UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

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FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

For this fiscal year ended December 31, 2014

 

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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	(IRS Employer Identification No.)
Incorporation or Organization)

 

100 Crowne Point Place	45241
Sharonville, Ohio	(Zip Code)
(Address of Principal Executive Office)

 

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

 

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Securities registered pursuant to section 12(b) of the Act:

 

TITLE OF EACH CLASS TO BE SO REGISTERED	NAME OF EACH EXCHANGE ON WHICH EACH CLASS IS TO BE REGISTERED
NOT APPLICABLE	NOT APPLICABLE

 

Securities registered pursuant to section 12(g) of the act:

 

Class A Redeemable Common Shares, no par value

Class B Redeemable Common Shares, no par value

Class C Redeemable Common Shares, no par value

 

 (Title of Class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    

 

YES      NO  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    

 

YES      NO  ☒

 

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 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  ☒    NO  ☐ 

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

YES  ☒    NO  ☐

  

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☐ 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  

 

 

Large accelerated filer ☐       Accelerated filer ☐        Non-accelerated filer ☒          Smaller reporting Company ☐

 

(Do not check if 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  ☒

 

As of June 30, 2014, the aggregate book value of the registrant’s Redeemable Common Shares, without par value, held by non-affiliates of the registrant was approximately $7.5 million. The value of a redeemable common share is based on the book value per share in accordance with the Company’s Articles of Incorporation and Code of Regulations. As of June 30, 2014, the number of Class A, Class B and Class C Redeemable Common Shares outstanding was 537; 7,678; and 0 respectively.

 

The number of Class A , Class B and Class C Redeemable Common Shares, without par value, outstanding as of March 6, 2015 was 529; 7,821; and 321, respectively.

 

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DOCUMENTS INCORPORATED BY REFERENCE

 

Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 22, 2015, into Part III, Items 10, 11, 12, 13 and 14

 

 

TABLE OF CONTENTS

 

		PAGE
	Part I
ITEM 1.	Business	1
ITEM 1A.	Risk Factors	12
ITEM 1B.	Unresolved staff comments	16
ITEM 2.	Properties	16
ITEM 3.	Legal proceedings	16
ITEM 4.	Mine safety disclosures	16
	Part II
ITEM 5.	Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities	16
ITEM 6.	Selected financial data	17
ITEM 7.	Management’s discussion and analysis of financial condition and results of operations	17
ITEM 7A.	Quantitative and qualitative disclosures about market risk	32
ITEM 8.	Financial statements and supplementary data	34
ITEM 9.	Changes in and disagreements with accountants on accounting and financial disclosure	56
ITEM 9A.	Controls and procedures	56
ITEM 9B.	Other information	56
	Part III
ITEM 10.	Directors, executive officers and corporate governance	57
ITEM 11.	Executive compensation	57
ITEM 12.	Security ownership of certain beneficial owners and management and related stockholder matters.	57
ITEM 13.	Certain relationships and related transactions, and director independence	57
ITEM 14.	Principal accounting fees and services	57
	Part IV
ITEM 15.	Exhibits, financial statement schedules	58
SIGNATURES		65
INDEX TO EXHIBITS		67

 

 

FORWARD LOOKING STATEMENTS

 

This report contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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 words or other 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 contained in the section entitled “Item 1A. Risk Factors.” We do not undertake any obligation to update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of this report.

  

 

PART I

 

 

ITEM 1.

BUSINESS

 

Overview

 

Headquartered in Cincinnati, Ohio, DCP Holding Company, doing business as the Dental Care Plus Group (“DCPG” or the “Company”), offers to employer groups of all sizes dental health maintenance organization (“HMO”), participating provider organization (“PPO”) and indemnity plans for dental care services and vision benefit plans. In 2014, the Company began offering low cost dental PPO plans to individuals and small groups on the federally facilitated market exchange in Ohio (“Ohio exchange”) and individual dental HMO plans in southwest Ohio. As of December 31, 2014, we had approximately 307,000 members in our dental benefit plans and approximately 28,900 members in our vision benefit plans. We market our products through a network of independent brokers and consultants.

 

We had 2,808 dentists participating in our dental HMO network and 3,047 dentists participating in our dental PPO network at December 31, 2014. The Company has 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, our Company dental PPO members now have access to approximately 2,500 additional dentists in our operating territories and approximately 42,700 additional dentists throughout the United States. The Company also has a network leasing arrangement with a national dental administration company for the dental PPO plans that it offered on the Ohio exchange in 2014. With this network leasing arrangement, Ohio exchange members have access to approximately 1,600 dentists in Ohio.

 

DCP Holding Company is the parent holding company, which includes wholly-owned subsidiaries Dental Care Plus, Inc., or Dental Care Plus, an Ohio corporation, Insurance Associates Plus, Inc., or Insurance Associates Plus, an Ohio corporation, and Adenta, Inc., or Adenta, a Kentucky corporation. We are owned and controlled primarily by 531 dentists who also participate in our Dental Care Plus plans.

 

As an Ohio-domiciled insurance company dually licensed as a life and health insurer and a specialty health insuring corporation, Dental Care Plus is able to underwrite dental indemnity, dental PPO, dental HMO, and vision benefit products as well as other life and health oriented products.

 

Business Segments

 

We manage our business with four reportable segments: fully-insured dental HMO and indemnity (“dental HMO/IND”), fully-insured dental PPO, self-insured dental, and corporate, all other. Corporate, all other consists of revenue associated with our dental PPO and vision products underwritten by third-party insurance carriers and certain corporate activities.

 

The results of our fully-insured dental HMO and indemnity, fully-insured dental PPO and self-insured dental segments are measured by gross profit, which is premium revenue less healthcare services expense. We do not allocate insurance expenses, investment and other income, interest expense, or other assets or liabilities to our fully-insured dental and self-insured dental segments. These items are retained in our corporate, all other segment. Our segments do not share overhead costs and assets. See footnote 17 to our consolidated financial statements for financial information regarding our segments.

 

 

Managed Dental Benefits Market

 

The following table shows the estimated 2013 and 2012 dental enrollment statistics for the United States:

 

 

		Estimated								Estimated								%
		2013				% of				2012				% of				Change
		Enrollment				Total				Enrollment				Total					2012 to 2013
Dental HMO			12,217,084				7.9	%			12,355,672				8.0	%			-1.1	%
Dental EPO			1,466,792				0.9	%			-
Dental PPO			121,041,576				78.0	%			120,747,901				78.4	%			0.2	%
Dental Indemnity			10,550,691				6.8	%			11,288,103				7.3	%			-6.5	%
Discount Dental			9,268,117				6.0	%			9,001,155				5.8	%			3.0	%
Direct Reimbursement			673,393				0.4	%			599,292				0.4	%			12.4	%
Total Commercial Dental			155,217,653				100.0	%			153,992,123				100.0	%			0.8	%
Medicaid / SCHIP			30,725,441								29,349,567								4.7	%
Other Public			5,511,293								3,920,050								40.6	%
Total Publicly Funded Dental			36,236,734								33,269,617								8.9	%
Estimated Total Dental			191,454,387								187,261,740								2.2	%

 

Source: NADP & Delta Dental Association Joint Dental Benefits Report, August 2014 and September 2013

 

According to the National Association of Dental Plans (“NADP”), in 2013 approximately 191.5 million persons residing in the United States were covered by some form of dental benefit through employer-sponsored group plans, other group or individual plans, or publicly funded dental coverage. These enrolled members represent approximately 61% of the U.S. population. This enrollment level represents an increase of approximately 2.2% from the estimated 2012 enrollment level of 187.3 million persons. This enrollment increase is primarily due to a 8.9% increase in publicly funded dental enrollment and in part due to a 0.8% increase in commercial dental enrollment in 2013 resulting from increases in both the dental PPO, discount dental and direct reimbursement product categories. Dental PPO product enrollment as a percentage of total commercial enrollment has decreased to 78.0% of total commercial enrollment in 2013.

 

  

The following table shows the estimated 2013 and 2012 dental enrollment statistics for Ohio and Kentucky, the two primary states in which we had group dental business:

 

		Ohio
		Estimated								Estimated								%
		2013				% of				2012				% of				Change
		Enrollment				Total				Enrollment				Total					2012 to 2013
Dental HMO			353,584				5.2	%			300,259				5.1	%			17.8	%
Dental EPO			38,933				0.6	%			-
Dental PPO			4,765,709				70.9	%			4,456,258				75.1	%			6.9	%
Dental Indemnity			137,199				2.0	%			161,002				2.7	%			-14.8	%
Discount Dental			158,825				2.4	%			128,003				2.2	%			24.1	%
Direct Reimbursement			11,274				0.2	%			11,274				0.2	%			0.0	%
Medicaid / SCHIP			743,471				11.0	%			616,773				10.4	%			20.5	%
Other Public			514,738				7.7	%			257,489				4.3	%			99.9	%
Total Dental			6,723,733				100.0	%			5,931,058				100.0	%			13.4	%

 

 

		Kentucky
		Estimated								Estimated								%
		2013				% of				2012				% of				Change
		Enrollment				Total				Enrollment				Total					2012 to 2013
Dental HMO			76,804				2.9	%			47,831				1.9	%			60.6	%
Dental PPO			1,528,937				58.5	%			1,440,155				57.8	%			6.2	%
Dental Indemnity			123,018				4.7	%			136,700				5.5	%			-10.0	%
Discount Dental			38,826				1.5	%			31,713				1.3	%			22.4	%
Direct Reimbursement			5,421				0.2	%			5,421				0.2	%			0.0	%
Medicaid / SCHIP			566,878				21.7	%			566,896				22.8	%			0.0	%
Other Public			272,369				10.4	%			261,955				10.5	%			4.0	%
Total Dental			2,612,253				100.0	%			2,490,671				100.0	%			4.9	%

 

Source: NADP & Delta Dental Association Joint Dental Benefits Reports dated August 2014 and September 2013

 

According to the NADP, total dental HMO enrollment in Ohio increased 17.8% in 2013 compared to 2012, whereas dental HMO enrollment in the United States decreased by approximately 1.1%. Total dental PPO enrollment in Ohio increased by 6.9% in 2013 compared to 2012, compared to the national dental PPO increase of 0.2%. In Ohio, total dental indemnity enrollment decreased by 14.8%, whereas national dental indemnity enrollment decreased by approximately 6.5%. Total discount dental enrollment in Ohio increased by 24.1%, whereas total discount dental enrollment in the United States increased less, by 3.0%. Total direct reimbursement dental enrollment in Ohio remained consistent between 2012 and 2013, whereas national direct reimbursement enrollment increased by approximately 12.4%. Medicaid / State Children’s Health Insurance Program (“SCHIP”) dental enrollment in Ohio increased by 20.5% in 2013 compared to 2012, compared to the national Medicaid / SCHIP dental enrollment increase of 4.7%. Other publicly funded dental enrollment in Ohio increased by 99.9% in 2013 compared to 2012, compared to the national other publicly funded dental enrollment increase of 40.6%.

 

Total dental HMO enrollment in Kentucky increased 60.6% in 2013 compared to 2012, while dental HMO enrollment in the United States decreased by approximately 1.1%. Total dental PPO enrollment in Kentucky increased by 6.2% in 2013 compared to 2012, which represents a larger percentage increase than the national dental PPO increase of 0.2%. In Kentucky, total dental indemnity enrollment decreased by 10.0%, compared to a decrease in national dental indemnity enrollment of 6.5%. Total discount dental enrollment in Kentucky increased by 22.4%, whereas total discount dental enrollment in the United States increased by only 3.0%. Total direct reimbursement dental enrollment in Kentucky remained consistent between 2012 and 2013, whereas national direct reimbursement enrollment increased by approximately 12.4%. Medicaid / SCHIP dental enrollment in Kentucky remained consistent in 2013 compared to 2012, compared to the national Medicaid / SCHIP dental enrollment increase of 4.7%. Other publicly funded dental enrollment in Kentucky increased by 4.0% in 2013 compared to 2012, compared to the national publicly funded dental enrollment increase of 40.6%.

 

 

Our Products

 

The following table presents our product membership, premiums and administrative services only (“ASO”) fees in our respective business segments for the three years ended December 31:

 

 

2014		Membership				Premiums (000's)				Other Fees (000's)				Total Premium Revenue (000's)				Percent of Total Premium Revenue
Fully-Insured Dental HMO/IND			155,200			$	47,948							$	47,948				52.2	%
Fully-Insured Dental PPO			60,100				16,459								16,459				17.9	%
Self-Insured Dental			91,700				25,549	(1)		$	1,356	(2)			26,905				29.2	%
Other Products			28,900				-				624	(3)			624				0.7	%
Total			335,900			$	89,956			$	1,980			$	91,936				100.00	%

 

2013		Membership				Premiums (000's)				Other Fees (000's)				Total Premium Revenue (000's)				Percent of Total Premium Revenue
Fully-Insured Dental HMO/IND			153,000			$	46,655							$	46,655				54.0	%
Fully-Insured Dental PPO			50,600				13,495								13,495				15.6	%
Self-Insured Dental			88,400				24,358	(1)		$	1,283	(2)			25,641				29.7	%
Other Products			27,200				-				572	(3)			572				0.7	%
Total			319,200			$	84,508			$	1,855			$	86,363				100.00	%

 

2012		Membership				Premiums (000's)				Other Fees (000's)				Total Premium Revenue (000's)				Percent of Total Premium Revenue
Fully-Insured Dental HMO/IND			148,500			$	43,844							$	43,844				54.7	%
Fully-Insured Dental PPO			43,400				11,429								11,429				14.3	%
Self-Insured Dental			84,400				23,131	(1)		$	1,249	(2)			24,380				30.4	%
Other Products			23,500				-				500	(3)			500				0.6	%
Total			299,800			$	78,404			$	1,749			$	80,153				100.00	%

 

(1)	Self-insured dental premium revenue or premium equivalent revenue is based on the gross amount of claims incurred by self-insured members and is recognized as revenue when those claims are paid.

(2)	Self-insured ASO fees are the administrative fees we charge to self-insured employers to manage their provider network and to process and pay claims. ASO fees are recognized as revenue when they are earned.

(3)	Other product fees are marketing and administrative fees we charge to third party insurance carriers that underwrite our vision benefit plan and one of our dental indemnity benefit plans.

 

Our dental enrollment increased 5.1% in 2014 compared to 2013 and increased by 5.6% in 2013 compared to 2012.

 

Our products primarily consist of dental HMO, dental indemnity and dental PPO plans, with fully-insured products constituting 70.1% of our total revenues for 2014. Substantially all of our products are marketed to employer groups through insurance brokers and consultants. Our business model allows us to offer dental benefit products including broad networks of participating dentists while at the same time promoting the use of private practice fee-for-service dentistry, a primary interest of our participating dentists. The dental benefit products we offer currently vary depending on geographic markets. Our ability to offer either a dental indemnity plan or dental PPO plan has had a positive impact on our membership growth.

 

 

We currently market our group dental products to employers in Ohio, Kentucky and Indiana. In general, our other, non-HMO products are offered in all counties in Ohio, Kentucky and Indiana. We have not offered our group PPO product in the eight county area Dental Care Plus has been serving since 1986. This area, which we refer to as our original eight county service area, includes Butler, Clermont, Hamilton and Warren counties in Ohio, and Boone, Campbell, Kenton and Pendleton counties in Kentucky. Our products may be offered to employer groups as “bundles,” where the subscribers are offered a combination of dental HMO, dental PPO and dental indemnity options, with various employer contribution strategies as determined by the employer.

 

Individuals may become subscribers of our group dental plans through their employers and qualified family members of these subscribers become members through such individuals. Employers may pay for all or part of the premiums, and make payroll deductions for any premiums payable by the employees.

 

Effective January 1, 2014, we commenced offering fully insured individual and small group dental PPO plans on the Ohio exchange. This new business is included in our fully insured dental PPO segment. Effective October 1, 2014, we commenced offering fully insured individual dental HMO plans in southwestern Ohio. This new business is included in our fully insured dental HMO segment.

 

Fully-Insured Dental HMO and Indemnity

 

Our fully-insured dental HMO/IND products segment includes our Dental Care Plus dental HMO and our DentaPremier dental indemnity products.

 

Dental Care Plus- Under our group dental HMO, premiums are paid to Dental Care Plus by the employer, and members receive access to our HMO network. Plan designs range from full premium payouts by the employer to shared contributions of varying proportions by the employer and its employees to full payment by the employees. There are no waiting periods and there is no balance billing in our fully-insured dental HMO; however, it includes cost-sharing with the member, through premium contributions, co-payments and annual deductibles. Under our individual dental HMO, premiums are paid to Dental Care Plus by the individual subscriber, and the subscriber and their dependents receive access to our HMO network. Dental Care Plus offers a limited number of plan designs to the individual market. The individual dental HMO plans have waiting periods on basic dental services and major dental services. If the member has been a member with Dental Care Plus within the last year, Dental Care Plus will waive these waiting periods. For the year ended December 31, 2014, fully-insured dental HMO premiums totaled approximately $46.5 million, or 50.6% of our total premiums and ASO fees.

 

DentaPremier- We offer DentaPremier, our dental indemnity product underwritten by Dental Care Plus, to employers who participate in our Dental Care Plus HMO fully-insured and self-insured plans with out-of-area members or members that require complete freedom of provider access. Employers and their participating employees typically share the cost of premiums in various contribution proportions. Members are responsible for paying standard deductible amounts, co-payments and balance billings. Premium rates for DentaPremier are generally higher than premium rates for our dental HMO and PPO products. When the DentaPremier product was introduced in 2003, the product was underwritten by a third party insurance carrier. As of December 31, 2014, approximately 94% of these dental indemnity members have been transitioned to Dental Care Plus insurance policies. For the year ended December 31, 2014, fully-insured dental indemnity premiums totaled approximately $1.4 million, or 1.6% of our total premiums and ASO fees.

 

Fully-Insured Dental PPO

 

Our fully-insured dental PPO product segment includes our DentaSelect, DentaTrust and DentaSpan dental PPO products.

 

DentaSelect- Our dental PPO product, DentaSelect, is underwritten and administered by Dental Care Plus. DentaSelect members have access to our proprietary PPO network and the national dentist network with which we have contracted. In addition, DentaSelect members have out-of-network benefits. DentaSelect includes some elements of managed health care; however, it includes more cost-sharing with the member. Employers and their participating employees typically share the cost of premiums in various contribution proportions.

 

DentaTrust and DentaSpan– Our individual dental PPO product for the Ohio exchange, DentaTrust, and our small group dental PPO product for the Ohio exchange, DentaSpan, are underwritten by Dental Care Plus and administered by two independent third party administrators (“TPAs”). Pediatric members under the age of 19 years old have pediatric oral health benefits that meet the requirements of the Affordable Care Act (“ACA”). Adult members have benefits that are subject to waiting periods on basic dental services and major dental services. In addition, all DentaTrust and DentaSpan members have out-of-network benefits.

 

For the year ended December 31, 2014, fully-insured dental PPO premiums totaled approximately $16.5 million, or 17.9% of our total premiums and ASO fees.

 

 

Self-Insured Dental

 

Our self-insured dental segment includes our ASO dental HMO, dental PPO and dental indemnity products, which we offer through Dental Care Plus to employers who self-insure their employee dental plans. These employers pay all claims from network dentists according to our fee schedules. In the case of our dental PPO and dental indemnity products, employers pay claims from non-network dentists based on a maximum allowed fee schedule. We provide administrative and claims processing services, benefit plan design, and access to our provider networks for an administrative fee, generally to “self-insured” groups. These products are offered only to employer groups that have chosen to bear the claims risk for the dental benefits of employees and their family members. Self-insured employers retain the risk of financing all of the cost of dental benefits. For the year ended December 31, 2014, self-insured revenue totaled approximately $26.9 million, or 29.2% of our total premiums and ASO fees.

 

Corporate, All Other

 

We offer dental PPO, dental indemnity and vision PPO benefit plans that are underwritten by third-party insurance carriers that are included in our corporate, all other segment. Our subsidiary, Insurance Associates Plus, is an insurance agency licensed in Ohio, Kentucky and Indiana that markets our third-party dental PPO and vision benefit products. Insurance Associates Plus earns commissions and administrative fees based on members enrolled in the dental PPO and vision benefit plans. Our vision benefit PPO product, Vision Care Plus, is underwritten by a third-party insurance carrier and administered by an independent TPA. Members can access both network and out-of-network vision care providers and are subject to fixed co-payments and benefit limits. Premium cost is typically shared by employers and their participating employees in various contribution proportions.

 

The commission and administrative fee revenue that we earned related to the dental PPO, dental indemnity and vision benefit product lines underwritten by third-party insurance carriers aggregated $624,000, or less than 1% of total premiums and ASO fees, for the year ended December 31, 2014.

 

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 2012, our quarterly healthcare services expense was highest in the first quarter, slightly above average in the second quarter, higher than average in the third quarter and lowest in the fourth quarter. In 2013, our quarterly healthcare services expense was slightly above average in the first quarter, lower than average in the second quarter, significantly higher than average in the third quarter and lowest in the fourth quarter. In 2014, our quarterly healthcare services expense was above average in the first quarter, slightly below average in the second quarter, higher than average in the third quarter and lowest in the fourth quarter. The following table shows these trends in tabular form:

 

		2014								2013								2012
		$000’s				$PMPM				$000’s				$PMPM				$000’s				$PMPM
First Quarter		$	18,077			$	20.05			$	16,954			$	19.78			$	16,240			$	19.83
Second Quarter			17,968				19.63				16,742				19.46				15,920				19.43
Third Quarter			18,640				20.43				18,238				20.98				16,092				19.61
Fourth Quarter			17,011				18.52				15,828				18.15				15,484				18.72
Calendar Year		$	71,696				19.65			$	67,762				19.59			$	63,736				19.39

 

Claims are generally higher in the first quarter because almost all of our employer-sponsored benefits reset on January 1. The third quarter claim level is generally higher primarily due to the high level of dental services used in July and August by student members prior to returning to school. Use of dental services is typically lowest in the fourth quarter due to the holiday season and the fact that a portion of our members have already reached their maximum annual benefit level for the year.

 

Business Strategy

 

Our objective is to become one of the leading providers of dental benefits in the Midwest. Our strategy is to continue increasing membership in all of our plans by gaining new employer group customers, acquiring other similar dental plans, adding more participating dentists to our provider networks and increasing our product offerings. We intend to further develop the use of dental PPO products as a means to grow membership sufficient to recruit dentists into our dental provider networks.

 

Our Dental Care Plus HMO plans offer both the broad provider access ordinarily attributed to a dental PPO and the utilization review and cost control features of a dental HMO. The combination of a large provider network, competitive pricing and renewal practices, and an emphasis on outstanding customer service have allowed us to effectively compete with dental PPOs. Because we are primarily owned by dentists who participate in our Dental Care Plus plans, and our dentists are reimbursed on a fee-for-service basis, we often have a competitive advantage in recruiting and retaining dentists for our networks.

 

 

Effective January 1, 2014, we began offering low cost dental PPO plans on the Ohio exchange. These dental PPO plans include the pediatric oral health benefit that is one of the essential health benefits required by the ACA. The family plans also include dental coverage for adults. On January 1, 2015 we began offering these exchange certified dental PPO plans on the federally facilitated exchange in Indiana (the “Indiana exchange”) as well, and we are planning on offering these dental PPO plans in additional states in 2016 and beyond.

 

In the fourth quarter of 2014, we launched our individual dental HMO plans in southwestern Ohio. These dental HMO plans are offered to individual subscribers on our website. In 2015 we are planning on offering individual dental PPO plans in Ohio and offering both individual dental HMO and PPO plans in Kentucky

 

Membership Retention- Employers generally contract with our dental plans for a period of one year. Continuous marketing and sales efforts are made to obtain contract renewals on an annual basis. The ability to obtain contract renewals depends on our premium schedules, competitive bids received by employers from our competitors, and employee satisfaction with our plans, among other factors. The cost of replacing lost members is higher than retaining members. Accordingly, membership retention is a primary focus of our marketing efforts. We strive for consistent employer and broker contracts and fair, justified renewal pricing in order to increase retention rates. Due to these membership retention efforts, we achieved a fully-insured retention rate of approximately 96.2% in 2014, compared to retention rates of 95.7% and 95.0% in 2013 and 2012, respectively.

 

Group Billing and Collection- We dedicate significant resources to achieving prompt and accurate billing for premiums, reimbursement for self-insured claims and ASO fees. We also have a structured process for monitoring and collecting our accounts receivable.

 

Customer Service- We provide customer service to employer group administrators, members, and dentists. Customer service representatives respond promptly to employer, member and provider staff inquiries regarding member identification cards, benefit determinations, eligibility, benefit verification and claims payments. We strive to answer questions in one phone call. We monitor key customer service statistics in order to maintain positive customer relationships with all constituencies.

 

Information Technology- Our dental plan administration system allows us to easily adapt to benefit changes sought by employer groups. Our system also allows for increased efficiencies and cost savings in the functional areas of group marketing, enrollment, billing, collections, cash application, claims adjudication and claims payment by reducing manual processing and facilitating the development of electronic membership enrollment, group billing, payment and automated cash application. With this system, we have a high percentage of claims that can be electronically loaded and adjudicated. We are also focused on the importance of data integrity, security, ease of data extraction, and interfacing with banks, clearinghouses, and other business partners.

 

Dentist Networks

 

Our networks are important to the success of our dental HMO and dental PPO plans. We maintain dental networks comprised of dentists who have contracted with our subsidiaries. As of December 31, 2014, we had provider contracts with 2,808 dentists operating out of 5,720 dentist office locations in our dental HMO network. Of these participating dentist office locations, there are 3,215 in Ohio, 1,828 in Kentucky, 576 in Indiana, and 101 in other states. Of the 2,808 participating dentists, 531 are shareholders who each own one or more Class A or Class B voting redeemable common shares. As of December 31, 2014, we had provider contracts with 3,047 dentists operating out of 6,344 dentist office locations in our dental PPO network. Of these participating dentist office locations, there are 3,756 in Ohio, 1,853 in Kentucky, 603 in Indiana, and 132 in other states. We actively recruit dentist providers in each of our markets. In some instances, we identify expansion area counties where additional providers are needed and locate dentists in these expansion area counties by reviewing state dental licensure records. In other cases, new employer group customers request that we recruit specific dentists to which their employees desire access.

 

Before a dentist can become a participating provider, we engage in extensive due diligence on the dentist’s professional licenses, training and experience, and malpractice history. The dentist must also be recommended by our Clinical Affairs Committee consisting of experienced dentists who represent various dental specialties and some of who are also members of our Board of Directors (the “Board”).

 

Our provider contracts require that participating dentists participate in periodic fee surveys for the purpose of establishing our fee schedule, to participate in and be bound by our utilization review and credentialing plans (see “Utilization Control and Quality Assurance Policies” below), to maintain a state license in good standing to practice dentistry, to maintain professional liability insurance coverage in amounts determined by our Clinical Affairs Committee, and to maintain patient records in a confidential manner. Our provider contracts are for a term of one year and are automatically renewed for successive one year periods unless a written termination notice is given by either party on 30 days’ notice.

 

Participating dentists are reimbursed for services provided to members of our dental plans on a “fee-for-service” basis based on a maximum allowable fee schedule we have developed or the actual fee charged by the dentist, whichever is less. In most cases, our reimbursement to our participating providers for covered dental services under the dental HMO and the dental PPO are subject to a 10% withhold by us. The amounts withheld are not retained in a separate fund and we have no obligation to pay any portion of the amounts withheld to the providers.

 

The Company has a network 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 2,500 additional dentists in our operating territories and approximately 42,700 additional dentists throughout the United States. Effective January 1, 2014, we entered into a network leasing arrangement with a national dental administration company for the dental PPO plans that we offered on the Ohio exchange in 2014. With this network leasing arrangement, our Ohio exchange members have access to approximately 1,600 dentists in Ohio.

 

 

Employees

 

At December 31, 2014, we had 77 employees. We have no collective bargaining agreements with any unions and believe that our overall relations with our employees are good.

 

Insurance Brokers and Consultants

 

Many of our employer group and individual customers are represented by insurance brokers and consultants who assist these customers in the design and purchase of health care products. We generally pay brokers a commission based on premiums collected, with commissions varying by market and premium volume, pursuant to our standard broker agreement. In addition to commissions based directly on premium volume for sales to particular customers, we also have programs that pay brokers and agents on other criteria. These include commission bonuses based on sales that attain certain levels or involve particular products. During 2014, approximately 58% of our business was generated by five independent brokers, one of which was responsible for generating approximately 27% of our total premium revenue.

 

Utilization Control and Quality Assurance Policies

 

Utilization control and quality assurance policies are essential to our success. Our benefits structure limits the frequency of various procedures in order to control utilization of dental care by members of our fully-insured and self-insured dental plans.

 

Each dentist in our networks is obligated to adhere to our utilization review program. Non-compliance or continued deviations from the utilization review program will result in sanctions against a dentist. Such sanctions may include probation, suspension or expulsion as a participating dentist, and may also affect the dentist’s ability to receive compensation from the plan for services provided to members. We believe that a stringent utilization review program is necessary to provide adequate cost containment and quality care.

 

Our Board appoints a committee of dentists to determine that the utilization review program is being adhered to and updated as appropriate. The Clinical Affairs Committee is charged with reviewing service patterns of providers and requests for pretreatment estimates that do not clearly meet Company standards.

 

The Clinical Affairs Committee is also charged with retrospective review of covered services provided by dentists to determine whether the frequency and nature of the services are in compliance with standards adopted by the Clinical Affairs Committee. The Clinical Affairs Committee may recommend that the participating agreement of a dentist who is not in compliance with these standards be terminated, suspended or not renewed, or that benefits paid to the provider for particular services rendered by him or her be reduced.

 

Credentialing

 

We have a dedicated provider relations department that communicates with network dentists and performs credentialing and re-credentialing of each participating dentist. The Clinical Affairs Committee also has oversight over the credentialing of new dentist providers that apply to be participating providers in our provider networks. This committee oversees the periodic re-credentialing of dentist providers already in one or more of our existing provider networks and evaluates whether a dentist should be terminated from one or more of the provider networks if an action is filed against the dentist with a state dental board or other regulatory agency or the provider loses their medical malpractice insurance coverage due to an adverse claim. The Clinical Affairs Committee is also charged in part with determining whether all participating dentists maintain good standing with regulatory agencies. The recommendations of the Clinical Affairs Committee are forwarded to our Board for consideration and appropriate action.

 

The national dental network management companies with which we have a network leasing agreement perform credentialing and re-credentialing of each of their participating dentists according to accepted industry standards.

 

Risk Management

 

We assess risks that may affect the Company’s financial results, operational capability, delivery of service and products to employer groups and plan members, and other significant risks. We evaluate industry trends, information technology changes and our operating efficiencies and results. We perform ongoing risk assessments and implement various measures to manage and mitigate identified risks. The Board has delegated responsibility for risk oversight to the Audit Committee. Periodically, the Audit Committee reviews the Company’s risk assessment and discusses with Company management, significant financial and non-financial risks (See Item 1A-Risk Factors) and the steps management has taken to monitor and mitigate such risks.

 

 

Competition

 

The marketing and sale of fully-insured and self-insured dental benefit plans is highly competitive. Rising health care benefit premiums and changes in the economy have had an impact on the number of companies able to offer dental benefits to their employees. We primarily compete with medical and full-line ancillary carriers, other dental HMO carriers and national insurance companies that offer dental or vision coverage. Many of the companies with whom we compete are larger, have well-established local, regional, and/or national reputations, and have substantially greater brand recognition and financial and sales resources. It is possible that other competitors will emerge as the market for dental plans continues to develop. Our primary competitors are Guardian, MetLife, Humana and Anthem. These companies offer dental indemnity and dental PPO plans. Other competitors include Delta Dental of Ohio and Delta Dental of Kentucky that operate as dental HMOs and dental PPOs in which members receive certain benefit incentives to receive services from network dentists. Most of these dental plans are similar to those offered by us in design, and they also pay providers on a fee-for-service basis. Dental indemnity plans lack the basic characteristics of a dental HMO plan, including contractually enforced utilization and quality assurance standards and limitations on dentists’ fees, and members are not restricted to participating dentists. Dental PPO plans include both in-network benefits similar to those of a dental HMO plan and out-of-network benefits like those associated with a dental indemnity plan. Our main competitors in the fully-insured vision benefit area are Vision Service Plan and EyeMed, a subsidiary of Luxottica Group. We believe that our vision benefit plans are competitively priced and include sufficient benefits to compete effectively.

  

In 2014, our dental membership in Southwestern Ohio increased from approximately 212,100 members as of December 31, 2013 to approximately 221,800 members as of December 31, 2014. Dental membership in Northern Kentucky increased slightly from approximately 24,300 members at December 31, 2013 to approximately 24,900 at December 31, 2014. Our dental benefits market share of approximately 15% to 20% in the Southwestern Ohio and Northern Kentucky market gives us a strong competitive position. This market share is due to our large provider networks, competitive pricing and customer service. As of December 31, 2014, we had 1,371 dentists in our provider networks which represent approximately 95% of the licensed dentists in Southwestern Ohio and Northern Kentucky.

 

We have approximately 42,400 total members in the Dayton and Central Ohio markets. As of December 31, 2014, we had approximately 35,300 dental PPO members and approximately 7,100 dental HMO/IND members in the Dayton and Central Ohio markets. As of December 31, 2013, we had approximately 32,600 dental PPO members and approximately 6,500 dental HMO/IND members in the Dayton, Central Ohio markets.

 

As of December 31, 2014, we had approximately 1,321 dentists in both our dental HMO and dental PPO provider networks which represent approximately 59% of the licensed dentists in Southern Kentucky. As of December 31, 2014, we had approximately 500 dental HMO members and approximately 17,600 dental PPO members in our Southern Kentucky market. As of December 31, 2013, we had approximately 600 dental HMO members and approximately 16,200 dental PPO members in our Southern Kentucky market.

 

Customers

 

During 2014, approximately 9% of our total premium revenue was generated by four fully-insured employer groups. Also during 2014, approximately 11% of our total revenue was generated by two self-insured employer groups. As we continue to increase the number of employers and members in our dental plans, these employers as a source of revenue and enrollment will lessen in proportion to our total revenue and size.

 

Each of our group customers signs a standard form contract, which differs depending on whether the customer is fully-insured or self-insured. There are two standard form contracts for fully-insured customers – one for employer-sponsored plans, and one for voluntary employee plans. Most of our standard form contracts are for one year terms. Certain contracts extend for a two-year or three-year term. The employer group customers may terminate our fully-insured customer contracts by giving 30-days’ prior written notice, yet the fully-insured customer contracts are non-cancelable by the Company during the contract term unless the contract coverage terminates due to non-payment of premium when due. Our self-insured customer contracts can be canceled by the Company or employer group by giving 60-days’ prior written notice. The premium rates set forth in each fully-insured customer contract remain in effect during each term, and may only be increased at renewal.

 

Each of our individual subscribers purchasing a policy (other than on the Ohio exchange) selects a fully-insured dental HMO plan and provides us with an electronic signature when they purchase the individual dental policy. Once the individual subscriber pays their first month premium, the subscriber can print out their identification card and their individual dental policy booklet. These individual dental policies begin on an effective date and extend for 12 months and are subject to applicable waiting periods for basic and major dental services. Individual subscribers may terminate their fully-insured policy with notice, yet the fully-insured individual policies are non-cancelable by the Company during the policy term unless the policy coverage terminates due to non-payment of premium when due.

 

 

Each of our individual subscribers on the Ohio exchange select a fully-insured dental PPO plan and provide us with an electronic signature when they purchase the individual dental policy. Once the individual subscriber pays their first month premium, we mail an individual dental policy to the subscriber. An individual dental policy purchased on the Ohio exchange will begin on an effective date in a calendar year and extend until December 31^st of that calendar year and are subject to applicable waiting periods for basic and major dental services. An individual subscriber may terminate their fully-insured policy by giving 14-days’ prior written notice. The Company may cancel a policy with 30-days’ prior written notice to the subscriber in the event (1) the subscriber submits a fraudulent claim or makes a material misrepresentation; (2) the subscriber does not pay the insurance premium subject to the Centers for Medicare & Medicaid Services (“CMS”) grace period rules; (3) the Company withdraws the dental product from the exchange; or (4) the Company withdraws from the exchange’s individual market.

 

Our competitors on the Ohio exchange in 2014 were Anthem, Best Life Insurance Company, and Dentegra. We designed our DentaTrust and DentaSpan dental PPO plans to offer low cost dental plans with a narrow dental network at a very competitive premium rates. As of December 31, 2014, we had approximately 4,000 members in our DentaTrust and DentaSpan dental plans.
 

Insurance Regulations

 

State insurance laws and other governmental regulations establish various licensing, operational, financial and other requirements relating to our business. State insurance departments in Ohio, Kentucky and Indiana are empowered to interpret such laws of their respective states and promulgate regulations applicable to our business. The National Association of Insurance Commissioners (“NAIC”) is a voluntary association of all of the state insurance commissioners in the United States. The primary function of the NAIC is to develop model laws on key insurance regulatory issues that can be used as guidelines for individual states in adopting or enacting insurance legislation. While NAIC model laws are accorded substantial deference within the insurance industry, these laws are not binding and variations from the model laws from state to state exist.

 

Dental Care Plus is dually licensed as a life and health insurance company and a health insuring corporation providing specialty health care services under Ohio law, as a limited health service benefit plan in Kentucky, and as a life and as a health insurance company and a dental HMO in Indiana. The regulations of each state insurance department include specific requirements with regard to such matters as minimum capital and surplus, reserves, permitted investments, contract terms, policy forms, claims processing requirements and annual reports. If Dental Care Plus fails to maintain compliance with all material regulations, regulatory authorities are empowered to take certain actions against it, such as revoking its license, imposing monetary penalties, taking over supervision of its operations, or seeking a court order for the rehabilitation, liquidation or conservation of Dental Care Plus.

 

DCP Holding Company is a licensed TPA in Ohio, Kentucky and Indiana. Insurance Associates Plus is licensed in Ohio, Kentucky, and Indiana as an insurance agency. As such, it is required to have at least one insurance agent licensed in each of those states. If Insurance Associates Plus fails to meet this requirement in Ohio, Kentucky, or Indiana, its license could be revoked by the state. Adenta is licensed as a life and health insurance agency in Kentucky and Indiana.

 

NAIC Accounting Principles- In 1998, the NAIC adopted the Codification of Statutory Accounting Principles (“Codification” or “SAP”) that became the NAIC’s primary guidance on statutory accounting. The Ohio Department of Insurance has adopted the Codification. SAP differs in some respects from accounting principles generally accepted in the United States (“GAAP”). For public reporting, we prepare consolidated financial statements in accordance with GAAP. However, certain data must also be calculated according to statutory accounting rules as defined in the NAIC’s Accounting Practices and Procedures Manual. While not a substitute for any GAAP measure of performance, statutory data frequently is used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies. For example, select significant differences for the Company are:

 

-Similar to GAAP, deferred income taxes are provided on temporary differences between the statutory and tax bases of assets and liabilities for SAP; however, statutory deferred tax assets are limited based upon tests that determine what is an admitted asset under SAP. Under SAP, the change in deferred taxes is recorded directly to surplus as opposed to GAAP where the change is recorded to current operations.

 

-Deferred acquisition costs are incremental direct costs that are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. For GAAP purposes, the Company defers acquisition costs and amortizes them over the estimated lives of the contracts in proportion to premiums earned. Under SAP, these acquisition costs are expensed as incurred.

 

-For GAAP, capital leases are recorded on the balance sheet as property and equipment with a corresponding capital lease obligation. Subsequently, depreciation expense and interest expense are recorded in current operations. SAP requires that all leases are classified as operating leases and expensed over the lease term.

 

 

Risk Based Capital- The NAIC’s Risk-Based Capital for Life and/or Health Insurers Model Act (the “Model Act”) provides a tool for insurance regulators to determine the levels of statutory capital and surplus an insurer must maintain in relation to its insurance and investment risks and whether there is a need for possible regulatory action. The Model Act (or similar legislation or regulation) has been adopted in states where Dental Care Plus does business. The Model Act provides for three levels of regulatory action, varying with the ratio of the insurance company’s total adjusted capital (defined as the total of its statutory capital and surplus, asset valuation reserve and certain other adjustments) to its authorized control level risk-based capital (“RBC”):

 

-If a company’s total adjusted capital is less than or equal to 200 percent but greater than 150 percent of its RBC (the “Company Action Level”), the company must submit a comprehensive plan aimed at improving its capital position to the regulatory authority proposing corrective actions.

 

-If a company’s total adjusted capital is less than or equal to 150 percent but greater than 100 percent of its RBC (the “Regulatory Action Level”), the regulatory authority will perform a special examination of the company and issue an order specifying the corrective actions that must be followed.

 

-If a company’s total adjusted capital is less than or equal to 100 percent but greater than 70 percent of its RBC (the “Authorized Control Level”), the regulatory authority may place the company under the regulatory authority’s control.

 

-If a company’s total adjusted capital is less than or equal to 70 percent of its RBC (the “Mandatory Control Level”), the regulatory authority must place the company under the regulatory authority’s control.

 

In addition to the levels of regulatory action described above, the regulatory authority may impose restrictions, reporting or other requirements on companies whenever the regulatory authority determines that the financial condition of the company warrants such action, notwithstanding the fact that the company meets the requirements of the Model Act. A regulatory authority may also seek an order of the courts placing the company in rehabilitation, liquidation or conservation whenever the regulatory authority determines that the company’s financial condition is hazardous, notwithstanding the fact that the company may be in compliance with the requirements of the Model Act.

 

Dental Care Plus’s statutory annual statements for the year ended December 31, 2014, filed with the Ohio Department of Insurance, reflected total adjusted capital in excess of Company Action Level RBC.

 

Government Regulations

 

Our management proactively monitors compliance with governmental laws and regulations affecting our Company. We are unable to predict how existing federal or state laws and regulations may be changed, what additional laws or regulations affecting our business may be enacted or proposed, when and which of the proposed laws will be adopted or the effect of any such new laws and regulations will have on our results of operations, financial position, or cash flows. For a description of material current activities in the federal and state legislative areas, see the “Item 1A – Risk Factors” in this report.

 

Executive Officers and Key Employees

 

Each of our executive officers is appointed to serve a one-year term. Anthony A. Cook is the only executive officer that has an employment agreement with the Company.

 

The name and age of each of the present officers of the Company follows along with a brief professional biography.

 

Anthony A. Cook, MS, MBA, 64, President, Chief Executive Officer and a member of the Company’s Board of Directors. Mr. Cook has been President and Chief Executive Officer of Dental Care Plus since February 2001 and, upon reorganization of Dental Care Plus, also assumed the role of President and Chief Executive Officer for the Company. In November 2008, Mr. Cook became a Director of the Company. Mr. Cook has over 30 years of management experience in the health care industry. He has HMO experience as a Plan Administrator, the Director of Health Systems for the largest Blue Cross and Blue Shield HMO in Ohio, as well as the Executive Director of a provider owned health plan. Before arriving at Dental Care Plus, Mr. Cook consulted with executives of health care organizations in developing capabilities to succeed in a managed care environment. Mr. Cook has a bachelor’s degree in psychology and a master’s degree in guidance and counseling from Youngstown State University as well as a Master of Business Administration degree from Baldwin-Wallace College in Cleveland, Ohio.

 

Robert C. Hodgkins, Jr., MBA, CPA, 55, Vice President - Chief Financial Officer. Mr. Hodgkins has been Vice President-Chief Financial Officer of Dental Care Plus since July 2003 and, upon reorganization of Dental Care Plus, became Vice President-Chief Financial Officer of the Company. Previously, Mr. Hodgkins was a Senior Manager in the Cincinnati office of PriceWaterhouseCoopers LLP, specializing in financial management and consulting to the health care industry from 1997 through 2002. Mr. Hodgkins also was a Director in the Finance Division of Blue Cross Blue Shield of Massachusetts (BCBSMA) from 1995 through 1997. He is a Certified Public Accountant licensed in Ohio and a past President of the Southwestern Ohio Chapter of the Healthcare Financial Management Association. He holds a Bachelor of Science degree in Industrial Engineering from Northwestern University and a Master of Business Administration from the J.L. Kellogg Graduate School of Management at Northwestern University.

 

Jodi M. Fronczek, 43, Chief Operations Officer. Ms. Fronczek has been employed by Dental Care Plus since May 1990. She has been Chief Operations Officer for the Company since February 2010. Prior to that, she was Director of Group Benefits and Product Development (2006 – 2010), Director of Claims/Member Services (1997 - 2006), and Claims Manager (1991 – 1997). Ms. Fronczek is a graduate of the University of Cincinnati and holds an Associate’s degree in office administration. She actively represents the Company as a member of the National Association of Dental Plans (NADP) and the National Dental EDI Council (NDEDIC) and previously served as a member of the Professional Relations Committee for NADP.

 

 

AVAILABLE INFORMATION

 

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange Commission (“SEC”) are available on the SEC’s website (www.sec.gov). Copies of these documents will be available without charge to any shareholder upon request. Requests should be directed in writing to the Company at 100 Crowne Point Place, Sharonville, Ohio 45241. In addition, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549. The public may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

 

ITEM 1A.

RISK FACTORS

 

If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected, and the value of our shares could decline. The risks and uncertainties described below are those that we currently believe may materially affect our Company.

 

The current state of the national economy and adverse changes in economic conditions could adversely affect the Company’s business and results of operations.

 

The current state of the national economy and any adverse changes in the market conditions could adversely affect our customers. As a result, our employer group customers may seek to control their employee benefit costs including their dental plan benefits, which may lead to limited rate increases, fewer new sales and the loss of some dental plan membership. These factors may affect the Company’s revenue in the near-term.

 

 

Our ability to achieve our performance objectives could be affected by changes in the financial, credit and capital markets.

 

We invest premiums received from policyholders and other available cash to generate investment income and capital appreciation, while also maintaining sufficient liquidity to pay covered claims and operating expenses, and service our debt obligations. Investment income is an important component of our revenues and net income. The ability to increase investment income and generate longer-term growth in book value is affected by factors beyond our control, such as inflation, economic growth, interest rates, world political conditions, changes in laws and regulations, market events leading to credit constriction, and other unpredictable events. These events may adversely affect the economy generally and could cause our investment income or the value of securities we own to decrease. A significant decline in our investment income could have an adverse effect on our net income and on our shareholders’ equity. For example, a significant increase in the general level of interest rates could lead to falling bond values. For more detailed discussion of risks associated with our investments, please refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risk.

 

 

Our business is highly concentrated in a limited geographic area and adverse economic conditions within the markets in which we do business could impair or reverse our growth trends and have a negative effect on our premium revenue and net income.

 

The operations of our subsidiaries have concentrated premium revenue in the Southwestern and Central Ohio, Northern and Southern Kentucky markets, although our primary operations are in Southwestern Ohio. A prolonged regional economic downturn could cause employers to stop offering dental coverage as an employee benefit or elect to offer dental on a voluntary, employee-funded basis as a means to reduce their operating costs. A decrease in employer groups offering dental coverage on an employer sponsored basis could lead to a decrease in our membership, premium revenue and net income.

 

Our business is dependent upon a limited number of customers, and the loss of any one such customer could result in a loss of substantial premium revenue.

 

During 2014, approximately 9% of our total revenue was generated by four fully-insured employer groups and approximately 11% of our total revenue was generated by two self-insured employer groups. If our relationship with any one of these employers were to terminate, our dental membership and the related premium revenue would decrease, which could lead to lower net income.

 

 

A small number of independent brokers source a substantial portion of our business, and the loss of any one such broker could result in a loss of substantial premium revenue.

 

During 2014, approximately 58% of our business was generated by five independent brokers, one of which was responsible for generating approximately 27% of our total premium revenue. If our relationship with any of these brokers were to terminate, our premium revenue could decrease materially.

 

Because our premiums are fixed by contract, we are unable to increase our premiums during the contract term if our claims costs exceed our estimates due to higher than expected dental services utilization.

 

Dental services utilization by members of our fully-insured dental plans may be higher than expected, resulting in higher than anticipated healthcare services expense and a reduction in our net income. Dental costs are subject to a high rate of inflation due to many factors, including new higher priced technologies and dental procedures, new dental service techniques and therapies, an aging population, the tort liability system and government regulations. If our claims costs exceed our estimates, we will be unable to adjust the premiums we receive under our current contracts, which may result in a decrease in our net income.

 

Our customers’ decisions to transition from a fully-insured to a self-insured dental plan or from a self-insured to a fully-insured dental plan could result in lower gross margins and increased costs.

 

In recent years, a number of fully-insured dental members shifted to our self-insured dental products. Additionally, a number of self-insured members shifted to our fully-insured dental products. If our customers continue to shift from a fully-insured dental product to a self-insured dental product, our dental gross margin may decrease. If our customers shift from a self-insured dental product to a fully-insured dental product, our capital and surplus requirements will increase. In both instances, we may incur significant transitioning costs.

 

The financial strength rating assigned to Dental Care Plus may be downgraded, which could result in a loss of employer groups and insurance brokers, which may, in turn, cause our premium revenue to decline.

 

A.M. Best assigns a rating to companies that have, in their opinion, an ability to meet their ongoing obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions. In July 2014, A.M. Best upgraded our rating to B+ (Good) with a stable outlook. In July 2013, A.M. Best affirmed our B (Fair) rating. In June 2012, A.M. Best upgraded our rating from B- (Fair) to B (Fair). Prior to June 2012, Our B- (Fair) rating was annually affirmed in each year from 2006 through 2011. Our A.M. Best rating is a measure of our financial strength relative to other insurance companies and is not a recommendation to buy, sell or hold securities. The rating assigned by A.M. Best Company is based, in part, on the ratio of our fully-insured premium revenue to our statutory capital and surplus. If Dental Care Plus continues to experience growth in its fully-insured premium revenue but does not retain enough of its earnings or obtain new sources of capital, the rating assigned to Dental Care Plus may be downgraded. If a downgrade were to occur, employer groups may decline to renew their annual or multi-year contract with us, and insurance brokers may refuse to market our dental products. In addition, a downgrade may make it difficult for us to contract with new employer groups and new brokers. The loss of existing employer groups, and the loss of insurance brokers may lead to a loss of premium revenue.

 

If we fail to maintain contracts with an adequate number of dentists, it may be difficult to attract and retain employer groups, which may lead to a loss of premium revenue.

 

Our business strategy is dependent to a large extent upon our continued maintenance of our dentist networks. Generally, our participating provider contracts allow either party to terminate on limited notice (generally 30 days prior to annual renewal). If we are unable to continue to establish and maintain contracts with an adequate number of dentists in our networks, employer groups may not renew their contracts with us and it may be difficult to attract new employer groups, which may lead to a loss of premium revenue.

 

We encounter significant competition that may limit our ability to increase or maintain membership in the markets we serve, which may harm our growth and our operating results.

 

We operate in a highly competitive environment. We compete for employer groups principally on the basis of the size, location and quality of our provider networks, premium rates, benefits provided, quality of service and reputation. A number of these competitive elements are partially dependent upon and can be positively affected by financial resources available to a dental plan. Many other organizations with which we compete have substantially greater financial, and other, resources than we do. For example, our competitors include Delta Dental of Ohio, which has an A.M. Best rating of A (Excellent) and Delta Dental of Kentucky, which has an A.M. Best rating of A- (Excellent). We also compete with the dental divisions of the medical insurance carriers in our markets, such as Humana Dental Insurance Company, which has an A.M. Best rating of A- (Excellent) and Anthem Blue Cross Life and Health Insurance Company, which has an A.M. Best rating of A (Excellent). In addition, we compete with national insurance carriers such as Metropolitan Life Insurance Company and Guardian Life Insurance Company of America, which have A.M. Best ratings of A+ (Superior) and A++ (Superior), respectively. Given the higher ratings and financial strength of many of our competitors, we may encounter difficulty in increasing or maintaining our dental membership in the future.

 

 

Health insurance companies will continue to offer premium concessions if employer groups sign up for both their medical plan and their dental plan, which could result in the loss of employer groups and a decrease in our premium revenue.

 

Many of the health insurance companies that operate in the Ohio and Kentucky markets offer both medical plans and dental plans to employer groups. If these companies offer a premium concession on the medical plan if the employer group signs up for their dental plan as well, employer groups may decide to purchase the bundled medical and dental plans to save money on their medical premium. As a result, we could experience significant loss of premium revenues.

 

We are subject to substantial government regulation. New laws or regulations, changes in existing laws or regulations and changes in public policy could adversely affect the markets for our products and our profitability.

 

Public Policy - It is not possible to predict with certainty the effect of fundamental public policy changes that could adversely affect the Company.  On March 23, 2010, President Obama signed comprehensive healthcare reform, the Patient Protection and Affordable Care Act (“Affordable Care Act”) into law. Provisions of the Affordable Care Act will continue to become effective at various dates over the next several years. Also the provisions of this legislation may change over the course of the next one to four years as its various provisions are modified or implemented. Thus far, in the states in which we operate, the provisions of the Affordable Care Act have been inconsistently implemented which makes it difficult for a stand-alone dental plan to enroll and retain membership. In accordance with the provisions of the Affordable Care Act of 2010, effective January 1, 2014, the federal government imposed an annual assessment on all U.S. health insurers of approximately $8 billion in 2014. This annual assessment will increase each year and is expected to be $14.3 billion in 2018. This annual assessment is allocated to individual health insurers based on the ratio of the insurer’s net premiums written during the preceding calendar year to the total health insurance premiums for any U.S. risk premium written for that same year. Our annual assessment for 2014 was approximately $333,000. We also incurred additional TPA expenses for our new on exchange dental PPO plans. Additional changes in public policy could materially affect our profitability and cash flow, our ability to retain or grow our business and our financial position even if we correctly predict their occurrence. Finally, we are unable to predict how the cost to employers of complying with this law will affect decisions those employers make with respect to offering dental and/or vision benefits to employees.

 

HIPAA - The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) authorized the U.S. Department of Health and Human Services (“HHS”) to adopt a series of regulations designed to simplify the exchange of information electronically between health plans and health care providers and to promote efficiency within the health care industry, as well as to protect the confidentiality and security of individually identifiable health information. Pursuant to this authority, HHS has adopted a series of regulations which are applicable to “Covered Entities,” which include health care providers, health plans and health care clearinghouses (collectively the “HIPAA Regulations”). Failing to comply with these HIPAA Regulations could result in significant civil penalties.

 

ARRA - The American Recovery and Reinvestment Act of 2009 (“ARRA”) contained several changes to the privacy and security rules under HIPAA. These changes are contained in the Health Information Technology for Economic and Clinical Health Act (the “HITECH” Act) provisions of the ARRA, and apply to all entities subject to the HIPAA privacy rules, including group health plans sponsored by employers. First, the HITECH Act makes several provisions of the HIPAA privacy and security rules directly applicable to the business associates of a group health plan. In addition, the HITECH Act contains notification rules that apply when there is a breach of the privacy rules due to an improper disclosure of unsecured protected health information (“PHI”). Generally, if a covered entity such as a group health plan discovers that an improper disclosure of unsecured PHI has occurred, the covered entity must notify the affected individuals whose PHI was breached. Covered entities must also notify the Department of Health and Human Services (“HHS”) of breaches and, if a breach affects more than 500 residents of a state or jurisdiction, the covered entity must provide notice of the breach to a prominent media outlet serving the state or jurisdiction. In addition, a business associate must notify a covered entity when it discovers a breach of unsecured PHI. Failing to comply with the breach notification rules could result in significant civil penalties.

 

GLBA- The Financial Services Modernization Act of 1999 (the “Gramm-Leach-Bliley Act,” or “GLBA”) contains privacy provisions and introduced new controls over the use of an individual’s nonpublic personal data by financial institutions, including insurance companies, insurance agents and brokers licensed by state insurance regulatory authorities. The privacy provisions of GLBA that became effective in July 2001 require a financial institution to provide written notice of its privacy practices to all of its customers. In addition, a financial institution is required to provide its customers with an opportunity to opt out of certain uses of their non-public personal information. Failing to comply with GLBA Regulations could result in significant civil penalties.

 

If we fail to comply with applicable privacy and security laws, regulations and standards, including with respect to third-party service providers that utilize sensitive personal information on our behalf, or if we fail to address emerging security threats or detect and prevent privacy and security incidents, our business, reputation, financial position and cash flows could be materially and adversely affected.  

 

 

Our business is heavily regulated by the states in which we do business, and our failure to comply with regulatory requirements could lead to a loss of our authority to do business in such states.

 

Our business is subject to substantial government regulation, principally under the insurance laws of Ohio, Kentucky and Indiana. We will also become subject to the insurance laws and regulations of other states in which our subsidiaries may in the future conduct business. These laws, which vary from state to state, generally require our subsidiaries to be licensed by the relevant state insurance department. With respect to our fully-insured dental products, these laws and regulations also establish operational, financial and other requirements. Dental Care Plus is currently required to maintain a minimum capital and surplus of approximately $2.5 million according to the regulations for the state of Ohio. The ability of Dental Care Plus to maintain such minimum required capital and surplus is directly dependent on the ability of Dental Care Plus to maintain a profitable business. Dental Care Plus operates in states that regulate its payment of dividends and debt service on inter-company loans, as well as other inter-company cash transfers and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid by Dental Care Plus, without prior approval by state regulatory authorities, is limited based on statutory income and statutory capital and surplus. Failure to maintain compliance with the minimum required capital and surplus of each state could result in Dental Care Plus becoming subject to supervision by the Ohio, Kentucky and Indiana insurance regulatory agencies, and could further result in the suspension or revocation of Dental Care Plus’s Certificate of Authority in Ohio, Kentucky and Indiana, monetary penalties, or the rehabilitation or liquidation of Dental Care Plus.

 

Due to the restrictions on the eligible owners of our common shares, we are limited in how we can raise capital to support the continued growth of our business.

 

At the present time, the only eligible owners of our Class A common shares and Class B common shares are dentists, employees and members of the Board of Directors. As of January 2014, non-dentist individuals are eligible owners of our new Class C voting common shares (with a limitation on the number of Class C shares that may be outstanding at any time as a percentage of Class A and Class B shares). We are able to offer non-voting preferred shares to institutional investors, but there are a limited number of institutional investors that will invest their capital with the Company without voting shares or some other means to have formal influence over the direction of the Company. Given the restriction on eligible owners of our common shares, we may not be successful in raising new capital, which would result in our need to retain our earnings, and this may limit our ability to continue our consistent trend of premium growth.

 

As a result of the aging and retirements of our dentist shareholders, we anticipate requests to redeem an increasing number of common shares each year resulting in a reduction in the level or amount of the redeemable common shares on our consolidated balance sheet.

 

As of December 31, 2014, approximately 275 of our network dentist shareholders were 60 years old or older and these shareholders owned, in the aggregate, 4,197 of our Class A and Class B redeemable common shares. Pursuant to the Company’s Amended and Restated Code of Regulations, retiring dentists have the right to require the Company to repurchase such dentist’s common shares on the term contained in the Code of Regulations. Generally, we will be required to purchase the shares for a price equal to the book value of his or her common shares at the time of the redemption request and the repurchase will typically occur within thirteen months of the date the request is made. However, the Code of Regulations provides for other payment terms and timing in certain circumstances. We will need to fund these anticipated increased shareholder redemptions by retaining earnings or raising additional capital.

 

A decrease in the working capital and liquidity of our business may have an adverse effect on our ability to meet debt service requirements.

 

If the working capital of our business were to decrease significantly due to an increase in accounts receivable, the loss of a significant number of employer groups or a period of continuing operating losses, we may be forced to liquidate portfolio investments in order to meet debt service requirements resulting in a reduction of our investment income and could result in a material reduction in our capital and surplus balance. If the accounts receivable balances from certain employer groups are greater than 90 days past due, these accounts receivable become non-admitted assets for statutory accounting purposes, leading to a decrease in our statutory basis capital and surplus balance. If our statutory-basis capital and surplus is lowered materially, the Ohio Department of Insurance may commence adverse regulatory action against us, ranging from requesting corrective action to assuming control of Dental Care Plus, and A.M. Best may consider lowering our financial strength rating.

 

Managing technology initiatives and meeting data security requirements are significant challenges.

 

 We necessarily collect, use and hold data concerning individuals and businesses with whom we have a relationship. Threats to data security, including unauthorized access and cyber-attacks, rapidly emerge and change, exposing us to additional costs for protection or remediation and competing time constraints to secure our data in accordance with customer expectations and statutory and regulatory requirements.

 

 While we take all reasonable measures to keep our systems and data secure, it is difficult or impossible to defend against every risk being posed by changing technologies as well as criminals’ intent on committing cyber-crime. Increasing sophistication of cyber-criminals and terrorists make keeping up with new threats difficult and could result in a breach. Patching and other measures to protect existing systems and servers could be inadequate. We could also experience a breach by intentional or negligent conduct on the part of associates or other internal sources. Our systems may become vulnerable to damage or disruption due to circumstances beyond our control, such as from catastrophic events, power anomalies or outages, natural disasters, network failures, and viruses and malware.

 

 

 A breach of our security that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs, and reputational damage.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

 

None

 

ITEM 2.

PROPERTIES

 

We currently maintain our principal place of business at 100 Crowne Point Place, Sharonville, Ohio 45241, which we own. We occupy approximately 80% of this property. The remaining amount, approximately 20%, is leased to a third-party tenant. We believe that our existing facility is adequate to support our business.

 

ITEM 3.

LEGAL PROCEEDINGS

 

We are not a party to any pending legal proceedings that we believe would, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

None.

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market for Redeemable Common Shares

 

There is no established public trading market for the Class A, Class B or Class C Redeemable Common. In addition, there are significant restrictions contained in the Company’s Code of Regulations on the ability to transfer the Class A, Class B and Class C Redeemable Common Shares.

 

Holders

 

As of December 31, 2014, there were 531 holders of Class A Redeemable Common Shares, 562 holders of Class B Redeemable Common Shares and 6 holders of Class C Redeemable Common Shares.

 

Dividend Policy

 

On February 11, 2015, our Board of Directors declared a $39.86 per share dividend for all Class A, Class B and Class C redeemable common shareholders of record on February 11, 2015, to be paid on March 27, 2015. With the dividend, the holders of restricted share units will receive an equivalent share based dividend.

 

See Item 12 under PART III for securities authorized for issuance under equity compensation plans.

 

Recent sales of unregistered securities

 

In the fourth quarter of 2014, we sold 7 Class B Redeemable Common Shares and 200 Class C Redeemable Common Shares with a price per share of $964.19.

 

Performance of Redeemable Common Shares

 

Pursuant to our Code of Regulations, the Company’s redeemable common shares are sold and repurchased by the Company at book value. The book value of a Company redeemable common share was $997, $894, $815, $687, and $614 at December 31, 2014, 2013, 2012, 2011, and 2010, respectively.

 

 

Purchases of Equity Securities

 

We repurchased and retired 4 Class A Redeemable Common Shares and 96 Class B Redeemable Common Shares during the three months ended December 31, 2014, as follows: 

 

Period				Total Class A shares purchased (a)				Total Class B shares purchased (a)				Total Class C shares purchased (a)				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
October 1	–	October 31, 2014			2				46				0				$964.19				0		N/A
November 1	–	November 30, 2014			1				11				0				$982.81				0		N/A
December 1	–	December 31, 2014			1				39				0				$1,018.48				0		N/A

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

 

ITEM 6.

SELECTED FINANCIAL DATA

 

The following table sets forth selected consolidated financial information for the Company and its subsidiaries for the years indicated. The financial information should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this report. 

 

 

			(All amounts in thousands)
		2014				2013				2012				2011				2010
Premium revenue		$	91,936			$	86,363			$	80,153			$	76,227			$	75,515
Investment income			222				164				128				111				115
Other income and realized gains, net			92				61				102				78				65
Net income (loss)			1,341				1,282				1,318				591				(89	)
Total assets			57,239				56,903				37,338				38,277				44,481
Mortgage loan payable and capital lease obligations			2,019				1,674				1,451				999				1,223
Redeemable provider preferred shares			—				—				—				—				185
Redeemable institutional preferred shares			2,709				2,563				1,453				345				326
Cash dividends declared, common and preferred			425				392				244				16				17

 

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

Overview

 

Headquartered in Cincinnati, Ohio, Dental Care Plus Group offers to employer groups of all sizes dental HMO, dental PPO, dental indemnity and vision PPO benefit plans and related services. In 2014, the Company began offering low cost dental PPO plans to individuals and small groups on the Ohio exchange and individual dental HMO plans in southwest Ohio. As of December 31, 2014, we had approximately 335,900 members in our dental and vision benefit programs with approximately 2,808 dentists participating in our dental HMO provider network and approximately 3,047 dentists participating in our dental PPO provider network. The Company has 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, our dental PPO members have access to approximately 2,500 additional dentists in our operating territories and approximately 42,700 additional dentists throughout the United States. The Company also has a network leasing arrangement with a national dental administration company for the dental PPO plans that it offered on the Ohio exchange in 2014. With this network leasing arrangement, Dental Care Plus Ohio exchange members have access to approximately 1,600 dentists in Ohio.

  

We manage our business with four reportable segments: fully-insured dental HMO/IND, fully-insured dental PPO, self-insured dental, and corporate, all other. Corporate, all other consists of revenue associated with our dental PPO and vision products underwritten by third-party insurance carriers and certain corporate activities. Our dental HMO, PPO and indemnity products and our vision product line are marketed to employer groups. Our dental HMO and PPO products are also marketed to individual subscribers.

 

 

The results of our fully-insured dental HMO/IND, fully-insured dental PPO, and self-insured dental segments are measured by gross profit. We do not measure the results of our corporate, all other segment. We do not allocate investment and other income, insurance expenses, interest expense or other 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.

 

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, the tort liability system, and government regulations.

 

Profitability Strategy

 

Our strategy focuses on providing solutions for 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 areas. We expect our dental PPO products to continue to be an important driver of growth in the years ahead.

 

Prior to the advent of the ACA, there was limited growth in the number of individuals enrolled in dental benefit plans. In our markets, there has been limited growth in recent years in the number of individuals enrolled in dental benefit plans. However, there has been a shift of membership out of the more expensive dental indemnity products into the dental PPO products that offer both less expensive in-network benefits and out-of-network benefits. At the same time, members have migrated away from dental HMO products with very limited provider networks. While these dental HMO products are the least expensive, employers and members have focused their attention on the dental PPO products that offer broad provider access with the cost control associated within a contracted provider network for the in-network portion of the dental services rendered. Beginning in 2014, there has been a significant increase in publicly funded dental membership that was the result of the expansion of Medicaid in certain states and the dental membership associated with state-based insurance exchanges across the country.

 

In our original eight county service area, our non-exclusive dental HMO provider network includes approximately 95% of the dental providers in the market. In that market our dental HMO provides the broad provider access of a dental PPO along with effective utilization and cost control features. Because of the broad provider network and our professional support services to employers, our fully-insured dental HMO is priced higher than other dental HMOs and has premium rates more equivalent to competitor dental PPOs.

 

We have experienced steady growth in membership and revenue in our dental products during the last five years. We attribute this growth to our broad provider networks, competitive premium rates for our fully-insured business and ASO fees for our self-insured business, and our commitment to providing outstanding customer service to all of our constituencies (employer groups, members, insurance brokers, and dentists).

 

Historically, healthcare services expense has generally increased for both the fully-insured dental segment and the self-insured dental segment. We continue to review and adjust our provider fee schedules where appropriate. In 2014, insurance expenses increased by approximately 9.1% compared to 2013. In 2013, insurance expenses increased by approximately 14.9% compared to 2012. Other important factors that have an impact on our profitability are both the competitive pricing environment and market conditions. With respect to pricing, there is a tradeoff between sustaining or increasing underwriting margins versus increasing enrollment. With respect to market conditions, economies of scale have an impact on our administrative overhead. As a result of a decline in preference for more closely managed dental HMO products, dental costs have become increasingly comparable among our larger competitors. Product design and consumer involvement have become more important drivers of dental services consumption, and administrative expense efficiency is becoming a more significant driver of margin sustainability. Consequently, we continually evaluate our administrative expense structure and attempt to realize administrative expense savings principally through technology improvements.

 

Highlights

 

●

We had net income of approximately $1,341,000 for the year ended December 31, 2014 compared to net income of approximately $1,282,000 for the year ended December 31, 2013. This increase in net income is primarily the result of an increase in premium revenue of approximately $5,573,000, to $91,936,000 in 2014 from $86,363,000 in 2013, offset by an increase in healthcare services expense of approximately $3,934,000, to $71,696,000 in 2014 from $67,762,000 in 2013. This increase in gross margin of approximately $1,639,000 was offset by an increase in insurance expenses of $1,536,000, to $18,325,000 in 2014 from $16,789,000 in 2013. Our ratio of insurance expense to total premium revenue (“insurance expense ratio”) increased to 19.9% in 2014 from 19.4% in 2013.

 

●

Our ratio of healthcare services expense to premium revenue (“loss ratio”) decreased by 0.5%, to 78.0% in 2014 from 78.5% in 2013. This loss ratio decrease is primarily due to an increase in fully-insured premium rates in 2014 compared to 2013 and improved underwriting practices. The fully-insured dental HMO/IND and fully-insured dental PPO segments together represent approximately 70.1% of our total dental business.

 

●

Our dental and vision products grew by approximately 16,700 members, or 5.2%, from 319,200 members at December 31, 2013 to 335,900 members at December 31, 2014. This membership increase from December 31, 2013 is due to an increase in fully-insured dental HMO/IND membership of approximately 2,200 members, an increase in fully-insured dental PPO membership of approximately 9,500 members, an increase in self-insured dental membership of approximately 3,300 members and an increase in corporate, all other membership of approximately 1,700 members.

  

 

We intend for the discussion of our financial condition and results of operations that follows to assist in the understanding of our consolidated financial statements and related changes in certain key items in those consolidated financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain critical accounting policies and estimates have an impact on our consolidated financial statements.

 

Comparison of Results of Operations for 2014 and 2013   

 

The following table shows membership totals and revenues and expenses for our four business segments for the years ended December 31, 2014 and 2013 (dollars in thousands):

 

		2014				2013				Change
Membership:
Fully-insured dental HMO/IND			155,200				153,000				1.4	%
Fully-insured dental PPO			60,100				50,600				18.8	%
Self-insured dental			91,700				88,400				3.7	%
Corporate, all other			28,900				27,200				6.3	%
Total membership			335,900				319,200				5.2	%
Premium revenue:
Fully-insured dental HMO /IND		$	47,948			$	46,656				2.8	%
Fully-insured dental PPO			16,459				13,494				22.0	%
Self-insured dental			26,905				25,641				4.9	%
Corporate, all other			624				572				9.1	%
Total premium revenue			91,936				86,363				6.5	%
Investment income:
Corporate, All Other			222				164				35.4	%
Other income and realized gains, net:
Corporate, All Other			92				61				50.8	%
Total revenue			92,250				86,588				6.5	%
Healthcare services expense:
Fully-insured dental HMO/IND			35,995				35,024				2.8	%
Fully-insured dental PPO			12,661				10,695				18.4	%
Self-insured dental			23,040				22,043				4.5	%
Total healthcare services expense			71,696				67,762				5.8	%
Insurance expense
Corporate, All Other			18,325				16,789				9.1	%
Income tax expense
Corporate, All Other			888				755				17.6	%

 

Summary

 

Net income was approximately $1,341,000 and $1,282,000 for 2014 and 2013, respectively. This increase in net income is primarily the result of an increase in premium revenue of approximately $5,573,000 offset by an increase in healthcare services expense of approximately $3,934,000 in 2013. This increase in gross margin of approximately $1,639,000 was offset by an increase in insurance expenses of $1,536,000 in 2013. Our ratio of insurance expense to total premium revenue (“insurance expense ratio”) increased to 19.9% in 2014 from 19.4% in 2013.

 

 

Membership

 

Our fully-insured dental HMO/IND membership increased approximately 2,200 in 2014. This membership increase is primarily attributable to an increase of approximately 1,200 fully-insured dental HMO members and an increase of approximately 1,000 fully-insured dental indemnity members underwritten by Dental Care Plus, Inc. (“DCP"). The increase in fully-insured dental HMO membership is due to new sales of approximately 9,400 members in the Cincinnati and Northern Kentucky markets during 2014, offset by the loss of approximately 8,200 members with employer groups that did not renew with the Company or reduced employee counts of retained employer groups. A significant portion of the fully-insured dental HMO membership losses were the result of not renewing certain employer groups that did not accept the premium rate increases we proposed. In addition, some of these membership losses were due to corporate acquisitions where our employer group customers moved to the new parent company benefit plans.

 

Our fully-insured dental PPO membership increased by approximately 9,500 members in 2014. This membership increase is due to new sales in the Dayton and Central Ohio markets and the Southern Kentucky market of approximately 12,100 members during 2014, offset by the loss of approximately 6,600 members with employer groups that did not renew with the Company or reduced employee counts of retained employer groups in these markets. The remaining increase of approximately 4,000 members is due to the new sales on the Ohio exchange in 2014.

 

Our self-insured dental membership increased by approximately 3,300 members in 2014. This increase is partially due to the addition of new self-insured dental HMO and dental PPO employer groups in the Southwest Ohio and Northern Kentucky markets, and primarily due to an increase in membership of existing employer groups in the last twelve months.

 

Our corporate, all other membership increased by approximately 1,700 members in 2014. The increase is primarily due to an increased membership in our vision plan.

 

Revenue 

  

		(Amounts in thousands)
														Member
										Total Dollar				Volume				Rate
		2014				2013				Change				Change				Change
Total Fully-Insured Dental HMO/IND Premium		$	47,948			$	46,656			$	1,292			$	494			$	798

 

 

Fully-insured dental HMO/IND premium increased approximately $1,292,000 in 2014 compared to 2013. Fully-insured dental HMO/IND premium rates negotiated with employer groups at their renewals resulted in an increase of approximately $798,000 in fully-insured dental HMO/IND premium revenue. An increase in fully-insured dental HMO/IND membership in 2014 resulted in an increase in fully-insured dental HMO/IND premiums of approximately $494,000. The fully-insured dental HMO/IND segment represented approximately 52.2% of our total dental business in 2014.

 

 

		(Amounts in thousands)
														Member
										Total Dollar				Volume				Rate
		2014				2013				Change				Change				Change
Total Fully-Insured Dental PPO Premium		$	16,459			$	13,494			$	2,965			$	2,865			$	100

 

Fully-insured dental PPO premium increased approximately $2,965,000 in 2014 compared to 2013. Fully-insured dental PPO premium rates negotiated with employer groups at their renewals resulted in an increase of approximately $100,000 in fully-insured dental PPO premium revenue. An increase in fully-insured PPO group membership in the 2014 period resulted in an increase in fully-insured dental PPO premiums of approximately $2,040,000. The addition of the fully-insured on-exchange dental PPO membership resulted in an increase in fully-insured dental PPO premiums of approximately $825,000. The fully-insured dental PPO segment represents approximately 17.9% of our total dental business.

 

 

		(Amounts in thousands)
														Member
										Total Dollar				Volume				Rate
		2014				2013				Change				Change				Change
Self-Insured Claim Revenue		$	25,549			$	24,358			$	1,191			$	847			$	344
Self-Insured ASO Fees			1,356				1,283				73				44				29
Total Self-Insured Revenue		$	26,905			$	25,641			$	1,264			$	891			$	373

 

 

Total self-insured revenue increased approximately $1,264,000 in 2014 compared to 2013. Self-insured dental revenue increased by approximately $891,000 due to new self-insured sales. In addition, self-insured revenue increased by approximately $373,000 due to an increase in the self-insured claims revenue on a per member per month basis as a result of slightly higher dental service utilization and a slight increase in self-insured administrative fee rates on a per member per month basis. The self-insured dental segment represented approximately 29.2% of our total dental business in 2014. The self-insured segment revenue has two components:

 

Self-Insured Claim Revenue - Self-insured claim revenue increased approximately $1,191,000, or 4.9%. Self-insured claim revenue increased by approximately $847,000 due to new self-insured sales. Also, self-insured claim revenue increased by approximately $344,000 primarily due to an increase in the self-insured claim revenue on a per member per month basis as a result of a 1.5% dental fee schedule increase effective January 1, 2014.

 

Self-Insured ASO Fees - Self-insured ASO fees increased approximately $73,000, or 5.7%. Approximately $44,000 of this increase is attributable to self-insured product sales and approximately $29,000 is due to an increase in average self-insured ASO fee rates for 2014 compared to 2013. 

 

Corporate, all other premium revenue is primarily derived from the non-DCP dental indemnity product, dental PPO product and vision product underwritten by third party insurance carriers. In the aggregate, corporate, all other premium revenue increased by approximately $52,000, or 9.1%, to $624,000 in 2014 from $572,000 in 2013.

 

Investment Income

 

Investment income increased approximately $58,000, or 35.4%, to $222,000 in 2014 from $164,000 in 2013. This increase is the result of the increased amount of funds that were invested in both medium duration investment and non-investment grade corporate bonds and short duration investment grade corporate bonds with higher yields during 2014.

 

Other Income and Realized Gains on Investments, Net

 

Other income increased approximately $31,000 or 50.8% to $92,000 in 2014 from $61,000 in 2013. This increase is primarily the result of realized gains due to the sale of investments in 2014 that did not occur in 2013.      

 

Healthcare Services Expenses

 

 

		(Amounts in thousands)
										Total Dollar				Member Volume				Utilization
		2014				2013				Change				Change				Change
Total Fully-Insured Dental HMO/IND Healthcare Service Expense		$	35,995			$	35,024			$	971			$	371			$	600

 

Fully-insured dental HMO/IND healthcare services expense increased by $971,000, or 2.8%, to $35,995,000 in 2014 from $35,024,000 in 2013. This increase is attributable to an increase in fully-insured dental HMO/IND healthcare services expense on a per member per month basis of approximately $600,000, or 1.7%, in 2014 for both existing and new fully-insured dental HMO/IND membership. Fully-insured dental HMO/IND healthcare services expense increased by approximately $531,000 due to the 1.5% fee schedule increase effective January 1, 2014. This increase was also the result of an increase in fully-insured dental HMO/IND claims of $69,000 due to an increase in dental service utilization level by our fully-insured dental HMO/IND members in 2014 compared to 2013. This increase in fully-insured dental HMO/IND healthcare services expense is also the result of an increase of approximately $371,000 due to an increase in fully-insured dental HMO/IND member months of 1.1% in 2014 compared to 2013.

 

 

 

		(Amounts in thousands)
										Total Dollar				Member Volume				Utilization
		2014				2013				Change				Change				Change
Total Fully-Insured Dental PPO Healthcare Service Expense		$	12,661			$	10,695			$	1,966			$	1,821			$	145

 

Fully-insured dental PPO healthcare services expense increased by $1,966,000, or 18.4%, to $12,661,000 in 2014 from $10,695,000 in 2013. This increase was primarily the result of an increase in fully-insured dental PPO healthcare services expense of approximately $1,617,000 related to the increase in fully-insured group dental PPO membership and approximately $204,000 related to the new fully-insured on-exchange dental PPO membership. This increase in fully-insured dental PPO healthcare services expense was also attributable to an increase of approximately $145,000 due to an increase in fully-insured dental PPO healthcare services expense on a per member per month basis of approximately 1.2% in 2014 for both existing and new fully-insured dental PPO membership. Fully-insured dental PPO healthcare services expense increased by approximately $185,000 due to the 1.5% fee schedule increase effective January 1, 2014. This increase was offset by a decrease in fully-insured dental PPO claims of $40,000 due to a decrease in dental service utilization level by our fully-insured dental PPO members in 2014 compared to 2013.

 

 

		(Amounts in thousands)
										Total Dollar				Member Volume				Utilization
		2014				2013				Change				Change				Change
Self-Insured Healthcare Services Expense		$	23,040			$	22,043			$	997			$	767			$	230

 

 

Self-insured healthcare services expense increased by approximately $997,000, or 4.5%, in 2014. An increase of 3.5% in self-insured member month volume in 2014 compared to 2013 resulted in an increase in self-insured healthcare services expense of approximately $767,000. Self-insured dental healthcare services expense increased by approximately $342,000 due to the 1.5% fee schedule increase effective January 1, 2014. This increase was offset by a decrease in self-insured claims of $112,000 due to a decrease in dental service utilization level by our self-insured members in 2014 compared to 2013.

 

Corporate, all other healthcare services expense is not recognized by the Company due to the fact that our other dental indemnity, dental PPO and vision PPO products are underwritten by third party insurance carriers.

 

Insurance Expenses

 

Consolidated insurance expenses increased approximately $1,536,000 in 2014. Total insurance expenses as a percentage of total premium revenue, or the insurance expense ratio, was 19.9% for 2014, increasing 0.5% from the 2013 ratio of 19.4%. Salaries and wages increased by approximately $403,000 as a result of salary and wage increases in 2014, the addition of some incremental full-time positions and increased management bonuses in 2014 due to our profitability. Commissions expense increased approximately $470,000, or 12.7%, due to the increase in total premium revenue in 2014 compared to 2013. Third party administrative services expense increased by approximately $320,000, or 237.2%, as a result of the third party administration services provided to the Company for the new on exchange dental PPO plans. In addition, federal premium tax expense increased by approximately $333,000 as a result of the advent of the federal premium tax assessment applicable to Dental Care Plus in 2014 in accordance with the Affordable Care Act.

 

Income Taxes

 

Our effective tax rate for 2014 was 39.8% compared to the 37.1% effective tax rate in 2013. The increase in the effective tax rate for 2014 compared to 2013 is the result of the new 2014 federal premium tax assessment that is not deductible for federal tax purposes. Also, our 2014 and 2013 effective tax rates were higher than the federal statutory rate primarily due to the impact of permanent tax differences related to meal and entertainment expenses and legal fees. See Note 6 to the consolidated financial statements included in Item 8-Financial Statements and Supplementary Data for a complete reconciliation of the federal statutory rate to the effective tax rate. 

 

 

Comparison of Results of Operations for 2013 and 2012 

 

The following table shows membership totals and revenues and expenses for our four business segments for the years ended December 31, 2013 and 2012 (dollars in thousands):

 

 

		2013				2012				Change
Membership:
Fully-insured dental HMO/IND			153,000				148,500				3.0	%
Fully-insured dental PPO			50,600				43,400				16.6	%
Self-insured dental			88,400				84,400				4.7	%
Corporate, all other			27,200				23,500				15.7	%
Total membership			319,200				299,800				6.5	%
Premium revenue:
Fully-insured dental HMO /IND		$	46,656			$	43,844				6.4	%
Fully-insured dental PPO			13,494				11,429				18.1	%
Self-insured dental			25,641				24,380				5.2	%
Corporate, all other			572				500				14.4	%
Total premium revenue			86,363				80,153				7.7	%
Investment income:
Corporate, All Other			164				128				28.1	%
Other income and realized gains, net:
Corporate, All Other			61				102				(40.2%	)
Total revenue			86,588				80,383				7.7	%
Healthcare services expense:
Fully-insured dental HMO/IND			35,024				33,399				4.9	%
Fully-insured dental PPO			10,695				9,363				14.2	%
Self-insured dental			22,043				20,974				5.1	%
Total healthcare services expense			67,762				63,736				6.3	%
Insurance expense
Corporate, All Other			16,789				14,610				14.9	%
Income tax expense
Corporate, All Other			755				720				*

 

* Not meaningful 

 

Summary

 

Net income was approximately $1,282,000 and $1,318,000 for 2013 and 2012, respectively. This slight decrease in net income is primarily the result of an increase in premium revenue of approximately $6,210,000, to $86,363,000 in 2013 from $80,153,000 in 2012, offset by an increase in healthcare services expense of approximately $4,026,000, to $67,762,000 in 2013 from $63,736,000 in 2012. This increase in gross margin of approximately $2,184,000 was offset by an increase in insurance expenses of $2,179,000, to $16,789,000 in 2013 from $14,610,000 in 2012. Our ratio of insurance expense to total premium revenue (“insurance expense ratio”) increased to 19.4% in 2013 from 18.2% in 2012.

 

Membership

 

Our fully-insured dental HMO/IND membership increased approximately 4,500 in 2013. This membership increase is primarily attributable to an increase of approximately 4,600 fully-insured dental HMO members, offset by a decrease of approximately 100 fully-insured dental indemnity members underwritten by Dental Care Plus, Inc. (“DCP"). The increase in fully-insured dental HMO membership of 4,600 members is due to new sales in the Cincinnati and Northern Kentucky markets of approximately 14,600 members during 2013, offset by the loss of approximately 10,000 members with employer groups that did not renew with the Company or reduced employee counts of retained employer groups. A significant portion of the fully-insured dental HMO membership losses were the result of not renewing certain employer groups that did not accept the premium rate increases we proposed. In addition, some of these membership losses were due to corporate acquisitions where our employer group customers moved to the new parent company benefit plans.

 

 

Our fully-insured dental PPO membership increased by approximately 7,200 members in 2013. This membership increase is due to new sales in the Dayton and Columbus, Ohio markets and the Southern Kentucky market of approximately 11,800 members during 2013, offset by the loss of approximately 4,600 members with employer groups that did not renew with the Company or reduced employee counts of retained employer groups in these markets.

 

Our self-insured dental membership increased by approximately 4,000 members in 2013. This increase is partially due to the addition of new self-insured dental HMO and dental PPO employer groups in the Southwest Ohio and Northern Kentucky markets, and primarily due to an increase in membership of existing employer groups in the last twelve months.

 

Our corporate, all other membership increased by approximately 3,700 members in 2013. The increase is primarily due to an increase of approximately 3,900 members in our vision plan, offset by a decrease of approximately 200 dental indemnity members that shifted into the fully-insured dental HMO/IND segment at renewal.

 

Revenue 

 

		(Amounts in thousands)
														Member
										Total Dollar				Volume				Rate
		2013				2012				Change				Change				Change
Total Fully-Insured Dental HMO/IND Premium		$	46,656			$	43,844			$	2,812			$	1,352			$	1,460

 

Fully-insured dental HMO/IND premium increased approximately $2,812,000 in 2013 compared to 2012. Fully-insured dental HMO/IND premium rates negotiated with employer groups at their renewals resulted in an increase of approximately $1,460,000 in fully-insured dental HMO/IND premium revenue. An increase in fully-insured dental HMO/IND membership in 2013 resulted in an increase in fully-insured dental HMO/IND premiums of approximately $1,352,000. The fully-insured dental HMO/IND segment represented approximately 54.0% of our total dental business in 2013.

 

 

		(Amounts in thousands)
														Member
										Total Dollar				Volume				Rate
		2013				2012				Change				Change				Change
Total Fully-Insured Dental PPO Premium		$	13,494			$	11,429			$	2,065			$	1,595			$	470

 

Fully-insured dental PPO premium increased approximately $2,065,000 in 2013 compared to 2012. Fully-insured dental PPO premium rates negotiated with employer groups at their renewals resulted in an increase of approximately $470,000 in fully-insured dental PPO premium revenue. An increase in fully-insured dental PPO membership in 2013 resulted in an increase in fully-insured dental PPO premiums of approximately $1,595,000. The fully-insured dental PPO segment represented approximately 15.6% of our total dental business in 2013.

 

 

		(Amounts in thousands)
														Member
										Total Dollar				Volume				Rate
		2013				2012				Change				Change				Change
Self-Insured Claim Revenue		$	24,358			$	23,131			$	1,227			$	1,103			$	124
Self-Insured ASO Fees			1,283				1,249			$	34				60				(26	)
Total Self-Insured Revenue		$	25,641			$	24,380			$	1,261			$	1,163			$	98

  

 

Total self-insured revenue increased approximately $1,261,000 in 2013 compared to 2012. Self-insured dental revenue increased by approximately $1,163,000 due to new self-insured sales. In addition, self-insured revenue increased by approximately $98,000 due to an increase in the self-insured claims revenue on a per member per month basis as a result of slightly higher dental service utilization, offset by a slight decrease in self-insured administrative fee rates on a per member per month basis. The self-insured dental segment represented approximately 29.7% of our total dental business in 2013. The self-insured segment revenue has two components:

 

Self-Insured Claim Revenue - Self-insured claim revenue increased approximately $1,227,000, or 5.3%, to $24,358,000 in 2013 from $23,131,000 in 2012. Self-insured claim revenue increased by approximately $1,103,000 due to new self-insured sales. Also, self-insured claim revenue increased by approximately $124,000 primarily due to an increase in the self-insured claim revenue on a per member per month basis as a result of slightly higher dental service utilization.

 

Self-Insured ASO Fees - Self-insured ASO fees increased approximately $34,000, or 2.7%, to $1,283,000 in 2013 from $1,249,000 in 2012. Approximately $60,000 of this increase is attributable to the self-insured product sales. This increase was offset by a decrease of $26,000 due to a small decrease in average self-insured ASO fee rates.

 

Corporate, all other premium revenue is primarily derived from the non-DCP dental indemnity product, dental PPO product and vision product underwritten by third party insurance carriers. In aggregate, corporate, all other premium revenue increased by approximately $72,000, or 14.4%, to $572,000 in 2013 from $500,000 in 2012.

 

Investment Income

 

Investment income increased approximately $36,000, or 28.1%, to $164,000 in 2013 from $128,000 in 2012. This increase is the result of the increased amount of funds that were invested in both medium duration investment and non-investment grade corporate bonds and short duration investment grade corporate bonds with higher yields during 2013.

 

Other Income and Realized Gains on Investments, Net

 

Other income decreased approximately $41,000 or 40.2% to $61,000 in 2013 from $102,000 in 2012. This decrease is primarily the result of realized gains due to the sale of investments in 2012 that did not recur in 2013.      

 

Healthcare Services Expenses

 

		(Amounts in thousands)
										Total Dollar				Member Volume				Utilization
		2013				2012				Change				Change				Change
Total Fully-Insured Dental HMO/IND Healthcare Service Expense		$	35,024			$	33,399			$	1,625			$	1,029			$	596

 

Fully-insured dental HMO/IND healthcare services expense increased by $1,625,000, or 4.9%, to $35,024,000 in 2013 from $33,399,000 in 2012. This increase is attributable to an increase in fully-insured dental HMO/IND healthcare services expense on a per member per month basis of approximately $596,000, or 1.7%, in 2013 for both existing and new fully-insured dental HMO/IND membership. This increase in fully-insured dental HMO/IND healthcare services expense is also the result of an increase of approximately $1,029,000 due to an increase in fully-insured dental HMO/IND member months of 3.1% in 2013 compared to 2012.  

 

		(Amounts in thousands)
										Total Dollar				Member Volume				Utilization
		2013				2012				Change				Change				Change
Total Fully-Insured Dental PPO Healthcare Service Expense		$	10,695			$	9,363			$	1,332			$	1,307			$	25

 

Fully-insured dental PPO healthcare services expense increased by $1,332,000, or 14.2%, to $10,695,000 in 2013 from $9,363,000 in 2012. This increase is attributable to an increase in fully-insured dental PPO healthcare services expense of approximately $1,307,000 due to an increase in fully-insured dental PPO member months of 14.0% in 2013 compared to 2012. This increase in fully-insured dental PPO healthcare services expense was also attributable to an increase of approximately $25,000 due to an increase in fully-insured dental PPO healthcare services expense on a per member per month basis of approximately 0.2% in 2013 for both existing and new fully-insured dental PPO membership.

 

  

		(Amounts in thousands)
										Total Dollar				Member Volume				Utilization
		2013				2012				Change				Change				Change
Self-Insured Healthcare Services Expense		$	22,043			$	20,974			$	1,069			$	1,000			$	69

 

 

Self-insured healthcare services expense increased by approximately $1,069,000, or 5.1%, in 2013. An increase of 4.6% in self-insured member month volume in 2013 compared to 2012 resulted in an increase in self-insured healthcare services expense of approximately $1,000,000. Self-insured dental healthcare services expense increased by approximately $69,000 due to an increase in dental service utilization level by our self-insured members in 2013 compared to 2012.

 

Corporate, all other healthcare services expense is not recognized by the Company due to the fact that our other dental indemnity, dental PPO and vision PPO products are underwritten by third party insurance carriers.

 

Insurance Expenses

 

Consolidated insurance expenses increased approximately $2,180,000 in 2013. Total insurance expenses as a percentage of total premium revenue, or the insurance expense ratio, was 19.4% for 2013, increasing 1.2% from the 2012 ratio of 18.2%. Salaries and wages increased by approximately $1,010,000 as a result of salary and wage increases in 2013, the addition of some incremental full-time positions and increased management bonuses in 2013 due to our profitability. Commissions expense increased approximately $301,000, or 8.8%, due to the increase in total premium revenue in 2013 compared to 2012. Legal services expense in 2013 increased by approximately $149,000, or 86.3%, as a result of the legal fees incurred related to the amendments to our Articles of Incorporation and Code of Regulations. Professional consulting expense increased by approximately $675,000, or 158.9%, as a result of special projects related to business cycle process automation and the planning and design work associated with our new individual dental products. In addition, miscellaneous expenses increased by approximately $134,000 due to the one-time costs incurred relative to the recruitment of new management staff.

 

Income Taxes

 

Our effective tax rate for 2013 was 37.1% compared to the 35.3% effective tax rate in 2012. Our 2013 and 2012 effective tax rates were higher than the federal statutory rate primarily due to the impact of permanent tax differences related to meal and entertainment expenses and legal fees. See Note 6 to the consolidated financial statements included in Item 8-Financial Statements and Supplementary Data for a complete reconciliation of the federal statutory rate to the effective tax rate.

 

Liquidity and Capital Resources and Changes in Financial Condition 

 

Our primary sources of cash are premiums, ASO fees, investment and other income, as well as the proceeds from the maturity or sale of our investment securities, from the sale of redeemable common and preferred shares, and from borrowings. Our primary uses of cash include disbursements for claims payments, insurance expense, interest expense, taxes, purchases of investment securities, capital expenditures, redeemable common shares redemptions, dividends, and payments on borrowings. Because premiums are collected in advance of claims payments, our business should normally produce positive operating cash flows during a period of increasing enrollment. Conversely, cash flows would be negatively impacted during a period of shrinking enrollment.

 

Cash increased $1,084,000, or 13.4%, for the year ended December 31, 2014 to approximately $9.2 million at December 31, 2014 from approximately $8.1 million at December 31, 2013. This cash increase is primarily the result of cash flow from operations of approximately $2,556,000, that was offset by cash used in investing activities of approximately $845,000 and cash used in financing activities of approximately $627,000.

 

Cash decreased $425,000, or 5.0%, for the year ended December 31, 2013 to approximately $8.1 million at December 31, 2013 from approximately $8.5 million at December 31, 2012. This cash decrease is primarily the result of an increase in our corporate bond investments of approximately $3.1 million and the investment in our office building and related equipment of approximately $601,000. These cash decreases due to investing activities were offset by strong profitability due to a lower fully-insured loss ratio in 2013. This loss ratio decrease is primarily due to an increase in fully-insured dental HMO/IND and fully-insured dental PPO premium rates in 2013 compared to 2012 and improved underwriting practices. The change in cash for the years ended December 31, 2014, 2013 and 2012 is summarized as follows (in thousands):

 

		2014				2013				2012
Net cash provided by operating activities		$	2,556			$	2,696			$	1,362
Net cash used in investing activities			(845	)			(3,379	)			(256	)
Net cash (used in) provided by financing activities			(627	)			258				448
Increase (decrease) in cash		$	1,084			$	(425	)		$	1,554

  

 

Cash flows from Operating Activities

 

In 2014, we generated approximately $2,556,000 of cash from operating activities. This level of cash flow from operating activities is $139,000 lower than the cash flow generated from operating activities in 2013. We had net income of approximately $1,341,000 in 2014 compared to net income of $1,282,000 in 2013. During 2014, we paid approximately $1,270,000 in federal tax payments. As a result, our federal income tax payable decreased by approximately $216,000 in 2014. In addition to our 2014 net income, we had non-cash depreciation and amortization expense of approximately $335,000 and an increase in deferred compensation liabilities of $959,000. The increase in deferred compensation liabilities is primarily due to the 12.4% increase in the book value of the common shares during 2014. In 2014, our claims payable liability increased by approximately $778,000 due to an increase in membership and an increase in utilization. A decrease in accounts receivable of approximately $1,954,000 was offset by a decrease in unearned premium revenue of $2,759,000, resulting in a net cash decrease of $805,000. This cash decrease is attributable to an increase in premium receivable of $302,000 and a decrease in unearned premium revenue received in advance of $502,000. Accounts receivable and unearned premium revenue are recorded primarily as the result of non-cancelable short-term insurance contracts. Most of our contracts are one year in duration; however, we occasionally enter into multi-year contracts that tend to be for larger groups. As a result, depending on the timing of large group renewals, the accounts receivable and unearned premium revenue can experience large fluctuations from period to period.

 

In 2013, we generated approximately $2,696,000 of cash from operating activities. This level of cash flow from operating activities is significantly higher than the cash flow generated from operating activities in 2012. We had net income of approximately $1,282,000 in 2013 compared to net income of $1,318,000 in 2012. During 2013, we paid approximately $540,000 in federal tax payments as compared to $1,110,000 in 2012. As a result, our federal income tax payable increased by approximately $271,000 in 2013. In addition to our 2013 net income, we had non-cash depreciation and amortization expense of approximately $358,000 and an increase in deferred compensation liabilities of $675,000. The increase in deferred compensation liabilities is primarily due to the 9.7% increase in the book value of the common shares during 2013. An increase in accounts receivable of approximately $15,449,000 was offset by an increase in unearned premium revenue of $15,603,000, resulting in a net cash increase of $154,000. This cash increase is attributable to an increase in unearned premium revenue received in advance and uncollected premiums.

 

In 2012, we generated approximately $1,362,000 of cash from operating activities. This level of cash flow from operating activities is similar to the cash flow generated from operating activities in 2011. We had net income of approximately $1,318,000 in 2012 compared to net income of $591,000 in 2011. During 2012, we paid approximately $1,110,000 in federal tax payments as compared to $95,000 in 2011. In addition to our 2012 net income, we had non-cash depreciation and amortization expense of approximately $288,000 and an increase in deferred compensation liabilities of $542,000. The increase in deferred compensation liabilities is primarily due to the 16% increase in the book value of the common shares during 2012. These sources of cash were offset by cash uses such as a decrease in the claims payable liability of approximately $665,000. A decrease in accounts receivable of approximately $2,705,000 was offset by a decrease in unearned premium revenue of $2,665,000, resulting in a net cash increase of $40,000. This cash increase is attributable to a decrease in uncollected premiums of approximately $82,000 offset by a decrease of unearned premium revenue received in advance of approximately $42,000.

 

Cash flows from Investing Activities

 

In 2014, we invested approximately $530,000 in building improvements, office equipment and computer equipment and software. In 2014, approximately $1.8 million of our investments in FDIC insured certificates of deposit, investment grade corporate bonds and money market funds either matured or were liquidated. We also invested approximately $2.6 million in additional FDIC insured certificates of deposit, investment and non-investment grade corporate bonds and money market funds. In addition, in December of 2014, we sold certain office equipment and computer equipment with a value of approximately $516,000 to a leasing company and entered into a capital lease agreement to lease back these same assets over a four year period. We invested an additional $5,000 in a dental and vision discount product. Collectively, these investments and transactions resulted in a decrease in cash from investment activities of approximately $845,000.

 

In 2013, we invested approximately $601,000 in building improvements, office equipment and computer equipment and software. In 2013, approximately $1.1 million of our investments in FDIC insured certificates of deposit, investment grade corporate bonds and money market funds either matured or were liquidated. We also invested approximately $4.2 million in additional FDIC insured certificates of deposit, investment grade corporate bonds and money market funds. In addition, in December of 2013, we also sold certain office equipment and computer equipment with a value of approximately $312,000 to a leasing company and entered into an agreement to lease back these same assets over a three year period. We also invested an additional $5,000 in a dental and vision discount product. Collectively, these investments and transactions resulted in a decrease in cash from investment activities of approximately $3.4 million.

 

  

In 2012, we invested approximately $124,000 in building improvements, office equipment and computer equipment and software. Also in 2012, approximately $1.1 million of our investments in FDIC insured certificates of deposit, investment grade corporate bonds and money market funds either matured or were liquidated. We also invested approximately $1.2 million in additional FDIC insured certificates of deposit, investment grade corporate bonds and money market funds. We also invested $40,000 to develop a dental and vision discount product. Collectively, these investments resulted in a decrease in cash from investment activities of approximately $256,000.

 

Cash flows from Financing Activities

 

In 2014, we paid approximately $47,000 of our outstanding mortgage balance and repaid approximately $124,000 related to the capital lease that we executed in December 2013. During 2014, we sold approximately $330,000 of Class B and Class C common shares. Also during 2014, we repurchased redeemable common shares of $362,000 from provider shareholders. In addition, we paid dividends to our institutional preferred shareholders and our common shareholders totaling approximately $425,000 in 2014.

 

In 2013, we paid approximately $46,000 of our outstanding mortgage balance and repaid approximately $137,000 related to the capital lease that we executed in December 2010. We sold $1 million of institutional preferred shares and approximately $97,000 of Class A and Class B common shares. Also during 2013, we repurchased redeemable common shares of $264,000 from provider shareholders. In addition, we paid dividends to our institutional preferred shareholders and our common shareholders totaling approximately $392,000 in 2013.

 

In 2012, we paid approximately $120,000 of our outstanding mortgage balance and repaid approximately $108,000 related to the capital lease that we executed in December 2010. In December 2012, we entered into a new mortgage loan in the amount of $1,340,000 in order to refinance both the remaining balance on our first mortgage of approximately $660,000 and to repay the balance on our revolving note of approximately $650,000. During 2012, we sold $1 million of institutional preferred shares and approximately $44,000 of Class A and Class B common. Also during 2012, we repurchased redeemable common shares of $138,000 from provider shareholders.

 

Contractual Obligations and Other Commitments

 

A summary of our future commitments as of December 31, 2014 is as follows:  

 

		Less than 1												More than
Contractual Obligations		year				1-2 years				3-5 years				5 years				Total
Long-term debt and interest (1)		$	98,000			$	194,000			$	195,000			$	1,089,000			$	1,576,000
Capital lease and interest			269,000				397,000				149,000				—				815,000
Operating leases			156,000				172,000				53,000				—				381,000
Claims payable			2,998,000				—				—				—				2,998,000
Total		$	3,521,000			$	763,000			$	397,000			$	1,089,000			$	5,770,000

  

 

(1)

Includes swap interest payments based on a fixed rate of 3.90%.

 

A mortgage note, secured by the land and the office building, accrues interest based on the 30-day LIBOR rate plus 1.95%. The note requires us to make principal payments of $3,800 per month in 2014 and higher principal payments in subsequent years through 2022 in accordance with the agreed upon loan amortization schedule. At the maturity date of the mortgage note in 2022, the expected outstanding balance of the note of approximately $804,000 must be repaid or refinanced. We also entered into an interest rate swap agreement that effectively changed the interest rate related to the $1,340,000 mortgage note with a commercial bank from a variable rate based on the 30-day LIBOR rate plus 1.95% to a fixed rate of approximately 3.90% for the 10-year period through December 2022. At December 31, 2014, the carrying value of the mortgage note approximates fair value. Under this mortgage, the Company is required to have a minimum tangible net worth equal to or greater than $3,500,000 at the end of each fiscal year and a debt service ratio of at least 1:1. The Company was in compliance with these covenants at December 31, 2014. The Company also entered into a capital lease agreement with the leasing company in 2013 that obligates the Company to pay lease payments over a three year period and an additional capital lease agreement with a leasing company in 2014 that obligates the Company to pay lease payments over a four year period. Under these capital lease agreements, the Company is required to have a minimum tangible net worth equal to or greater than $2,500,000 at the end of each fiscal year. At December 31, 2014, the Company was in compliance with this minimum tangible net worth requirement.

 

 

As of December 31, 2014, we believe our most significant other commitments are:

 

Deferred Compensation – We expect to pay our deferred compensation liability of approximately $2,766,000 to the Company directors and employees as they retire or otherwise terminate their association with the Company in future years. As of December 31, 2014, we do not expect to pay any of our deferred compensation liability to any directors or key employees in 2015.

 

Commissions – We expect commission payments to generally correspond to earned premium volume.

 

Redeemable Common Shares – Pursuant to the Company’s Amended and Restated Code of Regulations, holders of Class A, Class B and Class C shares have the right to require the Company to repurchase such holder’s common shares on the terms contained in the Code of Regulations. At December 31, 2014, approximately $83,000 in redeemed common shares are to be paid in 2015.

 

Federal and State Premium Taxes – We expect federal and state premium payments to generally correspond to earned premium volume.

 

Off-balance sheet Arrangements 

 

None.

 

Financial Condition 

 

Our consolidated cash and short term investments were approximately $9.9 million at December 31, 2014. Our consolidated cash and short term investments increased by approximately $1.5 million from approximately $8.4 million as of December 31, 2013.

 

This increase in cash and short term investments from December 31, 2013 to December 31, 2014 is primarily due to the net cash provided by operating activities of approximately $2,556,000, offset by cash used in investing activities of approximately $845,000 and cash used in financing activities of approximately $627,000. In addition, there was a shift of approximately $443,000 from long term investments to short term investments during this period.

 

In July 2014, we renewed an annually renewable agreement with a commercial bank for a $500,000 working capital line of credit. Interest is payable at a variable rate of LIBOR plus 2.50%. The Company did not have any interest expense for the line of credit in 2014, 2013 or 2012. As of December 31, 2014 and 2013, there was no amount outstanding on this line of credit.

 

In August 2014, we renewed an annually renewable agreement with a commercial bank for a $1,000,000 working capital line of credit. Interest is payable at a variable rate of LIBOR plus 2.50%. The Company did not have any interest expense for the line of credit in 2014, 2013 or 2012. As of December 31, 2014 and 2013, there was no amount outstanding on this line of credit. In addition, we had an irrevocable letter of credit in the amount of $10,000, with an interest payable rate of prime rate plus 6.00%. The letter of credit expired in December 2014 and was not renewed.

 

We believe our cash, short term investments and working capital lines of credit together are sufficient to meet our short term and long term liquidity needs. We are obligated to make payments related to our contractual obligations such as our building mortgage and our operating leases and other commitments (see contractual obligations and other commitments). We will also be obligated in certain circumstances to repurchase the redeemable shares of our Class A, Class B and Class C shareholders who die and our Class A and Class B shareholders who become permanently disabled, or retire. Our Board considers limitations on the amount of share redemptions each year. While we are not able to estimate future redeemable share redemptions, we repurchased approximately $362,000, $264,000, and $138,000 of redeemable common shares in the years ended December 31, 2014, 2013, and 2012, respectively. We believe our cash balances, available-for-sale investment securities, operating cash flows, and borrowing capacity, taken together, provide adequate resources to fund ongoing operating and regulatory requirements and fund future expansion opportunities and capital expenditures in the foreseeable future.

 

We operate as a holding company in a highly regulated industry. We are primarily dependent upon management fees that we receive from our subsidiaries. We receive over 99% of our management fees from our subsidiary, Dental Care Plus. We also receive dividends from our subsidiaries from time to time. The dividends from our subsidiary, Dental Care Plus, are subject to regulatory restrictions.

 

Regulatory Capital and Surplus Requirements

 

Our largest subsidiary, Dental Care Plus, operates in states that regulate its payment of dividends and debt service on inter-company loans, as well as other inter-company cash transfers and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid by Dental Care Plus, without prior approval by state regulatory authorities, is limited based on statutory income and statutory capital and surplus. Dividends cannot exceed in any one year the lesser of: (i) 10% of net worth (as of the preceding December 31), or (ii) net income for the prior year, and only if net worth exceeds $250,000 and only out of positive retained earnings. In 2012, Dental Care Plus paid an ordinary dividend in the amount of $360,000 to DCP Holding Company that did not require prior approval by the Ohio Department of Insurance. There were no dividends declared or paid by Dental Care Plus during 2014 or 2013. Even if prior approval is not required, prior notification must be provided to state insurance departments in Ohio, Kentucky and Indiana before paying a dividend.

 

 

Dental Care Plus, an Ohio-domiciled insurance company dually licensed as a life and health insurer and a specialty health insuring corporation, is able to underwrite dental indemnity, dental PPO, dental HMO, and vision benefit products as well as other life and health insurance products in Ohio. The minimum required capital and surplus for Dental Care Plus licensed as a life and health insurance company in Ohio was $2.5 million at December 31, 2014.

 

We maintained aggregate statutory capital and surplus of approximately $9.7 million as of December 31, 2014 and were in compliance with applicable statutory requirements. Although the minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements can vary significantly from state to state. Given our anticipated premium growth in 2015 resulting from the expansion of our networks and membership, capital requirements will increase. We expect to fund these increased requirements through the retention of earnings and future capital raising activities, if any.

 

Most states rely on risk-based capital requirements, or RBC, to define the required levels of equity. RBC is a model developed by the NAIC to monitor an entity’s solvency. This calculation indicates recommended minimum levels of required capital and surplus and signals regulatory measures should actual surplus fall below these recommended levels. RBC has been adopted by Ohio, Kentucky and Indiana, the three states in which we currently do business. We file our annual statement and RBC reporting with the Ohio Department of Insurance and the NAIC. Dental Care Plus’s statutory annual statements for the year ended December 31, 2014 filed with the Ohio Department of Insurance reflected total adjusted capital in excess of Company Action Level RBC.

 

Other Matters

 

The differences between our net income and comprehensive income include the changes in the unrealized gains or losses on marketable securities and changes in the fair value of our interest rate swap agreement. For the years ended December 31, 2014, 2013, and 2012, respectively, such changes increased or (decreased), net of related income tax effects, by the following amounts:

 

		For Years ended December 31,
		2014				2013				2012
Changes in:
Change in fair value of investments, net of tax		$	65,943			$	(109,695	)		$	143,369
Reclassification adjustment for gains included in net income, net of tax			(19,596	)							(22,708	)
Change in fair value of interest rate swap, net of tax			33,504				(9,466	)			(20,339	)
Total		$	79,851			$	(119,161	)		$	100,322

 

The fair market value of the variable-to-fixed interest rate swap contract (net of income tax effects) increased by $33,504 due to an increase in prevailing interest rates during 2014. During 2013, the fair market value of the variable-to-fixed interest rate swap contract (net of income tax effects) decreased by $9,466 due to a slight decrease in prevailing interest rates at the end of December 2013. During 2012, the fair market value of the variable-to-fixed interest rate swap contract (net of income tax effects) decreased by $20,339 due to a slight decrease in prevailing interest rates at the end of December 2012. The fair market value of the variable-to-fixed interest rate swap contract was a liability of $4,854 and $55,618 and is included in other payables and accruals at December 31, 2014 and 2013, respectively.

 

Critical Accounting Policies

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Application of those accounting principles includes the use of estimates and assumptions that are made by management, and that we believe are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses in the accompanying consolidated financial statements. We believe the most critical accounting policies used to prepare the accompanying consolidated financial statements are the following:

 

Liability for Claims Payable

 

Our estimated liability for claims payable and corresponding healthcare services expense includes claims incurred but not reported (“IBNR”), claims reported but not yet processed and paid and other healthcare services expenses incurred, including estimated costs of processing outstanding claims. Our estimated liability for claims payable is based primarily on the average historical lag time between the date of service and the date the related claim is paid, taking into account recent trends in payment rates and the average number of incurred claims per covered individual over a rolling 12 month period.

 

 

The following table shows our total claims payable liability as of December 31, and its three components. IBNR represents a substantial portion of our claims payable liability.

 

 

		2014								2013
IBNR		$	2,250,601				75.1	%		$	1,587,059				71.5	%
Reported claims in process			698,080				23.3	%			592,581				26.7	%
Other healthcare services expenses payable			48,932				1.6	%			40,085				1.8	%
Total claims payable liability		$	2,997,613				100	%		$	2,219,725				100	%

 

Between December 31, 2013 and December 31, 2014, our claims payable liability estimate increased by approximately $778,000 or 35%, primarily due to higher fully-insured dental HMO/IND and fully-insured dental PPO membership at December 31, 2014 compared to December 31, 2013, along with a significant increase in fully-insured dental HMO/IND utilization in December 2014 compared to December 2013. Fully-insured incurred claims were $18.34 PMPM for December 2014 compared to $17.52 PMPM for December 2013. Reported claims in process at December 31, 2014 was approximately $698,000, or $105,000 higher than the reported claims in process at December 31, 2013. This increase was the result of a larger claims inventory at December 31, 2014. There were four days of reported claims in process at December 31, 2014 and December 31, 2013.

 

We estimate liabilities for both IBNR and reported claims in process by employing actuarial methods that are commonly used by health insurance actuaries and meet actuarial standards of practice. These actuarial standards of practice require that claim liabilities estimates be adequate under moderately adverse circumstances. The Company’s consulting actuary assists us in making these estimates.

 

Since our liability for claims payable is based on actuarial estimates, the amount of claims eventually paid for services provided prior to the balance sheet date could differ from the estimated liability. Any such differences are recognized in the consolidated statements of comprehensive income for the period in which the differences are identified.

 

We develop our estimate for claims payable liability using actuarial methodologies primarily based on historical claim payments and claim receipt patterns, as well as historical dental cost trends. Depending on the period for which incurred claims are estimated, we apply a different method in determining our estimate. Throughout the year, we use both the “completion factors” and the “claims trend factor” to estimate our claims payable liability. On a quarterly basis, for periods prior to the most recent month, we calculate “completion factors” which indicate the percentage of claims payable estimated for a prior period that have been paid as of the end of the current reporting period. We use the completion factors to determine historical patterns over a rolling 12-month period, made consistent period over period with making adjustments for known changes in claim inventory levels and known changes in claim payment processes. Then, for the most recent month, we calculate a “claims trend factor” that estimates incurred claims primarily from a trend analysis based upon per member per month claims trends developed from our historical experience in the preceding months, adjusted for known provider contracting changes, changes in benefit levels and seasonality. We have consistently applied the key actuarial methodologies to estimate the IBNR and reported claims in process components of our claims payable liability.

 

When developing our estimate for claims payable liability as of December 31, 2014, we considered actual paid claim data from January 2015. As a result, we are able to use the completion factors approach for all historical months in 2014, including December 2014. The table below illustrates how our operating results are impacted when there is a variance between estimated claims expense and actual claims expense. The table shows the sensitivity of the estimated fully-insured incurred claims payable liability to fluctuations in the expected completion factors that were used to estimate the claims payable liability as of December 31, 2014 within variance ranges historically experienced. Based on historical experience, the completion factors we use to estimate outstanding IBNR and reported claims in process are highly reliable for predicting actual claims paid at future times, with a variance range of approximately one-half of one percent, plus or minus.

 

 

 

	Completion Factors (a)
						Estimated claims
	(Decrease)					payable liability
	Increase					as of
	In Factor					12/31/2014
		(0.50%)					3,240,420
		0%		(estimate used)			2,997,613
		0.50%					2,832,744

 

(a)     Reflects estimated potential changes in incurred claims payable liability caused by changes in completion factors for all months prior to December 31, 2014.

 

Recognition of Premium Revenue

 

Fully-insured premium revenue is recognized in the period during which dental or vision coverage is provided to the covered individuals. Payments received from customers in advance of the related period of coverage, as well as related accounts receivable, are reflected on the accompanying consolidated balance sheets as unearned premium revenue. The Company’s unearned premium revenue was approximately $32,637,000 and $35,395,000 at December 31, 2014 and 2013, respectively, for the estimated premium revenue associated with the remaining contract periods and related amounts recorded in accounts receivable. Enrollment changes not yet reflected on employer group invoices, also known as retroactive membership adjustments, are estimated based on available data and are reflected in revenue in the current period. These retroactive membership adjustments are generally immaterial to the consolidated financial statements. Self-insured premium revenue is recognized upon the payment of claims for self-insured members in accordance with contracts with self-insured employers. We provide administrative and claims processing services, benefit plan design, and access to 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.

 

Healthcare Services Expense

 

Healthcare services expense is recognized on a monthly basis. In the case of the fully-insured dental segment, healthcare services expense is calculated by taking the paid claims associated with the fully-insured membership and adjusting this amount for the change in the claims payable liability determined using the actuarial estimates discussed above. For the self-insured dental segment, the healthcare services expense is based solely on the paid claims for the self-insured membership. In most cases, our reimbursement to our participating providers for covered dental services under the dental HMO and in-network dental PPO are subject to a 10% withhold. The amounts withheld are not retained in a separate fund and we have no obligation to pay any portion of the amounts withheld to the providers.

 

Income Taxes

 

Our accounting for income taxes requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that are recognized in our consolidated financial statements in different periods than those in which the events are recognized in our tax returns. The measurement of deferred tax liabilities and assets is based on current tax laws as of the balance sheet date. We record a valuation allowance related to deferred tax assets in the event that available evidence indicates that the future tax benefits related to deferred tax assets may not be realized. A valuation allowance is required when it is more likely than not that the deferred tax assets will not be realized. Our determination of whether a valuation allowance is required is subject to change based on future estimates of the recoverability of our net deferred tax assets.

 

Impact of Inflation

 

We do not consider the impact of changes in prices due to inflation to be material in the analysis of our overall operations. 

 

 

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk that we will incur investment losses or increased interest expense due to adverse changes in market rates and prices. Our market risk exposures are substantially related to our investment portfolio and the impact of interest rate changes on these securities. In addition, interest rate changes can impact future interest expense for debt obligations that have a variable rate of interest associated with them.

 

 

At December 31, 2014, our investment portfolio consisted of approximately $276,000 of an institutional money market fund. Our portfolio also included approximately $7,263,000 of investment grade and non-investment grade corporate bonds and $1,055,000 of investments in FDIC-insured bank certificates of deposits. We have evaluated the impact on the invested portfolio’s fair value considering an immediate 100 basis point change in interest rates. A 100 basis point increase in interest rates would result in an approximate $263,000 decrease in fair value, whereas a 100 basis point decrease in interest rates would result in an approximate $240,000 increase in fair value. At December 31, 2014, the investment grade and non-investment grade corporate bonds and the certificates of deposit with amortized cost of approximately $7,047,000 and $1,050,000, respectively, are all classified as available for sale. Our investment in investment grade corporate bonds with a longer average maturity has added an element of market risk in 2014 and 2013.

 

At December 31, 2014, we had a mortgage note with a bank with an outstanding principal balance of $1,248,000 with a variable rate based on LIBOR plus 1.95%. However, in December 2012, we entered into a variable to fixed interest rate swap contract that effectively eliminated the interest rate risk exposure on all of the outstanding loan principal. Management estimates that a 100 basis point increase in interest rates would not materially impact our annual pre-tax earnings.

 

 

 

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of DCP Holding Company:

 

We have audited the accompanying consolidated balance sheets of DCP Holding Company and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income, redeemable shares and shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedules included in Item 15(a)2. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

  

 

/s/ Deloitte & Touche LLP

 

Cincinnati, OH

 

March 20, 2015

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2014 AND 2013

---

 

		2014				2013
ASSETS
INVESTMENTS:
Fixed maturities, available for sale at fair value, amortized cost of $7,397,000 and $6,986,000 at December 31, 2014 and 2013, respectively		$	7,547,366			$	7,068,365
Short-term investments, available for sale at fair value, cost of $700,000 and $260,000 at December 31, 2014 and 2013, respectively			704,676				261,244
Total investments			8,252,042				7,329,609
CASH AND CASH EQUIVALENTS			9,189,994				8,105,859
ACCRUED INVESTMENT INCOME			69,462				53,287
ACCOUNTS RECEIVABLE, including uncollected premiums of $1,021,970 and $719,755, net of allowance of $13,488 and $7,686 at December 31, 2014 and 2013, respectively			32,576,154				34,530,021
DEFERRED ACQUISITION COSTS			2,050,328				2,190,462
PROPERTY AND EQUIPMENT, net of depreciation and amortization of $2,968,846 and $2,728,361 at December 31, 2014 and 2013, respectively			2,676,914				2,473,285
OTHER ASSETS			2,423,916				2,220,582
TOTAL ASSETS		$	57,238,810			$	56,903,105
LIABILITIES, REDEEMABLE SHARES AND SHAREHOLDERS’ EQUITY
CLAIMS PAYABLE		$	2,997,613			$	2,219,725
UNEARNED PREMIUM REVENUE			32,636,768				35,395,337
OTHER PAYABLES AND ACCRUALS			5,444,808				5,445,258
MORTGAGE LOAN PAYABLE			1,247,600				1,294,400
CAPITAL LEASE OBLIGATION			771,478				379,265
DEFERRED COMPENSATION			2,766,449				2,062,783
TOTAL LIABILITIES			45,864,716				46,796,768
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED AND COMMON SHARES:
Institutional Preferred Shares-2010 Series, no par value, cumulative 5% dividend—authorized, 300 shares; issued and outstanding, 300 shares at December 31, 2014 and 2013, respectively			414,173				391,814
Institutional Preferred Shares-2012 Series, no par value, cumulative 5% dividend—authorized, 1,000 shares; issued and outstanding, 1,000 shares at December 31, 2014 and 2013, respectively			1,195,484				1,130,946
Institutional Preferred Shares-2013 Series, no par value, cumulative 5% dividend—authorized, 1,000 shares; issued and outstanding, 1,000 shares at December 31, 2014 and 2013			1,099,604				1,040,242
Class A, Redeemable Common Shares, no par value—authorized, 7,500 shares; issued and outstanding, 531 and 546 shares at December 31, 2014 and 2013, respectively			529,158				488,282
Class B Redeemable Common Shares, no par value—authorized, 120,000 shares; issued and outstanding, 7,843 and 7,889 shares at December 31, 2014 and 2013, respectively			7,815,789				7,055,053
Class C Redeemable Common Shares, no par value—authorized, 80,000 shares; issued and outstanding, 321 and zero shares at December 31, 2014 and 2013, respectively			319,886
Class D Redeemable Common Shares, no par value—authorized, 100,000 shares; issued none
Provider Preferred-2009 Series Redeemable Preferred Shares, no par value, cumulative 5% dividend—authorized, 5,000 shares; issued none
Total redeemable preferred and common shares			11,374,094				10,106,337
SHAREHOLDERS’ EQUITY—Preferred Shares; no par value—authorized, 92,700 shares; issued, none
TOTAL LIABILITIES, REDEEMABLE SHARES AND SHAREHOLDERS’ EQUITY		$	57,238,810			$	56,903,105

 

See notes to consolidated financial statements.

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

---

 

		2014				2013				2012
REVENUES
Premium revenue		$	91,936,578			$	86,362,613			$	80,153,437
Investment income			221,622				164,057				128,412
Realized gains on investments			29,691								34,046
Other income			62,304				61,477				67,926
Total revenues			92,250,195				86,588,147				80,383,821
EXPENSES
Healthcare services expense			71,695,797				67,762,332				63,735,583
Insurance expense:
Salaries and benefits expense			7,249,590				6,534,300				5,523,969
Commission expenses and other acquisition costs			5,123,790				4,074,714				3,879,603
Other insurance expense			5,952,103				6,180,356				5,206,212
Total insurance expense			18,325,483				16,789,370				14,609,784
Total expenses			90,021,280				84,551,702				78,345,367
INCOME BEFORE INCOME TAX			2,228,915				2,036,445				2,038,454
PROVISION (BENEFIT) FOR INCOME TAX:
Current			1,039,777				825,242				993,464
Deferred			(152,035	)			(70,403	)			(273,027	)
INCOME TAX EXPENSE			887,742				754,839				720,437
NET INCOME		$	1,341,173			$	1,281,606			$	1,318,017
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Change in the fair value of interest rate swap, net of income tax of $17,260, ($4,877), and ($10,479), respectively			33,504				(9,466	)			(20,342	)
Change in the fair value of investments, net of income tax of $33,974, ($56,513), and $73,856, respectively			65,943				(109,695	)			143,369
Reclassification adjustment for gains included in net income, net of tax of ($10,095) and ($11,697), respectively			(19,596	)							(22,708	)
Total other comprehensive income (loss)			79,851				(119,161	)			100,319
TOTAL COMPREHENSIVE INCOME		$	1,421,024			$	1,162,445			$	1,418,336

 

See notes to consolidated financial statements.

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF REDEEMABLE SHARES AND SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2014, 2013, AND 2012

---

		Redeemable Common Shares																								Redeemable Preferred Shares																								Stockholders' Equity
																										Institutional Preferred								Institutional Preferred								Institutional Preferred
		Class A								Class B								Class C								2010-Series								2012-Series								2013-Series												Accumulated
		Number of								Number of								Number of								Number of								Number of								Number of								Retained				Other Comprehensive
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Earnings				Income (Loss)				Total
Balance at December 31, 2011			596			$	409,211				7,827			$	5,378,383												300			$	342,464
Net Income																																																		$	1,318,017							$	1,318,017
Other comprehensive income, net																																																						$	100,319				100,319
Dividends declared																																																			(244,103	)							(244,103	)
Redeemable Shares issued			1				812				214				169,335																				1,000			$	1,000,000
Class A Common Shares exchanged for Class B Commons Shares			(14	)			(9,819	)			14				9,819
Redeemable Shares repurchased			(18	)			(13,649	)			(285	)			(212,956	)
Accretion of shares to redemption value							74,075								990,094																31,279								78,785								-				(1,073,914	)			(100,319	)			(1,174,233	)
Balance at December 31, 2012			565				460,630				7,770				6,334,675												300				373,743				1,000				1,078,785
Net Income																																																			1,281,606								1,281,606
Other comprehensive loss, net																																																							(119,161	)			(119,161	)
Dividends declared																																																			(392,196	)							(392,196	)
Redeemable Shares issued											376				322,481																												1,000			$	1,000,000
Class A Common Shares exchanged for Class B Commons Shares			(7	)			(5,672	)			7				5,672
Redeemable Shares repurchased			(12	)			(9,998	)			(264	)			(224,228	)
Accretion of shares to redemption value							43,322								616,453																18,071								52,161								40,242				(889,410	)			119,161				(770,249	)
Balance at December 31, 2013			546				488,282				7,889				7,055,053												300				391,814				1,000				1,130,946				1,000				1,040,242
Net Income																																																			1,341,173								1,341,173
Other comprehensive income, net																																																							79,851				79,851
Dividends declared																																																			(425,327	)							(425,327	)
Redeemable Shares issued											290				290,468				321			$	305,212
Redeemable Shares repurchased			(15	)			(13,834	)			(336	)			(309,786	)
Accretion of shares to redemption value							54,710								780,054								14,674								22,359								64,538								59,362				(915,846	)			(79,851	)			(995,697	)
Balance at December 31, 2014			531			$	529,158				7,843			$	7,815,789				321			$	319,886				300			$	414,173				1,000			$	1,195,484				1,000			$	1,099,604

 

See notes to consolidated financial statements. 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

---

 

		2014				2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	1,341,173			$	1,281,606			$	1,318,017
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			335,230				360,024				288,261
Loss on disposal of property							56,495
Realized gains on investments			(29,691	)							(34,046	)
Deferred income (benefit) tax			(152,035	)			(70,403	)			(273,027	)
Deferred compensation			959,380				675,195				542,630
Effects of changes in operating assets and liabilities:
Accrued investment income			(16,175	)			(20,369	)			6,746
Accounts receivable			1,953,867				(15,448,515	)			2,705,060
Deferred acquisition costs			140,134				(1,006,049	)			223,801
Other assets			(104,083	)			(195,397	)			(1,018	)
Claims payable			777,888				83,715				(665,458	)
Unearned premium revenue			(2,758,569	)			15,603,161				(2,664,626	)
Other payables and accruals			109,840				1,376,415				(84,275	)
Net cash provided by operating activities			2,556,959				2,695,878				1,362,065
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments			(2,629,082	)			(4,174,475	)			(1,166,660	)
Sales and maturities of investments			1,802,603				1,089,504				1,075,042
Acquisition of property and equipment			(530,245	)			(600,844	)			(124,222	)
Proceeds from the sale of property and equipment			516,394				311,955
Investment, other			(5,000	)			(5,000	)			(40,000	)
Net cash used in investing activities			(845,330	)			(3,378,860	)			(255,840	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Mortgage loan repayments			(46,800	)			(45,600	)			(780,000	)
Borrowing of mortgage loan											1,340,000
Repayment of capital lease			(124,181	)			(137,049	)			(107,753	)
Repurchase of redeemable shares			(361,721	)			(264,031	)			(137,891	)
Redeemable shares issued			330,535				1,096,959				1,044,245
Dividends paid			(425,327	)			(392,196	)			(260,426	)
Repayment of revolving note											(650,000	)
Net cash (used in) provided by financing activities			(627,494	)			258,083				448,175
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			1,084,135				(424,899	)			1,554,400
CASH AND CASH EQUIVALENTS—Beginning of year			8,105,859				8,530,758				6,976,358
CASH AND CASH EQUIVALENTS—End of year		$	9,189,994			$	8,105,859			$	8,530,758
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest		$	59,000			$	56,000			$	46,000
Cash paid for income taxes			1,270,000				540,000				1,110,000
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Redeemed common shares (in other payables and accruals)		$	82,518			$	130,219			$	160,024
Capital lease obligation			516,394				405,128
Redeemable common shares issued in lieu of cash payment of deferred compensation			255,714				225,522				125,902
Deferred restricted shares units issued in lieu of cash dividend			40,712				52,042				28,210
Class A redeemable common shares exchanged for Class B redeemable common shares							5,672				9,819
Purchased property and equipment (included in other payables and accruals)			1,344				13,169				26,338

 

See notes to consolidated financial statements.

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

AS OF DECEMBER 31, 2014 AND 2013 AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

 

 

 

1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

 DCP Holding Company (the “Company”) is the parent holding company of three wholly-owned subsidiaries which include Dental Care Plus, Inc., an Ohio corporation, Insurance Associates Plus, Inc., an Ohio corporation, and Adenta, Inc., a Kentucky corporation. The Company is primarily owned and controlled by dentists who participate in one or more of the networks that offers Dental Care Plus products. The Company is also partially owned by retired dentists, Company board members, non-dentist individuals and employees who hold voting redeemable common shares and by institutional investors that hold non-voting redeemable preferred shares. The Company primarily offers to employer groups of all sizes dental health maintenance organization (“HMO”), participating provider organization (“PPO”) and indemnity benefit plans and vision benefit plans. As of December 31, 2014, we had approximately 307,000 members in our dental benefits plans and approximately 28,900 members in our vision benefit plans. We had 2,808 dentists participating in our dental HMO network and 3,047 dentists participating in our dental PPO network at this time. The Company has 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, the Company’s dental PPO members have access to approximately 2,500 additional dentists in the Company’s operating territory and approximately 42,700 additional dentists throughout the United States. The Company also has a network leasing arrangement with a national dental administration company for the dental PPO plans that it offered on the Ohio exchange in 2014. With this network leasing arrangement, exchange members have access to approximately 1,600 dentists in Ohio.
 

Dental Care Plus Inc. is an Ohio-domiciled insurance company dually licensed as a life and health insurer and a specialty health insuring corporation and able to underwrite dental indemnity, dental PPO, dental HMO, and vision benefit products as well as other life and health insurance products.

 

The accounting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The accompanying consolidated financial statements include estimates for items such as claims payable, deferred acquisition costs, income taxes and various other liability accounts. Actual results could differ from those estimates. Policies that affect the more significant elements of the consolidated financial statements are summarized below.

 

Basis of Presentation— The accompanying consolidated financial statements include the accounts of the Company and subsidiaries, each of which is wholly-owned, and have been prepared in conformity with GAAP. All intercompany accounts and balances have been eliminated in consolidation. The Company presents its financial statements to conform with Article 7 of the Securities and Exchange Commission Regulation S-X pursuant to Section 13-15(d) of the Securities Exchange Act of 1934.

 

Cash and Cash Equivalents— The Company defines cash as cash held in operating accounts at financial institutions. The Company considers highly liquid investments with maturities of three months or less at the date of acquisition as cash equivalents in the accompanying consolidated financial statements. These investments are carried at cost, which approximates fair value.

 

Investments—The Company invests in certificates of deposit, corporate bonds and money market funds. The Company classifies all investments as available-for-sale. The Company engages a fixed income portfolio manager to manage the Company’s investment grade and non-investment grade corporate bonds, under the Company’s direction, in order to maximize investment returns. Such investments are recorded at fair value, with unrealized gains and losses recorded as a component of other comprehensive income. The Company recognizes gains and losses when these securities have other than temporary impairment, mature or are sold using the specific identification method.

 

Management follows a consistent and systematic process for recognizing impairments on securities that sustain other-than-temporary declines in value. The decision to record an other-than-temporary impairment for a security incorporates both quantitative criteria and qualitative information. The Company considers the severity of the loss on a security, duration of loss, duration of the investment, credit rating of the security, as well as payment performance and the Company’s intent or requirement to sell the investment before recovery when determining whether any impairment is other than temporary. The Company’s impairment policy for fixed-maturity securities states that other-than-temporary impairment is considered to have occurred if (1) the Company intends to sell the impaired fixed maturity security; (2) it is more likely than not that the Company will be required to sell the fixed maturity security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis.

 

  

Property and Equipment— Property and equipment is carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The building and the building improvements have useful lives of 27 years and 15 years, respectively. Furniture and fixtures have useful lives of 5 years, and computer equipment and software have useful lives of up to 5 years. Maintenance and repair costs are expensed as incurred. If an impairment exists, a loss is recorded as the amount by which the carrying value of the asset exceeds its fair value.

 

The Company reviews property and equipment for impairment whenever events or changes in circumstances, such as significant decreases in market values of assets, changes in legal factors or in the business climate, and accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset, or other such factors indicate that the carrying amount may not be recoverable.

 

State Guarantee Fund Deposits— The Company maintains funds on deposit with state insurance departments in those states where the Company is licensed to do business. These funds amounted to approximately $279,000 and $280,000 at December 31, 2014 and 2013, respectively. These funds are restricted and not available to the Company for normal operations and are included in other assets in the accompanying consolidated balance sheets.

 

Goodwill and Intangible Assets— Goodwill arises in business combinations when the purchase price of net assets less liabilities assumed acquired exceeds the fair value. As with tangible and other intangible assets, periodic impairment reviews are required, at least annually, as well as when events or circumstances change. Management uses judgment in assessing goodwill for impairment. Management reviews the recorded value of our goodwill annually, or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value. Professional judgment is exercised in determining future cash flows, timing and business valuation comparables or selecting discount rates to be used in any valuation assessments.

 

Business acquisitions often result in recording identifiable intangible assets. Identifiable intangible assets are recognized at the time of an acquisition, based upon their fair value. Similar to long-lived tangible assets, identifiable intangible assets are subject to amortization and periodic impairment reviews whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review for impairment of the Company’s intangible assets requires management to predict the estimated cash flows that will be generated by the long-lived asset over its remaining estimated useful life.

 

Deferred Acquisition Costs— Deferred acquisition costs are those incremental direct costs related to the successful acquisition of new and renewal business. These incremental direct costs are those that are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. Such incremental direct costs include commissions, costs of contract issuance and underwriting, premium taxes and other costs the Company incurs to acquire successful 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 $3,989,000, $4,867,000, and $3,368,000, and amortized approximately $4,129,000, $3,862,000, and $3,592,000 of these capitalized costs for the years ended December 31, 2014, 2013, and 2012, respectively. The amortization of these costs are recorded in commission expenses and other acquisition costs included in the consolidated statements of comprehensive income.

 

Redeemable Institutional Preferred Shares— In 2010, the Company entered into a Preferred Stock Purchase Agreement (the “2010-Stock Purchase Agreement”) with an investor. Pursuant to the 2010-Stock Purchase Agreement, the investor agreed to purchase 300 Shares at a purchase price of $1,000 per share, with an aggregate purchase price of $300,000. The annual dividend payable on each Share is 5% of the book value at the beginning of the dividend period.

 

In 2012, the Company entered into a Preferred Shares Purchase Agreement (the “2012-Stock Purchase Agreement”) with an investor. Pursuant to the 2012-Stock Purchase Agreement, the investor agreed to purchase 1,000 shares of Redeemable Institutional Preferred Shares (the “2012 Preferred Shares”) at a purchase price of $1,000 per share, for an aggregate purchase price of $1,000,000. The annual dividend payable on each 2012 Preferred Share is 5% of the book value at the beginning of the dividend period.

 

In 2013, the Company entered into a Preferred Shares Purchase Agreement (the “2013-Stock Purchase Agreement”) with an investor. Pursuant to the 2013-Stock Purchase Agreement, the investor agreed to purchase 1,000 shares of Redeemable Institutional Preferred Shares (the “2013 Preferred Shares”) at a purchase price of $1,000 per share, for an aggregate purchase price of $1,000,000. The annual dividend payable on each 2013 Preferred Share is 5% of the book value at the beginning of the dividend period.  

 

In the event of any liquidation, dissolution or winding up of the Company, any merger or consolidation resulting in a change of control of the Company, or any sale, lease, transfer or other disposition of substantially all of the assets of Company, holders of the Institutional Preferred Shares purchased pursuant to the 2012 and 2013-Stock Purchase Agreements will have the right to receive a cash payment in an amount equivalent to the consideration the investor would have otherwise received if the investor had the ability to convert each Preferred Share to 1.2 Class B Common Shares.

 

 

Redeemable Institutional Preferred Shares are participating securities that share in total comprehensive income as a change to the redemption value of the redeemable Institutional Preferred Shares to accrete (dilute) the carrying value to the redemption value at the end of each reporting period. Under this method, the end of the reporting period is treated as if it were also the redemption date for the securities. Redeemable Institutional Preferred Shares are considered to be redeemable shares due to the fact that the shareholders have the option to require the Company to repurchase these shares upon the shareholder’s discretion.

 

Redeemable Common Shares— The Company’s Class A, Class B, and Class C redeemable common shares are owned by participating providers, Company directors, employees and non-dentist individuals. All participating providers, Company directors and Company employees are eligible to own the Class A and Class B voting redeemable common shares. Non-dentist individuals are eligible to own the Class C voting redeemable common shares. The maximum percentage of Class C Common Shares outstanding at any time as a proportion of all voting Common Shares is 40%. The Company’s Class A, Class B and Class C common shares are considered to be redeemable common shares due to the fact that the shareholders have the option to require the Company to repurchase these shares under certain circumstances. The Company records Class A, Class B and Class C common shares as Redeemable Common Shares in the consolidated balance sheets outside of shareholders’ equity at the redemption value of the common shares. Accordingly, the Company records total comprehensive income as a change to the redemption value of the Redeemable Common Shares to accrete (dilute) the carrying value of the Redeemable Common Shares to the redemption value at the end of each reporting period.  Under this method, the end of the reporting period is treated as if it were also the redemption date for the securities.

 

Premium Revenue—

 

Fully-Insured—Membership contracts are written on an annual basis and are subject to cancellation by the employer group upon thirty days written notice. The Company’s unearned premium revenue was approximately $32,637,000 and $35,395,000 at December 31, 2014 and 2013, respectively, and primarily relates to the estimated premium revenue associated with the remaining contract periods. Related amounts recorded in accounts receivable were approximately $31,554,000 and $33,810,000 at December 31, 2014 and 2013, respectively. Premiums are due monthly in advance and are recognized evenly as revenue during the period in which the Company is obligated to provide services to members. Any amounts not received by the end of a reporting period are recorded as accounts receivable by the Company. Any premiums received prior to the beginning of a reporting period are recognized as premiums received in advance and are included in unearned premium revenue in the accompanying consolidated balance sheets. Premiums received in advance were approximately $1,083,000 and $1,585,000 at December 31, 2014 and 2013, respectively. Management has determined that as of December 31, 2014 and 2013, respectively, no premium deficiency reserve is required. The Company’s premium deficiency reserve analysis includes an allocation of investment income.

 

Self-Insured—The Company provides administrative and claims processing services, benefit plan design, and access to its provider networks for an administrative fee to self-insured groups. The Company has no underwriting risk arising from the provision or cost of any services provided to the self-insured groups. The Company recognizes and records self-insured premiums on a gross basis because: (i) the Company is the primary obligor in its contractual relationships with self-insured employers and dental service providers, (ii) the Company establishes the pricing for the services provided, (iii) the Company controls the selection of and the relationships with the dental service providers, and (iv) the Company is involved in the determination of dental service specifications. Self-insured premium revenue is recognized upon the payment of claims for self-insured members in accordance with agreements with self-insured employers and is included in premium revenue in the accompanying condensed consolidated statements of comprehensive income.

 

Third-party administration fee revenue (“ASO fees”) is recognized monthly when earned and is normally based on annual contracts with the self-insured groups. ASO fees are charged to self-insured employer groups monthly on a per subscriber per month basis. ASO fees also include the administrative fees the Company earns relative to the dental PPO, dental indemnity and vision products that are underwritten by third-party insurance carriers.

 

Investment Income— Investment income is comprised of interest income primarily earned from the Company’s certificates of deposit, investment grade corporate bonds, non-investment grade corporate bonds, and money market investments.

 

Other Income and Realized Gains On Investments, Net — Other income is comprised primarily of rental income from the rental of space in the building owned and partially occupied by the Company (See Note 15).  Realized gains on investments is primarily made up of realized investment gains and losses from the sale of investment grade and non-investment grade corporate bonds.

 

Healthcare Services Expense— Healthcare services expense is recognized on a monthly basis. In the case of the fully-insured dental HMO and indemnity (“dental HMO/IND”) and dental PPO segments, healthcare services expense is calculated by taking the paid claims associated with the fully-insured membership and adjusting this amount for the change in the claims payable liability determined using actuarial estimates. For the self-insured dental segment, the healthcare services expense is based solely on the paid claims for the self-insured membership. The Company incurred claim costs related to dental care providers amounting to approximately $71,696,000, $67,762,000, and $63,736,000, for the years ended December 31, 2014, 2013, and 2012, respectively.

 

 

41

---

 

 

Claims Payable— The Company estimates liabilities for both incurred but not reported (“IBNR”) and reported claims in process by employing actuarial methods that are commonly used by health insurance actuaries. These estimates meet actuarial standards of practice and are also recorded in accordance with GAAP. Management’s estimates of dental services provided are based on the Company’s historical experience and current trends, with assistance from the Company’s consulting actuary. Estimated dental claims payable are reviewed monthly by management and are adjusted based on current information, actual paid claims data, dental utilization statistics and other pertinent information. However, final claim payments may differ from the established reserves. Any resulting adjustments are reflected in current operations in the condensed consolidated statements of comprehensive income.

 

Reinsurance— In the normal course of business, the Company assumes premium revenue and related healthcare services expense from a third party insurance provider. There was no dental insurance premium assumed for the year ended December 31, 2014. Dental insurance premium assumed was approximately $38,000 and $189,000, for the years ended December 31, 2013 and 2012, respectively. There was no healthcare services expense assumed for the year ended December 31, 2014. The healthcare services expense assumed was approximately $28,000 and $173,000 for the years ended December 31, 2013 and 2012, respectively. As of December 31, 2014, the Company had no reinsurance premium receivable or claims payable. As of December 31, 2013, the Company had approximately $1,000 of reinsurance premium receivable and claims payable of approximately $1,000.      

 

Derivative Instruments— All derivative financial instruments are recorded on the consolidated balance sheet at fair value. The changes in fair value of derivatives that are designated and qualify as cash flow hedges are recorded in other comprehensive income, with subsequent reclassification to earnings when the hedged transaction asset or liability impacts earnings. Any ineffectiveness is recognized in earnings immediately. The Company’s risk management policy is to not enter into derivatives for speculative purposes.

 

Federal Income Tax— Deferred federal income tax is provided for in the accompanying consolidated financial statements for the tax effects of temporary differences between the carrying values and tax bases of assets and liabilities. Differences result primarily from items such as accrued commissions, deferred compensation, unearned premiums, property and equipment, deferred acquisition costs and unrealized gains on investments.

 

The Company reviews the deferred tax assets to determine the necessity of a valuation allowance. Valuation allowances are provided to the extent it is more likely than not that deferred tax assets will not be realized. The Company files a consolidated federal income tax return which includes all subsidiaries.

 

Concentrations of Credit Risk— Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of premiums receivable. Other than as discussed below, concentrations of credit risk with respect to premiums receivable are limited because of the large number of employer groups comprising the Company’s client base and contracts are cancelled if premiums are not paid within 90 days.

 

During 2014, 2013, and 2012, four fully-insured customers accounted for approximately 9%, 10%, and 9%, respectively, of the Company’s total revenue. Additionally, two self-insured customers accounted for approximately 11%, 11%, and 12% of the Company’s total revenue during each of the years 2014, 2013, and 2012, respectively.

 

The Company had one customer that had a balance of approximately 23% and 29% of the uncollected premium receivable balance at December 31, 2014 and 2013, respectively.

 

The Company maintains its cash in bank deposit accounts, which at times exceed federally insured limits. The Company has not experienced any losses in such accounts.

 

Fair Value of Financial Instruments— Certain financial instruments are required to be recorded at fair value. The Company primarily bases fair value for investments in fixed-maturity securities (including federally-insured certificates of deposits, investment grade corporate bonds and non-investment grade corporate bonds) on quoted market prices or on prices from a pricing vendor, an outside resource that supplies securities pricing, dividend, corporate action and descriptive information to support pricing, securities operations, research and portfolio management. The Company obtains and reviews the pricing service’s valuation methodologies and validates these prices using various inputs, including quotes from other independent regulatory sources. When deemed necessary, the Company validates prices by replicating a sample using a discounted cash flow model. Changes in assumptions or estimation methods could affect the fair value estimates.

 

2.     GOODWILL AND INTANGIBLE ASSETS

 

Goodwill and intangible assets were recorded as a result of the acquisition of Adenta, Inc. in 2005 related to goodwill, an acquired contract, memberships and a provider network. Goodwill amounted to approximately $136,000 at December 31, 2014 and 2013. There has not been any impairment on goodwill. Identifiable and amortizable intangible assets amounted to approximately $81,000 net of approximately $159,000 of accumulated amortization at December 31, 2014 and to approximately $97,000 net of approximately $143,000 of accumulated amortization at December 31, 2013. Amortization expense was approximately $15,000 for each of the three years ended December 31, 2014, 2013 and 2012. The provider network intangible asset of approximately $57,000 at December 31, 2014 is being amortized over a period of 20 years, a period during which the Company expects that all of these providers will have retired from the network. Membership intangible assets (net of individual memberships written-off in the year of acquisition) of approximately $24,000 at December 31, 2014 are being amortized over an 11 year useful life in accordance with the Company’s expectation for the membership retention. The remaining weighted-average amortization period for these intangible assets is approximately 8 years. Amortization expense for 2015 and 2016 is expected to be approximately $15,000 each year. Goodwill and intangible assets are included in other assets in the accompanying consolidated balance sheets at December 31, 2014 and 2013.

 

 

3.      INVESTMENTS

 

The Company owned certificates of deposit insured by the Federal Deposit Insurance Corporation (“FDIC”) with an amortized cost of $1,050,000 and $1,200,000 as of December 31, 2014 and 2013, 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. At December 31, 2013, the Company also invested in money market funds included in short-term investments and classified as available-for-sale, with a cost and fair value of approximately $60,000. The Company invested in corporate bonds with an amortized cost of approximately $7,047,000 and $5,936,000 as of December 31, 2014 and 2013, respectively. The investment and non-investment grade corporate bonds included in fixed maturity investments are classified as available-for-sale and are carried at fair value.

 

The Company owned 107 corporate bonds at December 31, 2014, which consist primarily of investment grade securities. At December 31, 2014, total bond fair value was approximately $7,196,000, which consists of 67 different securities each with a credit rating of A- or better totaling approximately $5,247,000. The remaining 40 securities, totaling approximately $1,949,000 had a credit rating of between BBB+ and B-. The weighted average yield-to-cost of the Company’s corporate bonds was approximately 3.18% at December 31, 2014. The weighted average maturity of the Company’s corporate bonds was 5.10 years at December 31, 2014. The unrealized gains and losses on available-for-sale investment activity are due to a change in fair value for these investments caused primarily by changes in prevailing interest rates since they were purchased. There were approximately $30,000 realized gains for the year ended December 31, 2014, respectively. There were no material realized gains or losses for the year ended December 31, 2013.

 

At December 31, 2014 and, 2013, maturity dates for fixed maturities and short-term investments (excluding the money market funds) were:

 

 

		Available-for-Sale
		Amortized				Fair				% of
		Cost				Value				Total Value
December 31, 2014
Maturity dates occurring:
Less than 1 year (Three certificates of deposit)		$	700,000			$	704,676				8.5	%
Greater than 1 year (Two certificates of deposit and 107 corporate bonds)			7,397,358				7,547,366				91.5	%
Total		$	8,097,358			$	8,252,042				100.0	%

 

		Available-for-Sale
		Amortized				Fair				% of
		Cost				Value				Total Value
December 31, 2013
Maturity dates occurring:
Less than 1 year (Two certificates of deposit)		$	200,000			$	201,027				2.8	%
Greater than 1 year (Six certificates of deposit and 108 corporate bonds)			6,986,176				7,068,365				97.2	%
Total		$	7,186,176			$	7,269,392				100.0	%

  

 

Investments classified at December 31, 2014 and 2013, as fixed maturities and short-term investments were as follows:

 

		Available-for-Sale
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gain				Loss				Value
December 31, 2014
Certificates of deposit, short term		$	700,000			$	4,676							$	704,676
Certificates of deposit, fixed maturities			350,000				926								350,926
Corporate bonds, fixed maturities			7,047,358				184,630			$	(35,548	)			7,196,440
Total investments		$	8,097,358			$	190,232			$	(35,548	)		$	8,252,042

 

		Available-for-Sale
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gain				Loss				Value
December 31, 2013
Money market fund		$	60,217											$	60,217
Certificates of deposit, short term			200,000			$	1,027								201,027
Certificates of deposit, fixed maturities			1,050,000				8,693			$	(1,625	)			1,057,068
Corporate bonds, fixed maturities			5,936,176				128,023				(52,902	)			6,011,297
Total investments		$	7,246,393			$	137,743			$	(54,527	)		$	7,329,609

 

     Unrealized losses at December 31, 2014 and 2013 on investments were generally due to higher current market yields relative to the yields of the investments at their amortized cost. Unrealized losses due to credit risk associated with the underlying collateral of the investments, if any, are not material. All investments with unrealized losses are reviewed quarterly to determine if any impairment is other than temporary, requiring a charge to earnings. The Company considers the severity of the loss on a security, duration of loss, duration of the investment, credit rating of the security, as well as payment performance and the Company’s intent or requirement to sell the investment before recovery when determining whether any impairment is other than temporary. The Company had no other than temporary impairment charges for the years ended December 2014, 2013 and 2012. The Company had no investments in a material unrealized loss position for greater than one year as of December 31, 2014 and 2013. 

 

 

4.    ACCUMULATED OTHER COMPREHENSIVE INCOME

 

 Accumulated other comprehensive income includes changes in unrealized gains and losses on available for sale and other invested assets as follows:

		2014												2013
		Before Tax				Income Tax				Net				Before Tax				Income Tax				Net
Accumulated unrealized gains, net on investments available for sale, beginning of period		$	85,588			$	29,101			$	56,487			$	251,796			$	85,614			$	166,182
Other comprehensive income (loss) before reclassification			99,917				33,974				65,943				(166,208	)			(56,513	)			(109,695	)
Reclassification adjustment for realized investment gains (losses), net included in realized gains on investments, net			(29,691	)			(10,095	)			(19,596	)
Effect on other comprehensive income (loss)			70,226				23,879				46,347				(166,208	)			(56,513	)			(109,695	)
Accumulated unrealized gains, net, on investments available for sale, end of period		$	155,814			$	52,980			$	102,834			$	85,588			$	29,101			$	56,487
Accumulated unrealized gains (losses), net, on interest rate swap, beginning of period		$	(55,618	)		$	(18,911	)		$	(36,707	)		$	(41,275	)		$	(14,034	)		$	(27,241	)
Other comprehensive income before reclassification			50,764				17,260				33,504				(14,343	)			(4,877	)			(9,466	)
Reclassification adjustment for realized interest swap loss, net included in realized gains on investments, net			-				-				-				-				-				-
Effect on other comprehensive income (loss)			50,764				17,260				33,504				(14,343	)			(4,877	)			(9,466	)
Accumulated unrealized gains, net, on interest rate swap, end of period		$	(4,854	)		$	(1,651	)		$	(3,203	)		$	(55,618	)		$	(18,911	)		$	(36,707	)
Accumulated other comprehensive income, beginning of period		$	29,970			$	10,190			$	19,780			$	210,521			$	71,580			$	138,941
Change in unrealized gains (losses), net, on investments available for sale			70,226				23,879				46,347				(166,208	)			(56,513	)			(109,695	)
Change in unrealized gains (losses), net, on interest rate swap			50,764				17,260				33,504				(14,343	)			(4,877	)			(9,466	)
Effect on other comprehensive income			120,990				41,139				79,851				(180,551	)			(61,390	)			(119,161	)
Accumulated other comprehensive income, end of period		$	150,960			$	51,329			$	99,631			$	29,970			$	10,190			$	19,780

 

		2012
		Before Tax				Income Tax				Net
Accumulated unrealized gains, net on investments available for sale, beginning of period		$	74,876			$	25,460			$	49,416
Other comprehensive income (loss) before reclassification			217,225				73,856				143,369
Reclassification adjustment for realized investment gains (losses), net included in realized gains on investments, net			(40,305	)			(13,702	)			(26,603	)
Effect on other comprehensive income (loss)			176,920				60,154				116,766
Accumulated unrealized gains, net, on investments available for sale, end of period		$	251,796			$	85,614			$	166,182
Accumulated unrealized gains (losses), net, on interest rate swap, beginning of period		$	(16,354	)		$	(5,560	)		$	(10,794	)
Other comprehensive income before reclassification			(30,821	)			(10,479	)			(20,342	)
Reclassification adjustment for realized interest swap loss, net included in realized gains on investments, net			5,900				2,005				3,895
Effect on other comprehensive income (loss)			(24,921	)			(8,474	)			(16,447	)
Accumulated unrealized gains, net, on interest rate swap, end of period		$	(41,275	)		$	(14,034	)		$	(27,241	)
Accumulated other comprehensive income, beginning of period		$	58,522			$	19,900			$	38,622
Change in unrealized gains (losses), net, on investments available for sale			176,920				60,154				116,766
Change in unrealized gains (losses), net, on interest rate swap			(24,921	)			(8,474	)			(16,447	)
Effect on other comprehensive income			151,999				51,680				100,319
Accumulated other comprehensive income, end of period		$	210,521			$	71,580			$	138,941

 

 

5.	LIABILITY FOR CLAIMS PAYABLE

 

Activity in the liability for claims payable for members is summarized as follows:

 

		2014				2013				2012
Balance—January 1		$	2,219,725			$	2,136,010			$	2,801,468
Net incurred claims related to:
Current year			48,580,639				45,865,228				42,909,476
Prior years			75,288				(146,287	)			(147,671	)
Net incurred claims			48,655,927				45,718,941				42,761,805
Net paid claims related to:
Current year			45,587,042				43,648,282				40,775,534
Prior years			2,290,997				1,986,944				2,651,729
Net paid claims			47,878,039				45,635,226				43,427,263
Balance—December 31		$	2,997,613			$	2,219,725			$	2,136,010

 

6.	FEDERAL INCOME TAXES

 

The components of the provision for income taxes are summarized as follows for the years ended December 31, 2014, 2013 and 2012, respectively:
 

		2014				2013				2012
Current tax expense:
Federal		$	1,020,061			$	811,632			$	973,336
State and local			19,716				13,610				20,128
Total current tax expense			1,039,777				825,242				993,464
Deferred tax benefit
Federal			(144,499	)			(64,374	)			(264,378	)
State and local			(7,536	)			(6,029	)			(8,649	)
Total deferred tax benefit			(152,035	)			(70,403	)			(273,027	)
Total provision for income taxes		$	887,742			$	754,839			$	720,437

 

Deferred tax assets and liabilities are comprised of the following: 

 

		2014				2013
Deferred tax assets:
Unearned premiums		$	73,616			$	107,785
Net operating loss			33,404				37,490
Recapitalization intangible			48,234				48,234
Accrued vacation			66,998				74,228
Accrued commissions			218,922				166,610
Deferred compensation			940,593				701,346
Accrued professional fees			46,342				43,282
Other, net			52,042				40,796
Gross deferred tax assets			1,480,151				1,219,771
Valuation Allowance			(48,234	)			(48,234	)
Gross deferred tax assets, net of valuation allowance			1,431,917				1,171,537
Deferred tax liabilities:
Unrealized gain on investments			51,326				10,192
Deferred policy acquisition costs			101,684				111,355
Prepaid insurance			70,772				66,154
Property and equipment			122,119				3,503
Identifiable intangible assets			27,571				32,790
Gross deferred tax liabilities			373,472				223,994
Net deferred tax asset		$	1,058,445			$	947,543

 

Management believes it is more likely than not that deferred tax assets, net of valuation allowance will reduce future income tax payments. Significant factors considered by management in its determination of the probability of the realization of the deferred tax benefits include the historical operating results and the expectations of future earnings. The Company had $98,247, $110,265, and $122,544 of net operating loss carry forwards to utilize in future years at December 31, 2014, 2013, and 2012, respectively. These losses will expire between 2018 and 2024. Net deferred tax assets are included in other assets in the accompanying consolidated balance sheets at December 31, 2014 and 2013.

 

The Company’s effective tax rate was different from the U.S statutory rate due to the following:

 

														2014				2013				2012
														Effective Tax				Effective Tax				Effective Tax
		2014				2013				2012				Rate				Rate				Rate
Provision computed at statutory rate		$	757,831			$	692,391			$	693,074				34.0	%			34.0	%			34.0	%
State and local taxes			4,575				2,954				4,864				0.2				0.1				0.2
Nondeductible meals, entertainment and legal expense			11,603				9,453				8,815				0.5				0.5				0.4
Nondeductible federal premium tax			113,733												5.1
Valuation Allowance							48,243												2.4
Other—net							1,798				13,684								0.1				0.7
Provision for income taxes		$	887,742			$	754,839			$	720,437				39.8	%			37.1	%			35.3	%

 

On September 13, 2013, the Internal Revenue Service released final tangible property regulations under Sections 162(a) and 263(a) of the Internal Revenue Code of 1986 (“Code”), regarding the deduction and capitalization of expenditures related to tangible property. The final regulations replace temporary regulations that were issued in December 2011. Also released were proposed regulations under Section 168 of the Code regarding dispositions of tangible property. These regulations generally apply to taxable years beginning on or after January 1, 2014 and did not have a material effect to the consolidated financial statements.

 

7.	ACCOUNTING FOR UNCERTAIN TAX POSITIONS

 

For the years ended December 31, 2014, 2013, and 2012, the Company did not have any significant uncertain tax positions. The Company is primarily subject to U.S. federal and various U.S. state and local tax authorities. Tax years subsequent to 2010 remain open to examination by the Internal Revenue Service (“IRS”), and tax years subsequent to 2009 remain open to other state and local tax authorities.

 

 

8. PROPERTY AND EQUIPMENT

 

Property and equipment at December 31 were summarized as follows:

 

		2014				2013
Land		$	364,000			$	364,000
Building and building improvements			2,494,601				2,435,101
Furniture and equipment			2,787,159				2,402,545
Total property and equipment			5,645,760				5,201,646
Less accumulated depreciation		$	(2,968,846	)		$	(2,728,361	)
Total property and equipment - net		$	2,676,914			$	2,473,285

 

The Company had depreciation expense of approximately $318,000, $347,000 and $271,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

  

9.	DEFERRED COMPENSATION PLAN

 

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

 

In 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 $130,000, $67,000, and $88,000 related to deferred director fees and deferred employee compensation for the years ended December 31, 2014, 2013 and 2012, respectively. Directors and key employees who elect to defer cash compensation may request that the Company invest this compensation in a mutual fund investment or phantom shares of the Company. The deferred cash compensation is included in the deferred compensation liability at December 31, 2014 and 2013.

 

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 individual is an employee of the Company at the end of the vesting year in question. There were approximately 145 and 165 of these non-vested awards outstanding at December 31, 2014 and 2013, respectively. The number of awards expected to vest approximates the total non-vested awards outstanding.

 

The Company has a long-term incentive compensation program for named executive officers pursuant to which an officer may receive an award of up to 45% of such officer’s base salary in the form of share awards which will vest if established Company performance criteria are achieved over a three year period. There were approximately 337 and 480 of these non-vested awards outstanding at December 31, 2014 and 2013, respectively.

 

The deferred compensation expense related to these awards is recorded ratably during the applicable vesting period. The Company recorded deferred compensation expense of approximately $872,000, $616,000, and $466,000, with a tax benefit of approximately $296,000, $209,000, and $158,000, related to deferred share awards and the change in the value of phantom shares for the years ended December 31, 2014, 2013 and 2012, respectively. As of December 31, 2014, there is approximately $301,000 of total unrecognized compensation cost related to non-vested awards under the Plans. That cost is expected to be recognized over a weighted average period of 1.34 years.

 

In February 2014 and 2013, the Board declared a per share cash dividend for all Class A, Class B and Class C redeemable common shares in the amounts of $35.77 and $32.60 per share, respectively. With the dividend, the holders of restricted share units and phantom shares received an equivalent share based dividend that resulted in an increase in the deferred compensation liability of approximately $41,000 and $52,000 in February 2014 and February 2013, respectively.

 

The maximum aggregate number of share based awards that may be issued under the Plans are 15,000 Class B Common Shares. In 2014, the non-employee members of the Board were granted a total of 252 share based awards. In 2014, key employees were granted 295 share based awards. As of December 31, 2014, the Company has granted a total of 3,293 share awards, net of share based dividends, forfeitures and rescinded share awards.

 

 

The following is a summary of activity of non-vested awards for the years ended December 31, 2014 and 2013:

 

		Individual Director's Share Awards				Weighted Average Grant Date Fair Value				Key Employee Share Awards				Fair Value at December 31,2014
Non-vested awards at January 1, 2014											644.6
Granted			252.0			$	894				295.0
Vested			(252.0	)			894				(433.1	)
Forfeited											(24.6	)
Non-vested awards at December 31, 2014											481.9			$	1,018

 

		Individual Director's Share Awards				Weighted Average Grant Date Fair Value				Key Employee Share Awards				Fair Value at December 31,2013
Non-vested awards at January 1, 2013											535.8
Granted			252.0			$	886				204.0
Vested during the year			(252.0	)			886				(74.2	)
Forfeited											(21.0	)
Non-vested awards at December 31, 2013											644.6			$	920

 

The following is a summary of activity of vested awards for the years ended December 31, 2014 and 2013: 

 

		Individual Director's Awards				Weighted Average Vested price				Key Employee Awards				Fair Value at December 31,2014
Vested awards at January 1, 2014			806.7			$	886				408.5
Share based dividend			32.5				887				13.4
Vested during the year			252.0				1,015				433.1
Redeemed vested awards											(76.2	)
Converted to Redeemable Common Shares			(252.0	)			1,015
Vested awards at December 31, 2014			839.2				1,018				778.8			$	1,018

 

		Individual Director's Awards				Weighted Average Vested price				Key Employee Awards				Fair Value at December 31,2013
Vested awards at January 1, 2013			876.0			$	815				339.7
Share based dividend			34.5				828				13.4
Vested during the year			252.0				881				74.2
Redeemed vested awards			(103.8	)			794				(14.8	)
Converted to Redeemable Common Shares			(252.0	)			881				(4.0	)
Vested awards at December 31, 2013			806.7				886				408.5			$	920

  

 

10. REDEEMABLE SHARES, SHAREHOLDERS’ EQUITY AND DIVIDEND RESTRICTIONS

 

Participating providers along with Company directors and employees have the option to purchase one or more voting Class B Redeemable Common Shares of the Company, when offered. Non-dentist individuals are eligible to purchase Class C voting redeemable common shares, when offered. The maximum percentage of Class C Common Shares outstanding at any time as a proportion of all voting Common Shares is 40%. The book value of a common share was approximately $997 and $894 at December 31, 2014 and 2013, respectively. In 2014, 2013 and 2012, the Board declared a per share cash dividend for all Class A, Class B and Class C redeemable common shares in the amounts of $35.77, $32.60 and $21.00, respectively.

 

The Company has 100,000 authorized Class D Redeemable Common Shares, without par value. The Class D Redeemable Common Shares are non-voting redeemable common shares that Preferred Shares may be converted to under certain circumstances. As of December 31, 2014 and 2013, none of these Class D redeemable shares were issued or are outstanding.

 

The Company is authorized to issue 100,000 preferred shares, without par. In 2010, the Company entered into a Preferred Stock Purchase Agreement with an investor for 300 Redeemable Institutional Preferred Shares at a purchase price of $1,000 per share. In 2012 and 2013, the Company entered into additional Stock Purchase Agreements with an investor for the sale of 1,000 Redeemable Institutional Preferred Shares each year at a purchase price of $1,000 per share. The annual dividend payable on each Redeemable Institutional Preferred Share is 5% of the book value at the beginning of the dividend period. As of December 31, 2014, 2013, and 2012, dividends declared were approximately $128,000, $123,000, and $67,000, respectively. As of December 31, 2014, 2013, and 2012, dividends paid were approximately $128,000, $123,000, and $83,000, respectively.

 

Redeemable Provider Preferred Shares-2009 Series are entitled to a cumulative cash dividend equal to 5% of the year end book value of the Redeemable Provider Preferred Shares. As of December 31, 2014 and 2013, none of these Provider Preferred Shares were issued or are outstanding.

 

Dividend restrictions vary among the subsidiaries. Dental Care Plus is restricted by regulatory requirements of its domiciliary state, which limit by reference to statutory net income and net worth, the dividends that can be paid without prior regulatory approval. Dividends paid by Dental Care Plus cannot, without prior approval of the Ohio Department of Insurance, exceed in any one year the lesser of: (i) 10% of net worth (as of the preceding December 31), or (ii) net income for the prior year, and only if net worth exceeds $250,000 and only out of unassigned surplus. There were no dividends declared or paid by any subsidiaries during 2014 or 2013. In December 2012, Dental Care Plus declared and paid a dividend to the Company totaling $360,000. During 2015, the total dividend that the Dental Care Plus subsidiary may declare without prior regulatory approval is approximately $969,000.

 

GAAP differs in certain respects from the accounting practices prescribed or permitted by state insurance regulatory authorities (“statutory-basis”), a non-GAAP basis of accounting. The statutory-basis net income for Dental Care Plus was approximately $1,156,000, $1,191,000, and $1,108,000 for the years ended December 31, 2014, 2013 and 2012, respectively. Statutory-basis equity was approximately $9,689,000 and $8,560,000 at December 31, 2014 and 2013, respectively.

 

11.DEBT

 

In December 2012, the Company refinanced the mortgage of its 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 $1,340,000. Interest is payable based on the 30-day LIBOR rate plus 1.95%. As a result of the mortgage note having a variable interest rate that adjusts monthly with the 30-day LIBOR rate, the carrying value of the mortgage note of $1,247,600 approximates fair value. The Company also entered into an interest rate swap agreement that effectively changed the interest rate related to the $1,340,000 mortgage note with a commercial bank from a variable rate based on the 30-day LIBOR rate plus 1.95% to a fixed rate of 3.90% for the 10-year period through December 22, 2022. Under this mortgage, the Company is required to have a minimum tangible net worth equal to or greater than $3,500,000 at the end of each fiscal year and a debt service ratio of at least 1:1. The mortgage note fair value disclosure is classified as Level 2 in the fair-value hierarchy.

 

Required principal repayments under the mortgage loan payable are as follows:

  

Years Ending
December 31
2015		$	49,200
2016			50,400
2017			52,800
2018			55,200
2019 and thereafter			1,040,000
Total mortgage payable		$	1,247,600

   

In 2014, the Company entered into a sale-leaseback transaction with a leasing company for the sale of certain fixed assets for approximately $516,000. There was no gain or loss on the sale. The Company did not retain the benefits and risk to the property sold and the risk of ownership was transferred to the leasing company. The Company also entered into a capital lease agreement with the leasing company that obligates the Company to pay lease payments totaling approximately $552,000 related to these assets over a four year period. Under this capital lease agreement, the Company is required to have a minimum tangible net worth equal to or greater than $2,500,000 at the end of each fiscal year.

 

  

In 2013, the Company entered into a sale-leaseback transaction with a leasing company for the sale of certain fixed assets for approximately $312,000. There was no gain or loss on the sale. The Company did not retain the benefits and risk to the property sold and the risk of ownership was transferred to the leasing company. The Company also entered into a capital lease agreement with the leasing company that obligates the Company to pay lease payments totaling approximately $327,000 related to these assets over a three year period. Under this capital lease agreement, the Company is required to have a minimum tangible net worth equal to or greater than $2,500,000 at the end of each fiscal year.

 

At December 31, 2014, future required payments under all outstanding capital leases are as follows:

 

2015		$	268,595
2016			249,638
2017			146,979
2018			137,929
2019			11,462
Total			814,603
Less imputed interest			(43,125	)
Present value of minimum lease payments		$	771,478

  

12. DERIVATIVE

 

In December 2012, the Company entered into an interest rate swap agreement (“Agreement”) (cash flow hedge) with an original notional amount of $1,340,000. The Agreement is used to manage the Company’s interest rate risk. The swap agreement effectively changed the interest rate related to the Company’s 2012 refinanced mortgage note with a commercial bank from a variable rate based on the 30-day LIBOR rate plus 1.95% to a fixed rate of 3.90% for the 10-year period through December 22, 2022. The Company’s risk management policy is to not enter into derivatives for speculative purposes. The notional amount decreases in direct correlation to the principal reduction of the mortgage. The Company believes that the risk of nonperformance by the counter party to this Agreement is not material to the financial statements. At December 31, 2014 and 2013, the fair value of this Agreement was a liability of approximately $5,000 and $56,000, respectively. This amount is included in other payables and accruals in the accompanying consolidated balance sheets. The agreement will terminate upon maturity of the mortgage loan payable (Note 11).

 

In 2003, the Company previously entered into an interest rate swap agreement (“2003-Agreement”) (cash flow hedge) with an original notional amount of $1,500,000. The swap agreement effectively changed the interest rate related to $1,500,000 of the Company’s $1,800,000 previous 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%. The 2003-Agreement terminated in December 2012 when the Company refinanced the mortgage note (Note 11). Upon termination of the 2003-Agreement, the Company realized a loss of approximately $5,900, which is included in realizable gains (losses) on investments, net in the accompanying consolidated statements of comprehensive income for the year ended December 31, 2012.

 

The amounts included in other comprehensive income (loss) related to the interest rate swaps were $33,504, $(9,466), and ($16,447), net of income tax expense (benefit) of $17,260, $(4,877), and $(8,474), during 2014, 2013 and 2012, respectively.

 

13.	LINES OF CREDIT

 

The Company has an annually renewable agreement with a commercial bank for a $500,000 working capital line of credit. Interest is payable at a variable rate of LIBOR plus 2.50%. The Company did not have any interest expense or significant fees for the line of credit for each of the three years ended December 31, 2014. As of December 31, 2014 and 2013, there was no amount outstanding on this line of credit. The $500,000 working capital line of credit expires in July 2015.

 

The Company has an additional annually renewable working capital line of credit for $1,000,000. Interest is payable at a variable rate of LIBOR plus 2.50%. The Company did not have any interest expense or significant fees for the line of credit for each of the three years ended December 31, 2014. At December 31, 2014 and 2013, there was no amount outstanding on this line of credit. The $1,000,000 working capital line of credit expires in July 2015. In addition, the Company had an irrevocable letter of credit for $10,000, with interest payable on all outstanding amounts at a variable rate of the prime rate of borrowing plus 6.00%. The letter of credit also had an annual fixed rate of 2.10% for access to the letter of credit obligation. The letter of credit expired in December 2014 and was not renewed.

 

 

14.	COMMITMENTS AND CONTINGENCIES

 

Leases—The Company leases certain equipment and office space under non-cancelable operating leases. Rent expense under all operating leases was approximately $154,000, $136,000, and $118,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

 

At December 31, 2014, future approximate minimum annual lease payments under non-cancelable operating leases are as follows:

 

 

Years Ending
December 31
2015		$	156,000
2016			126,000
2017			46,000
2018			36,000
2019 and thereafter			17,000
Total		$	381,000

 

Litigation—In the normal course of business, the Company is subject to various regulatory proceedings, lawsuits, claims and other matters. We are not aware of any matters which are more than remote in possibility and in the opinion of the Company’s management, the eventual resolution of such matters for amounts above those reflected in the consolidated financial statements would not have a material adverse effect on the financial condition or results of operations of the Company.

 

15.      LEASE INCOME

 

The Company leases space in its building to unrelated parties under non-cancelable leases. Income recorded by the Company under non-cancelable leases amounted to approximately $62,000, $62,000, and $68,000 for the years ended December 31, 2014, 2013 and 2012. Such amounts are recorded as other income in the accompanying consolidated statements of comprehensive income. As of December 31, 2014, the Company has approximately $62,000 of future minimum annual lease income under non-cancelable leases in 2015.

 

16.	RETIREMENT PLAN

 

Employees of the Company are covered by a defined contribution 401(k) plan sponsored by the Company. Discretionary contributions of a certain percentage of each employee’s contribution, which may not exceed a limit set annually by the Internal Revenue Service, are contributed by the Company each year and vest ratably over a five-year period. Company contributions, including administration fees paid by the Company, amounted to approximately $60,000 for the years ended December 31, 2014, 2013 and 2012.

 

 

17.	SEGMENT INFORMATION

 

The Company manages its business with four segments: fully-insured dental HMO and indemnity, fully-insured dental PPO, self-insured dental and corporate, all other. Self-insured dental consists of the self-insured dental HMO, self-insured dental PPO and self-insured dental indemnity products. Corporate, all other consists of revenue associated with the Company’s dental indemnity, dental PPO, and vision products underwritten by third-party insurance carriers and certain other corporate activities. These segments are consistent with information used by the Chief Executive Officer (the chief operating decision maker) in managing the business.

 

The results of the fully-insured dental HMO and indemnity, fully-insured dental PPO and self-insured dental segments are measured by gross profit. The Company does not allocate insurance expense, investment and other income, assets or liabilities to these segments because the Company does not use these measures to analyze the segments. These items are assigned to the remainder of the Company’s business, which it identifies as corporate, all other. The Company’s gross profit was approximately $20,240,000, $18,601,000, and $16,417,000, for the years ended December 31, 2014, 2013 and 2012, respectively.

 

 

Listed below is financial information required for each reportable segment for the years ended December 31, 2014, 2013 and 2012 (amounts in thousands):

 

 

		Fiscal Year Ended												Fiscal Year Ended
		December 31, 2014												December 31, 2013
		Revenues-				Healthcare								Revenues-				Healthcare
		External				Services								External				Services
		Customers				Expense				Total				Customers				Expense				Total
Reportable segments:
Fully-insured dental HMO/Indemnity		$	47,948			$	35,995			$	11,953			$	46,656			$	35,024			$	11,632
Fully-insured dental PPO			16,459				12,661				3,798				13,494				10,695				2,799
Self-insured dental			26,905				23,040				3,865				25,641				22,043				3,598
Corporate, all other			624								624				572								572
Total		$	91,936			$	71,696				20,240			$	86,363			$	67,762				18,601
Investment income											222												164
Realized gains on investments, net											30
Other income											62												61
Insurance expense											18,325												16,790
Income before income tax										$	2,229											$	2,036
Total assets-corporate										$	57,239											$	56,903

 

 

		Fiscal Year Ended
		December 31, 2012
		Revenues-				Healthcare
		External				Services
		Customers				Expense				Total
Reportable segments:
Fully-insured dental HMO/Indemnity		$	43,844			$	33,399			$	10,445
Fully-insured dental PPO			11,429				9,363				2,066
Self-insured dental			24,380				20,974				3,406
Corporate, all other			500								500
Total		$	80,153			$	63,736				16,417
Investment income											128
Realized gains on investments, net											34
Other income											68
Insurance expense											14,609
Income before income tax										$	2,038
Total assets-corporate										$	37,337

 

Inter-segment revenues were not significant for 2014, 2013, or 2012.

 

18.	RELATED PARTIES

 

All of the Company’s Class A, and Class B shareholders are related parties, either as a participating provider, director or an employee of the Company.

 

The Company’s providers, who are also shareholders, submitted claims of approximately $36,902,000, $37,566,000, and $37,720,000 in 2014, 2013 and 2012, respectively. The Company had claims payable liability to related party providers of approximately $1,547,000 and $1,231,000 at December 31, 2014 and 2013, respectively.

 

Seven of our Board members are also participating providers and as a group received approximately $191,000, $154,000 and $159,000 in directors’ fees for the years ended December 31, 2014, 2013, and 2012, respectively.

  

19.	FAIR VALUE MEASUREMENTS

 

The Company classifies the assets and liabilities that require measurement of fair value based on the priority of the observable and market-based sources of data into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows:

 

 

●

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

●

Level 2 – Valuations based on significant other observable inputs other than those included in Level 1 such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

●

Level 3 – Valuations based on unobservable inputs such as when observable inputs are not available or inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The following table presents for each of the fair value levels, the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2014 and 2013 (amounts in thousands):

 

		December 31, 2014												December 31, 2013
		Level 1				Level 2				Total Balance				Level 1				Level 2				Total Balance
Assets
Fixed maturities
Federally-Insured certificates of deposit						$	351			$	351							$	1,057			$	1,057
Investment grade corporate bonds							6,780				6,780								6,011				6,011
Non-investment grade corporate bonds							416				416
Short-term investments
Money Short-term investmentsmarket fund														$	60								60
Federally-Insured certificates of deposit							705				705								201				201
Deferred compensation investments (a)
Equity mutual fund investments		$	530								530				419								419
State guarantee fund deposits (b)
Government securities			229								229				230								230
Federally-Insured certificates of deposit							50				50								50				50
Total		$	759			$	8,302			$	9,061			$	709			$	7,319			$	8,028
Liabilities
Interest rate swap (c)						$	5			$	5							$	56			$	56
Total		$				$	5			$	5			$				$	56			$	56

 

(a) Included as a trading security in other assets

(b) Included in other assets

(c) Included in other payables and accruals

 

The Company measures fair value using the following valuation methodologies. The Company uses quoted market prices to determine the fair value of the deferred compensation investments and certain state fund guarantee deposits; such items are classified as Level 1 of the fair value hierarchy. Examples include government securities and mutual fund equity securities. The Company primarily bases fair value for investments in fixed-maturity securities on quoted market prices or on prices from a pricing vendor, an outside resource that supplies independent securities pricing, dividend, corporate action and descriptive information to support fund pricing, securities operations, research and portfolio management. The Company obtains and reviews the pricing service’s valuation methodologies and validates these prices using various inputs including quotes from other independent regulatory sources. When deemed necessary, the Company validates prices by replicating a sample using a discounted cash flow model. Such items are classified as Level 2 of the fair value hierarchy. The Company obtains a price from an independent vendor to determine the fair value of the interest rate swap. The independent vendor uses a discounted cash flow method whereby the significant observable inputs include the replacement interest rates of similar swap instruments in the market and swap curves; such items are classified as Level 2 of the fair value hierarchy.

 

At December 31, 2014 and 2013, there were no assets or liabilities that were required to be measured at fair value on a non-recurring basis. The Company did not have any transfers between fair value hierarchy levels during December 2014 and 2013. As of December 31, 2014 and 2013, the Company did not have any assets or liabilities classified as Level 3 of the fair value hierarchy.

 

 

20.	QUARTERLY DATA (UNAUDITED)

 

A summary of our unaudited quarterly results of operations for the years ended December 31, 2014 and 2013 is as follows (amounts in thousands):

 

		2014
		March 31				June 30				September 30				December 31				Total
Premium revenue		$	22,636			$	22,851			$	23,578			$	22,871			$	91,936
Gross profit			4,559				4,883				4,937				5,861				20,240
Income before income taxes			195				363				882				789				2,229

 

		2013
		March 31				June 30				September 30				December 31				Total
Premium revenue		$	20,849			$	21,415			$	22,614			$	21,485			$	86,363
Gross profit			3,895				4,673				4,376				5,657				18,601
Income before income taxes			140				581				188				1,127				2,036

 

21.  SUBSEQUENT EVENTS

 

In accordance with the provisions of the Affordable Care Act of 2010, the federal government imposed an annual assessment on all U.S. health insurers of approximately $11.3 billion in 2015. This annual assessment will increase each year and is expected to be $16.0 billion in 2019. This annual assessment is allocated to individual health insurers based on the ratio of the insurer’s net premiums written during the preceding calendar year to the total health insurance premiums for any U.S. risk premium written for that same year. The first $25 million of a health insurer’s net premium written is exempt from the federal premium tax assessment. The net premium written by a health insurer from $25 million to $50 million is subject to 50% of the federal premium tax rate. Accordingly, in January 2015, the Company established a liability for the federal premium tax of approximately $530,000 that is payable to the United States Treasury in September 2015, along with an offsetting asset that will be amortized during 2015.     

 

On February 11, 2015, the Company’s Board of Directors declared a $39.86 per share dividend for all Class A, Class B and Class C redeemable common shareholders of record on February 11, 2015, payable on March 27, 2015. With the dividend, the holders of restricted share units will receive an equivalent share based dividend.

 

 

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.     CONTROLS AND PROCEDURES

 

 

Evaluation of Disclosure Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Securities and Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2014. Based on such evaluation, the Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), concluded that the Company’s disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

The Chief Executive Officer and Chief Financial Officer also have concluded that in the fourth quarter of the fiscal year ended December 31, 2014, there were no changes in the Company’s internal controls that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

Management’s Report on Internal Control Over Financial Reporting

 

      Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). In evaluating the Company’s internal control over financial reporting, management has adopted the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014. Based on our evaluation under the framework in Internal Control-Integrated Framework, our management has concluded that our internal control over financial reporting was effective.

 

     The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. However, because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

ITEM 9B.     OTHER INFORMATION

 

None.

 

 

PART III

 

 

ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Information required by this Item 10 regarding our directors and corporate governance is incorporated by reference to the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on April 22, 2015 in the sections and subsections entitled, “Election of Directors”, “Director Nominees”, “Audit Committee”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Report of the Audit Committee of the Board of Directors”, “Corporate Affairs Committee”, “Director Nomination Process” and “Code of Conduct”. The information required by Item 10 regarding our executive officers appears as a Supplement Item at the end of Item 1 under Part I hereof.

 

 

ITEM 11.     EXECUTIVE COMPENSATION

 

Information required by this Item 11 is incorporated by reference to the information under the sections and subsections “Executive Compensation”, “Corporate Affairs Committee” and “Report of the Corporate Affairs Committee” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on April 22, 2015.

 

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The information required by this Item 12 (other than the information required by Item 201(d) of Regulation S-K which is set forth below) is incorporated by reference to the information under the section “Security Ownership of Certain Beneficial Owners and Management” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on April 22, 2015.

 

In December 2005, we adopted the 2006 Dental Care Plus Management Equity Incentive Plan for our directors, Named Executive Officers and other key employees. The maximum aggregate number of restricted shares or restricted share units (“RSUs”) which may be issued under this plan are 15,000 Class B Common Shares. In 2014, the non-employee members of the Board were granted a total of 252 RSUs. In 2014, Named Executive Officers and other key employees were granted 295 restricted share units. As of December 31, 2014, the Company granted a total of 3,293 RSUs, net of share based dividends, forfeitures and rescinded RSUs.

 

 

 

Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by shareholders			—				—				—
Equity compensation plans not approved by shareholders			—				—				11,707
TOTAL			—				—				11,707

 

 

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information required by this Item 13 is incorporated by reference to the information under the Section “Transactions with Related Persons, Promoters and Certain Control Persons” and the subsection “Director Independence” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on April 22, 2015.

 

ITEM 14.     PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information required by this Item 14 relating to auditor fees is incorporated by reference to the information under the Section “Other Matters” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on April 22, 2015.

 

 

PART IV

 

 

 

ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a) The following documents are filed as part of this Form 10-K.

 

Page in Form 10-K
(1) Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm	34
Consolidated Balance Sheets as of December 31, 2014 and 2013	35
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013, and 2012	36
Consolidated Statements of Redeemable Shares and Shareholders’ Equity for the Years Ended December 31, 2014, 2013, and 2012	37
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013, and 2012	38
Notes to the Consolidated Financial Statements	39
(2) Financial Statement Schedules:
Schedule I- Summary of Investments - Other than Investments in Related Parties as of December 31, 2014	58
Schedule II-Condensed Balance Sheets of Parent Company as of December 31, 2014 and 2013	59
Schedule II-Condensed Statements of Comprehensive Income of Parent Company for the Years Ended December 31, 2014, 2013, and 2012	60
Schedule II-Condensed Statements of Cash Flows of the Parent Company for the Years Ended December 31, 2014, 2013, and 2012	61
Schedule III-Supplementary Insurance Information for the Years Ended December 31, 2014, 2013, and 2012	63
Schedule IV-Reinsurance for the Years Ended December 31, 2014, 2013 and 2012	64
Schedule V-Valuation and Qualifying Accounts for the Years Ended December 31, 2014, 2013, and 2012	64
(3) Exhibits:
See the List of Exhibits on the Index to Exhibits following the signature page.

 

(b) The exhibits listed on the Index to Exhibits are filed as part of or incorporated by reference into this report.

 

 

DCP Holding Company and subsidiaries

Schedule I - Summary of Investments -

Other than Investments in Related Parties 

At December 31, 2014

(amounts in thousands)

 

Type of Investment		Amortized Cost				Fair Value				Balance Sheet
Fixed Maturities:
Bonds:
All other corporate bonds		$	7,047			$	7,196			$	7,196
Certificates of deposit			1,050				1,056				1,056
Total Investments		$	8,097			$	8,252			$	8,252

 

 

DCP HOLDING COMPANY (Parent Only)

 

Schedule II - Condensed Financial Information of Registrant

Condensed Balance Sheets

As of December 31, 2014 and 2013

 

		2014				2013
ASSETS
INVESTMENTS:
Fixed maturities		$	926,182			$	877,671
Short-term investments							41,738
Total investments			926,182				919,409
CASH AND CASH EQUIVALENTS			1,831,520				1,375,743
ACCRUED INVESTMENT INCOME			11,165				4,349
INTERCOMPANY RECEIVABLES			572,005				373,829
INTERCOMPANY NOTE RECEIVABLE			230,000				230,000
PROPERTY			1,854,933				1,907,474
INVESTMENT IN SUBSIDIARIES			10,269,275				9,333,447
DEFERRED INCOME TAX			1,045,723				811,976
OTHER ASSETS			789,431				690,855
TOTAL ASSETS		$	17,530,234			$	15,647,082
LIABILITIES, REEDEMABLE SHARES, AND SHAREHOLDERS’ EQUITY
OTHER PAYABLES AND ACCRUALS		$	2,142,091			$	2,183,562
MORTGAGE LOAN PAYABLE			1,247,600				1,294,400
DEFERRED COMPENSATION			2,766,449				2,062,783
TOTAL LIABILITIES			6,156,140				5,540,745
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SHARES:
Institutional Preferred Shares-2010 Series, no par value, cumulative 5% dividend—authorized, 300 shares; issued and outstanding, 300 shares at December 31, 2014 and 2013, respectively			414,173				391,814
Institutional Preferred Shares-2012 Series, no par value, cumulative 5% dividend—authorized, 1,000 shares; issued and outstanding, 1,000 shares at December 31, 2014 and 2013, respectively			1,195,484				1,130,946
Institutional Preferred Shares-2013 Series, no par value, cumulative 5% dividend—authorized, 1,000 shares; issued and outstanding, 1,000 shares at December 31, 2014 and 2013, respectively			1,099,604				1,040,242
Class A, Redeemable Common Shares, no par value—authorized, 7,500 shares; issued and outstanding, 531 and 546 shares at December 31, 2014 and 2013, respectively			529,158				488,282
Class B Redeemable Common Shares, no par value—authorized, 120,000 shares; issued and outstanding, 7,843 and 7,889 shares at December 31, 2014 and 20132, respectively			7,815,789				7,055,053
Class C Redeemable Common Shares, no par value—authorized, 80,000 shares; issued and outstanding, 321 and zero shares at December 31, 2014 and 2013, respectively			319,886
Class D Redeemable Common Shares, no par value—authorized, 100,000 shares;
Provider Preferred-2009 Series Redeemable Preferred Shares, no par value, cumulative 5% dividend—authorized, 5,000 shares; issued none
Total redeemable preferred and common shares			11,374,094				10,106,337
SHAREHOLDERS’ EQUITY—Preferred Shares; no par value—authorized, 92,700 shares; issued, none
TOTAL LIABILITIES, REDEEMABLE SHARES AND SHAREHOLDERS' EQUITY		$	17,530,234			$	15,647,082

 

This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8, Page 34 and the notes to the Condensed Financial Statements.

 

 

DCP HOLDING COMPANY (Parent Only)

 

Schedule II - Condensed Financial Information of Registrant 

Condensed Statements of Comprehensive Income

For the Years ended December 31, 2014, 2013 and 2012

 

		2014				2013				2012
REVENUES
Management fees from subsidiaries		$	11,486,781			$	11,029,944			$	9,531,143
Investment income			33,528				16,536				7,502
Administrative fees			798,900				713,915				273,251
Total revenues			12,319,209				11,760,395				9,811,896
EXPENSES
Insurance expense:
Salaries and benefit expense			7,356,679				6,626,586				5,603,918
Other insurance expense			4,470,223				5,043,160				3,956,496
Total expenses			11,826,902				11,669,746				9,560,414
INCOME BEFORE INCOME TAX			492,307				90,649				251,482
PROVISION (BENEFIT) FOR INCOME TAX:
Current			428,152				226,519				284,933
Deferred			(246,426	)			(134,903	)			(187,044	)
Total			181,726				91,616				97,889
Income (Loss) before undistributed income of subsidiaries			310,581				(967	)			153,593
Undistributed income of subsidiaries			1,030,592				1,282,573				1,164,424
NET INCOME		$	1,341,173			$	1,281,606			$	1,318,017
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Change in the fair value of interest rate swap											6,900
Change in the fair value of investments			74,832				(104,983	)			143,369
Reclassification adjustment for gains included in undistributed income			(19,596	)							(22,708	)
Total other comprehensive income held by subsidaries			55,236				(104,983	)			127,561
Change in the fair value of investments			(8,889	)			(4,712	)
Change in the fair value of interest rate swap			33,504				(9,466	)			(27,242	)
TOTAL COMPREHENSIVE INCOME		$	1,421,024			$	1,162,445			$	1,418,336

 

This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8, Page 34 and the notes to the Condensed Financial Statements.

 

 

DCP HOLDING COMPANY (Parent Only)

 

Schedule II - Condensed Financial Information of Registrant

Condensed Statements of Cash Flows

For the Years ended December 31, 2014, 2013 and 2012

 

		2014				2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	1,341,173			$	1,281,606			$	1,318,017
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			116,194				110,567
Loss on disposal of property							56,495
Undistributed income of subsidiaries			(1,030,592	)			(1,282,573	)			(1,164,424	)
Deferred income (benefit) tax			(246,426	)			(134,903	)			(187,044	)
Deferred compensation			959,380				675,195				542,630
Effects of changes in operating assets and liabilities:
Accrued investment income			(6,816	)			(4,349	)
Intercompany accounts receivables			(198,176	)			34,003				(403,074	)
Other assets			(89,141	)			(151,936	)			5,839
Other payables and accruals			56,994				339,117				684,596
Net cash provided by operating activities			902,590				923,222				796,540
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments			(822,222	)			(885,902	)
Sale and maturities of investments			794,972
Acquisition of property and equipment			(61,250	)			(187,427	)
Acquisition of property from subsidiary											(1,886,004	)
Investment, other			(5,000	)			(5,000	)			(40,000	)
Net cash used in investing activities			(93,500	)			(1,078,329	)			(1,926,004	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Mortgage loan repayments			(46,800	)			(45,600	)
Borrowing of mortgage note											1,340,000
Advance to subsidiaries											(605,478	)
Dividends from subsidiaries to finance real estate			150,000								360,000
Repurchase of redeemable shares			(361,721	)			(264,031	)			(137,891	)
Issuance of redeemable shares			330,535				1,096,959				1,044,245
Additional contribution with share exchange
Dividends paid			(425,327	)			(392,196	)			(260,426	)
Net cash (used in) provided by financing activities			(353,313	)			395,132				1,740,450
INCREASE IN CASH			455,777				240,025				610,986
CASH AND CASH EQUIVALENTS—Beginning of year			1,375,743				1,135,718				524,732
CASH AND CASH EQUIVALENTS—End of year		$	1,831,520			$	1,375,743			$	1,135,718
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest		$	47,000			$	52,000
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Redeemed common shares (in other payables and accruals)		$	82,518			$	130,219			$	160,024
Redeemed common shares issued in lieu of cash payment of deferred compensation			255,714				225,522				125,902
Deferred restricted shares units issued in lieu of cash dividend			40,712				52,042				28,210
Class A redeemable common shares exchanged for Class B redeemable common shares							5,672				9,819

 

This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8, Page 34 and the notes to the Condensed Financial Statements.

 

 
SCHEDULE II - PARENT COMPANY FINANCIAL INFORMATION

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

 

 

1.	BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Parent company financial information has been derived from our consolidated financial statements and excludes the accounts of all operating subsidiaries. This information should be read in conjunction with our consolidated financial statements.

 

Parent company maintains its investment in all subsidiaries on the equity method. The investment in subsidiary is adjusted for the changes in other comprehensive income from the subsidiaries.

 

2.	TRANSACTIONS WITH SUBSIDIARIES

 

Transfer of real estate

 

In December 2012, the Dental Care Plus, Inc. (“DCP”) subsidiary transferred real estate to the parent totaling approximately $1,886,000.

 

Management Fee

 

Through intercompany service agreements approved, if required, by state regulatory agencies, our parent company charges a management fee for reimbursement of certain centralized services provided to its subsidiaries including information systems, investment and cash administration, marketing, legal, finance, executive management oversight and other operating expenses.

 

Salaries and benefit expense

 

Salary and benefit expense includes dental benefit expense of approximately $107,000, $92,000, and $80,000, for the years ended December 31, 2014, 2013 and 2012, respectively. These amounts eliminate in consolidation.

 

Investments in subsidiaries and dividends

 

In 2014, the parent company received a dividend from the Adenta, Inc. subsidiary in the amount of $150,000. There were no dividends declared or paid to the parent company in 2013.

 

Federal Income Tax Arrangement

 

The parent company has an income tax allocation arrangement with its subsidiaries. DCP makes federal tax payments on behalf of the Company. DCP paid approximately $1,270,000, $540,000, and $1,110,000 for the years ended December 31, 2014, 2013, and 2012. The Company’s policy is to settle this intercompany receivable within 30 days of the filing of its consolidated income tax return.

 
There were no additional investment in subsidiaries in 2014 and 2013.

 

Reconciliation of Investment in Subsidiaries

 

		2014				2013
Investment in Subsidiaries—January 1		$	9,333,447			$	8,155,857
Undistributed income of subsidiaries			1,030,592				1,282,573
Total other comprehensive income held by subsidiaries			55,236				(104,983	)
Dividends from subsidiaries to finance real estate			(150,000	)
Increase in Investment in Subsidiary			935,828				1,177,590
Investment in Subsidiaries—December 31		$	10,269,275			$	9,333,447

  

 

DCP HOLDING COMPANY AND SUBSIDIARIES

Schedule III - Supplementary Insurance Information

For each of the Three Years in the Period ended December 31, 2014

(amounts in thousands)

 

		2014				2013				2012
Deferred policy acquisition cost (a)		$	2,050			$	2,190			$	1,184
Claims payable (a)		$	2,998			$	2,220			$	2,136
Unearned premium (a)		$	32,637			$	35,395			$	19,792
Other policy claims and benefits payable (a)		$	3,229			$	3,088			$	2,105
Premium revenues
Fully-insured dental HMO/ Indemnity		$	47,948			$	46,656			$	43,844
Fully-insured dental PPO			16,459				13,494				11,429
Self-insured dental			26,905				25,641				24,380
Corporate, All Other			624				572				500
		$	91,936			$	86,363			$	80,153
Investment income (a)		$	222			$	164			$	128
Future policy benefits, losses, claims and expense losses
Fully-insured dental HMO/ Indemnity		$	35,995			$	35,024			$	33,399
Fully-insured dental PPO			12,661				10,695				9,363
Self-insured dental			23,040				22,043				20,974
		$	71,696			$	67,762			$	63,736
Amortization of deferred policy acquisition cost (a)		$	4,129			$	3,862			$	3,592
Other operating expense (a)		$	14,196			$	12,928			$	11,018
Premium written
Fully-insured dental (a)		$	62,151			$	75,363			$	52,650

 

(a) The Company does not allocate insurance expense, investment and other income, or other assets or liabilities to identified segments.

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

Schedule IV- Reinsurance

For each of the Three Years in the Period ended December 31, 2014

(amounts in thousands)

 

		2014				2013				2012
Gross earned premium amounts
Fully-insured dental HMO/Indemnity		$	47,948			$	46,656			$	43,844
Fully-insured dental PPO			16,459				13,456				11,240
Self-insured dental			26,905				25,641				24,380
Corporate, All Other			624				572				500
		$	91,936			$	86,325			$	79,964
Ceded earned premium amounts to other companies
Fully-insured dental HMO/Indemnity
Fully-insured dental PPO
Self-insured dental
Corporate, All Other
		$				$				$
Assumed amounts from other companies
Fully-insured dental HMO/Indemnity
Fully-insured dental PPO						$	38			$	189
Self-insured dental
Corporate, All Other
		$				$	38			$	189
Net earned premium amounts
Fully-insured dental HMO/Indemnity		$	47,948			$	46,656			$	43,844
Fully-insured dental PPO			16,459				13,494				11,429
Self-insured dental			26,905				25,641				24,380
Corporate, All Other			624				572				500
		$	91,936			$	86,363			$	80,153

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

Schedule V - Valuation and Qualifying Accounts

For the Years Ended December 31, 2014, 2013 and 2012

 

		Balance at				Charged to								Balance at
		beginning of				costs and								end of
Description		period				expenses				Deductions				period
Year ended December 31, 2014:
Allowance for Uncollectible Accounts Receivable		$	7,686				37,225				31,423			$	13,488
Year ended December 31, 2013:
Allowance for Uncollectible Accounts Receivable		$	55,163				24,256				71,733			$	7,686
Year ended December 31, 2012:
Allowance for Uncollectible Accounts Receivable		$	15,293				72,788				32,918			$	55,163

  

  

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  

 

		DCP Holding Company
March 20, 2015		/s/ Robert C. Hodgkins, Jr.
		Robert C. Hodgkins, Jr.
		Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)
March 20, 2015		/s/ Anthony A. Cook
		Anthony A. Cook
		President, Chief Executive Officer and Director
		(Principal Executive Officer)

 

 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.  

 

March 20, 2015		/s/ Stephen T. Schuler
		Stephen T. Schuler
		Chairman of the Board of Directors
March 20, 2015		/s/ Robert E. Hamilton
		Robert E. Hamilton
		Director
March 20, 2015		/s/ David A. Kreyling
		David A. Kreyling
		Secretary
March 20, 2015		/s/ Michael J. Carl
		Michael Carl
		Treasurer
March 20, 2015		/s/ Fred H. Peck
		Fred H. Peck
		Assistant Treasurer
March 20, 2015		/s/ Jack M. Cook
		Jack M. Cook
		Director

  

 

March 20, 2015		/s/ Donald J. Peak
		Donald J. Peak
		Director
March 20, 2015		/s/ James E. Kroeger
		James E. Kroeger
		Director
March 20, 2015		/s/ Molly Meakin-Rogers
		Molly Meakin-Rogers
		Director
March 20, 2015		/s/ James T. Foley
		James Foley
		Director
March 20, 2015		/s/ Mark E. Bronson
		Mark E. Bronson
		Director
March 20, 2015		/s/ Ronald Poulos
		Ronald Poulos
		Director

 

 

INDEX TO EXHIBITS

 

EXHIBIT NUMBER

DESCRIPTION OF DOCUMENT

 

3.1		Amended and Restated Articles of Incorporation (incorporated by reference to the Company’s Form 8-K current report filed on May 28, 2009)
3.2		Amended and Restated Code of Regulations (incorporated by reference to Exhibit 3.2 to the Company’s Form 10 registration statement filed on May 1, 2006)
3.3		Amendment to the Amended and Restated Articles of Incorporation dated July 17, 2010, (incorporated by reference to exhibit 3.3 to the Company’s Form 10-K for the year ended December 31, 2010)
3.4		Amendment to Amended and Restated Articles of Incorporation of DCP Holding Company effective January 3, 2012 (incorporated by reference to exhibit 3.1 to the Company’s Form 8-K current report filed on January 6, 2012)
3.5		Amendment to Amended and Restated Articles of Incorporation of DCP Holding Company effective January 9, 2013 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K current report filed on January 16, 2013)
3.6		Second Amended and Restated Articles of Incorporation of DCP Holding Company effective January 9, 2014 (incorporated by reference to Exhibit 3(a) to the Company’s Form 8-K current report filed on January 15, 2014)
3.7		Second Amended and Restated Code of Regulations (incorporated by reference to Exhibit 3(b) to the Company’s current report filed on January 15, 2014).
10.1		Ninth Amended and Restated DCP Holding Company Employment Agreement with Anthony A. Cook effective January 1, 2014 (incorporated by reference to Exhibit 10.1 and 10.2 to the Company’s Form 8-K current report filed on June 24, 2014)*
10.2		Dental Care Plus, Inc. and DCP Holding Company Deferred Compensation Plan, amended and restated (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-K Annual Report filed on March 25, 2008)*
10.3		2006 Dental Care Plus Management Equity Incentive Plan, amended and restated (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-K Annual Report filed on March 25, 2008)*
10.4		2006 Dental Care Plus Management Equity Incentive Plan, amended and restated Effective January 1, 2014 (incorporate by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on May 20, 2014)*
10.5		Restricted Share Unit (RSU) Agreement between DCP Holding Company and Robert C. Hodgkins, Jr. and RSU Award to Robert C. Hodgkins, Jr. (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K current report filed on April 6, 2012)*
10.6		Preferred Stock Purchase Agreement (incorporated by reference to the Company’s Form 8-K current report filed on July 21, 2010)
10.7		Preferred Shares Purchase Agreement between DCP Holding Company and Cincinnati Financial Corporation dated as of January 4, 2012 (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K current report filed January 6, 2012)
10.8		Preferred Shares Purchase Agreement between DCP Holding Company and Cincinnati Financial Corporation dated as of January 11, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K current report filed January 16, 2013)
10.9		Restricted Shares Unit (RSU) Agreement between DCP Holding Company and Robert C. Hodgkins, Jr. (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K current report fled June 18, 2013)*.
10.10		Long Term Incentive Compensation Agreement between DCP Holding Company and Robert C. Hodgkins, Jr. effective January 1, 2014 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K current report filed on June 24, 2014)*
14.1		Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.1 to the Company’s Form 10-K Annual Report filed on March 30, 2007)
21.1		List of Subsidiaries. (incorporated by reference to Exhibit 21.1 to the Company’s Form 10 registration statement filed on May 1, 2006)
31.1		Chief Executive Officer certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002, filed herewith
31.2		Chief Financial Officer certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002, filed herewith
32.1		Chief Executive Officer and Chief Financial Officer certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, filed herewith
101		Financial information and Notes to Financial Statements for the year-ended December 31, 2014 formatted in XBRL (Extensible Business Reporting Language)
*		Reflects management contracts or compensation plan arrangement required to be filed as an exhibit pursuant to Item 15(b) of this Annual Report on Form 10-K.

  

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