increase in the effective tax rate for 2015 compared to 2014 is the result of the increase in the 2015 federal premium tax assessment that is not deductible for federal tax purposes. Also, our 2015 and 2014 effective tax rates were higher than the federal statutory rate primarily due to the impact of permanent tax differences related to meal and entertainment expenses and legal fees. See Note 6 to the consolidated financial statements included in Item 8 - Financial Statements and Supplementary Data for a complete reconciliation of the federal statutory rate to the effective tax rate.
Comparison of Results of Operations for 2014 and 2013
The following table shows membership totals and revenues and expenses for our four business segments for the years ended December 31, 2014 and 2013 (dollars in thousands):
Summary
Net income was approximately $1,341,000 and $1,282,000 for 2014 and 2013, respectively. This increase in net income is primarily the result of an increase in premium revenue of approximately $5,573,000 offset by an increase in healthcare services expense of approximately $3,934,000 in 2013. This increase in gross margin of approximately $1,639,000 was offset by an increase in insurance expenses of $1,536,000 in 2013. Our ratio of insurance expense to total premium revenue (“insurance expense ratio”) increased to 19.9% in 2014 from 19.4% in 2013.
Membership
Our fully-insured dental HMO/IND membership increased approximately 2,200 in 2014. This membership increase is primarily attributable to an increase of approximately 1,200 fully-insured dental HMO members and an increase of approximately 1,000 fully-insured dental indemnity members underwritten by Dental Care Plus, Inc. (“DCP"). The increase in fully-insured dental HMO membership is due to new sales of approximately 9,400 members in the Cincinnati and Northern Kentucky markets during 2014, offset by the loss of approximately 8,200 members with employer groups that did not renew with the Company or reduced employee counts of retained employer groups. A significant portion of the fully-insured dental HMO membership losses were the result of not renewing certain employer groups that did not accept the premium rate increases we proposed. In addition, some of these membership losses were due to corporate acquisitions where our employer group customers moved to the new parent company benefit plans.
Our fully-insured dental PPO membership increased by approximately 9,500 members in 2014. This membership increase is due to new sales in the Dayton and Central Ohio markets and the Southern Kentucky market of approximately 12,100 members during 2014, offset by the loss of approximately 6,600 members with employer groups that did not renew with the Company or reduced employee counts of retained employer groups in these markets. The remaining increase of approximately 4,000 members is due to the new sales on the Ohio exchange in 2014.
Our self-insured dental membership increased by approximately 3,300 members in 2014. This increase is partially due to the addition of new self-insured dental HMO and dental PPO employer groups in the Southwest Ohio and Northern Kentucky markets, and primarily due to an increase in membership of existing employer groups in the last twelve months.
Our corporate, all other membership increased by approximately 1,700 members in 2014. The increase is primarily due to an increased membership in our vision plan.
Revenue
Fully-insured dental HMO/IND premium increased approximately $1,292,000 in 2014 compared to 2013. Fully-insured dental HMO/IND premium rates negotiated with employer groups at their renewals resulted in an increase of approximately $798,000 in fully-insured dental HMO/IND premium revenue. An increase in fully-insured dental HMO/IND membership in 2014 resulted in an increase in fully-insured dental HMO/IND premiums of approximately $494,000. The fully-insured dental HMO/IND segment represented approximately 52.2% of our total dental business in 2014.
Fully-insured dental PPO premium increased approximately $2,965,000 in 2014 compared to 2013. Fully-insured dental PPO premium rates negotiated with employer groups at their renewals resulted in an increase of approximately $100,000 in fully-insured dental PPO premium revenue. An increase in fully-insured PPO group membership in the 2014 period resulted in an increase in fully-insured dental PPO premiums of approximately $2,040,000. The addition of the fully-insured on-exchange dental PPO membership resulted in an increase in fully-insured dental PPO premiums of approximately $825,000. The fully-insured dental PPO segment represents approximately 17.9% of our total dental business.
Total self-insured revenue increased approximately $1,264,000 in 2014 compared to 2013. Self-insured dental revenue increased by approximately $891,000 due to new self-insured sales. In addition, self-insured revenue increased by approximately $373,000 due to an increase in the self-insured claims revenue on a per member per month basis as a result of slightly higher dental service utilization and a slight increase in self-insured administrative fee rates on a per member per month basis. The self-insured dental segment represented approximately 29.2% of our total dental business in 2014. The self-insured segment revenue has two components:
Self-Insured Claim Revenue - Self-insured claim revenue increased approximately $1,191,000, or 4.9%. Self-insured claim revenue increased by approximately $847,000 due to new self-insured sales. Also, self-insured claim revenue increased by approximately $344,000 primarily due to an increase in the self-insured claim revenue on a per member per month basis as a result of a 1.5% dental fee schedule increase effective January 1, 2014.
Self-Insured ASO Fees - Self-insured ASO fees increased approximately $73,000, or 5.7%. Approximately $44,000 of this increase is attributable to self-insured product sales and approximately $29,000 is due to an increase in average self-insured ASO fee rates for 2014 compared to 2013.
Corporate, all other premium revenue is primarily derived from the non-DCP dental indemnity product, dental PPO product and vision product underwritten by third party insurance carriers. In the aggregate, corporate, all other premium revenue increased by approximately $52,000, or 9.1%, to $624,000 in 2014 from $572,000 in 2013.
Investment Income
Investment income increased approximately $58,000, or 35.4%, to $222,000 in 2014 from $164,000 in 2013. This increase is the result of the increased amount of funds that were invested in both medium duration investment and non-investment grade corporate bonds and short duration investment grade corporate bonds with higher yields during 2014.
Other Income and Realized Gains on Investments, Net
Other income increased approximately $31,000 or 50.8% to $92,000 in 2014 from $61,000 in 2013. This increase is primarily the result of realized gains due to the sale of investments in 2014 that did not occur in 2013.
Healthcare Services Expenses
Fully-insured dental HMO/IND healthcare services expense increased by $971,000, or 2.8%, to $35,995,000 in 2014 from $35,024,000 in 2013. This increase is attributable to an increase in fully-insured dental HMO/IND healthcare services expense on a per member per month basis of approximately $600,000, or 1.7%, in 2014 for both existing and new fully-insured dental HMO/IND membership. Fully-insured dental HMO/IND healthcare services expense increased by approximately $531,000 due to the 1.5% fee schedule increase effective January 1, 2014. This increase was also the result of an increase in fully-insured dental HMO/IND claims of $69,000 due to an increase in dental service utilization level by our fully-insured dental HMO/IND members in 2014 compared to 2013. This increase in fully-insured dental HMO/IND healthcare services expense is also the result of an increase of approximately $371,000 due to an increase in fully-insured dental HMO/IND member months of 1.1% in 2014 compared to 2013.
Fully-insured dental PPO healthcare services expense increased by $1,966,000, or 18.4%, to $12,661,000 in 2014 from $10,695,000 in 2013. This increase was primarily the result of an increase in fully-insured dental PPO healthcare services expense of approximately $1,617,000 related to the increase in fully-insured group dental PPO membership and approximately $204,000 related to the new fully-insured on-exchange dental PPO membership. This increase in fully-insured dental PPO healthcare services expense was also attributable to an increase of approximately $145,000 due to an increase in fully-insured dental PPO healthcare services expense on a per member per month basis of approximately 1.2% in 2014 for both existing and new fully-insured dental PPO membership. Fully-insured dental PPO healthcare services expense increased by approximately $185,000 due to the 1.5% fee schedule increase effective January 1, 2014. This increase was offset by a decrease in fully-insured dental PPO claims of $40,000 due to a decrease in dental service utilization level by our fully-insured dental PPO members in 2014 compared to 2013.
Self-insured healthcare services expense increased by approximately $997,000, or 4.5%, in 2014. An increase of 3.5% in self-insured member month volume in 2014 compared to 2013 resulted in an increase in self-insured healthcare services expense of approximately $767,000. Self-insured dental healthcare services expense increased by approximately $342,000 due to the 1.5% fee schedule increase effective January 1, 2014. This increase was offset by a decrease in self-insured claims of $112,000 due to a decrease in dental service utilization level by our self-insured members in 2014 compared to 2013.
Corporate, all other healthcare services expense is not recognized by the Company due to the fact that our other dental indemnity, dental PPO and vision PPO products are underwritten by third party insurance carriers.
Insurance Expenses
Consolidated insurance expenses increased approximately $1,536,000 in 2014. Total insurance expenses as a percentage of total premium revenue, or the insurance expense ratio, was 19.9% for 2014, increasing 0.5% from the 2013 ratio of 19.4%. Salaries and wages increased by approximately $403,000 as a result of salary and wage increases in 2014, the addition of some incremental full-time positions and increased management bonuses in 2014 due to our profitability. Commissions expense increased approximately $470,000, or 12.7%, due to the increase in total premium revenue in 2014 compared to 2013. Third party administrative services expense increased by approximately $320,000, or 237.2%, as a result of the third party administration services provided to the Company for the new on exchange dental PPO plans. In addition, federal premium tax expense increased by approximately $333,000 as a result of the advent of the federal premium tax assessment applicable to Dental Care Plus in 2014 in accordance with the Affordable Care Act.
Income Taxes
Our effective tax rate for 2014 was 39.8% compared to the 37.1% effective tax rate in 2013. The increase in the effective tax rate for 2014 compared to 2013 is the result of the new 2014 federal premium tax assessment that is not deductible for federal tax purposes. Also, our 2014 and 2013 effective tax rates were higher than the federal statutory rate primarily due to the impact of permanent tax differences related to meal and entertainment expenses and legal fees. See Note 6 to the consolidated financial statements included in Item 8 - Financial Statements and Supplementary Data for a complete reconciliation of the federal statutory rate to the effective tax rate.
Liquidity and Capital Resources and Changes in Financial Condition
Our primary sources of cash are premiums, ASO fees, investment and other income, as well as the proceeds from the maturity or sale of our investment securities, from the sale of redeemable common and preferred shares, and from borrowings. Our primary uses of cash include disbursements for claims payments, insurance expense, interest expense, taxes, purchases of investment securities, capital expenditures, Redeemable Common Share redemptions, dividends, and payments on borrowings. Because premiums are collected in advance of claims payments, our business should normally produce positive operating cash flows during a period of increasing enrollment. Conversely, cash flows would be negatively impacted during a period of shrinking enrollment.
Cash increased $2,467,000, or 26.8%, for the year ended December 31, 2015 to approximately $11,657,000 at December 31, 2015 from approximately $9,190,000 at December 31, 2014. This cash increase is primarily the result of cash flow from operations of approximately $2,994,000 and cash provided by financing activities of approximately $817,000 that was offset by cash used in investing activities of approximately $1,095,000.
Cash increased $1,084,000, or 13.4%, for the year ended December 31, 2014 to approximately $9,190,000 million at December 31, 2014 from approximately $8,106,000 million at December 31, 2013. This cash increase is primarily the result of cash flow from operations of approximately $2,556,000, that was offset by cash used in investing activities of approximately $845,000 and cash used in financing activities of approximately $627,000. The change in cash for the years ended December 31, 2015, 2014 and 2013 is summarized as follows (in thousands):
Cash flows from Operating Activities
In 2015, approximately $2,994,000 was provided by operating activities. We had net income of approximately $958,000. An increase in premiums received in advance as well as an improvement in remittance of uncollected accounts receivable resulted in a favorable increase of cash of approximately $829,000 in 2015. Due to claims activity and the timing of our payments, our claims payable liability increased approximately $256,000. Our deferred compensation liability increased by approximately $748,000 primarily due to current year vesting activity for restricted share unit awards and an increase in current book value in 2015. Other payables and accrued expenses increased and resulted in a net increase in cash flow from operations of approximately $98,000. The remaining effects of changes in operating assets and liabilities that represent fluctuations are not significant and are consistent with 2015.
In 2014, we generated approximately $2,556,000 of cash from operating activities. This level of cash flow from operating activities is $139,000 lower than the cash flow generated from operating activities in 2013. We had net income of approximately $1,341,000 in 2014 compared to net income of $1,282,000 in 2013. During 2014, we paid approximately $1,270,000 in federal tax payments. As a result, our federal income tax payable decreased by approximately $216,000 in 2014. In addition to our 2014 net income, we had non-cash depreciation and amortization expense of approximately $335,000 and an increase in deferred compensation liabilities of $959,000. The increase in deferred compensation liabilities is primarily due to the 12.4% increase in the book value of the common shares during 2014. In 2014, our claims payable liability increased by approximately $778,000 due to an increase in membership and an increase in utilization. A decrease in accounts receivable of approximately $1,954,000 was offset by a decrease in unearned premium revenue of $2,759,000, resulting in a net cash decrease of $805,000. This cash decrease is attributable to an increase in premium receivable of $302,000 and a decrease in unearned premium revenue received in advance of $502,000. Accounts receivable and unearned premium revenue are recorded primarily as the result of non-cancelable short-term insurance contracts. Most of our contracts are one year in duration; however, we occasionally enter into multi-year contracts that tend to be for larger groups. As a result, depending on the timing of large group renewals, the accounts receivable and unearned premium revenue can experience large fluctuations from period to period.
In 2013, we generated approximately $2,696,000 of cash from operating activities. This level of cash flow from operating activities is significantly higher than the cash flow generated from operating activities in 2012. We had net income of approximately $1,282,000 in 2013 compared to net income of $1,318,000 in 2012. During 2013, we paid approximately $540,000 in federal tax payments as compared to $1,110,000 in 2012. As a result, our federal income tax payable increased by approximately $271,000 in 2013. In addition to our 2013 net income, we had non-cash depreciation and amortization expense of approximately $358,000 and an increase in deferred compensation liabilities of $675,000. The increase in deferred compensation liabilities is primarily due to the 9.7% increase in the book value of the common shares during 2013. An increase in accounts receivable of approximately $15,449,000 was offset by an increase in unearned premium revenue of $15,603,000, resulting in a net cash increase of $154,000. This cash increase is attributable to an increase in unearned premium revenue received in advance and uncollected premiums.
Cash flows from Investing Activities
During 2015, we made purchases totaling approximately $4,955,000 of investment grade and non-investment grade corporate bonds, money markets and certificates of deposit in order to improve investment income. Also during 2015, we sold investment grade and non-investment grade corporate bonds, and certificates of deposit and maturities that together totaled approximately $3,738,000. In addition, in December 2015, we sold certain office equipment and computer equipment with a value of approximately $347,000 to a leasing company and entered into a capital lease agreement to lease back these same assets over a four year period. The remaining net cash used in investing activities during 2015 was primarily due to purchases in building improvements, internally developed software development cost and computer equipment.
In 2014, we invested approximately $530,000 in building improvements, office equipment and computer equipment and software. In 2014, approximately $1.8 million of our investments in FDIC insured certificates of deposit, investment grade corporate bonds and money market funds either matured or were liquidated. We also invested approximately $2.6 million in additional FDIC insured certificates of deposit, investment and non-investment grade corporate bonds and money market funds. In addition, in December of 2014, we sold certain office equipment and computer equipment with a value of approximately $516,000 to a leasing company and entered into a capital lease agreement to lease back these same assets over a four year period. We invested an additional $5,000 in a dental and vision discount product. Collectively, these investments and transactions resulted in a decrease in cash from investment activities of approximately $845,000.
In 2013, we invested approximately $601,000 in building improvements, office equipment and computer equipment and software. Also in 2013, approximately $1.1 million of our investments in FDIC insured certificates of deposit, investment grade corporate bonds and money market funds either matured or were liquidated. We also invested approximately $4.2 million in additional FDIC insured certificates of deposit, investment grade corporate bonds and money market funds. In addition, in December of 2013, we also sold certain office equipment and computer equipment with a value of approximately $312,000 to a leasing company and entered into an agreement to lease back these same assets over a three year period. We also invested an additional $5,000 in a dental and vision discount product. Collectively, these investments and transactions resulted in a decrease in cash from investment activities of approximately $3.4 million.
Cash flows from Financing Activities
In 2015, we made scheduled principal payments of approximately $49,000 related to our office building mortgage and scheduled payments of approximately $249,000 related to our capital leases. During 2015, we repurchased Redeemable Common Shares with a value of approximately $223,000. We also paid dividends of approximately $346,000 to holders of our Redeemable Common Shares and approximately $135,000 to holders of our Redeemable Institutional Preferred Shares in 2015. In addition, we issued approximately $1,932,000 of new Redeemable Common Shares during 2015.
In 2014, we paid approximately $47,000 of our outstanding mortgage balance and repaid approximately $124,000 related to the capital lease that we executed in December 2013. During 2014, we sold approximately $330,000 of Class B and Class C Redeemable Common Shares. Also during 2014, we repurchased Redeemable Common Shares of $362,000 from provider shareholders. In addition, we paid dividends to our institutional preferred shareholders and our common shareholders totaling approximately $425,000 in 2014.
In 2013, we paid approximately $46,000 of our outstanding mortgage balance and repaid approximately $137,000 related to the capital lease that we executed in December 2010. We sold $1 million of Institutional Preferred Shares and approximately $97,000 of Class A and Class B common shares. Also during 2013, we repurchased Redeemable Common Shares of $264,000 from provider shareholders. In addition, we paid dividends to our institutional preferred shareholders and our common shareholders totaling approximately $392,000 in 2013.
Contractual Obligations and Other Commitments
A summary of our future commitments as of December 31, 2015 is as follows:
(1)
Includes swap interest payments based on a fixed rate of 3.90%.
A mortgage note, secured by the land and the office building, accrues interest based on the 30-day LIBOR rate plus 1.95%. The note requires us to make principal payments of $4,100 per month in 2015 and higher principal payments in subsequent years through 2022 in accordance with the agreed upon loan amortization schedule. At the maturity date of the mortgage note in 2022, the expected outstanding balance of the note of approximately $804,000 must be repaid or refinanced. We also entered into an interest rate swap agreement that effectively changed the interest rate related to the $1,340,000 mortgage note with a commercial bank from a variable rate based on the 30-day LIBOR rate plus 1.95% to a fixed rate of approximately 3.90% for the 10-year period through December 2022. At December 31, 2015, the carrying value of the mortgage note approximates fair value. Under this mortgage, the Company is required to have a minimum tangible net worth equal to or greater than $3,500,000 at the end of each fiscal year and a debt service ratio of at least 1:1. The Company was in compliance with these covenants at December 31, 2015. The Company also entered into a capital lease agreement with a leasing company in 2014 and 2015 that obligates the Company to pay lease payments over a four year period for each capital lease. Under these capital lease agreements, the Company is required to have a minimum tangible net worth equal to or greater than $2,500,000 at the end of each fiscal year. At December 31, 2015, the Company was in compliance with this minimum tangible net worth requirement.
As of December 31, 2015, we believe our most significant other commitments are:
Deferred Compensation - We expect to pay our deferred compensation liability of approximately $3,287,000 to the Company directors and employees as they retire or otherwise terminate their association with the Company in future years. As of December 31, 2015, we do not expect to pay any of our deferred compensation liability to any directors or key employees in 2016.
Commissions - We expect commission payments to generally correspond to earned premium volume.
Redeemable Common Shares - Pursuant to the Company’s Code of Regulations, holders of Class A, Class B and Class C shares have the right to require the Company to repurchase such holder’s common shares on the terms contained in the Code of Regulations. At December 31, 2015, approximately $85,000 in redeemed common shares are to be paid in 2016.
Federal and State Premium Taxes - We expect federal and state premium payments to generally correspond to earned premium volume.
Off-balance sheet Arrangements
None.
Financial Condition
Our consolidated cash and short term investments were approximately $12.1 million at December 31, 2015. Our consolidated cash and short term investments increased by approximately $2.2 million from approximately $9.9 million as of December 31, 2014.
This increase in cash and short term investments from December 31, 2014 to December 31, 2015 is primarily due to the net cash provided by operating activities of approximately $2,994,000 and an increase of approximately $818,000 of financing activities, offset by cash used in investing activities of approximately $1,344,000. In addition, there was a shift of approximately $505,000 from short term investments to long term investments during this period.
We have an annually renewable agreement with a commercial bank for a $500,000 working capital line of credit. Interest is payable at a variable rate of LIBOR plus 2.50%. The Company did not have any interest expense for the line of credit in 2015, 2014 or 2013. As of December 31, 2015 and 2014, there was no amount outstanding on this line of credit.
We have an annually renewable agreement with a commercial bank for a $1,000,000 working capital line of credit. Interest is payable at a variable rate of LIBOR plus 2.50%. The Company did not have any interest expense for the line of credit in 2015, 2014 or 2013. As of December 31, 2015 and 2014, there was no amount outstanding on this line of credit.
We believe our cash, short term investments and working capital lines of credit together are sufficient to meet our short term and long term liquidity needs. We are obligated to make payments related to our contractual obligations such as our building mortgage and our operating leases and other commitments (see contractual obligations and other commitments). We will also be obligated in certain circumstances to repurchase the redeemable shares of our Class A, Class B and Class C shareholders who die and our Class A and Class B shareholders who become permanently disabled, or retire. Our Board considers limitations on the amount of share redemptions each year. While we are not able to estimate future redeemable share redemptions, we repurchased approximately $223,000, $362,000, and $264,000, of Redeemable Common Shares in the years ended December 31, 2015, 2014, and 2013, respectively. We believe our cash balances, available-for-sale investment securities, operating cash flows, and borrowing capacity, taken together, provide adequate resources to fund ongoing operating and regulatory requirements and fund future expansion opportunities and capital expenditures in the foreseeable future.
We operate as a holding company in a highly regulated industry. We are primarily dependent upon management fees that we receive from our subsidiaries. We receive over 99% of our management fees from our subsidiary, Dental Care Plus. We also receive dividends from our subsidiaries from time to time. The dividends from our subsidiary, Dental Care Plus, are subject to regulatory restrictions.
Regulatory Capital and Surplus Requirements
Our largest subsidiary, Dental Care Plus, operates in states that regulate its payment of dividends and debt service on inter-company loans, as well as other inter-company cash transfers and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid by Dental Care Plus, without prior approval by state regulatory authorities, is limited based on statutory income and statutory capital and surplus. Dividends cannot exceed in any one year the lesser of: (i) 10% of net worth (as of the preceding December 31), or (ii) net income for the prior year, and only if net worth exceeds $250,000 and only out of positive retained earnings. There were no dividends declared or paid by Dental Care Plus during 2015, 2014 or 2013. Even if prior approval is not required, prior notification must be provided to state insurance departments before paying a dividend.
Dental Care Plus, an Ohio-domiciled insurance company dually licensed as a life and health insurer and a specialty health insuring corporation, is able to underwrite dental indemnity, dental PPO, dental HMO, and vision benefit products as well as other life and health insurance products in Ohio. The minimum required capital and surplus for Dental Care Plus licensed as a life and health insurance company in Ohio was $2.5 million at December 31, 2015.
We maintained aggregate statutory capital and surplus of approximately $10.5 million as of December 31, 2015 and were in compliance with applicable statutory requirements. Although the minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements can vary significantly from state to state. Given our anticipated premium growth in 2016 resulting from the expansion of our networks and membership, capital requirements will increase. We expect to fund these increased requirements through the retention of earnings and future capital raising activities, if any.
Most states rely on risk-based capital requirements, or RBC, to define the required levels of equity. RBC is a model developed by the NAIC to monitor an entity’s solvency. This calculation indicates recommended minimum levels of required capital and surplus and signals regulatory measures should actual surplus fall below these recommended levels. RBC has been adopted the states in which we currently do business. We file our annual statement and RBC reporting with the Ohio Department of Insurance and the NAIC. Dental Care Plus’s statutory annual statements for the year ended December 31, 2015 filed with the Ohio Department of Insurance reflected total adjusted capital in excess of Company Action Level RBC.
Other Matters
The differences between our net income and comprehensive income include the changes in the unrealized gains or losses on marketable securities and changes in the fair value of our interest rate swap agreement. For the years ended December 31, 2015, 2014, and 2013, respectively, such changes increased or (decreased), net of related income tax effects, by the following amounts:
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Application of those accounting principles includes the use of estimates and assumptions that are made by management, and that we believe are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses in the accompanying consolidated financial statements. We believe the most critical accounting policies used to prepare the accompanying consolidated financial statements are the following:
Liability for Claims Payable
Our estimated liability for claims payable and corresponding healthcare services expense includes claims incurred but not reported (“IBNR”), claims reported but not yet processed and paid and other healthcare services expenses incurred, including estimated costs of processing outstanding claims. Our estimated liability for claims payable is based primarily on the average historical lag time between the date of service and the date the related claim is paid, taking into account recent trends in payment rates and the average number of incurred claims per covered individual over a rolling 12 month period.
The following table shows our total claims payable liability as of December 31, and its three components. IBNR represents a substantial portion of our claims payable liability.
Between December 31, 2014 and December 31, 2015, our claims payable liability estimate increased by approximately $256,000 or 9%, primarily due to higher fully-insured dental HMO/IND and fully-insured dental PPO membership at December 31, 2015 compared to December 31, 2014, along with a significant increase in fully-insured dental HMO/IND utilization in December 2015 compared to December 2014.
We estimate liabilities for both IBNR and reported claims in process by employing actuarial methods that are commonly used by health insurance actuaries and meet actuarial standards of practice. These actuarial standards of practice require that claim liabilities estimates be adequate under moderately adverse circumstances. The Company’s consulting actuary assists us in making these estimates.
Since our liability for claims payable is based on actuarial estimates, the amount of claims eventually paid for services provided prior to the balance sheet date could differ from the estimated liability. Any such differences are recognized in the consolidated statements of comprehensive income for the period in which the differences are identified.
We develop our estimate for claims payable liability using actuarial methodologies primarily based on historical claim payments and claim receipt patterns, as well as historical dental cost trends. Depending on the period for which incurred claims are estimated, we apply a different method in determining our estimate. Throughout the year, we use both the “completion factors” and the “claims trend factor” to estimate our claims payable liability. On a quarterly basis, for periods prior to the most recent month, we calculate “completion factors” which indicate the percentage of claims payable estimated for a prior period that have been paid as of the end of the current reporting period. We use the completion factors to determine historical patterns over a rolling 12-month period, made consistent period over period with making adjustments for known changes in claim inventory levels and known changes in claim payment processes. Then, for the most recent month, we calculate a “claims trend factor” that estimates incurred claims primarily from a trend analysis based upon per member per month claims trends developed from our historical experience in the preceding months, adjusted for known provider contracting changes, changes in benefit levels and seasonality. We have consistently applied the key actuarial methodologies to estimate the IBNR and reported claims in process components of our claims payable liability.
When developing our estimate for claims payable liability as of December 31, 2015, we considered actual paid claim data from January 2016. As a result, we are able to use the completion factors approach for all historical months in 2015, including December 2015. The table below illustrates how our operating results are impacted when there is a variance between estimated claims expense and actual claims expense. The table shows the sensitivity of the estimated fully-insured incurred claims payable liability to fluctuations in the expected completion factors that were used to estimate the claims payable liability as of December 31, 2015 within variance ranges historically experienced. Based on historical experience, the completion factors we use to estimate outstanding IBNR and reported claims in process are highly reliable for predicting actual claims paid at future times, with a variance range of approximately one-half of one percent, plus or minus.
(a) Reflects estimated potential changes in incurred claims payable liability caused by changes in completion factors for all months prior to December 31, 2015.
Recognition of Premium Revenue
Fully-Insured-Membership contracts are written on an annual basis and are subject to cancellation by the employer group upon thirty days written notice. The Company’s unearned premium revenue was approximately $32,631,000 and $32,637,000 at December 31, 2015 and 2014, respectively, and primarily relates to the estimated premium revenue associated with the remaining contract periods. Related amounts recorded in accounts receivable were approximately $30,955,000 and $31,554,000 at December 31, 2015 and 2014, respectively. Premiums are due monthly in advance and are recognized evenly as revenue during the period in which the Company is obligated to provide services to members. Any amounts not received by the end of a reporting period are recorded as accounts receivable by the Company. Any premiums received prior to the beginning of a reporting period are recognized as premiums received in advance and are included in unearned premium revenue in the accompanying consolidated balance sheets. Premiums received in advance were approximately $1,676,000 and $1,083,000 at December 31, 2015 and 2014, respectively. Management has determined that as of December 31, 2015 and 2014, respectively, no premium deficiency reserve is required. The Company’s premium deficiency reserve analysis includes an allocation of investment income.
Self-Insured-The Company provides administrative and claims processing services, benefit plan design, and access to its provider networks for an administrative fee to self-insured groups. The Company has no underwriting risk arising from the provision or cost of any services provided to the self-insured groups. The Company recognizes and records self-insured premiums on a gross basis because: (i) the Company is the primary obligor in its contractual relationships with self-insured employers and dental service providers, (ii) the Company establishes the pricing for the services provided, (iii) the Company controls the selection of and the relationships with the dental service providers, and (iv) the Company is involved in the determination of dental service specifications. Self-insured premium revenue is recognized upon the payment of claims for self-insured members in accordance with agreements with self-insured employers and is included in premium revenue in the accompanying condensed consolidated statements of comprehensive income.
Third-party administration fee revenue (“ASO fees”) is recognized monthly when earned and is normally based on annual contracts with the self-insured groups. ASO fees are charged to self-insured employer groups monthly on a per subscriber per month basis. ASO fees also include the administrative fees the Company earns relative to the dental PPO, dental indemnity and vision products that are underwritten by third-party insurance carriers.
Healthcare Services Expense
Healthcare services expense is recognized on a monthly basis. In the case of the fully-insured dental segment, healthcare services expense is calculated by taking the paid claims associated with the fully-insured membership and adjusting this amount for the change in the claims payable liability determined using the actuarial estimates discussed above. For the self-insured dental segment, the healthcare services expense is based solely on the paid claims for the self-insured membership. In most cases, our reimbursement to our participating providers for covered dental services under the dental HMO and in-network dental PPO are subject to a 10% withhold. The amounts withheld are not retained in a separate fund and we have no obligation to pay any portion of the amounts withheld to the providers.
Income Taxes
Our accounting for income taxes requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that are recognized in our consolidated financial statements in different periods than those in which the events are recognized in our tax returns. The measurement of deferred tax liabilities and assets is based on current tax laws as of the balance sheet date. We record a valuation allowance related to deferred tax assets in the event that available evidence indicates that the future tax benefits related to deferred tax assets may not be realized. A valuation allowance is required when it is more likely than not that the deferred tax assets will not be realized. Our determination of whether a valuation allowance is required is subject to change based on future estimates of the recoverability of our net deferred tax assets.
Impact of Inflation
We do not consider the impact of changes in prices due to inflation to be material in the analysis of our overall operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk that we will incur investment losses or increased interest expense due to adverse changes in market rates and prices. Our market risk exposures are substantially related to our investment portfolio and the impact of interest rate changes on these securities. In addition, interest rate changes can impact future interest expense for debt obligations that have a variable rate of interest associated with them.
At December 31, 2015, our investment portfolio included approximately $249,000 of an institutional money market fund. Our portfolio also included approximately $7,822,000 of investment grade and non-investment grade corporate bonds and $1,087,000 of investments in FDIC-insured bank certificates of deposits. We have evaluated the impact on the invested portfolio’s fair value considering an immediate 100 basis point change in interest rates. A 100 basis point increase in interest rates would result in an approximate $261,000 decrease in fair value, whereas a 100 basis point decrease in interest rates would result in an approximate $264,000 increase in fair value. At December 31, 2015, the investment grade and non-investment grade corporate bonds and the certificates of deposit with amortized cost of approximately $7,855,000 and $1,090,000, respectively, are all classified as available for sale. Our investment in investment grade corporate bonds with a longer average maturity has added an element of market risk in 2015 and 2014.
At December 31, 2015, we had a mortgage note with a bank with an outstanding principal balance of $1,198,000 with a variable rate based on LIBOR plus 1.95%. However, in December 2012, we entered into a variable to fixed interest rate swap contract that effectively eliminated the interest rate risk exposure on all of the outstanding loan principal. Management estimates that a 100 basis point increase in interest rates would not materially impact our annual pre-tax earnings.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of DCP Holding Company:
We have audited the accompanying consolidated balance sheets of DCP Holding Company and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of comprehensive income, redeemable shares and shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedules included in Item 15(a)2. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements present fairly, in all material respects, the financial position of the DCP Holding Company and its subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Cincinnati, OH
March 23, 2016
DCP HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2015 AND 2014
See notes to consolidated financial statements.
DCP HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
See notes to consolidated financial statements.
DCP HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE SHARES AND SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014, AND 2013
See notes to consolidated financial statements.
DCP HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
See notes to consolidated financial statements.
DCP HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2015 AND 2014 AND FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
1.
GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DCP Holding Company (the “Company”) is the parent holding company of three wholly-owned subsidiaries which include Dental Care Plus, Inc., an Ohio corporation, Insurance Associates Plus, Inc., an Ohio corporation, and Adenta, Inc., a Kentucky corporation. The Company is primarily owned and controlled by dentists who participate in one or more of the networks that offers Dental Care Plus products. The Company is also partially owned by retired dentists, Company board members, non-dentist individuals and employees who hold voting Redeemable Common Shares and by institutional investors that hold non-voting Redeemable Preferred Shares. The Company primarily offers to employer groups of all sizes dental health maintenance organization (“HMO”), participating provider organization (“PPO”) and indemnity benefit plans and vision benefit plans. As of December 31, 2015, we had approximately 326,000 members in our dental benefits plans and approximately 36,200 members in our vision benefit plans and approximately 2,800 dentists participating in our dental HMO network, approximately 3,000 dentists participating in our DentaSelect dental PPO network and approximately 2,100 in our Balanced Value dental PPO network. The Company has a network access agreement with a national dental network management company that has one of the largest PPO networks of dentists under contract in the United States. With this network access agreement, our dental PPO members have access to approximately 2,500 additional dentists in Ohio and Indiana and approximately 44,200 additional dentists throughout the United States. The Company also has other network access arrangements for the dental PPO plans that it offers on the Ohio and Indiana exchanges. With these network access arrangements, Dental Care Plus exchange members have access to approximately 1,600 and 1,000 dentists in Ohio and Indiana, respectively.
Dental Care Plus Inc. is an Ohio-domiciled insurance company dually licensed as a life and health insurer and a specialty health insuring corporation and able to underwrite dental indemnity, dental PPO, dental HMO, and vision benefit products as well as other life and health insurance products.
The accounting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The accompanying consolidated financial statements include estimates for items such as claims payable, deferred acquisition costs, income taxes and various other liability accounts. Actual results could differ from those estimates. Policies that affect the more significant elements of the consolidated financial statements are summarized below.
Basis of Presentation- The accompanying consolidated financial statements include the accounts of the Company and subsidiaries, each of which is wholly-owned, and have been prepared in conformity with GAAP. All intercompany accounts and balances have been eliminated in consolidation. The Company presents its financial statements to conform with Article 7 of the Securities and Exchange Commission Regulation S-X pursuant to Section 13-15(d) of the Securities Exchange Act of 1934.
Cash and Cash Equivalents- The Company defines cash as cash held in operating accounts at financial institutions. The Company considers highly liquid investments with maturities of three months or less at the date of acquisition as cash equivalents in the accompanying consolidated financial statements. These investments are carried at cost, which approximates fair value.
Investments-The Company invests in certificates of deposit, corporate bonds and money market funds. The Company classifies all investments as available-for-sale. The Company engages a fixed income portfolio manager to manage the Company’s investment grade and non-investment grade corporate bonds, under the Company’s direction, in order to maximize investment returns. Such investments are recorded at fair value, with unrealized gains and losses recorded as a component of other comprehensive income. The Company recognizes gains and losses when these securities have other than temporary impairment, mature or are sold using the specific identification method.
Management follows a consistent and systematic process for recognizing impairments on securities that sustain other-than-temporary declines in value. The decision to record an other-than-temporary impairment for a security incorporates both quantitative criteria and qualitative information. The Company considers the severity of the loss on a security, duration of loss, duration of the investment, credit rating of the security, as well as payment performance and the Company’s intent or requirement to sell the investment before recovery when determining whether any impairment is other than temporary. The Company’s impairment policy for fixed-maturity securities states that other-than-temporary impairment is considered to have occurred if (1) the Company intends to sell the impaired fixed maturity security; (2) it is more likely than not that the Company will be required to sell the fixed maturity security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis.
Property and Equipment- Property and equipment is carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The building and the building improvements have useful lives of 27 years and 15 years, respectively. Furniture and fixtures have useful lives of 5 years, and computer equipment and software have useful lives of up to 5 years. Maintenance and repair costs are expensed as incurred. If an impairment exists, a loss is recorded as the amount by which the carrying value of the asset exceeds its fair value.
The Company reviews property and equipment for impairment whenever events or changes in circumstances, such as significant decreases in market values of assets, changes in legal factors or in the business climate, and accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset, or other such factors indicate that the carrying amount may not be recoverable.
State Guarantee Fund Deposits- The Company maintains funds on deposit with state insurance departments in those states where the Company is licensed to do business. These funds amounted to approximately $326,000 and $279,000 at December 31, 2015 and 2014, respectively. These funds are restricted and not available to the Company for normal operations and are included in other assets in the accompanying consolidated balance sheets.
Goodwill and Intangible Assets- Goodwill arises in business combinations when the purchase price of net assets less liabilities assumed acquired exceeds the fair value. As with tangible and other intangible assets, periodic impairment reviews are required, at least annually, as well as when events or circumstances change. Management uses judgment in assessing goodwill for impairment. Management reviews the recorded value of our goodwill annually, or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value. Professional judgment is exercised in determining future cash flows, timing and business valuation comparables or selecting discount rates to be used in any valuation assessments.
Business acquisitions often result in recording identifiable intangible assets. Identifiable intangible assets are recognized at the time of an acquisition, based upon their fair value. Similar to long-lived tangible assets, identifiable intangible assets are subject to amortization and periodic impairment reviews whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review for impairment of the Company’s intangible assets requires management to predict the estimated cash flows that will be generated by the long-lived asset over its remaining estimated useful life.
Deferred Acquisition Costs- Deferred acquisition costs are those incremental direct costs related to the successful acquisition of new and renewal business. These incremental direct costs are those that are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. Such incremental direct costs include commissions, costs of contract issuance and underwriting, state premium taxes and other costs the Company incurs to successfully acquire new business or renew existing business. The Company defers policy acquisition costs and amortizes them over the estimated life of the contracts, which are short-duration in nature, in proportion to premiums earned. The Company capitalized deferred acquisition costs of approximately $4,358,000, $3,989,000, and $4,867,000, and amortized approximately $4,396,000, $4,129,000, and $3,862,000 of these capitalized costs for the years ended December 31, 2015, 2014, and 2013, respectively. The amortization of these costs are recorded in commission expenses and other acquisition costs included in the consolidated statements of comprehensive income.
Redeemable Institutional Preferred Shares- In 2010, the Company entered into a Preferred Stock Purchase Agreement (the “2010 Stock Purchase Agreement”) with an investor. Pursuant to the 2010 Stock Purchase Agreement, the investor agreed to purchase 300 Redeemable Institutional Preferred Shares at a purchase price of $1,000 per share, with an aggregate purchase price of $300,000. The annual dividend payable on each share is 5% of the book value at the beginning of the dividend period.
In 2012, the Company entered into a Preferred Shares Purchase Agreement (the “2012 Stock Purchase Agreement”) with an investor. Pursuant to the 2012 Stock Purchase Agreement, the investor agreed to purchase 1,000 shares of Redeemable Institutional Preferred Shares at a purchase price of $1,000 per share, for an aggregate purchase price of $1,000,000. The annual dividend payable on each share is 5% of the book value at the beginning of the dividend period.
In 2013, the Company entered into a Preferred Shares Purchase Agreement (the “2013 Stock Purchase Agreement”) with an investor. Pursuant to the 2013 Stock Purchase Agreement, the investor agreed to purchase 1,000 shares of Redeemable Institutional Preferred Shares at a purchase price of $1,000 per share, for an aggregate purchase price of $1,000,000. The annual dividend payable on each share is 5% of the book value at the beginning of the dividend period.
In the event of any liquidation, dissolution or winding up of the Company, any merger or consolidation resulting in a change of control of the Company, or any sale, lease, transfer or other disposition of substantially all of the assets of Company, holders of the Institutional Preferred Shares purchased pursuant to the 2012 and 2013 Stock Purchase Agreements will have the right to receive a cash payment in an amount equivalent to the consideration the investor would have otherwise received if the investor had the ability to convert each Preferred Share to 1.2 Class B Common Shares.
Redeemable Institutional Preferred Shares are participating securities that share in total comprehensive income as a change to the redemption value of the Redeemable Institutional Preferred Shares to accrete (dilute) the carrying value to the redemption value at the end of each reporting period. Under this method, the end of the reporting period is treated as if it were also the redemption date for the securities. Redeemable Institutional Preferred Shares are considered to be redeemable shares due to the fact that the shareholders have the option to require the Company to repurchase these shares upon the shareholder’s discretion.
Redeemable Common Shares- The Company’s Class A, Class B, and Class C Redeemable Common Shares are owned by participating providers, Company directors, employees and accredited non-dentist individuals. All participating providers, Company directors and Company employees are eligible to own the Class A and Class B voting redeemable common shares. Accredited non-dentist individuals are eligible to own the Class C voting redeemable common shares. The maximum percentage of Class C Common Shares outstanding at any time as a proportion of all voting Common Shares is 40%. The Company’s Class A, Class B and Class C common shares are considered to be redeemable common shares due to the fact that the shareholders have the option to require the Company to repurchase these shares under certain circumstances. The Company records Class A, Class B and Class C common shares as Redeemable Common Shares in the consolidated balance sheets outside of shareholders’ equity at the redemption value of the common shares. Accordingly, the Company records total comprehensive income as a change to the redemption value of the Redeemable Common Shares to accrete (dilute) the carrying value of the Redeemable Common Shares to the redemption value at the end of each reporting period. Under this method, the end of the reporting period is treated as if it were also the redemption date for the securities.
Premium Revenue-
Fully-Insured-Membership contracts are written on an annual or multi-year basis and are subject to cancellation by the employer group upon thirty days written notice. The Company’s unearned premium revenue was approximately $32,631,000 and $32,637,000 at December 31, 2015 and 2014, respectively, and primarily relates to the estimated premium revenue associated with the remaining contract periods. Related unbilled amounts recorded in accounts receivable were approximately $30,955,000 and $31,554,000 at December 31, 2015 and 2014, respectively. Premiums are due monthly in advance and are recognized evenly as revenue during the period in which the Company is obligated to provide services to members. Any amounts not received by the end of a reporting period are recorded as accounts receivable by the Company. Any premiums received prior to the beginning of a reporting period are recognized as premiums received in advance and are included in unearned premium revenue in the accompanying consolidated balance sheets. Premiums received in advance were approximately $1,676,000 and $1,083,000 at December 31, 2015 and 2014, respectively. Management has determined that as of December 31, 2015 and 2014, respectively, no premium deficiency reserve is required. The Company’s premium deficiency reserve analysis includes an allocation of investment income.
Self-Insured-The Company provides administrative and claims processing services, benefit plan design, and access to its provider networks for an administrative fee to self-insured groups. The Company has no underwriting risk arising from the provision or cost of any services provided to the self-insured groups. The Company recognizes and records self-insured premiums on a gross basis because: (i) the Company is the primary obligor in its contractual relationships with self-insured employers and dental service providers, (ii) the Company establishes the pricing for the services provided, (iii) the Company controls the selection of and the relationships with the dental service providers, and (iv) the Company is involved in the determination of dental service specifications. Self-insured premium revenue is recognized upon the payment of claims for self-insured members in accordance with agreements with self-insured employers and is included in premium revenue in the accompanying consolidated statements of comprehensive income.
Third-party administration fee revenue (“ASO fees”) is recognized monthly when earned and is normally based on annual contracts with the self-insured groups. ASO fees are charged to self-insured employer groups monthly on a per subscriber per month basis. ASO fees also include the administrative fees the Company earns relative to the dental PPO, dental indemnity and vision products that are underwritten by third-party insurance carriers.
Investment Income- Investment income is comprised of interest income primarily earned from the Company’s certificates of deposit, investment grade corporate bonds, non-investment grade corporate bonds, and money market investments.
Other Income and Realized (Losses) Gains On Investments, Net - Other income is comprised primarily of rental income from the rental of space in the building owned and partially occupied by the Company (See Note 15). Realized (losses) gains on investments is primarily made up of realized investment gains, losses and other than temporary impairments of investment grade and non-investment grade corporate bonds.
Healthcare Services Expense- Healthcare services expense is recognized on a monthly basis. In the case of the fully-insured dental HMO and indemnity (“dental HMO/IND”) and dental PPO segments, healthcare services expense is calculated by taking the paid claims associated with the fully-insured membership and adjusting this amount for the change in the claims payable liability determined using actuarial estimates. For the self-insured dental segment, the healthcare services expense is based solely on the paid claims for the self-insured membership. The Company incurred claim costs related to dental care providers amounting to approximately $76,684,000, $71,696,000, and $67,762,000, for the years ended December 31, 2015, 2014, and 2013, respectively.
Claims Payable- The Company estimates liabilities for both incurred but not reported (“IBNR”) and reported claims in process by employing actuarial methods that are commonly used by health insurance actuaries. These estimates meet actuarial standards of practice and are also recorded in accordance with GAAP. Management’s estimates of dental services provided are based on the Company’s historical experience and current trends, with assistance from the Company’s consulting actuary. Estimated dental claims payable are reviewed monthly by management and are adjusted based on current information, actual paid claims data, dental utilization statistics and other pertinent information. However, final claim payments may differ from the established reserves. Any resulting adjustments are reflected in current operations in the condensed consolidated statements of comprehensive income.
Reinsurance- In the normal course of business, the Company assumes premium revenue and related healthcare services expense from a third party insurance provider. There were no dental insurance premium assumed for the year ended December 31, 2015 and 2014. Dental insurance premium assumed was approximately $38,000 for the year ended December 31, 2013. There were no healthcare services expense assumed for the year ended December 31, 2015 and 2014. The healthcare services expense assumed was approximately $28,000 for the year ended December 31, 2013. As of December 31, 2015 or 2014, the Company had no reinsurance premium receivable or claims payable.
Derivative Instruments- All derivative financial instruments are recorded on the consolidated balance sheet at fair value. The changes in fair value of derivatives that are designated and qualify as cash flow hedges are recorded in other comprehensive income, with subsequent reclassification to earnings when the hedged transaction asset or liability impacts earnings. Any ineffectiveness is recognized in earnings immediately. The Company’s risk management policy is to not enter into derivatives for speculative purposes.
Federal Income Tax- Deferred federal income tax is provided for in the accompanying consolidated financial statements for the tax effects of temporary differences between the carrying values and tax bases of assets and liabilities. Differences result primarily from items such as accrued commissions, deferred compensation, unearned premiums, property and equipment, deferred acquisition costs and unrealized appreciation (depreciation) on investments.
The Company reviews the deferred tax assets to determine the necessity of a valuation allowance. Valuation allowances are provided to the extent it is more likely than not that deferred tax assets will not be realized. The Company files a consolidated federal income tax return which includes all subsidiaries.
Concentrations of Credit Risk- Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of premiums receivable. Other than as discussed below, concentrations of credit risk with respect to premiums receivable are limited because of the large number of employer groups comprising the Company’s client base and contracts are cancelled if premiums are not paid within 90 days.
During 2015, 2014, and 2013, four fully-insured customers accounted for approximately 10%, 9%, and 10%, respectively, of the Company’s total revenue. Additionally, two self-insured customers accounted for approximately 11% of the Company’s total revenue during each of the years 2015, 2014, and 2013, respectively.
The Company had one customer that had a balance of approximately 28% and 23% of the uncollected premium receivable balance at December 31, 2015 and 2014, respectively.
The Company maintains its cash in bank deposit accounts, which at times exceed federally insured limits. The Company has not experienced any losses in such accounts.
Fair Value of Financial Instruments- Certain financial instruments are required to be recorded at fair value. The Company primarily bases fair value for investments in fixed-maturity securities (including federally-insured certificates of deposits, investment grade corporate bonds and non-investment grade corporate bonds) on quoted market prices or on prices from a pricing vendor, an outside resource that supplies securities pricing, dividend, corporate action and descriptive information to support pricing, securities operations, research and portfolio management. The Company obtains and reviews the pricing service’s valuation methodologies and validates these prices using various inputs, including quotes from other independent regulatory sources. When deemed necessary, the Company validates prices by replicating a sample using a discounted cash flow model. Changes in assumptions or estimation methods could affect the fair value estimates.
New Accounting Guidance-In May 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-09, Financial Services-Insurance: Disclosures About Short-Duration Contracts. ASU 2015-09 requires entities to provide additional disclosures about the liability for unpaid claims and claim adjustment expenses to increase the transparency of significant estimates. The guidance also requires entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. In addition, this guidance also requires entities to disclose a roll forward of the liability of unpaid claims and claim adjustment expense for annual and interim reporting periods. The effective date of this new guidance is for annual reporting periods beginning after December 15, 2015, and interim reporting periods within the annual period beginning after December 15, 2016. The ASU has not yet been adopted by the Company. This ASU is not expected to have an impact on our company’s consolidated financial position, cash flows or results of operation, but the ASU will require additional disclosures to our annual and interim financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The effective date of ASU 2016-01 is for interim and annual reporting periods beginning after December 15, 2017. The ASU has not yet been adopted by the Company. Management is currently evaluating the impact on our company’s consolidated financial position, cash flows and results of operations, but it is not expected to have a significant impact.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 introduces a new lease model that requires the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of key information about leasing arrangements. While this new standard retains most of the principles of the existing lessor model under U.S. GAAP, it aligns many of those principles with ASC 606: Revenue from Contracts with Customers. The effective date of ASU 2016-02 is for interim and annual reporting periods beginning after December 15, 2018. The ASU has not yet been adopted by the Company. Management is currently evaluating the impact on our company’s consolidated financial position, cash flows and results of operations, but it is not expected to have a significant impact.
2.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets were recorded as a result of the acquisition of Adenta, Inc. in 2005 related to goodwill, an acquired contract, memberships and a provider network. Goodwill amounted to approximately $136,000 at December 31, 2015 and 2014. There has not been any impairment on goodwill. Identifiable and amortizable intangible assets amounted to approximately $66,000 net of approximately $174,000 of accumulated amortization at December 31, 2015 and to approximately $81,000 net of approximately $159,000 of accumulated amortization at December 31, 2014. Amortization expense was approximately $15,000 for each of the three years ended December 31, 2015, 2014 and 2013. The provider network intangible asset of approximately $52,000 at December 31, 2015 is being amortized over a period of 20 years, a period during which the Company expects that all of these providers will have retired from the network. Membership intangible assets (net of individual memberships written-off in the year of acquisition) of approximately $14,000 at December 31, 2015 are being amortized over an 11 year useful life in accordance with the Company’s expectation for the membership retention. The remaining weighted-average amortization period for these intangible assets is approximately 8 years. Goodwill and intangible assets are included in other assets in the accompanying consolidated balance sheets at December 31, 2015 and 2014.
3.
INVESTMENTS
The Company owned certificates of deposit insured by the Federal Deposit Insurance Corporation (“FDIC”) with an amortized cost of $1,090,000 and $1,050,000 as of December 31, 2015 and 2014, respectively. The certificates of deposit included in short-term and fixed maturities investments are classified as available-for-sale and are carried at fair value. The Company also invests in money market funds included in short-term investments and are classified as available-for-sale, with a cost and fair value of approximately $249,000 as of December 31, 2015. The Company invested in corporate bonds with an amortized cost of approximately $7,855,000 and $7,047,000 as of December 31, 2015 and 2014, respectively. The investment and non-investment grade corporate bonds included in fixed maturity investments are classified as available-for-sale and are carried at fair value.
The Company owned corporate bonds at December 31, 2015, which consist primarily of investment grade securities. At December 31, 2015, total bond fair value was approximately $7,822,000, which consists of approximately $7,145,000 with a credit rating of BBB- or better. The remaining securities, totaling approximately $677,000 had a credit rating of between BB+ and CCC+. The weighted average yield-to-cost of the Company’s corporate bonds was approximately 3.57% at December 31, 2015. The weighted average maturity of the Company’s corporate bonds was 5.02 years at December 31, 2015.
At December 31, 2015 and, 2014, maturity dates for fixed maturities and short-term investments (excluding the money market funds) were:
Investments classified at December 31, 2015 and 2014, as fixed maturities and short-term investments were as follows:
Unrealized losses at December 31, 2015 and 2014 on investments were generally due to higher current market yields relative to the yields of the investments at their amortized cost. Unrealized losses due to credit risk associated with the underlying collateral of the investments, if any, are not material. All investments with unrealized losses are reviewed quarterly to determine if any impairment is other than temporary, requiring a charge to earnings. The Company considers the severity of the loss on a security, duration of loss, duration of the investment, credit rating of the security, as well as payment performance and the Company’s intent or requirement to sell the investment before recovery when determining whether any impairment is other than temporary. During 2015, the Company had six other-than-temporarily impaired securities which were recorded as a realized loss of approximately $111,000. The Company had no other-than-temporary impairment charges for the years ended December 2014 and 2013. The Company had no investments in a material unrealized loss position for greater than one year as of December 31, 2015 and 2014.
The following table provides realized investments gains and losses for the years ended December 31, 2015, 2014 and 2013:
4.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income includes changes in unrealized gains and losses on available for sale and other invested assets as follows:
5.
LIABILITY FOR CLAIMS PAYABLE
Activity in the liability for claims payable for members is summarized as follows:
6.
FEDERAL INCOME TAXES
The components of the provision for income taxes are summarized as follows for the years ended December 31, 2015, 2014 and 2013, respectively:
Deferred tax assets and liabilities are comprised of the following:
Management believes it is more likely than not that deferred tax assets, net of valuation allowance will reduce future income tax payments. Significant factors considered by management in its determination of the probability of the realization of the deferred tax benefits include the historical operating results and the expectations of future earnings. The Company had $86,226, $98,247, and $110,265 of net operating loss carry forwards to utilize in future years at December 31, 2015, 2014, and 2013, respectively. These losses will expire between 2018 and 2024. Net deferred tax assets are included in other assets in the accompanying consolidated balance sheets at December 31, 2015 and 2014.
The Company’s effective tax rate was different from the U.S statutory rate due to the following:
On September 13, 2013, the Internal Revenue Service released final tangible property regulations under Sections 162(a) and 263(a) of the Internal Revenue Code of 1986 (“Code”), regarding the deduction and capitalization of expenditures related to tangible property. The final regulations replace temporary regulations that were issued in December 2011. Also released were proposed regulations under Section 168 of the Code regarding dispositions of tangible property. These regulations generally apply to taxable years beginning on or after January 1, 2014 and did not have a material effect to the consolidated financial statements.
7.
ACCOUNTING FOR UNCERTAIN TAX POSITIONS
For the years ended December 31, 2015, 2014, and 2013, the Company did not have any significant uncertain tax positions. The Company is primarily subject to U.S. federal and various U.S. state and local tax authorities. Tax years subsequent to 2011 remain open to examination by the Internal Revenue Service (“IRS”), and tax years subsequent to 2010 remain open to other state and local tax authorities.
8.
PROPERTY AND EQUIPMENT
Property and equipment at December 31 were summarized as follows:
The Company had depreciation expense of approximately $449,000 $318,000, and $347,000 for the years ended December 31, 2015, 2014 and 2013, respectively.
9.
DEFERRED COMPENSATION PLAN
In accordance with the 2006 Dental Care Plus Management Equity Incentive Plan and the Dental Care Plus, Inc. and DCP Holding Company Deferred Compensation Plan (the “Plans”), Company directors and certain key employees elected to defer portions of their director fees and employee compensation, as applicable. The Company recorded expense of approximately $141,000, $130,000, and $67,000 related to deferred director fees and deferred employee compensation for the years ended December 31, 2015, 2014 and 2013, respectively. Directors and key employees who elect to defer cash compensation may request that the Company invest this compensation in a mutual fund investment or phantom shares of the Company. The deferred cash compensation is included in the deferred compensation liability at December 31, 2015 and 2014.
The Plans also provide for the directors and key employees to receive share awards based on the book value of the Redeemable Common Shares. Subsequent to 2010, a director will receive Class B Redeemable Common Shares upon vesting. A key employee may elect to defer receiving such amounts until termination of employment and vesting requirements are met. If a key employee does not elect to defer receiving his or her share awards, the individual will receive Class B Redeemable Common Shares upon vesting. If the share awards are deferred, these deferred amounts will be paid in cash at redemption. An individual director’s award vests 100% at the end of each year if the director meets certain attendance requirements. The key employee awards vest 10%, 20%, 30% and 40% at the end of each respective year in a four-year period following the grant date. There are no performance criteria associated with the vesting of the awards for key employees and the only requirement for vesting is that the individual is an employee of the Company at the end of the vesting year in question. There were approximately 157 and 145 of these non-vested awards outstanding at December 31, 2015 and 2014, respectively. The number of awards expected to vest approximates the total non-vested awards outstanding.
The Company has a long-term incentive compensation program for named executive officers pursuant to which an officer may receive an award of up to 45% of such officer’s base salary in the form of share awards which will vest if established Company performance criteria are achieved over a three year period. There were no outstanding non-vested awards outstanding at December 31, 2015. There were approximately 337 non-vested awards outstanding at December 31, 2014.
The deferred compensation expense related to these awards is recorded ratably during the applicable vesting period. The Company recorded deferred compensation expense of approximately $597,000, $872,000, and $616,000, with a tax benefit of approximately $203,000, $296,000, and $209,000, related to deferred share awards and the change in the value of phantom shares for the years ended December 31, 2015, 2014, and 2013, respectively. As of December 31, 2015, there is approximately $164,000 of total unrecognized compensation cost related to non-vested awards under the Plans. That cost is expected to be recognized over a weighted average period of 1.86 years.
Share-based compensation cost is measured at the grant date based on the fair value of the awards and is recognized as expense over the vesting periods and is included in total insurance expense in the condensed consolidated statements of comprehensive income. The fair value of employee awards is remeasured at the end of each reporting period through the remaining vesting period with the change in fair value recognized in earnings.
In February 2015 and 2014, the Board declared a per share cash dividend for all Redeemable Common Shares in the amounts of $39.86 and $35.77 per share, respectively. With the dividend, the holders of restricted share units and phantom shares received an equivalent share based dividend that resulted in an increase in the deferred compensation liability of approximately $65,000 and $41,000 in February 2015 and February 2014, respectively. At December 31, 2015 and 2014, the deferred compensation liability was approximately $3,287,000 and $2,766,000, respectively.
The maximum aggregate number of share based awards that may be issued under the Plans are 15,000 Class B Common Shares. In 2015, the non-employee members of the Board were granted a total of 228 share based awards. In 2015, key employees were granted 88 share based awards. In 2015, individuals who elected to defer a portion of their cash compensation purchased approximately 52 phantom shares. As of December 31, 2015, the Company has granted a total of 4,123 share awards, net of share based dividends, forfeitures and rescinded share awards of which 2,672 are outstanding.
The following is a summary of activity of non-vested awards for the years ended December 31, 2015 and 2014:
The following is a summary of activity of vested awards for the years ended December 31, 2015 and 2014:
10.
REDEEMABLE SHARES, SHAREHOLDERS’ EQUITY AND DIVIDEND RESTRICTIONS
Participating providers along with Company directors and employees have the option to purchase one or more voting Class B Redeemable Common Shares of the Company, when offered. Non-dentist individuals are eligible to purchase Class C voting Redeemable Common Shares, when offered. The maximum percentage of Class C Common Shares outstanding at any time as a proportion of all voting Common Shares is 40%. The book value of a common share was approximately $1,012 and $997 at December 31, 2015 and 2014, respectively. In 2015, 2014, and 2013, the Board declared a per share cash dividend for all Class A, Class B and Class C Redeemable Common Shares in the amounts of $39.86, $35.77, and $32.60, respectively.
The Company has 100,000 authorized Class D Redeemable Common Shares, without par value. The Class D Redeemable Common Shares are non-voting redeemable common shares that Preferred Shares may be converted to under certain circumstances. As of December 31, 2015 and 2014, none of these Class D Redeemable Common Shares were issued or are outstanding.
The Company is authorized to issue 100,000 preferred shares, without par. In 2010, the Company entered into a Preferred Stock Purchase Agreement with an investor for 300 Redeemable Institutional Preferred Shares at a purchase price of $1,000 per share. In 2012 and 2013, the Company entered into additional Stock Purchase Agreements with an investor for the sale of 1,000 Redeemable Institutional Preferred Shares each year at a purchase price of $1,000 per share. The annual dividend payable on each Redeemable Institutional Preferred Share is 5% of the book value at the beginning of the dividend period. As of December 31, 2015, 2014, and 2013, dividends declared and paid were approximately $135,000, $128,000, and $123,000, respectively.
Redeemable Provider Preferred Shares-2009 Series are entitled to a cumulative cash dividend equal to 5% of the year end book value of the Redeemable Provider Preferred Shares. As of December 31, 2015 and 2014, none of these Provider Preferred Shares were issued or are outstanding.
Dividend restrictions vary among the subsidiaries. Dental Care Plus is restricted by regulatory requirements of its domiciliary state, which limit by reference to statutory net income and net worth, the dividends that can be paid without prior regulatory approval. Dividends paid by Dental Care Plus cannot, without prior approval of the Ohio Department of Insurance, exceed in any one year the lesser of: (i) 10% of net worth (as of the preceding December 31), or (ii) net income for the prior year, and only if net worth exceeds $250,000 and only out of unassigned surplus. There were no dividends declared or paid by any subsidiaries in 2015, 2014 or 2013. During 2016, the total dividend that the Dental Care Plus subsidiary may declare without prior regulatory approval is approximately $1,044,000.
GAAP differs in certain respects from the accounting practices prescribed or permitted by state insurance regulatory authorities (“statutory-basis”), a non-GAAP basis of accounting. The statutory-basis net income for Dental Care Plus was approximately $710,000, $1,156,000, and $1,191,000 for the years ended December 31, 2015, 2014 and 2013, respectively. Statutory-basis equity was approximately $10,454,000, and $9,689,000 at December 31, 2015 and 2014, respectively.
11.
DEBT
The Company has a mortgage note with a bank, secured by the land and the office building with interest payable based on the 30-day LIBOR rate plus 1.95%. As a result of the mortgage note having a variable interest rate that adjusts monthly with the 30-day LIBOR rate, the carrying value of the mortgage note of $1,198,400 approximates fair value. The Company also entered into an interest rate swap agreement that effectively changed the interest rate related to the mortgage note with a commercial bank from a variable rate based on the 30-day LIBOR rate plus 1.95% to a fixed rate of 3.90% for the 10-year period through December 22, 2022. Under this mortgage, the Company is required to have a minimum tangible net worth equal to or greater than $3,500,000 at the end of each fiscal year and a debt service ratio of at least 1:1. The mortgage note fair value disclosure is classified as Level 2 in the fair-value hierarchy.
Required principal repayments under the mortgage loan payable are as follows:
In 2015, the Company entered into a sale-leaseback transaction with a leasing company for the sale of certain fixed assets for approximately $347,000. There was no gain or loss on the sale. The Company did not retain the benefits and risk to the property sold and the risk of ownership was transferred to the leasing company. The Company also entered into a capital lease agreement with the leasing company that obligates the Company to pay lease payments totaling approximately $373,000 related to these assets over a four year period. Under this capital lease agreement, the Company is required to have a minimum tangible net worth equal to or greater than $2,500,000 at the end of each fiscal year.
In 2014, the Company entered into a sale-leaseback transaction with a leasing company for the sale of certain fixed assets for approximately $516,000. There was no gain or loss on the sale. The Company did not retain the benefits and risk to the property sold and the risk of ownership was transferred to the leasing company. The Company also entered into a capital lease agreement with the leasing company that obligates the Company to pay lease payments totaling approximately $552,000 related to these assets over a four year period. Under this capital lease agreement, the Company is required to have a minimum tangible net worth equal to or greater than $2,500,000 at the end of each fiscal year.
In 2013, the Company entered into a sale-leaseback transaction with a leasing company for the sale of certain fixed assets for approximately $312,000. There was no gain or loss on the sale. The Company did not retain the benefits and risk to the property sold and the risk of ownership was transferred to the leasing company. The Company also entered into a capital lease agreement with the leasing company that obligates the Company to pay lease payments totaling approximately $327,000 related to these assets over a three year period. Under this capital lease agreement, the Company is required to have a minimum tangible net worth equal to or greater than $2,500,000 at the end of each fiscal year.
At December 31, 2015, future required payments under all outstanding capital leases are as follows:
12.
DERIVATIVE
The Company entered into an interest rate swap agreement (“Agreement”) (cash flow hedge) used to manage the Company’s interest rate risk. The swap agreement effectively changed the interest rate related to the Company’s mortgage note with a commercial bank from a variable rate based on the 30-day LIBOR rate plus 1.95% to a fixed rate of 3.90% for the 10-year period through December 22, 2022. The Company’s risk management policy is to not enter into derivatives for speculative purposes. The notional amount decreases in direct correlation to the principal reduction of the mortgage and was approximately $1,198,000 and $1,248,000 at December 31, 2015 and 2014, respectively. The Company believes that the risk of nonperformance by the counter party to this Agreement is not material to the financial statements. At December 31, 2015 and 2014, the fair value of this Agreement was a liability of approximately $18,000 and $5,000, respectively. This amount is included in other payables and accruals in the accompanying consolidated balance sheets. The agreement will terminate upon maturity of the mortgage loan payable (Note 11).
The amounts included in other comprehensive (loss) income related to the interest rate swap was $(8,687), $33,504, and $(9,466), net of income tax (benefit) expense of $(4,475), $17,260, and $(4,877), during 2015, 2014 and 2013, respectively.
13.
LINES OF CREDIT
The Company has an annually renewable agreement with a commercial bank for a $500,000 working capital line of credit. Interest is payable at a variable rate of LIBOR plus 2.50%. The Company did not have any interest expense or significant fees for the line of credit for each of the three years ended December 31, 2015. As of December 31, 2015 and 2014, there was no amount outstanding on this line of credit. The $500,000 working capital line of credit expires in July 2016. The Company expects to renew this line of credit at its maturity.
The Company has an additional annually renewable working capital line of credit for $1,000,000. Interest is payable at a variable rate of LIBOR plus 2.50%. The Company did not have any interest expense or significant fees for the line of credit for each of the three years ended December 31, 2015. At December 31, 2015 and 2014, there was no amount outstanding on this line of credit. The $1,000,000 working capital line of credit expires in July 2016. The Company expects to renew this line of credit at its maturity.
14.
COMMITMENTS AND CONTINGENCIES
Leases-The Company leases certain equipment and office space under non-cancelable operating leases. Rent expense under all operating leases was approximately $168,000, $154,000, and $136,000 for the years ended December 31, 2015, 2014 and 2013, respectively.
At December 31, 2015, future approximate minimum annual lease payments under non-cancelable operating leases are as follows:
Litigation-In the normal course of business, the Company is subject to various regulatory proceedings, lawsuits, claims and other matters. In the opinion of the Company’s management, we are not aware of any matters which are more than remote in possibility, and the eventual resolution of such matters for amounts above those reflected in the consolidated financial statements would not have a material adverse effect on the financial condition or results of operations of the Company.
15.
LEASE INCOME
The Company leases space in its building to unrelated parties under non-cancelable leases. Income recorded by the Company under non-cancelable leases amounted to approximately $62,000 for the years ended December 31, 2015, 2014 and 2013. Such amounts are recorded as other income in the accompanying consolidated statements of comprehensive income. As of December 31, 2015, the Company has approximately $62,000 of future minimum annual lease income under non-cancelable leases in 2016.
16.
RETIREMENT PLAN
Employees of the Company are covered by a defined contribution 401(k) plan sponsored by the Company. Discretionary contributions of a certain percentage of each employee’s contribution, which may not exceed a limit set annually by the Internal Revenue Service, are contributed by the Company each year and vest ratably over a five-year period. Company contributions, including administration fees paid by the Company, amounted to approximately $83,000, $60,000 and $60,000 for the years ended December 31, 2015, 2014 and 2013, respectively.
17.
SEGMENT INFORMATION
The Company manages its business with four segments: fully-insured dental HMO and indemnity, fully-insured dental PPO, self-insured dental and corporate, all other. Self-insured dental consists of the self-insured dental HMO, self-insured dental PPO and self-insured dental indemnity products. Corporate, all other consists of revenue associated with the Company’s dental indemnity, dental PPO, and vision products underwritten by third-party insurance carriers and certain other corporate activities. These segments are consistent with information used by the Chief Executive Officer (the chief operating decision maker) in managing the business.
The results of the fully-insured dental HMO and indemnity, fully-insured dental PPO and self-insured dental segments are measured by gross profit. The Company does not allocate insurance expense, investment and other income, assets or liabilities to these segments because the Company does not use these measures to analyze the segments. These items are assigned to the remainder of the Company’s business, which it identifies as corporate, all other. The Company’s gross profit was approximately $21,577,000, $20,240,000, and $18,601,000 for the years ended December 31, 2015, 2014 and 2013, respectively.
Listed below is financial information required for each reportable segment for the years ended December 31, 2015, 2014 and 2013 (amounts in thousands):
Inter-segment revenues were not significant for 2015, 2014, or 2013.
18.
RELATED PARTIES
All of the Company’s Class A and Class B shareholders are related parties, either as a participating provider, director or an employee of the Company.
The Company’s providers, who are also shareholders, submitted claims of approximately $38,248,000, $36,902,000, and $37,566,000, in 2015, 2014, and 2013, respectively. The Company had claims payable liability to related party providers of approximately $1,631,000 and $1,547,000 at December 31, 2015 and 2014, respectively.
Seven of our Board members are also participating providers and as a group received approximately $191,000, $191,000, and $154,000 in directors’ fees for the years ended December 31, 2015, 2014, and 2013, respectively.
19.
FAIR VALUE MEASUREMENTS
The Company classifies the assets and liabilities that require measurement of fair value based on the priority of the observable and market-based sources of data into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows:
●
Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
●
Level 2 - Valuations based on significant other observable inputs other than those included in Level 1 such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
●
Level 3 - Valuations based on unobservable inputs such as when observable inputs are not available or inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table presents for each of the fair value levels, the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2015 and 2014 (amounts in thousands):
(a) Included as a trading security in other assets
(b) Included in other assets
(c) Included in other payables and accruals
The Company measures fair value using the following valuation methodologies. The Company uses quoted market prices to determine the fair value of the deferred compensation investments and certain state fund guarantee deposits; such items are classified as Level 1 of the fair value hierarchy. Examples include government securities and mutual fund equity securities. The Company primarily bases fair value for investments in fixed-maturity securities on quoted market prices or on prices from a pricing vendor, an outside resource that supplies independent securities pricing, dividend, corporate action and descriptive information to support fund pricing, securities operations, research and portfolio management. The Company obtains and reviews the pricing service’s valuation methodologies and validates these prices using various inputs including quotes from other independent regulatory sources. When deemed necessary, the Company validates prices by replicating a sample using a discounted cash flow model. Such items are classified as Level 2 of the fair value hierarchy. The Company obtains a price from an independent vendor to determine the fair value of the interest rate swap. The independent vendor uses a discounted cash flow method whereby the significant observable inputs include the replacement interest rates of similar swap instruments in the market and swap curves; such items are classified as Level 2 of the fair value hierarchy.
At December 31, 2015 and 2014, there were no assets or liabilities that were required to be measured at fair value on a non-recurring basis. The Company did not have any transfers between fair value hierarchy levels during December 2015 and 2014. As of December 31, 2015 and 2014, the Company did not have any assets or liabilities classified as Level 3 of the fair value hierarchy.
20.
QUARTERLY DATA (UNAUDITED)
A summary of our unaudited quarterly results of operations for the years ended December 31, 2015 and 2014 is as follows (amounts in thousands):
21.
SUBSEQUENT EVENTS
In accordance with the provisions of the Affordable Care Act of 2010, the federal government imposed an annual assessment on all U.S. health insurers of approximately $13.9 billion in 2016. This annual assessment will increase each year and is expected to be $16.0 billion in 2019. This annual assessment is allocated to individual health insurers based on the ratio of the insurer’s net premiums written during the preceding calendar year to the total health insurance premiums for any U.S. risk premium written for that same year. The first $25 million of a health insurer’s net premium written is exempt from the federal premium tax assessment. The net premium written by a health insurer from $25 million to $50 million is subject to 50% of the federal premium tax rate. Accordingly, in January 2016, the Company established a liability for the federal premium tax of approximately $580,000 that is payable to the United States Treasury in September 2016, along with an offsetting asset that will be amortized during 2016.
On February 10, 2016, the Company’s Board of Directors declared a $40.47 per share dividend for all holders of Class A, Class B and Class C redeemable common shares of record on February 10, 2016, payable on March 25, 2016. With the dividend, the holders of restricted share units will receive an equivalent share based dividend.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Securities and Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2015. Based on such evaluation, the Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
The Chief Executive Officer and Chief Financial Officer also have concluded that in the fourth quarter of the fiscal year ended December 31, 2015, there were no changes in the Company’s internal controls that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). In evaluating the Company’s internal control over financial reporting, management has adopted the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2015. Based on our evaluation under the framework in Internal Control-Integrated Framework, our management has concluded that our internal control over financial reporting was effective.
The 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 in the United States of America. 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 in the United States of America, 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. However, because of 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.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this Item 10 regarding our directors and corporate governance is incorporated by reference to the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on April 27, 2016 in the sections and subsections entitled, “Election of Directors”, “Director Nominees”, “Audit Committee”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Report of the Audit Committee of the Board of Directors”, “Corporate Affairs Committee”, “Director Nomination Process” and “Code of Conduct”. The information required by Item 10 regarding our executive officers appears as a Supplement Item at the end of Item 1 under Part I hereof.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is incorporated by reference to the information under the sections and subsections “Executive Compensation”, “Corporate Affairs Committee” and “Report of the Corporate Affairs Committee” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on April 27, 2016.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this Item 12 (other than the information required by Item 201(d) of Regulation S-K which is set forth below) is incorporated by reference to the information under the section “Security Ownership of Certain Beneficial Owners and Management” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on April 27, 2016.
In December 2005, we adopted the 2006 Dental Care Plus Management Equity Incentive Plan for our directors, Named Executive Officers and other key employees. The maximum aggregate number of restricted shares or restricted share units (“RSUs”) which may be issued under this plan are 15,000 Class B Common Shares. In 2015, the non-employee members of the Board were granted a total of 228 RSUs. In 2015, Named Executive Officers and other key employees were granted 88 restricted share units.
In 2015, Company directors and certain key employees can elect to defer portions of their director fees and employee compensations. These individuals can request to invest in phantom shares of the Company and in 2015 they purchased 52 phantom shares.
As of December 31, 2015, the Company granted a total of 4,093 RSUs, net of share based dividends, forfeitures and rescinded RSUs.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is incorporated by reference to the information under the Section “Transactions with Related Persons, Promoters and Certain Control Persons” and the subsection “Director Independence” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on April 27, 2016.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 relating to auditor fees is incorporated by reference to the information under the Section “Other Matters” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on April 27, 2016.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Form 10-K.
(b) The exhibits listed on the Index to Exhibits are filed as part of or incorporated by reference into this report.
DCP Holding Company and subsidiaries
Schedule I - Summary of Investments -
Other than Investments in Related Parties
At December 31, 2015
(amounts in thousands)
DCP HOLDING COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets
As of December 31, 2015 and 2014
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8, Page 34 and the notes to the Condensed Financial Statements.
DCP HOLDING COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Condensed Statements of Comprehensive Income
For the Years ended December 31, 2015, 2014 and 2013
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8, Page 34 and the notes to the Condensed Financial Statements.
DCP HOLDING COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Condensed Statements of Cash Flows
For the Years ended December 31, 2015, 2014 and 2013
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8, Page 34 and the notes to the Condensed Financial Statements.
SCHEDULE II - PARENT COMPANY FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Parent company financial information has been derived from our consolidated financial statements and excludes the accounts of all operating subsidiaries. This information should be read in conjunction with our consolidated financial statements.
Parent company maintains its investment in all subsidiaries on the equity method. The investment in subsidiary is adjusted for the changes in other comprehensive income from the subsidiaries.
2.
TRANSACTIONS WITH SUBSIDIARIES
Management Fee
Through intercompany service agreements approved, if required, by state regulatory agencies, our parent company charges a management fee for reimbursement of certain centralized services provided to its subsidiaries including information systems, investment and cash administration, marketing, legal, finance, executive management oversight and other operating expenses.
Salaries and benefit expense
Salary and benefit expense includes dental benefit expense of approximately $119,000, $107,000, and $92,000, for the years ended December 31, 2015, 2014 and 2013, respectively. These amounts eliminate in consolidation.
Investments in subsidiaries and dividends
There were no dividends declared or paid to the parent company in 2015. In 2014, the parent company received a dividend from the Adenta, Inc. subsidiary in the amount of $150,000.
Federal Income Tax Arrangement
The parent company has an income tax allocation arrangement with its subsidiaries. DCP makes federal tax payments on behalf of the Company. DCP paid approximately $963,000, $1,270,000, and $540,000, for the years ended December 31, 2015, 2014, and 2013. The Company’s policy is to settle this intercompany receivable within 30 days of the filing of its consolidated income tax return.
There were no additional investment in subsidiaries in 2015 and 2014.
Reconciliation of Investment in Subsidiaries
DCP HOLDING COMPANY AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
For each of the Three Years in the Period ended December 31, 2015
(amounts in thousands)
(a)
The Company does not allocate insurance expense, investment and other income, or other assets or liabilities to identified segments.
DCP HOLDING COMPANY AND SUBSIDIARIES
Schedule IV- Reinsurance
For each of the Three Years in the Period ended December 31, 2015
(amounts in thousands)
DCP HOLDING COMPANY AND SUBSIDIARIES
Schedule V - Valuation and Qualifying Accounts
For the Years Ended December 31, 2015, 2014, and 2013
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.
DCP Holding Company
March 23, 2016
/s/ Robert C. Hodgkins, Jr.
Robert C. Hodgkins, Jr.
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
March 23, 2016
/s/ Anthony A. Cook
Anthony A. Cook
President, Chief Executive Officer and Director
(Principal 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.
March 23, 2016
/s/ Stephen T. Schuler
Stephen T. Schuler
Chairman of the Board of Directors
March 23, 2016
/s/ Robert E. Hamilton
Robert E. Hamilton
Vice-Chairman of the Board of Directors
March 23, 2016
/s/ David A. Kreyling
David A. Kreyling
Secretary
March 23, 2016
/s/ Michael J. Carl
Michael Carl
Treasurer
March 23, 2016
/s/ Fred H. Peck
Fred H. Peck
Assistant Treasurer
March 23, 2016
/s/ Jack M. Cook
Jack M. Cook
Director
March 23, 2016
/s/ Donald J. Peak
Donald J. Peak
Director
March 23, 2016
/s/ James E. Kroeger
James E. Kroeger
Director
March 23, 2016
/s/ Molly Meakin-Rogers
Molly Meakin-Rogers
Director
March 23, 2016
/s/ James T. Foley
James Foley
Director
March 23, 2016
/s/ Mark E. Bronson
Mark E. Bronson
Director
March 23, 2016
/s/ Ronald Poulos
Ronald Poulos
Director
INDEX TO EXHIBITS
EXHIBIT NUMBER
DESCRIPTION OF DOCUMENT
3.1
Amended and Restated Articles of Incorporation (incorporated by reference to the Company’s Form 8-K current report filed on May 28, 2009)
3.2
Amended and Restated Code of Regulations (incorporated by reference to Exhibit 3.2 to the Company’s Form 10 registration statement filed on May 1, 2006)
3.3
Amendment to the Amended and Restated Articles of Incorporation dated July 17, 2010, (incorporated by reference to exhibit 3.3 to the Company’s Form 10-K for the year ended December 31, 2010)
3.4
Amendment to Amended and Restated Articles of Incorporation of DCP Holding Company effective January 3, 2012 (incorporated by reference to exhibit 3.1 to the Company’s Form 8-K current report filed on January 6, 2012)
3.5
Amendment to Amended and Restated Articles of Incorporation of DCP Holding Company effective January 9, 2013 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K current report filed on January 16, 2013)
3.6
Second Amended and Restated Articles of Incorporation of DCP Holding Company effective January 9, 2014 (incorporated by reference to Exhibit 3(a) to the Company’s Form 8-K current report filed on January 15, 2014)
3.7
Second Amended and Restated Code of Regulations (incorporated by reference to Exhibit 3(b) to the Company’s current report filed on January 15, 2014).
10.1
Tenth Amended and Restated DCP Holding Company Employment Agreement with Anthony A. Cook effective January 1, 2015 (incorporated by reference to Exhibit 10.1 and 10.2 to the Company’s Form 8-K current report filed on May 19, 2015)*
10.2
Dental Care Plus, Inc. and DCP Holding Company Deferred Compensation Plan, amended and restated (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-K Annual Report filed on March 25, 2008)*
10.3
2006 Dental Care Plus Management Equity Incentive Plan, amended and restated (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-K Annual Report filed on March 25, 2008)*
10.4
2006 Dental Care Plus Management Equity Incentive Plan, amended and restated Effective January 1, 2014 (incorporate by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on May 20, 2014)*
10.5
Restricted Share Unit (RSU) Agreement between DCP Holding Company and Robert C. Hodgkins, Jr. and RSU Award to Robert C. Hodgkins, Jr. (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K current report filed on April 6, 2012)*
10.6
Preferred Stock Purchase Agreement (incorporated by reference to the Company’s Form 8-K current report filed on July 21, 2010)
10.7
Preferred Shares Purchase Agreement between DCP Holding Company and Cincinnati Financial Corporation dated as of January 4, 2012 (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K current report filed January 6, 2012)
10.8
Preferred Shares Purchase Agreement between DCP Holding Company and Cincinnati Financial Corporation dated as of January 11, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K current report filed January 16, 2013)
10.9
Restricted Shares Unit (RSU) Agreement between DCP Holding Company and Robert C. Hodgkins, Jr. (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K current report fled June 18, 2013)*.
10.10
Long Term Incentive Compensation Agreement between DCP Holding Company and Robert C. Hodgkins, Jr. effective January 1, 2015 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K current report filed on May 19, 2015)*
14.1
Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.1 to the Company’s Form 10-K Annual Report filed on March 30, 2007)
21.1
List of Subsidiaries. (incorporated by reference to Exhibit 21.1 to the Company’s Form 10 registration statement filed on May 1, 2006)
31.1
Chief Executive Officer certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002, filed herewith
31.2
Chief Financial Officer certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002, filed herewith
32.1
Chief Executive Officer and Chief Financial Officer certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, filed herewith
Financial information and Notes to Financial Statements for the year-ended December 31, 2015 formatted in XBRL (Extensible Business Reporting Language)
*
Reflects management contracts or compensation plan arrangement required to be filed as an exhibit pursuant to Item 15(b) of this Annual Report on Form 10-K.