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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2011

 

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

For the transition period from             to             

Commission File Number 000-51954

 

 

DCP Holding Company

(Exact name of Registrant as specified in its Charter)

 

 

 

Ohio   20-1291244

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

100 Crowne Point Place

Sharonville, Ohio

  45241
(Address of Principal Executive Office)   (Zip Code)

Registrant’s telephone number, including area code: (513) 554-1100

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting Company   ¨

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

As of September 30, 2011, there were 597 and 7,345 of the Registrant’s Class A and Class B Redeemable Common Shares outstanding, respectively.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          PAGE  
   PART I – FINANCIAL INFORMATION   
Item 1.    Financial Statements (unaudited)      1   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      14   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      23   
Item 4.    Controls and Procedures      24   
   PART II – OTHER INFORMATION   
Item 1.    Legal Proceedings      25   
Item 1A.    Risk Factors      25   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      25   
Item 3.    Defaults Upon Senior Securities      25   
Item 4.    (Removed and Reserved)      25   
Item 5.    Other Information      25   
Item 6.    Exhibits      26   
   Signatures      26   

 

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Table of Contents

Item 1. Financial Statements

DCP HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

     September 30,
2011
     December 31,
2010
 

ASSETS

     

INVESTMENTS:

     

Fixed maturities, available for sale at fair value, amortized cost of $3,092,540 and $600,000 at September 30, 2011 and December 31, 2010, respectively

   $ 3,101,995       $ 607,959   

Fixed maturities, held-to-maturity at amortized cost, fair value of $2,359,612 at December 31, 2010

        2,316,092   

Short-term investments, available for sale at fair value, amortized cost of $929,724 and $956,000 at September 30, 2011 and December 31, 2010, respectively

     930,620         958,343   
  

 

 

    

 

 

 

Total investments

     4,032,615         3,882,394   

CASH AND CASH EQUIVALENTS

     5,937,547         6,061,069   

ACCRUED INVESTMENT INCOME

     19,810         42,397   

ACCOUNTS RECEIVABLE, net of allowance of $15,142 and $8,116 at September 30, 2011 and December 31, 2010, respectively

     536,633         506,597   

UNBILLED ACCOUNTS RECEIVABLE

     29,142,455         28,061,168   

DEFERRED ACQUISITION COSTS

     2,201,124         2,117,664   

PROPERTY AND EQUIPMENT, net of depreciation and amortization of $2,361,686 and $2,201,929 at September 30, 2011 and December 31, 2010, respectively

     2,265,145         2,327,885   

OTHER ASSETS

     1,555,717         1,646,799   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 45,691,046       $ 44,645,973   
  

 

 

    

 

 

 

LIABILITIES, REDEEMABLE SHARES AND SHAREHOLDERS’ EQUITY

     

CLAIMS PAYABLE

   $ 2,491,615       $ 2,776,328   

UNEARNED PREMIUM REVENUE

     30,577,864         29,531,077   

OTHER PAYABLES AND ACCRUALS

     4,105,728         3,744,901   

REVOLVING NOTE

     650,000         650,000   

MORTGAGE LOAN PAYABLE

     810,000         900,000   

CAPITAL LEASE OBLIGATION

     245,353         323,365   

DEFERRED COMPENSATION

     1,102,026         1,091,745   
  

 

 

    

 

 

 

TOTAL LIABILITIES

     39,982,586         39,017,416   
  

 

 

    

 

 

 

COMMITMENTS AND CONTINGENCIES

     
  

 

 

    

 

 

 

REDEEMABLE PREFERRED AND COMMON SHARES:

     

Institutional Preferred Shares, no par value, cumulative 5% dividend—authorized, 300 shares; issued and outstanding, 300 shares at September 30, 2011 and December 31, 2010, respectively

     331,900         326,458   

Provider Preferred-2009 Series Redeemable Preferred Shares, no par value, cumulative 5% dividend—authorized, 5,000 shares; issued and outstanding, 330 shares at September 30, 2011 and December 31, 2010, respectively

     191,246         185,447   

Class A, Redeemable Common Shares, no par value—authorized, 7,500 shares; issued and outstanding, 597 and 608 shares at September 30, 2011 and December 31, 2010, respectively

     389,780         384,825   

Class B Redeemable Common Shares, no par value—authorized, 100,000 shares; issued and outstanding, 7,345 and 7,476 shares at September 30, 2011 and December 31, 2010, respectively

     4,795,534         4,731,827   
  

 

 

    

 

 

 

Total redeemable preferred and common shares

     5,708,460         5,628,557   
  

 

 

    

 

 

 

SHAREHOLDERS’ EQUITY—Preferred Shares; no par value—authorized, 94,700 shares; issued, none

     
  

 

 

    

 

 

 

TOTAL LIABILITIES, REDEEMABLE SHARES AND SHAREHOLDERS’ EQUITY

   $ 45,691,046       $ 44,645,973   
  

 

 

    

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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DCP HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2011      2010     2011      2010  

REVENUES

          

Premium revenue

   $ 19,647,588       $ 19,446,048      $ 57,272,071       $ 56,889,830   

Investment income

     22,071         27,158        75,911         83,613   

Realized gains (losses) on investments, net

     14,859           14,859      

Other income

     15,405         15,845        45,680         48,652   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues

     19,699,923         19,489,051        57,408,521         57,022,095   
  

 

 

    

 

 

   

 

 

    

 

 

 

EXPENSES

          

Healthcare services expense

     15,999,201         16,751,400        47,373,347         48,684,449   
  

 

 

    

 

 

   

 

 

    

 

 

 

Insurance expense:

          

Salaries and benefits expense

     1,193,463         1,197,062        3,746,599         3,867,277   

Commission expenses and other acquisition costs

     941,296         799,401        2,725,455         2,347,549   

Other insurance expense

     1,133,917         1,059,564        3,289,601         3,365,374   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total insurance expense

     3,268,676         3,056,027        9,761,655         9,580,200   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total expenses

     19,267,877         19,807,427        57,135,002         58,264,649   
  

 

 

    

 

 

   

 

 

    

 

 

 

INCOME (LOSS) BEFORE INCOME TAX

     432,046         (318,376     273,519         (1,242,554
  

 

 

    

 

 

   

 

 

    

 

 

 

INCOME TAX EXPENSE (BENEFIT)

     157,437         2,528        99,670         (329,898
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INCOME (LOSS) ON REDEEMABLE SHARES

   $ 274,609       $ (320,904   $ 173,849       $ (912,656
  

 

 

    

 

 

   

 

 

    

 

 

 

BASIC EARNINGS (LOSS) PER REDEEMABLE COMMON SHARE

   $ 31.78       $ (38.16   $ 18.82       $ (107.76
  

 

 

    

 

 

   

 

 

    

 

 

 

DILUTED EARNINGS (LOSS) PER REDEEMABLE COMMON SHARE

   $ 31.09       $ (38.16   $ 18.42       $ (107.76
  

 

 

    

 

 

   

 

 

    

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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DCP HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE SHARES AND SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Unaudited)

 

 

    Redeemable Common Shares     Redeemable Preferred Shares     Shareholders’ Equity        
    Class A     Class B     Institutional Preferred     Provider Preferred          

Other

Accumulated

             
    Number of           Number of           Number of           Number of           Retained     Comprehensive           Comprehensive  
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Earnings     Income (Loss)     Total     Income (Loss)  

BALANCE—DECEMBER 31, 2010

    608      $ 384,825        7,476      $ 4,731,827        300      $ 326,458        330      $ 185,447           

Net income

                  $ 173,849        $ 173,849      $ 173,849   

Change in fair value of interest rate swap (net of income tax expense of $2,519)

                    $ 4,887        4,887        4,887   

Change in unrealized gain on investments (net of income tax benefit of $21,420)

                      (41,370     (41,370     (41,370

Transfer of investments from Held-to-Maturity to Available for Sale (net of income tax expense of $21,630)

                      41,987        41,987        41,987   
                       

 

 

 

Total comprehensive income

                        $ 179,353   
                       

 

 

 

Dividend payable

                    (12,242       (12,242  

Class A Common Shares exchanged for Class B Common Shares

    (2     (1,232     2        1,232                   

Redeemable Shares repurchased

    (9     (5,474     (133     (81,734                

Accretion of shares to redemption value

      11,661          144,209          5,442          5,799        (161,607     (5,504     (167,111  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

BALANCE—SEPTEMBER 30, 2011

    597      $ 389,780        7,345      $ 4,795,534        300      $ 331,900        330      $ 191,246      $        $        $       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
    Redeemable Common Shares     Redeemable Preferred Shares     Shareholders’ Equity        
    Class A     Class B     Institutional Preferred     Provider Preferred          

Other

Accumulated

             
    Number of           Number of           Number of           Number of           Retained     Comprehensive           Comprehensive  
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Earnings     Income (Loss)     Total     Income (Loss)  

BALANCE—DECEMBER 31, 2009

    621      $ 394,813        7,604      $ 4,834,398          $ 330      $ 196,095           

Net loss

                  $ (912,656     $ (912,656   $ (912,656

Change in fair value of interest rate swap (net of income tax benefit of $3,446)

                    $ (6,689     (6,689     (6,689

Change in unrealized gain on investments (net of income tax benefit of $2,873)

                      (5,577     (5,577     (5,577
                       

 

 

 

Total comprehensive loss

                        $ (924,922
                       

 

 

 

Dividend payable

                    (2,993       (2,993  

Redeemable Shares issued

        28        17,753        300      $ 300,000               

Class A Common Shares exchanged for Class B Commons Shares

    (3     (1,752     3        1,752                   

Redeemable Shares repurchased

    (9     (5,297     (161     (93,208                

Dilution of shares to redemption value

      (67,036       (824,536       (2,735       (33,608     915,649        12,266        927,915     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

BALANCE—SEPTEMBER 30, 2010

    609      $ 320,728        7,474      $ 3,936,159        300      $ 297,265        330      $ 162,487      $        $        $       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

See notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

DCP HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

 

     For the Nine Months Ended
September 30,
 
     2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income (loss) on redeemable shares

   $ 173,849      $ (912,656

Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:

    

Depreciation and amortization

     205,736        390,686   

Realized gains (losses) on investments, net

     (14,859  

Deferred compensation

     10,281        83,404   

Effects of changes in operating assets and liabilities:

    

Accrued investment income

     22,587        (30,562

Accounts receivable

     (30,036     (143,673

Unbilled accounts receivable

     (1,081,287     (15,330,045

Deferred acquisition costs

     (83,460     (1,423,984

Other assets

     81,109        (410,309

Claims payable

     (284,713     663,266   

Unearned premium revenue

     1,046,787        15,218,826   

Other payables and accruals

     413,514        708,162   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     459,508        (1,186,885
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of investments

     (6,141,166     (6,979,977

Sales and maturities of investments

     5,967,884        5,109,431   

Acquisition of property and equipment

     (97,006     (110,231
  

 

 

   

 

 

 

Net cash used in investing activities

     (270,288     (1,980,777
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Mortgage loan repayments

     (90,000     (90,000

Payments on capital lease

     (78,012  

Repurchase of redeemable shares

     (128,153     (54,014

Redeemable shares issued

       317,753   

Dividends paid

     (16,577     (10,519
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (312,742     163,220   
  

 

 

   

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

     (123,522     (3,004,442

CASH AND CASH EQUIVALENTS—Beginning of period

     6,061,069        6,769,186   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS—End of period

   $ 5,937,547      $ 3,764,744   
  

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

    

Cash paid for interest

   $ 42,027      $ 39,500   

NON-CASH INVESTING AND FINANCING ACTIVITIES:

    

Redeemed common shares (in other payables and accruals)

   $
58,496
  
  $ 106,661   

See notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

DCP HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2011 (UNAUDITED)

 

 

 

1. BASIS OF PRESENTATION

The condensed consolidated interim financial statements included in this report have been prepared by DCP Holding Company and subsidiaries (the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation are reflected in the interim financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited 2010 financial statements and notes thereto as included in the DCP Holding Company annual report on Form 10-K for the year ended December 31, 2010 filed with the Commission on March 16, 2011. These unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial statements. Certain financial information that is required in the annual financial statements may not be required for interim financial reporting purposes and has been condensed or omitted. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The interim condensed consolidated financial statements have been prepared in accordance with the accounting policies described in the notes to the Company’s consolidated financial statements for the year ended December 31, 2010. While management believes that the procedures followed in preparation of interim financial information are reasonable, the accompanying condensed consolidated financial statements include estimates for items such as changes in claims payable, deferred tax accounts, deferred acquisition costs, deferred share-based compensation and accrued expenses, among others. Any adjustments related to such estimates during the reporting period were of a normal recurring nature.

Use of Estimates—The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

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 $30,578,000 and $29,531,000 at September 30, 2011 and December 31, 2010, respectively, and primarily relates to the estimated premium revenue associated with the remaining contract periods. Related amounts recorded in unbilled accounts receivable were approximately $29,142,000 and $28,061,000 at September 30, 2011 and December 31, 2010, 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 condensed consolidated balance sheets. Premiums received in advance were approximately $1,436,000 and $1,470,000 at September 30, 2011 and December 31, 2010, respectively. Management has determined that as of September 30, 2011 and December 31, 2010, 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

 

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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 operations.

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— The Company compensates its providers based on contractual reimbursement for various services. With respect to the dental HMO product and, effective April 1, 2011, the in-network portion of the dental PPO product, the Company generally retains 10% of this reimbursement (including payments on self-insured claims) in accordance with the Company’s provider agreements. Healthcare services expense is recorded net of any amounts withheld in the accompanying condensed consolidated statements of operations. Under the terms of the Company’s provider agreements, the Company is not obligated to return to providers any amounts withheld. Withheld amounts are retained by the Company but not reserved or retained in a separate fund. Participating providers have no interest in the amounts withheld, unless the Company’s Board authorizes any amount to be paid to the providers.

The cost of fully-insured healthcare services to members is accrued in the period such services are provided based on the accumulation of estimates of claims reported prior to the end of a reporting period and of estimates of dental services incurred but not reported to the Company, net of the amounts withheld, in accordance with the provider agreements.

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.

Each year the Board evaluates the performance of the Company’s dental plans, capital and surplus requirements prescribed by the Ohio Department of Insurance, factors affecting the Company’s financial strength rating, funding needed to support strategic objectives for the coming years and any other factors deemed relevant by the Board and, based on that evaluation, determines whether or not to authorize the payment to the providers of any portion of the provider withhold. Once authorized by the Board, such amounts are recorded as additional healthcare services expense in the period authorized and shown as additional claims payable liability until paid.

Investments—The Company invests in certificates of deposit, investment grade corporate bonds and money market funds. The Company classifies all certificates of deposit investments and the money market funds as available-for-sale. In August 2011, the Company engaged a fixed income portfolio manager to manage the Company’s investment grade corporate bonds, under the Company’s direction, in order to maximize investment returns. With a revised investment strategy, the Company considers the available-for-sale classification to be more appropriate and began classifying all investment grade corporate bonds as available-for-sale. Such certificates of deposit, investment grade corporate bonds and money market funds investments are recorded at fair value, with unrealized gains and losses recorded as a component of other comprehensive income. Prior to August 2011, the Company classified all investment grade corporate bonds as held-to-maturity. Held-to-maturity investments were recorded at amortized cost. The amortized cost of held-to-maturity investments was adjusted for amortization of premiums and accretion of discounts to maturity using the effective-yield method of amortization. Such amortization was included in investment income. As of the date the investments were transferred, the investments had a carrying value of $2,710,273 and a net unrealized gain of $41,987. The Company recognizes gains and losses when these securities mature or are sold using the specific identification method. There have been no material changes in exposures to market risk for the three and nine months ended September 30, 2011.

Management follows a consistent and systematic process for recognizing impairments on securities that sustain other-than-temporary declines in value. The decision to impair a security incorporates both quantitative criteria and qualitative information. The Company considers the percentage 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 (1) if the Company intends to sell the impaired fixed maturity security; (2) if it is more likely than not 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.

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 $283,000 and

 

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$278,000 at September 30, 2011 and December 31, 2010, respectively. These funds are restricted and not available to the Company for normal operations and are included in other assets in the accompanying condensed consolidated balance sheets.

Deferred Acquisition Costs—Deferred acquisition costs are those costs that vary with and are primarily related to the acquisition of new and renewal business. Such costs include commissions, costs of contract issuance and underwriting, premium taxes and other costs the Company incurs to 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 $848,000 and $1,106,000 and amortized approximately $986,000 and $883,000 of these capitalized costs for the three months ended September 30, 2011 and 2010, respectively. The Company capitalized deferred acquisition costs of approximately $3,012,000 and $3,928,000 and amortized approximately $2,929,000 and $2,504,000 of these capitalized costs for the nine months ended September 30, 2011 and 2010, respectively. These amounts are recorded in commission expense and other acquisition costs included in the condensed consolidated statements of operations.

Reinsurance—In the normal course of business, the Company assumes premium revenue and related healthcare services expense from a third party insurance provider. Dental insurance premium assumed was approximately $65,000 and $194,000 for the three and nine months ended September 30, 2011, respectively. The healthcare services expense assumed was approximately $59,000 and $178,000 for the three and nine months ended September 30, 2011, respectively. Dental insurance premium assumed was approximately $74,500 for the three and nine months ended September 30, 2010. The healthcare services expense assumed was approximately $77,000 for the three and nine months ended September 30, 2010. The Company had approximately $10,000 and $9,000 of reinsurance premium receivable and claims payable of approximately $27,000 and $29,000 at September 30, 2011 and December 31, 2010, respectively.

New Accounting Standards—In October 2010, the Financial Accounting Standards Board (“FASB”) issued guidance that amends Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The new guidance modifies the definitions of the type of costs incurred by insurance entities that can be capitalized in the successful acquisition of new and renewal contracts. The guidance requires incremental direct costs of successful contract acquisition as well as certain costs related to underwriting, policy issuance and processing, medical and inspection and sales force contract selling for successful contract acquisition to be capitalized. These incremental direct costs and other costs are those that are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. The effective date is for reporting periods beginning after December 15, 2011. The Company plans to apply the retrospective method when adopting the new guidance on January 1, 2012. The Company estimates that the new guidance change would result in a decrease in the deferred acquisition cost asset and total redeemable preferred and common shares of approximately $160,000, net of tax, as of September 30, 2011 and approximately $120,000, net of tax, at adoption on January 1, 2012.

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. The new guidance requires an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. Although the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of the new guidance will have no significant effect on the consolidated financial statements and related disclosures; however, the guidance will affect the presentation of the financial statements.

In May 2011, the FASB issued guidance related to amendments to certain measurement principles and disclosures regarding fair value measurements. The amendments in this update improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of the new guidance will have no significant effect on the consolidated financial statements and related disclosures.

In September 2011, the FASB issued guidance relating to goodwill and intangibles. This guidance amends procedures to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this amendment an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The new guidance applies to all companies that have goodwill reported in their financial statements. This new guidance is effective for fiscal and interim periods beginning after December 15, 2011. The Company does not believe the adoption of the new guidance will have a material impact on the consolidated financial statements.

 

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3. INVESTMENTS

The Company owned certificates of deposit insured by the Federal Deposit Insurance Corporation (“FDIC”) with an amortized cost of $1,200,000 and $1,000,000 as of September 30, 2011 and December 31, 2010, 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, which is based on broker-quoted market prices. The Company also invests in money market funds with a cost and fair value of $529,724 and $556,341 as of September 30, 2011 and December 31, 2010, respectively. The Company invests in investment grade corporate bonds with an amortized cost of approximately $2,293,000 and $2,316,000 as of September 30, 2011 and December 31, 2010, respectively. Effective August 2011, the investment grade corporate bonds included in fixed maturities investments are classified as available-for-sale and are carried at fair value, which is based on broker-quoted market prices. Prior to August 2011, the investment grade corporate bonds were classified as held-to-maturity and were recorded at amortized cost. At the transfer date to available-for-sale, the Company recorded approximately $42,000 of net unrealized gains, net of tax, in other accumulated comprehensive income.

The investment grade corporate bonds consisted of thirteen different securities each with a credit rating of A- or better at September 30, 2011. The remaining four securities had a credit rating of BBB- at September 30, 2011. There was no decrease in the credit rating of any investment grade corporate bond during 2011. The weighted average yield-to-book value of our investment grade corporate bonds was approximately 4.51% at September 30, 2011. The weighted average maturity of our investment grade corporate bonds was 8.23 years at September 30, 2011. The unrealized gains and losses on available-for-sale investment activity are due to a change in the quoted market prices for these investments caused by any changes in prevailing interest rates since they were purchased. The Company realized approximately $15,000 of net investment gains for the three and nine months ended September 30, 2011. There were no realized gains or losses for the three and nine months ended September 30, 2010.

At September 30, 2011 and December 31, 2010, maturity dates for fixed maturities and short-term investments (excluding the money market funds) were:

 

     Available-for-Sale     Held-to-Maturity  
     Amortized
Cost
     Fair
Value
     % of
Total Value
    Amortized
Cost
     Fair
Value
     % of
Total Value
 

September 30, 2011

                

Maturity dates occurring:

                

Less than 1 year (Two certificates of deposit)

   $ 400,000       $ 400,896         11.4        

Greater than 1 year (Six certificates of deposit and seventeen corporate bonds)

     3,092,540         3,101,995         88.6   $         $           0.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total investments

   $ 3,492,540       $ 3,502,891         100.0   $         $           0.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     Available-for-Sale     Held-to-Maturity  
     Amortized
Cost
     Fair
Value
     % of
Total Value
    Amortized
Cost
     Fair
Value
     % of
Total Value
 

December 31, 2010

                

Maturity dates occurring:

                

Less than 1 year (Three certificates of deposit)

   $ 400,000       $ 402,002         39.8        

Greater than 1 year (Four certificates of deposit and eleven corporate bonds)

     600,000         607,959         60.2   $ 2,316,092       $ 2,359,612         100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total investments

   $ 1,000,000       $ 1,009,961         100.0   $ 2,316,092       $ 2,359,612         100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Investments classified at September 30, 2011 and December 31, 2010, as fixed maturities and short-term investments were as follows:

 

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     Available-for-Sale      Held-to-Maturity  
     Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
    Fair
Value
     Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Fair
Value
 

September 30, 2011

                      

Money market fund

   $ 529,724            $ 529,724               

Certificates of deposit, short term

     400,000       $ 896           400,896               

Certificates of deposit, fixed maturities

     800,000         5,722           805,722               

Corporate Bonds, fixed maturities

     2,292,540         21,451       $ (17,718     2,296,273       $         $         $         $     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 4,022,264       $ 28,069       $ (17,718   $ 4,032,615       $         $         $         $     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Available-for-Sale      Held-to-Maturity  
     Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
    Fair
Value
     Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Fair
Value
 

December 31, 2010

                      

Money market fund

   $ 556,341            $ 556,341               

Certificates of deposit, short term

     400,000       $ 2,002           402,002               

Certificates of deposit, fixed maturities

     600,000         7,959           607,959               

Corporate Bonds, fixed maturities

         $           $ 2,316,092       $ 43,520       $         $ 2,359,612   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 1,556,341       $ 9,961       $        $ 1,566,302       $ 2,316,092       $ 43,520       $         $ 2,359,612   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unrealized losses on investments, when they occur, are 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 write-down to fair market value. The Company considers the percentage 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 had no other than temporary impairment charges for the three and nine months ended September 30, 2011 and 2010. The Company had no investments in a continuous unrealized loss position for greater than one year as of September 30, 2011 and December 31, 2010.

 

4. DEFERRED COMPENSATION PLAN

Share-based compensation cost is measured at the grant date based on the fair value of the liability awards and is recognized as expense ratably over the vesting periods and is included in other insurance expense in the condensed consolidated statements of operations. The fair value of the liability awards are remeasured at the end of each reporting period through the remaining vesting period with the change in fair value recognized in earnings currently.

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 $15,000 and $12,000 related to deferred director fees and deferred employee compensation for the three months ended September 30, 2011 and 2010, respectively. The Company recorded expense of approximately $45,000 and $51,000 related to deferred director fees and deferred employee compensation for the nine months ended September 30, 2011 and 2010, 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 Plans also provide for the directors and key employees to receive share awards based on the book value of the Redeemable Common Shares and to elect to defer receiving such amounts until termination of board membership or employment and vesting requirements are met. If a director or 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

 

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individual is an employee of the Company at the end of the vesting year in question. The deferred compensation expense related to these awards is recorded ratably during the applicable vesting period. The Company recorded deferred compensation expense (benefit) of approximately $48,000 and ($5,000) related to deferred share awards and the change in the value of phantom shares for the three months ended September 30, 2011 and 2010, respectively. The Company recorded deferred compensation expense of approximately $113,000 and $15,000 related to deferred share awards and the change in the value of phantom shares for the nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011, there is approximately $149,000 of total unrecognized compensation cost related to non-vested award compensation under the Plans. That cost is expected to be recognized over a weighted average period of 2.22 years.

The expected fair value of the awards is calculated by applying the three year historical average trend rate of the book value per redeemable common share over the respective vesting period. The weighted average grant date fair value of the awards granted in the nine months ended September 30, 2011 and 2010 were $638 and $713, respectively. At September 30, 2011 and December 31, 2010, the deferred compensation liability was approximately $1,102,000 and $1,092,000, respectively.

The following is a summary of activity of non-vested awards for the nine months ended September 30, 2011:

 

     Individual
Director’s
Share Awards
     Weighted
Average Grant
Date Fair
Value
     Key Employee
Share Awards
    Weighted
Average Grant
Date Fair Value
 

Non-vested awards at January 1, 2011

           176.4      $ 877   

Granted

     168.0       $ 630         80.0        658   

Forfeited

           (31.8     791   
  

 

 

       

 

 

   

Non-vested awards at September 30, 2011

     168.0       $ 630         224.6      $ 816   
  

 

 

       

 

 

   

There were no shares that vested during the three and nine months ended September 30, 2011.

 

5. EARNINGS (LOSS) PER REDEEMABLE COMMON SHARE

The earnings (loss) per redeemable common share is calculated as follows for the three and nine months ended September 30, 2011 and 2010, respectively:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Net income (loss) on redeemable shares

   $ 274,609      $ (320,904   $ 173,849      $ (912,656

Less dividend payable to redeemable preferred shareholders

     4,081      $ 2,993        12,242      $ 2,993   

(Less accretion) plus dilution allocated to redeemable preferred shareholders

     (17,656     14,419        (10,889     36,118   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) accretive (dilutive) to redeemable common shareholders

   $ 252,872      $ (309,478   $ 150,718      $ (879,531
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average outstanding redeemable common shares used to compute basic income (loss) per redeemable common share

     7,956        8,110        8,007        8,162   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average outstanding redeemable common shares used to compute diluted income (loss) per redeemable common share

     8,133        8,110        8,184        8,162   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per redeemable common share

   $ 31.78      $ (38.16   $ 18.82      $ (107.76
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per redeemable common share

   $ 31.09      $ (38.16   $ 18.42      $ (107.76
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company Directors who were eligible to receive stock-based compensation for 2011 and 2010 elected to receive Class B Redeemable Common Shares in lieu of deferring this compensation. In addition, one key employee also elected to receive Class B Redeemable Common Shares in lieu of deferring this compensation. The outstanding shares awards consisting of 177 shares at September 30, 2011 are dilutive for the three and nine months ended September 30, 2011 and are included in the diluted loss per redeemable common share calculation. The outstanding share awards, consisting of

 

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226 shares at September 30, 2010 are anti-dilutive for the three and nine months ended September 30, 2010 due to the net loss for those periods and are not included in the diluted loss per redeemable common share calculation.

 

6. SEGMENT INFORMATION

The Company manages its business with three reportable segments: fully-insured dental, self-insured dental and corporate, all other. Fully-insured dental consists of the fully-insured dental HMO, fully-insured dental PPO and fully-insured dental indemnity products. 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 segment information aggregates products with similar economic characteristics. These characteristics include the nature of employer groups, pricing, benefits and underwriting requirements.

The results of the fully-insured 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. These items are assigned to the remainder of the Company’s business, which it identifies as corporate, all other. The Company’s gross profit, which is defined as premium revenue less healthcare services expense, was approximately $3,649,000 and $2,695,000 for the three months ended September 30, 2011 and 2010, respectively. The Company’s gross profit was approximately $9,899,000 and $8,206,000 for the nine months ended September 30, 2011 and 2010, respectively.

Listed below is financial information required for each reportable segment for the three and nine months ended September 30, 2011 and 2010 (amounts in thousands):

 

     Three Months Ended
September 30, 2011
     Three Months Ended
September 30, 2010
 
     Revenues-
External
Customers
     Healthcare
Services
Expense
     Total      Revenues-
External
Customers
     Healthcare
Services
Expense
     Total  

Reportable segments:

                 

Fully-insured dental

   $ 13,089       $ 10,433       $ 2,656       $ 13,160       $ 11,416       $ 1,744   

Self-insured dental

     6,438         5,566         872         6,180         5,335         845   

Corporate, all other

     121            121         106            106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,648       $ 15,999         3,649       $ 19,446       $ 16,751         2,695   
  

 

 

    

 

 

       

 

 

    

 

 

    

Investment income

           22               27   

Realized gains (losses) on investments, net

  

     15            

Other income

           15               16   

Insurance expense

           3,269               3,056   
        

 

 

          

 

 

 

Income (loss) before income tax

  

      $ 432             $ (318
        

 

 

          

 

 

 

Total assets-corporate

         $ 45,691             $ 50,459   
        

 

 

          

 

 

 

 

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     Nine Months Eded
September 30, 2011
     Nine Months Ended
September 30, 2010
 
     Revenues-
External
Customers
     Healthcare
Services
Expense
     Total      Revenues-
External
Customers
     Healthcare
Services
Expense
     Total  

Reportable segments:

                 

Fully-insured dental

   $ 38,892       $ 31,860       $ 7,032       $ 38,841       $ 33,422       $ 5,419   

Self-insured dental

     18,015         15,513         2,502         17,706         15,262         2,444   

Corporate, all other

     365            365         343            343   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 57,272       $ 47,373         9,899       $ 56,890       $ 48,684         8,206   
  

 

 

    

 

 

       

 

 

    

 

 

    

Investment income

           76               84   

Realized gains (losses) on investments, net

  

     15            

Other income

           46               49   

Insurance expense

           9,762               9,581   
        

 

 

          

 

 

 

Income (Loss) before income tax

  

      $ 274             $ (1,242
        

 

 

          

 

 

 

Total assets-corporate

         $ 45,691             $ 50,459   
        

 

 

          

 

 

 

Inter-segment revenues were not significant for the three and nine months ended September 30, 2011 and 2010.

 

7. FEDERAL INCOME TAXES

The Company calculates its year to date income tax provision or benefit by applying the estimated annual effective tax rate for the year to pretax income or loss. The Company’s income tax expense for the three months ended September 30, 2011 was approximately $157,000 with an effective tax rate of 36.4%. The Company’s income tax expense for the three months ended September 30, 2010 was approximately $3,000 due to the fact that the Company revised its 2010 effective tax rate from 35.6% to 26.5% as of September 30, 2010. The income tax expense for the nine months ended September 30, 2011 was approximately $100,000 with an effective tax rate of 36.4%. The income tax benefit for the nine months ended September 30, 2010 was approximately $330,000 with an effective tax rate of approximately 26.5%. Tax years subsequent to 2007 remain open to examination by the Internal Revenue Service (“IRS”), and 2006 remains open to other state and local tax authorities. As of September 30, 2011, the Company is under an examination with the IRS for the 2009 U.S. federal income tax return. The Company has recorded no uncertain tax positions in the tax years that are subject to examination.

 

8. DEBT

In 2003, the Company purchased land and an office building and in connection therewith, the Company executed a mortgage note with a bank, secured by the land and the office building, in the amount of $1,800,000. Interest is payable based on the 30-day LIBOR rate plus 1.75% and was 1.98% and 2.01% at September 30, 2011 and December 31, 2010, respectively. At September 30, 2011, the carrying value of the mortgage note of $810,000 approximates fair value. The Company also entered into an interest rate swap agreement that effectively changed the interest rate related to $1,500,000 of the Company’s $1,800,000 mortgage note with a commercial bank from a variable rate based on the 30-day LIBOR rate plus 1.75% to a fixed rate of approximately 4.95% for the 10-year period through June 12, 2013 (see Note 9). The Company is in compliance with all debt covenants at September 30, 2011 and December 31, 2010.

In 2010, the Company renewed a revolving note with a commercial bank in the amount of $700,000 collateralized by a second mortgage on the office building that matures in December 2011. There was a principal balance outstanding of $650,000 at September 30, 2011 and December 31, 2010. Interest is payable based on the 30-day LIBOR rate plus 1.75% and was 1.98% and 2.01% at September 30, 2011 and December 31, 2010, respectively. At September 30, 2011, the carrying value of the revolving note approximates fair value.

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% and was 2.73% and 2.88% at September 30, 2011 and December 31, 2010, respectively. The Company did not have any interest expense or significant fees for the line of credit for the three and nine months ended September 30, 2011 or 2010. As of September 30, 2011 and December 31, 2010,

 

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there was no amount outstanding on this line of credit. The $500,000 working capital line of credit expires in July 2012.

The Company has an additional annually renewable working capital line of credit for $960,000. Interest is payable at a variable rate of LIBOR plus 2.50% and was 2.73% and 2.88% at September 30, 2011 and December 31, 2010, respectively. The Company did not have any interest expense for the line of credit in the three and nine months ended September 30, 2011 and 2010. At September 30, 2011 and December 31, 2010, there was no amount outstanding on this line of credit. The $960,000 working capital line of credit expires in August 2012. In addition, the Company obtained an irrevocable letter of credit for $40,000, with interest payable on all outstanding amounts at a variable rate of the prime rate of borrowing plus 6.00%. The letter of credit will also have an annual fixed rate of 2.10% for access to the letter of credit obligation. The letter of credit expires in December 2011. At September 30, 2011 and December 2010, there was no amount outstanding on the irrevocable letter of credit obligation.

 

9. FAIR VALUE MEASUREMENTS

The Company classifies the assets and liabilities that require measurement of fair value on a recurring basis 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 September 30, 2011 and December 31, 2010 (amounts in thousands):

 

     September 30, 2011      December 31, 2010  
     Level 1      Level 2      Total
Balance
     Level 1      Level 2      Total
Balance
 

Assets

                 

Fixed maturities

                 

Federally-Insured certificates of deposits

      $ 806       $ 806          $ 608       $ 608   

Investment grade corporate bonds

        2,296         2,296            

Short-term investments

                 

Money market funds

   $ 530            530       $ 556            556   

Federally-Insured certificates of deposits

        401         401            402         402   

Deferred compensation investments (a)

                 

Equity mutual fund investments

     223            223         323            323   

State guarantee fund deposits (b)

                 

Government securities

     233            233         228            228   

Federally-Insured certificates of deposits

        50         50            50         50   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 986       $ 3,553       $ 4,539       $ 1,107       $ 1,060       $ 2,167   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

                 

Interest rate swap (c)

      $ 20       $ 20          $ 28       $ 28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $         $ 20       $ 20       $         $ 28       $ 28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Included as a trading security in other assets
(b) Included in other assets
(c) Included in other payables and accruals

 

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Certain assets and liabilities included in other assets are measured at fair value on a non-recurring basis, and therefore, are not included in the table above. These include long-lived assets such as certain property and equipment items, intangible assets and goodwill measured at cost that are written down to fair value during a period as a result of an impairment. For the three and nine months ended September 30, 2011 and 2010, there were no assets or liabilities that were required to be measured at fair value on a non-recurring basis.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking statements

Portions of this report, including this discussion and the information contained in the notes to the condensed consolidated financial statements, contain forward-looking statements under the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by words such as “may,” “might,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,” “potential,” “likely will result,” or the negative of such terms or similar expressions. These forward-looking statements reflect our current expectations and views about future events and speak only as of the date of this report. The forward-looking statements are subject to risks, uncertainties and other factors that could cause actual events or results to differ materially from those expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements, include, among others: claims costs exceeding our estimates, a downgrade in our financial strength rating, competitive pressures, changes in demand for dental benefits and other economic conditions, the loss of a significant customer or broker, the occurrence or non-occurrence of circumstances beyond our control and those items described in Item 1A – Risk Factors of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date this report is filed.

Overview

Headquartered in Cincinnati, Ohio, we offer dental HMO, dental PPO, dental indemnity and vision PPO benefit plans and related services, primarily to employer groups of two or more employees. As of September 30, 2011, we had approximately 290,600 members in our dental and vision benefit programs with approximately 2,700 dentists participating in our networks of providers. Effective June 1, 2011, the Company entered into a network leasing 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 leasing agreement, Dental Care Plus dental PPO members now have access to approximately 2,100 additional dentists in Ohio, Kentucky and Indiana and approximately 33,900 additional dentists throughout the United States.

We manage our business with three reportable segments: fully-insured dental, self-insured dental, and corporate, all other. 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. Our dental HMO, PPO and indemnity products and our vision product line are primarily marketed to employer groups. The results of our fully-insured and self-insured dental segments are measured by gross profit. We do not measure the results of our corporate, all other segment. We do not allocate investment and other income, insurance expenses, assets or liabilities to our fully-insured and self-insured segments. These items are retained in our corporate, all other segment. Our segments do not share overhead costs and 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.

Many factors have an effect on our results, but most notably our results are influenced by our ability to establish and maintain a competitive and efficient cost structure and to accurately and consistently establish competitive premiums, ASO fees, and plan benefit levels that are commensurate with our dental and administrative costs. Dental costs are subject to a high rate of inflation due to many forces, including new higher priced technologies and dental procedures, new dental service techniques and therapies, an aging population, lifestyle choices, the tort system and government regulations.

 

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Strategy

Our strategy focuses on providing solutions to employers to 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 more choices. Additionally, we have increased the diversification of our membership base, not only through our newer products, but also by entering new geographic territories. We expect our dental PPO products to be important components of growth in the years ahead.

In our original eight county service area, our non-exclusive dental HMO provider network includes over 95% of the dental providers in the market. In that market, our dental HMO provides the broad provider access of a dental PPO along with effective utilization and cost control features.

Highlights

 

   

We had net income of approximately $275,000 for the three months ended September 30, 2011 compared to a net loss of approximately $321,000 for the three months ended September 30, 2010, and we had net income of approximately $174,000 for the nine months ended September 30, 2011 compared to a net loss of approximately $913,000 for the nine months ended September 30, 2010. The profitability in the 2011 quarter and the 2011 period are primarily due to rate increases for fully-insured groups negotiated at renewal in the latter part of 2010 and the first nine months of 2011 and lower healthcare services expense on a per member per month basis for our fully-insured segment primarily due to the introduction of a 10% provider withhold on the in-network portion of dental PPO product effective April 1, 2011.

 

   

To date in 2011, our dental and vision product membership increased by approximately 2,700 members to approximately 290,600 members at September 30, 2011. This membership increase from December 31, 2010 is due to an increase in self-insured membership of approximately 4,200 members and an increase in corporate, all other membership of approximately 2,800 members, offset by a decrease in fully-insured dental membership of approximately 4,300 members. The decrease in fully-insured membership is primarily due to a few employer groups that were acquired and transitioned to their new parent company benefits and fully-insured dental HMO groups that did not renew with the Company or reduced their employee counts in the first nine months of 2011.

 

   

Our ratio of healthcare services expense to premium revenue (“loss ratio”) decreased from 85.6% in the nine months ended September 30, 2010 to 82.7% in the nine months ended September 30, 2011. This loss ratio decrease is due to premium rate increases negotiated with fully-insured employer groups at renewal and a decrease in fully-insured dental healthcare services expense on a per member per month basis in the first nine months of 2011 compared to the first nine months of 2010. The fully-insured dental segment represents approximately 67.9% of our total dental business based on premium revenues.

Comparison of Results of Operations

The following is a discussion of our results of operations for the three months ended September 30, 2011, or the 2011 quarter, the three months ended September 30, 2010, or the 2010 quarter, the nine months ended September 30, 2011 or the 2011 period, and the nine months ended September 30, 2010, or the 2010 period.

The following table presents membership and financial data for our three reportable segments (dollar amounts in thousands):

 

     As of
September 30, 2011
     As of
September 30, 2010
     Change  

Membership:

        

Fully-insured dental

     185,100         191,300         (3.2 %) 

Self-insured dental

     82,800         78,900         4.9

Corporate, all other

     22,700         20,100         12.9
  

 

 

    

 

 

    

Total membership

     290,600         290,300         0.1
  

 

 

    

 

 

    

 

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     Three months ended
September 30, 2011
     Three months ended
September 30, 2010
    Change  

Premium revenue:

       

Fully-insured dental

   $ 13,089       $ 13,160        (0.5 %) 

Self-insured dental

     6,438         6,180        4.2

Corporate, all other

     121         106        14.2
  

 

 

    

 

 

   

Total premium revenue

     19,648         19,446        1.0
  

 

 

    

 

 

   

Investment income

     22         27        (18.5 %) 
  

 

 

    

 

 

   

Realized gains (losses) on investments, net

     15        
  

 

 

      

Other income

     15         16        (6.3 %) 
  

 

 

    

 

 

   

Total revenue

     19,700         19,489        1.1
  

 

 

    

 

 

   

Healthcare services expense:

       

Fully-insured dental

     10,433         11,416        (8.6 %) 

Self-insured dental

     5,566         5,335        4.3

Corporate, all other

          0.0
  

 

 

    

 

 

   

Total healthcare service expense

     15,999         16,751        (4.5 %) 
  

 

 

    

 

 

   

Insurance expense

     3,269         3,056        7.0
  

 

 

    

 

 

   

Income tax expense

     157         3         
  

 

 

    

 

 

   

Net Income (Loss)

   $ 275       $ (321     185.7
  

 

 

    

 

 

   

 

     Nine months ended
September 30, 2011
     Nine months ended
September 30, 2010
    Change  

Premium revenue:

       

Fully-insured dental

   $ 38,892       $ 38,841        0.1

Self-insured dental

     18,015         17,706        1.7

Corporate, all other

     365         343        6.4
  

 

 

    

 

 

   

Total premium revenue

     57,272         56,890        0.7
  

 

 

    

 

 

   

Investment income

     76         84        (9.5 %) 
  

 

 

    

 

 

   

Realized gains (losses) on investments, net

     15        
  

 

 

      

Other income

     46         49        (6.1 %) 
  

 

 

    

 

 

   

Total revenue

     57,409         57,023        0.7
  

 

 

    

 

 

   

Healthcare services expense:

       

Fully-insured dental

     31,860         33,422        (4.7 %) 

Self-insured dental

     15,513         15,262        1.6

Corporate, all other

          0.0
  

 

 

    

 

 

   

Total healthcare service expense

     47,373         48,684        (2.7 %) 
  

 

 

    

 

 

   

Insurance expense

     9,762         9,581        1.9
  

 

 

    

 

 

   

Income tax expense (benefit)

     100         (330      
  

 

 

    

 

 

   

Net Income (Loss)

   $ 174       $ (913     119.1
  

 

 

    

 

 

   

 

* not meaningful

Summary

On a fully diluted basis, earnings per Redeemable Common Share were $31.09 in the 2011 quarter compared to loss per Redeemable Common Share of $38.16 in the 2010 quarter. Earnings per Redeemable Common Share were $18.42 in the 2011 period compared to loss per Redeemable Common Share of $107.76 in the 2010 period. The decrease in the net loss for the 2011 period was primarily due to an increase in total revenue less healthcare services expense of

 

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approximately $1,697,000. Fully-insured premium revenue increased by $51,000 in the 2011 period from the 2010 period, and fully-insured premium on a per member per month basis (“PMPM”) increased by 2.8%, from $22.89 PMPM in the 2010 period to $23.53 PMPM in the 2011 period due to rate increases obtained on renewal business. Fully-insured healthcare services expense decreased by $1,562,000 in the 2011 period from the 2010 period, and fully-insured healthcare services expense on a PMPM basis decreased by 2.1%, from $19.69 PMPM in the 2010 period to $19.28 in the 2011 period. The lower level of dental healthcare services expense on a per member per month basis for our fully-insured products resulted in a decrease in healthcare services expense of $689,000, and the remaining decrease in healthcare services expense of $873,000 was due to a decrease in membership volume in the 2011 period compared to the 2010 period. Self-insured healthcare services expense increased by $251,000 in the 2011 period from the 2010 period. An increase in self-insured membership volume resulted in an increase of $692,000 in the 2011 period that was offset by a decrease in self-insured healthcare services expense of approximately $441,000 due to a 2.8% decrease in self-insured claims on a PMPM basis. Insurance expense increased by $181,000 in the 2011 period compared to the 2010 period. This insurance expense increase is primarily attributable to higher employee benefit, professional consulting and regulatory compliance related expenses in the 2011 period compared to the 2010 period.

Membership

Our fully-insured dental membership decreased by approximately 6,200 members as of September 30, 2011 from September 30, 2010. This membership decrease is primarily attributable to a decrease of approximately 3,300 fully-insured dental HMO members, a decrease of approximately 2,600 fully-insured dental PPO members, and a decrease of approximately 300 fully-insured dental indemnity members underwritten by Dental Care Plus, Inc. (“DCP”). The decrease in fully-insured dental HMO membership of 6,200 members is the result of the loss of approximately 14,400 members due to employer groups that did not renew with the Company or reduced employee counts of retained employer groups, offset by new sales in the Cincinnati and Northern Kentucky markets of approximately 8,200 members. A significant portion of the fully-insured dental HMO membership losses were the result of corporate acquisitions where our employer group customers moved to the new parent company benefit plans. The changes in fully-insured dental PPO membership and fully-insured dental indemnity membership are the result of new sales net of membership losses due to employer groups that did not renew with the Company or reduced employee counts of retained employer groups.

Our self-insured dental membership increased by approximately 3,900 members as of September 30, 2011 from September 30, 2010. This increase is primarily due to the addition of new self-insured dental HMO and dental PPO employer groups in the last twelve months.

Our corporate, all other membership increased by approximately 2,600 members as of September 30, 2011 from September 30, 2010. The increase is primarily due to an increase of approximately 3,100 members in our vision plan, offset by a decrease of approximately 500 dental indemnity members that shifted into the fully-insured segment at renewal.

Revenue

Fully-insured dental premium revenue for the 2011 quarter decreased by approximately $71,000 compared to the 2010 quarter. Fully-insured dental premium rates negotiated with employer groups at their renewals resulted in an increase of approximately $430,000 in fully-insured dental premium revenue. A decrease in fully-insured membership in the 2011 quarter resulted in a decrease in fully-insured dental premiums of approximately $500,000. This decrease is also due to the decrease in fully-insured dental HMO membership that has slightly higher premium rates than the fully-insured dental PPO product.

Fully-insured dental premium revenue for the 2011 period increased by approximately $51,000 compared to the 2010 period. Fully-insured dental premium rates negotiated with employer groups at their renewals resulted in an increase of approximately $1,066,000 in fully-insured dental premium revenue. A decrease in fully-insured membership in the 2011 period resulted in a decrease in fully-insured dental premiums of approximately $1,015,000. This decrease is also due to the decrease in fully-insured dental HMO membership that has slightly higher premium rates than the fully-insured dental PPO product.

Total self-insured dental revenue for the 2011 quarter increased approximately $258,000 compared to the 2010 quarter. Self-insured dental revenue increased by $349,000 due to new self-insured sales. This self-insured revenue increase was offset by a decrease of approximately $91,000 due to a decrease in the self-insured claims revenue on a per member per month basis as a result of lower dental service utilization.

Total self-insured dental revenue for the 2011 period increased approximately $309,000 compared to the 2010 period. Self-insured dental revenue increased by $803,000 due to new self-insured sales. This self-insured revenue increase was offset by a decrease of approximately $494,000 due to a decrease in the self-insured claims revenue on a

 

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per member per month basis as a result of lower dental service utilization. Approximately $147,000 of this decrease was the result of run-out claims in the 2010 period for a larger employer group that was self-insured in 2009 and converted to fully-insured effective January 1, 2010 that did not recur in the 2011 period.

The self-insured segment revenue has two components:

Self-Insured Claim Revenue - Self-insured claim revenue for the 2011 quarter increased approximately $268,000, or 4.6%, to approximately $6,144,000 in the 2011 quarter from approximately $5,876,000 in the 2010 quarter. Self-insured claim revenue increased by approximately $332,000 due to new self-insured sales. This self-insured claims revenue increase was offset by a decrease of approximately $64,000 primarily due to a decrease in the self-insured claims revenue on a per member per month basis as a result of lower dental service utilization.

Self-insured claim revenue for the 2011 period increased approximately $289,000, or 1.7%, to approximately $17,113,000 in the 2011 period from approximately $16,824,000 in the 2010 period. Self-insured claim revenue increased by approximately $763,000 due to new self-insured sales. This self-insured claims revenue increase was offset by a decrease of approximately $474,000 primarily due to a decrease in the self-insured claims revenue on a per member per month basis as a result of lower dental service utilization. Approximately $147,000 of this decrease was the result of run-out claims in the 2010 period for a larger employer group that was self-insured in 2009 and converted to fully-insured effective January 1, 2010 that did not recur in the 2011 period.

Self-Insured ASO Fees - Self-insured ASO fees for the 2011 quarter decreased approximately $10,000, or 3.3%, to approximately $294,000 in the 2011 quarter from approximately $304,000 in the 2010 quarter. Approximately $17,000 of this increase is attributable to the new self-insured product sales. This increase was offset by a decrease of approximately $27,000 due to a small decrease in average self-insured ASO fee rates.

Self-insured ASO fees for the 2011 period increased approximately $21,000, or 2.3%, to approximately $902,000 in the 2011 period from approximately $881,000 in the 2010 period. Approximately $40,000 of this increase is attributable to the new self-insured product sales. This increase was offset by a decrease of approximately $19,000 due to a small decrease in average self-insured ASO fee rates.

Corporate, all other premium revenue is primarily derived from the dental indemnity product and the vision product underwritten by third-party insurance carriers. In aggregate, corporate, all other premium revenue increased by approximately $15,000 in the 2011 quarter compared to the 2010 quarter. In aggregate, corporate, all other premium revenue increased by approximately $22,000 in the 2011 period compared to the 2010 period. This revenue increase was primarily due to the new sales of the vision product discussed above, offset by a revenue decrease related to the shift of approximately 1,500 fully-insured dental PPO members from the corporate, all other segment to the fully-insured segment when the Company assumed the risk on this membership through a reinsurance agreement with a third-party insurance carrier that became effective July 1, 2010.

Investment Income

Investment income for the 2011 quarter decreased approximately $5,000 compared to the 2010 quarter. This decrease is primarily attributable to a decrease in the amount of funds invested in corporate bonds during the 2011 quarter compared to the 2010 quarter as well as lower yields on corporate bonds. Investment income for the 2011 period decreased approximately $8,000 compared to the 2010 period. This decrease is primarily attributable to a decrease in the amount of funds invested in corporate bonds during 2011 period compared to the 2010 period.

Healthcare Services Expense

Fully-insured dental healthcare services expense for the 2011 quarter decreased approximately $983,000 compared to the 2010 quarter. A decrease in fully-insured dental healthcare services expense on a per member per month basis that is in part attributable to the introduction of a 10% provider withhold on the in-network portion of the dental PPO product resulted in a decrease in fully-insured dental healthcare services expense of approximately $549,000. A decrease in fully-insured membership in the 2011 quarter compared to the 2010 quarter resulted in a decrease in fully-insured dental healthcare services expense of approximately $434,000.

Fully-insured dental healthcare services expense for the 2011 period decreased approximately $1,562,000 compared to the 2010 period. A decrease in fully-insured dental healthcare services expense on a per member per month basis that is in part attributable to the introduction of a 10% provider withhold on the in-network portion of the dental PPO product resulted in a decrease in fully-insured dental healthcare services expense of approximately $689,000. A decrease in fully-insured membership in the 2011 period compared to the 2010 period resulted in a decrease in fully-insured dental healthcare services expense of approximately $873,000. The fully-insured segment represents approximately 67.9% of our total dental business.

 

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Self-insured dental healthcare services expense for the 2011 quarter increased approximately $231,000 compared to the 2010 quarter. The self-insured new sales resulted in an increase in self-insured dental healthcare services expense of approximately $301,000. Offsetting this increase was a decrease of approximately $70,000 primarily due to a decrease in the self-insured healthcare services expense on a per member per month basis as a result of lower dental service utilization.

Self-insured dental healthcare services expense for the 2011 period increased approximately $251,000 compared to the 2010 period. The self-insured new sales resulted in an increase in self-insured dental healthcare services expense of approximately $692,000. Offsetting this increase was a decrease of approximately $441,000 primarily due to a decrease in the self-insured healthcare services expense on a per member per month basis as a result of lower dental service utilization. Approximately $147,000 of this decrease is attributable to run-out claims in the 2010 period for a larger employer group that was self-insured in 2009 and converted to fully-insured effective January 1, 2010 that did not recur in the 2011 period.

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 Expense

Consolidated insurance expense for the 2011 quarter increased approximately $213,000 compared to the 2010 quarter. Consolidated insurance expense for the 2011 period increased approximately $181,000 compared to the 2010 period. The higher consolidated insurance expense for both the 2011 quarter and the 2011 period was primarily due to higher employee benefit, professional consulting and regulatory compliance related expenses in the 2011 period compared to the 2010 period. Insurance expense as a percentage of total revenue, or the insurance expense ratio, was 16.6% for the 2011 quarter compared to 15.7% for the 2010 quarter. The insurance expense ratio was 17.0% for the 2011 period compared to 16.8% for the 2010 period.

Income Taxes

The Company calculates its year to date income tax provision or benefit by applying the estimated annual effective tax rate for the year to pretax income or loss. Our income tax expense for the three months ended September 30, 2011 was approximately $157,000 with an effective tax rate of 36.4%. Our income tax expense for the three months ended September 30, 2010 was approximately $3,000 due to the fact that we revised our 2010 effective tax rate from 35.6% to 26.5% as of September 30, 2010. Our income tax expense for the nine months ended September 30, 2011 was approximately $100,000 with an effective tax rate of 36.4%. Our income tax benefit for the nine months ended September 30, 2010 was approximately $330,000 with an effective tax rate of approximately 26.5%. Tax years subsequent to 2007 remain open to examination by the Internal Revenue Service (“IRS”), and 2006 remains open to other state and local tax authorities. As of September 30, 2011, we are under an examination with the IRS for our 2009 U.S. federal income tax return. We have recorded no uncertain tax positions in the tax years that are subject to examination.

Liquidity and Capital Resources and Changes in Financial Condition

Our primary sources of cash include receipts of premiums, ASO fees, investment and other income, as well as the proceeds from the sale or maturity 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 and payments on borrowings. Cash decreased approximately $124,000, or 2.0%, during the 2011 period to approximately $5,937,000 as of September 30, 2011 from approximately $6,061,000 as of December 31, 2010. The change in cash for the 2011 and 2010 periods is summarized as follows (in thousands):

 

     Nine months ended September 30,
2011
    Nine months ended September 30,
2010
 

Net cash provided by (used in) operating activities

   $ 459      $ (1,187

Net cash used in investing activities

     (270     (1,980

Net cash provided by (used in) financing activities

     (313     163   
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

   $ (124   $ (3,004
  

 

 

   

 

 

 

Cash Flows from Operating Activities

In the 2011 period, approximately $459,000 was provided by operating activities. We had net income of approximately $174,000. Non-cash depreciation and amortization expense was approximately $206,000 in the 2011

 

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period compared to approximately $391,000 in the 2010 period. In addition, no cash was paid related to income taxes in the 2011 period or the 2010 period.

In the 2011 period, our claims payable liability decreased by approximately $285,000 to approximately $2,491,000 at September 30, 2011 from approximately $2,776,000 at December 31, 2010. This decrease is primarily the result of a decrease in the number of fully-insured dental members. The increase in our unearned premium revenue liability of approximately $1.1 million, to approximately $30.6 million at September 30, 2011 from approximately $29.5 million at December 31, 2010 and the increase in unbilled accounts receivable of approximately $1.1 million to approximately $29.1 million at September 30, 2011 from $28.1 million at December 31, 2010 are primarily attributable to the renewal of a large portion of our fully-insured dental HMO, PPO and indemnity employer groups on January 1, 2011 that are non-cancelable by DCP. Deferred acquisition costs increased by approximately $83,000 in the 2011 period primarily due to the contract renewals discussed above. Other payables and accruals expenses increased by approximately $414,000 primarily due to an increase in our accrued payroll liability of approximately $323,000 and an increase in federal income tax payable of approximately $100,000. Other assets decreased by approximately $81,000 primarily due to a decrease in deferred compensation investments of approximately $100,000, offset by increases in certain other assets totaling $19,000. The remaining effects of changes in operating assets and liabilities that represent fluctuations in these assets and liabilities are not significant and are consistent with the 2010 period.

Cash Flows from Investing Activities

In the 2011 period, we invested approximately $97,000 in building improvements, furniture and fixtures and computer equipment. During the 2011 period, we made purchases totaling approximately $6.1 million of investment grade corporate bonds, certificates of deposit and institutional money market funds in order to improve investment income. Also during the 2011 period, we had investment grade corporate bond sales, certificate of deposit maturities and institutional money market sales that together totaled approximately $6.0 million.

Cash Flows from Financing Activities

In the 2011 period, we made the scheduled principal payments of approximately $90,000 related to our office building mortgage and scheduled payments of approximately $78,000 related to our capital lease. During the 2011 period, we repurchased Redeemable Common Shares with a value of approximately $128,000 and issued no Redeemable Common or Preferred Shares. We also paid dividends to holders of our Redeemable Provider Preferred and Institutional Preferred Shares of approximately $17,000 in the 2011 period.

Provider Withhold Funds

In most cases, our reimbursement to our participating providers for covered dental services under the dental HMO and the dental PPO are generally subject to a 10% withhold by us. The 10% withhold related to the dental PPO product was effective April 1, 2011. 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 dental providers have no vested rights in the amounts withheld unless our Board of Directors authorizes that any amounts withheld shall be paid to the providers, and then vesting is only to the extent of such amounts authorized to be paid by the Board. Once authorized for payment by the Board, such amounts are recorded as claims payable liabilities until paid.

In the 2011 and 2010 period, we paid no withhold return to participating providers because a withhold return was not authorized by the Board of Directors.

Contractual Obligations, other Commitments and Off-balance Sheet Arrangements

Refer to the Company’s 2010 Annual Report on Form 10-K filed with the SEC for a description of contractual obligations, other commitments and off-balance sheet arrangements. We have had no significant changes in these items in the 2011 period.

Financial Condition

Our consolidated cash and short-term investments were approximately $6.9 million as of September 30, 2011 and approximately $7.0 million as of December 31, 2010. Based on total expenses for the nine months ended September 30, 2011, we estimate that we had approximately 32 days of cash and short-term investments on hand at September 30, 2011. In addition, the Company has access to approximately $3.1 million of fixed maturity investments that are classified as available-for-sale and two working capital lines of credit discussed below.

Our cash and short-term investments totaled approximately $6.9 million at September 30, 2011 due to the decrease in cash of approximately $124,000 during the 2011 period and the decrease in short-term investments of approximately $28,000 during the 2011 period. The decrease in cash was primarily due to the cash used in investing and financing

 

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activities of approximately $583,000, offset by the cash provided by operating activities of approximately $459,000. We expect to generate positive cash flow from operations during the balance of 2011.

In July 2011, we renewed an annually renewable agreement with a commercial bank for a $500,000 working capital line of credit. Interest was payable at a variable rate of LIBOR plus 2.50% and was 2.73% and 2.88% at September 30, 2011 and December 31, 2010, respectively. We did not have any interest expense or significant fees for the line of credit in the 2011 period or the 2010 period. As of September 30, 2011 and December 31, 2010, there was no amount outstanding on this line of credit. The $500,000 working capital line of credit expires in July 2012.

In August 2011, we renewed a second working capital line of credit for $960,000. Interest is payable at a variable rate of LIBOR plus 2.50% and was 2.73% and 2.88% at September 30, 2011 and December 31, 2010, respectively. The Company did not have any interest expense for the line of credit in the 2011 period or the 2010 period. At September 30, 2011 and December 31, 2010, there was no amount outstanding on this line of credit. The $960,000 working line of credit expires in August 2012. In addition, we renewed an irrevocable letter of credit for $40,000, with interest payable on all outstanding amounts at a variable rate of the prime rate of borrowing plus 6.00%. The letter of credit will also have an annual fixed rate of 2.10% for access to the letter of credit obligation. The letter of credit expires in December 2011. At September 30, 2011 and December 2010, there was no amount outstanding on the irrevocable letter of credit obligation.

On December 30, 2010, we renewed our revolving note with a commercial bank in the amount of $700,000 collateralized by a second mortgage on our office building. As of September 30, 2011, there was a principal balance outstanding of $650,000 related to this revolving note. This revolving note matures on December 15, 2011, is annually renewable and requires us to make monthly interest payments at a variable rate of 30-day LIBOR plus 1.75%, or 1.98% at September 30, 2011. Under this revolving note, we are required to have a minimum tangible net worth equal to or greater than $2.5 million at the end of each fiscal year, and we are in compliance with this covenant. As of September 30, 2011, we expect to renew the revolving note in December 2011.

We believe our premium revenues, cash, investments and working capital lines of credit are sufficient to meet our short-term and long-term liquidity needs. In the short-term, we are obligated to make payments related to our contractual obligations such as our healthcare services expense, building mortgage, and our capital and operating leases and other commitments, including future payment of key employee and director deferred compensation obligations. In the long-term, we will continue to be obligated to make payments related to our other contractual obligations. We will also be obligated in certain circumstances to repurchase the Redeemable Common Shares and Redeemable Provider Preferred Shares of our provider shareholders who die, become permanently disabled or retire. We will also be obligated in certain circumstances to repurchase the Redeemable Institutional Preferred Shares upon redemption request. Our Board of Directors establishes limitations on the amount of share redemptions each year. While we are not able to estimate future redemptions of our Redeemable Common Shares, Redeemable Provider Preferred Shares and Redeemable Institutional Preferred Shares, we believe our cash balances, 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 next twelve months.

Our largest subsidiary, DCP, 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 DCP, without prior approval by state regulatory authorities, is limited based on statutory income and statutory capital and surplus. Even if prior approval is not required, prior notification must be provided to state agencies in Ohio, Kentucky and Indiana before paying a dividend. There were no dividends declared or paid in the 2011 or 2010 period.

A.M. Best Company 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. Our B- (Fair) rating was affirmed in April 2010 and May 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.

We attempt to reduce overall risk by maintaining a well-diversified fixed-maturity portfolio. We invest in certificates of deposits, investment grade corporate bonds and money market funds, targeting what we believe to be optimal risk-adjusted after-tax yields. Risk, in this context, includes interest rate, call, reinvestment rate, credit and liquidity risk. We do not make a concerted effort to alter duration on a portfolio basis in response to anticipated movements in interest rates. By continually investing in certificates of deposits, money market funds and investment grade corporate bonds, we believe the portfolio mitigates the impact of adverse economic factors. As of September 30, 2011, we had approximately $1,711,000 or 75% of the total fair value of investment grade corporate bonds with a Standard & Poor’s rating of A- or

 

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better. The remaining investment grade corporate bonds had a fair value of approximately $585,000 with a Standard & Poor’s rating of BBB- or better. The weighted average yield-to-book value of our investment grade corporate bonds was approximately 4.51% at September 30, 2011. The weighted average maturity of our investment grade corporate bonds was 8.23 years at September 30, 2011.

Critical Accounting Policies

Claims Payable Liability

We estimate 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 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 condensed consolidated statements of operations for the period in which the differences are identified. The amounts have not been material.

We develop our estimate for claims payable liability using actuarial methodologies and assumptions, 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. For periods prior to the most recent month, we calculate a “completion factor” which indicates 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 factor to determine historical patterns over a rolling 12-month period, made consistent by making adjustments for known changes in claims in process levels and known changes in claim payment processes. 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. When developing our estimate for claims payable liability as of December 31, 2010, we considered actual paid claim data from January 2011. As a result, we were able to use the completion factors approach for all historical months at December 31, 2010.

We have not changed the key actuarial methodologies used by management to estimate the IBNR and reported claims in process components of our claims payable liability during the periods presented, and management has not adjusted any of the key methodologies used in calculating the most recent estimate of the IBNR and reported claims in process components of our claims payable liability. Our assumptions in the 2011 period for the claims trend factor used to estimate incurred claims for September 30, 2011 are consistent with the dental services utilization levels we experienced in 2009, 2010 and first three quarters of 2011 and our expectation that this level of utilization may continue in the future.

The table set forth below illustrates how our operating results are affected 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 and claims trend factors that were used to estimate the claims payable liability as of September 30, 2011 within variance ranges historically experienced.

 

Completion Factor (a)

  

Claims Trend Factor (b)

(Decrease)

Increase

       

Estimated claims
payable liability

as of

  

(Decrease)

Increase

       

Estimated claims
payable liability

as of

In Factor

       

9/30/2011

  

In Factor

       

9/30/2011

(0.5)%

      2,703,402    (5)%       2,327,168

0%

   (estimate used)    2,491,615    0%    (estimate used)    2,491,615

0.5%

      2,337,135    5%       2,656,062

 

(a) Reflects estimated potential changes in incurred claims payable liability caused by changes in completion factors for months prior to the most recent month.

 

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(b) Reflects estimated potential changes in incurred claims payable liability caused by annualized claims trend used for the estimation of the per member per month incurred claims for the most recent month.

Based on historical experience, we believe the completion factors we use to estimate outstanding IBNR and reported claims in process are reliable for predicting actual claims paid at future times, with a variance range of approximately one-half of one percent, plus or minus. The claims trend factors we use to estimate outstanding IBNR and reported claims in process for the most recent month are somewhat less reliable based on historical experience, with a variance range of approximately five percent, plus or minus. We have found that the estimated claims trend factor can be higher or lower than what the paid claims data indicates with the passage of time primarily because of factors beyond our control, such as the level of utilization of services by dental members and the expected and actual mix of the types of services received by dental members.

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 2010, our quarterly healthcare services expense was slightly below average in the first quarter, above average in the second quarter, significantly higher than average in the third quarter and lowest in the fourth quarter. In 2011, our first quarter healthcare services expense was higher than the first quarter of 2010. This increase was primarily due to the higher level of fully-insured dental healthcare services expense on a per member per month basis. Our healthcare services expense for the second quarter of 2011 was lower than the second quarter of 2010 primarily due to the introduction of a provider withhold to the dental PPO product effective April 1, 2011. In general, claims are high in the first quarter because almost all of our employer-sponsored benefits reset on January 1. The third quarter 2011 claim level was lower than the third quarter 2010 claim level due to the dental PPO product withhold and was higher than second quarter 2011 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 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. The following shows these trends in tabular form:

 

     Healthcare Service Expense  
    

2011

    

2010

 
     $000’s      $PMPM      $000’s      $PMPM  

First Quarter

   $ 16,190       $ 20.31       $ 15,542       $ 19.58   

Second Quarter

     15,184         19.11         16,239         20.25   

Third Quarter

     15,999         19.98         16,751         20.81   

Fourth Quarter

           14,610         18.19   

Risk-Based Capital

Our regulated subsidiary’s state of domicile has statutory risk-based capital, or RBC, requirements for health and other insurance companies largely based on the NAIC’s RBC Model Act. These RBC requirements are intended to measure capital adequacy, taking into account the risk characteristics of an insurer’s investments and products. The NAIC sets forth the formula for calculating the RBC requirements, which are designed to take into account asset risks, insurance risks, interest rate risks and other relevant risks with respect to an individual insurance company’s business. In general, an insurance company must submit a report of its RBC level to the state insurance department or insurance commissioner, as appropriate, at the end of each calendar year. Our subsidiary’s risk-based capital as of December 31, 2010, which was the most recent date for which reporting was required, was in excess of all mandatory RBC thresholds.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 affect future interest expense for debt obligations that have a variable rate of interest associated with them.

At September 30, 2011 and December 31, 2010, respectively, our investment portfolio consisted of approximately $530,000 and $556,000 of institutional money market funds. Our portfolio also included approximately $2,296,000 and

 

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$2,360,000 of investment grade corporate bonds and approximately $1,206,000 and $1,010,000 of investments in FDIC-insured bank certificates of deposits at September 30, 2011 and December 31, 2010, respectively. In August 2011, we engaged a fixed income investment manager to manage our investment grade corporate bond portfolio under the Company’s direction. We have instructed our investment manager to continue to limit our corporate bond investments to investment grade corporate bonds, and invest in investment grade corporate bonds with maturities of up to ten years. As a result, as of August 2011, we reclassified our investment grade corporate bond portfolio from held to maturity to available for sale. We expect investment in investment grade corporate bonds with longer durations will result in increased investment income in the balance of 2011 and beyond.

However there is increased interest rate risk associated with our investment in longer duration investment grade corporate bonds. 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 $169,000 decrease in fair value, whereas a 100 basis point decrease in interest rates would result in an approximate $174,000 increase in fair value. The investment grade corporate bonds with a fair value of $2,296,000 and $2,360,000 at September 30, 2011 and December 31, 2010, respectively, are all classified as available for sale. The certificates of deposit with a cost of $1,200,000 at September 30, 2011 and $1,000,000 at December 31, 2010 are all classified as available-for-sale.

At September 30, 2011 and December 31, 2010, we had a mortgage note with a bank with an outstanding principal balance of $810,000 and $900,000, respectively, with a variable rate based on LIBOR plus 1.75%. However, in June 2003, we entered into a variable to fixed interest rate swap contract that effectively eliminated the interest rate risk exposure on all but $300,000 of the outstanding loan principal. Management estimates that a 100 basis point increase in interest rates would decrease our annual pre-tax earnings by $3,000.

At September 30, 2011 and December 31, 2010, we had a revolving note with a commercial bank with an outstanding principal balance of $650,000 with a variable rate based on LIBOR plus 1.75%. Management estimates that a 100 basis point increase in interest rates would decrease our annual pre-tax earnings by $6,500.

ITEM 4. 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 (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the design and effectiveness of the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2011. Based on the evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2011.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Securities Exchange Act Rules 13a-15(f) and 15(d)-15(f)) during the three and nine months ended September 30, 2011 that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

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PART II. OTHER INFORMATION

ITEM 1. 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 1A. RISK FACTORS

Certain factors may have a material adverse effect on our business, financial condition and results of operations and you should carefully consider them. It is not possible to predict or identify all such factors. For discussion of our potential risks or uncertainties, refer to Part I, Item 1A, Risk Factors, included in our 2010 Annual Report on Form 10-K. There have been no material changes to the risk factors disclosed in our 2010 Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We repurchased and retired 33 Class B Redeemable Common Shares during the three months ended September 30, 2011 as follows:

 

Period

   Total Class A
shares
purchased
    Total Class B
shares
purchased
    Average price
paid per share
     Total Number of Shares
Purchased as Part of a
Publicly Announced
Plans or Programs
     Maximum Number of
Shares that May Yet Be
Purchased Under  the
Plans or Programs
 

July 1 – Julyl 31, 2011

     0        0      $ 0.00         0         N/A   

August 1 – August 31, 2011

     3 (a)      33 (a)    $ 617.89         0         N/A   

September 1 – September 30, 2011

     0        0      $ 0.00         0         N/A   

 

(a) 

Repurchased from shareholder in accordance with the Company’s obligations under its Amended and Restated Code of Regulations.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

None.

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

 

Exhibits

     
  31.1    CEO certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
  31.2    CFO certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
  32    CEO and CFO certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    Financial statements from the quarterly report on Form 10-Q of DCP Holding Company and Subsidiaries for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Redeemable Shares and Shareholder’s Equity, (iv) the Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements

SIGNATURES

Pursuant to the requirements of the Securities and 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
      November 14, 2011    

By: /s/ Anthony A. Cook

      Anthony A. Cook.
      President, Chief Executive Officer and Director
      Principal Executive Officer
      November 14, 2011    

By: /s/ Robert C. Hodgkins, Jr.

      Robert C. Hodgkins, Jr.
      Vice President and Chief Financial Officer
      Principal Executive Officer

 

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INDEX TO EXHIBITS

Exhibit
No.

  

Item

  31.1    Certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002
  31.2    Certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002
  32    Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    Financial statements from the quarterly report on Form 10-Q of DCP Holding Company and Subsidiaries for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Redeemable Shares and Shareholder’s Equity, (iv) the Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statement