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EX-31.1 - EXHIBIT 31.1 - DCP Holding COex31-1.htm
EX-32 - EXHIBIT 32 - DCP Holding COex32.htm
EX-31.2 - EXHIBIT 31.2 - DCP Holding COex31-2.htm

 



 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

_______________

 

FORM 10-Q

_______________

 

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

For the quarterly period ended March 31, 2017

 

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

For the transition period from ____________ to ____________

 

Commission File Number 000-51954

_______________

 

DCP Holding Company

(Exact name of Registrant as specified in its Charter)

 

Ohio

20-1291244

(State or Other Jurisdiction of

(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

 

_______________

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    

 Yes ☒     No ☐

 

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

 

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

 

Large accelerated filer

 

Accelerated filer ☐

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

     

Smaller reporting company ☐

 

     

Emerging growth company ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

             

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 March 31, 2017, there were 503, 8,550 and 3,771 of the Registrant’s Class A, Class B and Class C Redeemable Common Shares outstanding, respectively.

 



 

 
 

 

 

TABLE OF CONTENTS

 

 

PART I – FINANCIAL INFORMATION

 
     
 

 

PAGE

Item 1.

Financial Statements (unaudited)

1

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

11

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19

Item 4.

Controls and Procedures

19

     
 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

20

Item 1A.

Risk Factors

20

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

20

Item 3.

Defaults Upon Senior Securities

20

Item 4.

Mine Safety Disclosures

20

Item 5.

Other Information

20

Item 6.

Exhibits

21

 

Signatures

21

 

 
 i

 

 

PART I. FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

 DCP HOLDING COMPANY AND SUBSIDIARIES

 

     

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

   

 

   

March 31,

   

December 31,

 
   

2017

   

2016

 

ASSETS

               
                 

INVESTMENTS:

               

Fixed maturities, available for sale at fair value, amortized cost of $8,984,000 and $8,825,000 at March 31, 2017 and December 31, 2016, respectively

  $ 8,993,636     $ 8,824,420  

Short-term investments, available for sale at fair value, cost of $318,000 and $513,000 at March 31, 2017 and December 31, 2016, respectively

    317,804       512,989  

Total investments

    9,311,440       9,337,409  
                 

CASH AND CASH EQUIVALENTS

    10,269,724       11,221,951  
                 

ACCRUED INVESTMENT INCOME

    77,412       78,662  
                 

ACCOUNTS RECEIVABLE, including uncollected premiums of $1,161,189 and $1,018,391, net of allowance of $31,410 and $41,092 at March 31, 2017 and December 31, 2016, respectively

    62,976,008       46,705,170  
                 

DEFERRED ACQUISITION COSTS

    4,209,504       3,109,117  
                 

PROPERTY AND EQUIPMENT, net of depreciation and amortization of $3,515,260 and $3,531,436 at March 31, 2017 and December 31, 2016, respectively

    2,994,734       2,756,999  
                 

OTHER ASSETS

    4,882,707       4,872,499  
                 

TOTAL ASSETS

  $ 94,721,529     $ 78,081,807  
                 
                 

LIABILITIES, REDEEMABLE SHARES AND SHAREHOLDERS’ EQUITY

               
                 

CLAIMS PAYABLE

  $ 3,725,134     $ 3,743,551  
                 

UNEARNED PREMIUM REVENUE

    63,907,017       46,954,609  
                 

OTHER PAYABLES AND ACCRUALS

    7,433,106       7,334,165  
                 

MORTGAGE LOAN PAYABLE

    1,134,800       1,148,000  
                 

CAPITAL LEASE OBLIGATIONS

    495,841       558,114  
                 

DEFERRED COMPENSATION

    4,118,386       4,051,078  
                 

TOTAL LIABILITIES

    80,814,284       63,789,517  
                 

COMMITMENTS AND CONTINGENCIES

               
                 

REDEEMABLE PREFERRED AND COMMON SHARES:

               

Class A, Redeemable Common Shares, no par value—authorized, 7,500 shares; issued and outstanding, 503 and 506 shares at March 31, 2017 and December 31, 2016, respectively

    545,488       561,439  

Class B Redeemable Common Shares, no par value—authorized, 120,000 shares; issued and outstanding, 8,550 and 8,604 shares at March 31, 2017 and December 31, 2016, respectively

    9,272,220       9,546,686  

Class C Redeemable Common Shares, no par value—authorized, 80,000 shares; issued and outstanding, 3,771 shares at March 31, 2017 and December 31, 2016

    4,089,537       4,184,165  
                 

Total redeemable preferred and common shares

    13,907,245       14,292,290  
                 

SHAREHOLDERS’ EQUITY—Preferred Shares; no par value—authorized, 92,700 shares; issued, none outstanding

               
                 

TOTAL LIABILITIES, REDEEMABLE SHARES AND SHAREHOLDERS’ EQUITY

  $ 94,721,529     $ 78,081,807  

 

See notes to unaudited condensed consolidated financial statements.

   

 

 
1

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

   
     

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

   

 

   

For the Three Months Ended

 
   

March 31,

 
   

2017

   

2016

 
                 

REVENUES

               

Premium revenue

  $ 27,097,654     $ 26,562,482  

Investment income

    65,325       68,160  

Realized gains (loss) on investments, net

    69,587       (52,239 )

Other income

            15,576  

Total revenues

    27,232,566       26,593,979  
                 

EXPENSES

               

Healthcare services expense

    21,424,675       21,047,113  

Insurance expense:

               

Salaries and benefits expense

    2,312,061       2,255,884  

Commission expenses and other acquisition costs

    1,282,980       1,024,860  

Other insurance expense

    1,973,604       1,769,067  

Total insurance expense

    5,568,645       5,049,811  

Total expenses

    26,993,320       26,096,924  
                 
                 

INCOME BEFORE INCOME TAX

    239,246       497,055  
                 

INCOME TAX EXPENSE

    85,399       215,569  
                 

NET INCOME

    153,847       281,486  
                 

OTHER COMPREHENSIVE INCOME (LOSS)

               

Change in the fair value of interest rate swap, net of income tax (benefit) of $1,894 and ($11,231), respectively

    3,677       (21,800 )

Change in the fair value of investments, net of income tax of $13,841 and $57,294, respectively

    26,869       111,218  

Reclassification adjustment for realized (gains) losses included in net income, net of income tax expense (benefit) of ($9,933) and $17,761, respectively

    (19,282 )     34,478  

Total other comprehensive income

    11,264       123,896  
                 

TOTAL COMPREHENSIVE INCOME

  $ 165,111     $ 405,382  

 

See notes to unaudited condensed consolidated financial statements.

   

 

 
2

 

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

   
     

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

   

 

   

For the Three Months Ended

March 31,

 
                 
   

2017

   

2016

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 153,847     $ 281,486  

Adjustments to reconcile net income to cash provided by operating activities:

               

Depreciation and amortization

    129,591       123,504  

Realized (gain) loss on investments, net

    (69,587 )     52,239  

Deferred compensation

    127,224       96,589  

Effects of changes in operating assets and liabilities:

               

Accrued investment income

    1,250       8,180  

Accounts receivable

    (16,270,838 )     (35,854,197 )

Deferred acquisition costs

    (1,100,387 )     (2,380,789 )

Other assets

    21,807       (623,738 )

Claims payable

    (18,417 )     321,013  

Unearned premium revenue

    16,952,408       36,827,641  

Other payables and accruals

    65,520       1,637,381  
                 

Net cash (used in) provided by operating activities

    (7,582 )     489,309  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Purchases of investments

    (1,483,220 )     (1,057,048 )

Sales of investments

    1,344,736       847,736  

Maturities of investments

    200,000       200,000  

Acquisition of property and equipment

    (359,609 )     (25,911 )
                 

Net cash used in investing activities

    (298,093 )     (35,223 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Mortgage loan repayments

    (13,200 )     (12,600 )

Payments on capital lease

    (62,273 )     (73,916 )

Repurchase of redeemable common shares

    (23,636 )     (72,138 )

Redeemable shares issued

            289,784  

Issuance cost of redeemable shares

            (14,955 )

Dividends paid

    (547,443 )     (476,033 )
                 

Net cash used in financing activities

    (646,552 )     (359,858 )
                 

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

    (952,227 )     94,228  
                 

CASH AND CASH EQUIVALENTS—Beginning of period

    11,221,951       11,657,287  
                 

CASH AND CASH EQUIVALENTS—End of period

  $ 10,269,724     $ 11,751,515  
                 

SUPPLEMENTAL CASH FLOW INFORMATION:

               

Cash paid for interest

  $ 16,000     $ 18,000  

Cash paid for income taxes

            650,000  
                 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

               

Redeemed common shares (in other payables and accruals)

  $ 64,435     $ 84,508  

Deferred restricted shares in lieu of cash dividend

    114,672       101,840  

 

See notes to unaudited condensed consolidated financial statements.

   

 

 
3

 

  

DCp HOLDING COMPANY And subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 

1.

BASIS OF PRESENTATION

 

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. Providers who participate in one or more of the Dental Care Plus networks own a majority of the Company’s Redeemable Common Shares. The Company’s Redeemable Common Shares are also owned by retired providers, Company board members, non-provider individuals and employees. The Company primarily offers to employer groups of all sizes health maintenance organization (“HMO”), participating provider organization (“PPO”) and indemnity plans for dental care services and vision benefit plans. The condensed consolidated interim financial statements included in this report have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation are reflected in the interim financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited 2016 financial statements and notes thereto as included in the DCP Holding Company annual report on Form 10-K for the year ended December 31, 2016 filed with the Commission on March 24, 2017. These unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements. Certain financial information that is required in the annual financial statements may not be required for interim financial reporting purposes and has been condensed or omitted. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

 

The accounting policies of the Company conform 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. Actual results could differ from those estimates.

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The interim condensed consolidated financial statements have been prepared in accordance with the accounting policies described in the notes to the Company’s consolidated financial statements for the year ended December 31, 2016. While management believes that the procedures followed in preparation of interim financial information are reasonable, the accompanying condensed consolidated financial statements include estimates for items such as changes in claims payable, income tax accounts, deferred acquisition costs, deferred share-based compensation and accrued expenses and various other liability accounts. Any adjustments related to such estimates during the reporting period were of a normal recurring nature.

 

Premium Revenue

 

Fully-Insured—Membership contracts are written on an annual or multi-year basis and are subject to cancellation by the employer group upon thirty days written notice. The Company’s unearned premium revenue was approximately $63,907,000 and $46,955,000 at March 31, 2017 and December 31, 2016, respectively, and primarily relates to the estimated premium revenue associated with the remaining contract periods. Related unbilled amounts recorded in unbilled accounts receivable were approximately $61,815,000 and $45,687,000 at March 31, 2017 and December 31, 2016, respectively. Premiums are due monthly in advance and are recognized evenly as revenue during the period in which the Company is obligated to provide services to members. Any amounts not received by the end of a reporting period are recorded as accounts receivable by the Company. Any premiums received prior to the beginning of a reporting period are recognized as premiums received in advance and are included in unearned premium revenue in the accompanying condensed consolidated balance sheets. Premiums received in advance were approximately $2,092,000 and $1,268,000 at March 31, 2017 and December 31, 2016, respectively. Management has determined that as of March 31, 2017 and December 31, 2016, 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.

 

 
4

 

 

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 and included in premium revenue in the accompanying condensed consolidated statements of comprehensive income. ASO fees also include the administrative fees the Company earns relative to the dental indemnity and vision products that are underwritten by third-party insurance carriers.

 

Healthcare Services Expense—Healthcare services expense is recognized on a monthly basis. In the case of the fully-insured dental HMO and indemnity 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.

 

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.

 

Deferred Acquisition Costs—Deferred acquisition costs are those incremental direct costs related to the successful acquisition of new and renewal business. These incremental direct costs are those that are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. Such incremental direct costs include commissions, costs of contract issuance and underwriting, state premium taxes and other costs the Company incurs to successfully acquire new business or renew existing business. The Company defers policy acquisition costs and amortizes them over the estimated life of the contracts, which are short-duration in nature, in proportion to premiums earned. The Company capitalized deferred acquisition costs of approximately $2,329,000 and $3,557,000 and amortized approximately $1,228,000 and $1,176,000 of these capitalized costs for the three months ended March 31, 2017 and 2016, respectively. The amortization of these costs is recorded in commission expense and other acquisition costs included in the condensed consolidated statements of comprehensive income.     

 

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 generally accepted accounting principles.  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.     

 

New Accounting Guidance—In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 amends the accounting for revenue recognition. Insurance contracts are not included in the scope of this new guidance. The effective date of ASU 2014-09 is for annual reporting periods beginning after December 15, 2017. While we expect revenue related to our self-insured dental business to remain primarily unchanged, we are still evaluating the impact of the new guidance on the customer arrangements for this business. Accordingly, management continues to evaluate the impact of the new standard on the Company’s results of operations, financial condition and cash flows.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The effective date of ASU 2016-01 is for interim and annual reporting periods beginning after December 15, 2017. The ASU has not yet been adopted by the Company. Management is currently evaluating the impact on our Company’s consolidated financial position, cash flows and results of operations, but it is not expected to have a significant impact.

 

 
5

 

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 introduces a new guidance that requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Leases would be classified as finance or operating leases and both types of leases will be recognized on the balance sheet. The new guidance will also require new qualitative and quantitative disclosures. The effective date of ASU 2016-02 is for interim and annual reporting periods beginning after December 15, 2018. The ASU has not yet been adopted by the Company. The Company’s implementation efforts are primarily focused on the review of its existing lease contracts as well as identification of other contracts that may fall under the scope of the new guidance. We do not expect the adoption to have a material impact on the Company’s consolidated financial position, cash flows and results of operations.     

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends previous guidance on the impairment of financial instruments by adding an impairment model that allows an entity to recognize expected credit losses as an allowance rather than impairing as they are incurred. The new guidance is intended to reduce complexity of credit impairment models and result in a more timely recognition of expected credit losses. The effective date of ASU 2016-13 is for interim and annual reporting periods beginning after December 15, 2019. The ASU has not yet been adopted by the Company. Management is currently evaluating the impact on our Company’s consolidated financial position, cash flows and results of operations, but it is not expected to have a significant impact.

 

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. ASU 2017-08 amends guidance on the amortization period of premiums on certain purchased callable debt securities. The amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment to beginning retained earnings. The effective date of ASU 2017-08 is for interim and annual reporting periods beginning after December 15, 2018. The ASU has not yet been adopted by the Company. Management is currently evaluating the impact on our Company’s consolidated financial position, cash flows and results of operations, but it is not expected to have a significant impact.

 

 

3.

INVESTMENTS

 

The Company owned certificates of deposit insured by the Federal Deposit Insurance Corporation (“FDIC”) with an amortized cost of $1,140,000 and $1,090,000 as of March 31, 2017 and December 31, 2016, respectively. The certificates of deposit included in short term and fixed maturities investments are classified as available-for-sale and are carried at fair value. The Company also invests in money market funds included in short term investments that are classified as available-for-sale, with a cost of approximately $178,000 and $223,000 as of March 31, 2017 and December 31, 2016, respectively. The Company invested in corporate bonds with an amortized cost of approximately $7,984,000 and $8,025,000 as of March 31, 2017 and December 31, 2016, respectively. These corporate bonds included in fixed maturity investments are classified as available-for-sale and are carried at fair value.

 

The Company owned corporate bonds at March 31, 2017, which consisted primarily of investment grade securities. At March 31, 2017, total bond fair value was approximately $7,991,000, which consisted of approximately $7,271,000 with a credit rating of BBB- or better. The remaining securities, totaling approximately $720,000 had a credit rating of BB+ or lower. The weighted average yield-to-cost of the Company’s corporate bonds was approximately 3.09% at March 31, 2017. The weighted average maturity of the Company’s corporate bonds was 5.21 years at March 31, 2017.

 

 
6

 

 

At March 31, 2017 and December 31, 2016, maturity dates for fixed maturities and short term investments (excluding the money market funds) were:

 

   

Available-for-Sale

 
   

Amortized

   

Fair

   

% of Total

 

March 31, 2017

 

Cost

   

Value

   

Fair Value

 

Maturity dates occurring:

                       

Less than 1 year

  $ 140,000     $ 140,210       1.5 %

Years 1-5

    5,932,799       5,948,956       65.2 %

Years 5-10

    2,762,391       2,757,060       30.2 %

Due after ten years

    288,990       287,620       3.1 %
                         

Total

  $ 9,124,180     $ 9,133,846       100.0 %

 

   

Available-for-Sale

 
   

Amortized

   

Fair

   

% of Total

 

December 31, 2016

 

Cost

   

Value

   

Fair Value

 

Maturity dates occurring:

                       

Less than 1 year

  $ 290,000     $ 290,412       3.2 %

Years 1-5

    5,722,990       5,741,735       63.0 %

Years 5-10

    3,052,388       3,035,185       33.3 %

Due after ten years

    50,000       47,500       0.5 %
                         

Total

  $ 9,115,378     $ 9,114,832       100.0 %

 

Investments classified at March 31, 2017 and December 31, 2016 as fixed maturities and short term investments were as follows:

 

   

Available-for-Sale

 
   

Cost or

   

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

March 31, 2017

 

Cost

   

Gain

   

Loss

   

Value

 
                                 

Money market fund

  $ 177,594                     $ 177,594  
                                 

Certificates of deposit, short term

    140,000     $ 210               140,210  
                                 

Certificates of deposit, fixed maturities

    1,000,000       3,256     $ (598 )     1,002,658  
                                 

Corporate bonds, fixed maturities

    7,984,180       73,591       (66,793 )     7,990,978  
                                 

Total investments

  $ 9,301,774     $ 77,057     $ (67,391 )   $ 9,311,440  

 

   

Available-for-Sale

 
   

Cost or

   

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

December 31, 2016

 

Cost

   

Gain

   

Loss

   

Value

 
                                 

Money market fund

  $ 222,577                     $ 222,577  
                                 

Certificates of deposit, short term

    290,000     $ 412               290,412  
                                 

Certificates of deposit, fixed maturities

    800,000       4,728     $ (66 )     804,662  
                                 

Corporate bonds, fixed maturities

    8,025,378       76,323       (81,943 )     8,019,758  
                                 

Total investments

  $ 9,337,955     $ 81,463     $ (82,009 )   $ 9,337,409  

 

Unrealized losses on investments at March 31, 2017 and December 31, 2016 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 investments in a material unrealized loss position for greater than one year at March 31, 2017 or December 31, 2016.

 

 
7

 

 

4.

DEFERRED COMPENSATION PLAN

 

In accordance with the 2006 Dental Care Plus Management Equity Incentive Plan and the Dental Care Plus, Inc. and DCP Holding Company Deferred Compensation Plan (the “Plans”), Company directors and certain key employees elected to defer portions of their director fees and employee compensation, as applicable. In 2017, the non-employee members of the Board were granted a total of 216 share based awards, key employees were granted 99 share based awards. The Company recorded deferred compensation expense of approximately $107,000 and $87,000 related to deferred share awards and the change in the value of deferred employee compensation for the three months ended March 31, 2017 and 2016, respectively. The Company recorded deferred compensation expense of approximately $19,000 and $20,000 related to deferred director fees and deferred employee compensation for the three months ended March 31, 2017 and 2016, respectively. The Plans also provide for the directors and key employees to receive share awards based on the book value of the Redeemable Common Shares.

 

 In February 2017 and 2016, the Board declared a per share cash dividend for all Redeemable Common Shares in the amounts of $42.50 and $40.47 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 $115,000 and $102,000 in February 2017 and February 2016, respectively.

 

At March 31, 2017 and December 31, 2016, the deferred compensation liability was approximately $4,118,000 and $4,051,000, respectively.

 

 

5.

LIABILITY FOR CLAIMS PAYABLE

 

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

 

   

Three months ended

   

Three months ended

 
   

March 31, 2017

   

March 31, 2016

 
                 

Balance—January 1

  $ 3,743,551     $ 3,253,346  
                 

Net incurred claims related to:

               

Current year

    14,991,258       14,579,084  

Prior years

    (101,529 )     (62,737 )
                 

Net incurred claims

    14,889,729       14,516,347  
                 

Net paid claims related to:

               

Current year

    11,584,529       11,281,875  

Prior years

    3,323,617       2,913,459  
                 

Net paid claims

    14,908,146       14,195,334  
                 

Balance—March 31

  $ 3,725,134     $ 3,574,359  

 

 

6.

FEDERAL INCOME TAXES

 

The Company calculates its year to date income tax provision by applying the estimated annual effective tax rate for the year to pretax income. The effective tax for the three months ended March 31, 2017 was 35.7% with tax expense of approximately $85,000. The effective tax for the three months ended March 31, 2016 was 43.4% with tax expense of approximately $216,000. The decrease in federal income tax is the result of a 2017 moratorium on the non-deductible federal premium tax and lower pre-tax income. Tax years subsequent to 2013 remain open to examination by the Internal Revenue Service (“IRS”), and 2012 remains open to state and local tax authorities.  The Company has recorded no uncertain tax positions in the tax years that are subject to examination.

 

 
8

 

 

7.

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:

 

   

Three months ended

   

Three months ended

 
   

March 31, 2017

   

March 31, 2016

 
   

Before Tax

   

Income Tax

   

Net

   

Before Tax

   

Income Tax

   

Net

 

Accumulated unrealized loss, net, on investments available for sale, beginning of period

  $ (13,376 )   $ (4,544 )   $ (8,832 )   $ (34,498 )   $ (11,726 )   $ (22,772 )

Other comprehensive income before reclassification

    40,710       13,841       26,869       168,512       57,294       111,218  

Reclassification adjustment for realized investment (gains) losses, net, included in realized gains on investments, net

    (29,215 )     (9,933 )     (19,282 )     52,239       17,761       34,478  

Effect on other comprehensive income

    11,495       3,908       7,587       220,751       75,055       145,696  

Accumulated unrealized (loss) gains, net, on investments available for sale, end of period

  $ (1,881 )   $ (636 )   $ (1,245 )   $ 186,253     $ 63,329     $ 122,924  
                                                 

Accumulated unrealized losses, net, on interest rate swap, beginning of period

  $ (6,697 )   $ (2,278 )   $ (4,419 )   $ (18,016 )   $ (6,126 )   $ (11,890 )

Other comprehensive income (loss) before reclassification

    5,571       1,894       3,677       (33,031 )     (11,231 )     (21,800 )

Effect on other comprehensive income (loss)

    5,571       1,894       3,677       (33,031 )     (11,231 )     (21,800 )

Accumulated unrealized losses, net, on interest rate swap, end of period

  $ (1,126 )   $ (384 )   $ (742 )   $ (51,047 )   $ (17,357 )   $ (33,690 )
                                                 

Accumulated other comprehensive loss, beginning of period

  $ (20,073 )   $ (6,822 )   $ (13,251 )   $ (52,514 )   $ (17,852 )   $ (34,662 )

Change in unrealized gains, net, on investments available for sale

    11,495       3,908       7,587       220,751       75,055       145,696  

Change in unrealized gains (losses), net, on interest rate swap

    5,571       1,894       3,677       (33,031 )     (11,231 )     (21,800 )

Effect on other comprehensive income

    17,066       5,802       11,264       187,720       63,824       123,896  

Accumulated other comprehensive (loss) income, end of period

  $ (3,007 )   $ (1,020 )   $ (1,987 )   $ 135,206     $ 45,972     $ 89,234  

 

 

8.

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 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 $5,673,000 and $5,515,000 for the three months ended March 31, 2017 and 2016, respectively.

 

 
9

 

 

Listed below is financial information required for each reportable segment for the three months ended March 31, 2017 and 2016 (amounts in thousands):

 

   

Three Months Ended

   

Three Months Ended

 
   

March 31, 2017

   

March 31, 2016

 
                                                 
   

Revenues-

   

Healthcare

           

Revenues-

   

Healthcare

         
   

External

   

Services

           

External

   

Services

         
   

Customers

   

Expense

   

Total

   

Customers

   

Expense

   

Total

 

Reportable segments:

                                               

Fully-insured dental HMO/Indemnity

  $ 12,882     $ 10,278     $ 2,604     $ 13,247     $ 10,594     $ 2,653  

Fully-insured dental PPO

    6,458       4,612       1,846       5,578       3,922       1,656  

Self-insured dental

    7,552       6,535       1,017       7,551       6,531       1,020  

Corporate, all other

    206               206       186               186  

Total

  $ 27,098     $ 21,425       5,673     $ 26,562     $ 21,047       5,515  
                                                 

Investment income

                    65                       68  

Realized gains (loss) on investments, net

                    70                       (52 )

Other income

                                            16  
                                                 

Insurance expense

                    5,569                       5,050  
                                                 

Income before income tax

                  $ 239                     $ 497  
                                                 

Total assets-corporate

                  $ 94,722                          

 

Inter-segment revenues were not significant for the three months ended March 31, 2017 and 2016.

 

9.

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.

 

 
10

 

 

The following table presents each of the fair value levels, the Company’s assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016 (amounts in thousands):

 

   

March 31, 2017

   

December 31, 2016

 
    Level 1     Level 2    

Total

Balance 

    Level 1     Level 2    

Total

Balance 

 
                                                 

Assets

                                               

Fixed maturities

                                               
Federally-Insured certificates of deposit           $ 1,003     $ 1,003             $ 805     $ 805  
Investment grade corporate bonds             7,271       7,271               7,363       7,363  
Non-investment grade corporate bonds             720       720               657       657  

Short-term investments

                                               
Money market funds   $ 178               178     $ 223               223  
Federally-Insured certificates of deposit             140       140               290       290  

Deferred compensation investments (a)

                                               
Equity mutual fund investments     783               783       729               729  

State guarantee fund deposits (b)

                                               
Government securities     1,775               1,775       1,775               1,775  
Federally-Insured certificates of deposit             75       75               75       75  
Total   $ 2,736     $ 9,209     $ 11,945     $ 2,727     $ 9,190     $ 11,917  
                                                 

Liabilities

                                               

Interest rate swap (c)

          $ 1     $ 1             $ 7     $ 7  
Total   $       $ 1     $ 1     $       $ 7     $ 7  

 

(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.

 

As of March 31, 2017 and December 31, 2016, 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 the three months ended March 31, 2017 or 2016. As of March 31, 2017 and December 31, 2016, the Company did not have any assets or liabilities classified as Level 3 of the fair value hierarchy.

 

 

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

 

Forward-Looking statements

 

Portions of this report, including this discussion and the information contained in the notes to the condensed consolidated financial statements, contain forward-looking statements under the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by words such as “may,” “might,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,” “potential,” “likely will result,” or the negative of such terms or similar expressions. These forward-looking statements reflect our current expectations and views about future events and speak only as of the date of this report. The forward-looking statements are subject to risks, uncertainties and other factors that could cause actual events or results to differ materially from those expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements, include, among others: claims costs exceeding our estimates, a downgrade in our financial strength rating, competitive pressures, changes in demand for dental benefits and other economic conditions, the loss of a significant customer or broker, the occurrence or non-occurrence of circumstances beyond our control and those items described in Item 1A – Risk Factors of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date this report is filed.

 

 
11

 

 

Overview

 

Headquartered in Cincinnati, Ohio, the Dental Care Plus Group offers to Ohio, Kentucky and Indiana employer groups of all sizes dental HMO, dental PPO, dental indemnity and vision PPO benefit plans and related services. The Company also offers dental PPO plans to individuals and small groups on the Ohio, Kentucky, Indiana, Pennsylvania, Georgia, Tennessee, Illinois and Virginia exchanges (“the FFM exchanges”) and individual dental HMO and PPO plans in Ohio, Kentucky and Indiana. As of March 31, 2017, we had approximately 392,500 members in our dental and vision benefit programs with approximately 2,900 providers participating in our dental HMO network, approximately 3,100 providers participating in our DentaSelect dental PPO network and approximately 2,200 providers in our Balanced Value dental PPO network. The Company has a network access agreement with a national dental network management company that has one of the largest PPO networks of providers under contract in the United States. With this network access agreement, our dental PPO members have access to approximately 2,600 additional providers in Ohio and Indiana and approximately 45,000 additional providers throughout the United States. The Company also has other network access arrangements for the dental PPO plans that it offers on the FFM exchanges. With these network access arrangements, our exchange members have access to approximately 6,000 providers across the FFM exchange states.

 

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

 

The results of our fully-insured dental HMO/IND, fully-insured dental PPO and self-insured dental segments are measured by gross profit. We do not measure the gross profit of our corporate, all other segment. We do not allocate investment and other income, insurance expenses, assets or liabilities to our segments because these measures are not used to analyze the segments. Our segments do not share overhead costs or assets. We do, however, measure the contributions of each of our fully-insured and self-insured segments to costs retained in our corporate, all other segment.

 

Profitability Strategy

 

Our strategy focuses on providing solutions to employers and individuals to manage the rising cost of dental care by leveraging our products that give employer groups and members options that meet their needs. We strive to provide excellent customer service to our employer groups, members, brokers and providers. Additionally, we have increased the diversification of our membership base, not only through our newer products, but also by entering new geographic territories.

 

 

Highlights 

 

 

We had net income of approximately $154,000 for the three months ended March 31, 2017 (the “2017 quarter”) compared to net income of approximately $281,000 for the three months ended March 31, 2016 (the “2016 quarter”). The decrease in net income was primarily the result of an increase in insurance expense of approximately $519,000 in the 2017 quarter as compared to the 2016 quarter, offset by an increase in gross profit (total premium revenue less healthcare services expense) of $158,000.

 

 

Our dental and vision product membership increased by approximately 10,700 members to approximately 392,500 members at March 31, 2017. This membership increase from March 31, 2016 is due to an increase in fully-insured dental PPO membership of approximately 14,000 members and an increase in self-insured membership of approximately 300 members. These membership increases were offset by a decrease in fully-insured HMO/IND membership of approximately 3,500 members and Corporate, all other membership of approximately 100 members.

 

 
12

 

 

 

Our ratio of healthcare services expense to premium revenue (“loss ratio”) decreased from 79.2% in the 2016 quarter to 79.1% in the 2017 quarter. This loss ratio decrease is due primarily to the increase in fully insured exchange dental PPO product membership that has a lower than average loss ratio.

 

 

In March 2017, we paid a dividend of $42.50 per share to shareholders of record for all Redeemable Common Shares. We paid a dividend in March 2016 of $40.47 per share to shareholders of record for all Redeemable Common Shares.

 

Comparison of Results of Operations

 

The following is a discussion of our results of operations for the 2017 quarter and the 2016 quarter.

 

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

 

   

As of

   

As of

         
   

March 31, 2017

   

March 31, 2016

   

Change

 

Membership:

                       

Fully-insured dental HMO/IND

    161,400       164,900       (2.1% )

Fully-insured dental PPO

    95,700       81,700       17.1 %

Self-insured dental

    97,400       97,100       0.3 %

Corporate, all other

    38,000       38,100       (0.3% )

Total membership

    392,500       381,800       2.8 %

 

   

Three months ended

   

Three months ended

         
   

March 31, 2017

   

March 31, 2016

   

Change

 

Premium revenue:

                       

Fully-insured dental HMO/IND

  $ 12,882     $ 13,247       (2.8% )

Fully-insured dental PPO

    6,458       5,578       15.8 %

Self-insured dental

    7,552       7,551       0.0 %

Corporate, all other

    206       186       10.8 %

Total premium revenue

    27,098       26,562       2.0 %
                         

Investment income

    65       68       (4.4% )

Realized gains on investments, net

    70       (52 )     (234.6% )

Other income

    -       16       (100.0% )

Total revenue

    27,233       26,594       2.4 %
                         

Healthcare services expense:

                       

Fully-insured dental HMO/IND

    10,278       10,594       (3.0% )

Fully-insured dental PPO

    4,612       3,922       17.6 %

Self-insured dental

    6,535       6,531       0.1 %

Total healthcare service expense

    21,425       21,047       1.8 %
                         

Insurance expense

    5,569       5,050       10.3 %
                         

Income tax expense

    85       216       (60.6% )
                         

Net income

  $ 154     $ 281       (45.2% )

 

 

 

Membership

 

Our fully-insured dental HMO/IND membership decreased approximately 3,500 members as of March 31, 2017 from March 31, 2016. This membership decrease is attributable to the reduction of approximately 10,000 fully-insured dental HMO members due to the conversion of one employer group from our fully-insured dental HMO/IND product to our self-insured dental product effective January 1, 2017. In addition, a decrease of approximately 7,300 members is the result of employer groups that did not renew with the Company or reduced employee counts of retained employer groups, which was offset with new sales of 13,800. Some of our fully-insured dental HMO membership losses were the result of corporate consolidation and employer groups moving to medical carriers to take advantage of medical/dental packaged savings.

 

 
13

 

 

Our fully insured dental PPO membership increased by approximately 14,000 members as of March 31, 2017 from March 31, 2016. The increase in fully-insured dental PPO membership is primarily the result of new sales of approximately 20,000 members, offset by the loss of approximately 6,000 members due to employer groups that did not renew with the Company or reduced employee counts of retained employer groups. Some of our fully-insured dental PPO membership losses were the result of employer groups moving to medical carriers to take advantage of medical/dental packaged savings.

 

Our self-insured dental membership increased by approximately 300 members as of March 31, 2017 from March 31, 2016 primarily due to the conversion of approximately 10,000 members of an employer groups from our fully-insured dental HMO product to our self-insured dental product effective January 1, 2017. This was offset by a decrease of 9,700 members as the result of employer groups that did not renew with the Company.

 

Our corporate, all other membership decreased by approximately 100 members as of March 31, 2017 from March 31, 2016.

 

Revenue

 

Fully-insured dental HMO/IND premium revenue for the 2017 quarter decreased by approximately $365,000 compared to the 2016 quarter. A decrease in fully-insured HMO/IND membership in the 2017 quarter resulted in a decrease in fully-insured dental HMO/IND premiums of approximately $245,000. New fully-insured dental HMO/IND sales volume resulted in an increase in fully-insured dental HMO/IND premium revenue of approximately $566,000 that was offset by a decrease in fully-insured dental HMO/IND revenue of approximately $811,000 due to the conversion of an employer group to the self-insured product line in 2017. Fully-insured dental HMO/IND premium decreased by $120,000 due to lower overall premium rates on a PMPM basis. The conversion of an employer group from fully-insured to the self-insured product line resulted in $53,000 of this decrease. The remaining decrease is due to discounted new sales rates that are lower than the 2016 quarter rates for new group business.

 

Fully-insured dental PPO premium revenue for the 2017 quarter increased by approximately $880,000 compared to the 2016 quarter. Fully-insured dental PPO revenue increased by approximately $1,141,000 due to an increase in fully-insured PPO group and individual membership in the 2017 quarter. This increase in fully-insured PPO group and individual membership was offset by a decrease of approximately $261,000 due to a decrease in rates established for membership.

 

Total self-insured dental revenue for the 2017 quarter remained consistent compared to the 2016 quarter. The self-insured segment revenue has two components:

 

Self-Insured Claim Revenue – Self-insured claim revenue increased approximately $3,000, to approximately $7,200,000 in the 2017 quarter from approximately $7,197,000 in the 2016 quarter. The self-insured claim revenue increased by approximately $768,000 due to the conversion of a fully-insured HMO/IND group to the self-insured product. This increase was offset by a decrease of approximately $772,000, as a result of the loss of employer groups in 2017. In addition, there was an increase in self-insured claim revenue of approximately $7,000 as a result of an increase in self-insured claim revenue on a PMPM basis in the 2017 quarter.

 

Self-Insured ASO Fees - Self-insured ASO fees decreased approximately $2,000 to approximately $352,000 in the 2017 quarter from approximately $354,000 in the 2016 quarter. Self-insured ASO fees decreased by approximately $3,000 due to a decrease in the average self-insured ASO fee rates on a PMPM basis for the 2017 quarter compared to the 2016 quarter, which was offset by an increase of approximately $1,000 due to a net membership increase with employer groups.

 

Corporate, all other premium revenue is primarily derived from the dental indemnity product and the vision product that are underwritten by third-party insurance carriers. In aggregate, corporate, all other premium revenue increased by approximately $20,000 in the 2017 quarter compared to the 2016 quarter.

 

Healthcare Services Expense

 

Fully-insured dental HMO/IND healthcare services expense decreased $316,000 in the 2017 quarter compared to the 2016 quarter, and fully-insured dental HMO/IND healthcare services expense on a PMPM basis decreased by 1.2% from $21.50 PMPM in the 2016 quarter to $21.25 PMPM in the 2017 quarter. A decrease in fully-insured dental HMO/IND membership due to the conversion of an employer group to our self-insured product resulted in a claim decrease of approximately $648,000. Lower healthcare services utilization resulted in a decrease in fully-insured dental HMO/IND healthcare services expense of approximately $234,000 in the 2017 quarter compared to the 2016 quarter. These decreases were offset by an increase of approximately $452,000 due to an increase in new membership. In addition, an increase of $114,000 is attributable to fee schedule increases effective January 1, 2017.

 

Fully-insured dental PPO healthcare services expense increased by $690,000 in the 2017 quarter compared to the 2016 quarter, and fully-insured dental PPO healthcare services expense on a PMPM basis decreased 2.4%, from $16.73 PMPM in the 2016 quarter to $16.33 PMPM in the 2017 quarter. An increase in fully-insured dental PPO membership resulted in an increase in fully-insured dental PPO healthcare services expense of $803,000. In addition, an increase of $52,000 is attributable to fee schedule increases effective January 1, 2017, and a decrease of approximately $165,000 is attributable to lower healthcare services expense on a PMPM basis.

 

 
14

 

 

Self-insured healthcare services expense slightly increased by $4,000 in the 2017 quarter compared to the 2016 quarter, and self-insured healthcare services expense on a PMPM basis decreased slightly by 0.4% from $22.39 PMPM in the 2016 quarter to $22.31 PMPM in the 2017 quarter. An increase in self-insured dental membership due to the conversion of an employer group to our self-insured product resulted in an increase of approximately $727,000. In addition, self-insured healthcare services expense increased approximately $72,000 attributable to fee schedule increases effective January 1, 2017. These increases were offset by a decrease of $701,000 due to the loss of self-insured groups in 2017. Also, lower healthcare services utilization resulted in a decrease in self-insured healthcare services expense of approximately $94,000 in the 2017 quarter compared to the 2016 quarter.

 

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

 

Insurance Expense 

 

Consolidated insurance expense for the 2017 quarter increased approximately $519,000 compared to the 2016 quarter. The higher consolidated insurance expense for the 2017 quarter was primarily due to increases in salaries and wages, commissions, and a reduction in the capitalization of deferred acquisition costs in the 2017 quarter. Insurance expense as a percentage of total premium revenue, or the insurance expense ratio, was approximately 20.6% and 19.0% for the 2017 and the 2016 quarter, respectively.

 

Income Taxes

 

The Company calculates its year to date income tax provision by applying the estimated annual effective tax rate for the year to pretax income. The effective tax rate for the three months ended March 31, 2017 was 35.7% with tax expense of approximately $85,000. The effective tax rate for the three months ended March 31, 2016 was 43.4% with tax expense of approximately $216,000. The decrease in federal income tax is the result of a 2017 moratorium on the non-deductible federal premium tax and lower pre-tax income. Tax years subsequent to 2013 remain open to examination by the Internal Revenue Service (“IRS”), and 2012 remains open to state and local tax authorities.  The Company has recorded no uncertain tax positions in the tax years that are subject to examination.

 

Liquidity and Capital Resources and Changes in Financial Condition

 

Our primary sources of cash include receipts of premiums, ASO fees, investment and other income, proceeds from the sale or maturity of our investment securities, as well as 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, dividends, redeemable common share redemptions and payments on borrowings. Cash decreased approximately $952,000, or 8.5% during the 2017 quarter to approximately $10,269,000 at March 31, 2017 from approximately $11,221,000 at December 31, 2016. The change in cash for the 2017 and 2016 quarter is summarized as follows (in thousands):

 

   

Three months ended

   

Three months ended

 
   

March 31, 2017

   

March 31, 2016

 

Net cash (used in) provided by operating activities

  $ (8 )   $ 489  

Net cash used in investing activities

    (298 )     (35 )

Net cash used in financing activities

    (646 )     (360 )

(Decrease) increase in cash and cash equivalents

  $ (952 )   $ 94  

 

Cash Flows from Operating Activities

 

In the 2017 quarter, we had net income of approximately $154,000. Our non-cash deferred compensation activity was approximately $127,000 primarily due to current year vesting activity and an increase in current book value in the 2017 quarter. Deferred policy acquisition costs increased by approximately $1,100,000 primarily as a result of the increase in the fully-insured business renewed in January 2017. Other assets decreased by approximately $22,000 primarily due to the decrease in the prepaid expense. Other payables and accrued expenses increased and resulted in a net increase in cash flow from operating activities of approximately $66,000. An increase in accounts receivable offset by an increase in unearned premium revenue resulted in an increase of cash of approximately $682,000 in the 2017 quarter. The remaining effects of changes in operating assets and liabilities that represent fluctuations are not significant and are consistent with the 2016 quarter.

 

 
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Cash Flows from Investing Activities

 

During the 2017 quarter, we made purchases totaling approximately $1,483,000 of investment grade and non-investment grade corporate bonds and certificates of deposit in order to improve investment income. Also during the 2017 quarter, we had investment grade and non-investment grade corporate bond sales and certificate of deposit sales and maturities that together totaled approximately $1,545,000. The remaining net cash of approximately $360,000 used in investing activities during the 2017 quarter was due to purchases in computer software, furniture and fixtures.

 

Cash Flows from Financing Activities

 

In the 2017 quarter, we made scheduled principal payments of approximately $13,000 related to our office building mortgage and scheduled payments of approximately $62,000 related to our capital leases. During the 2017 quarter, we paid dividends of approximately $547,000 to holders of our Redeemable Common Shares.

 

Contractual Obligations, Other Commitments and Off-balance Sheet Arrangements

 

Refer to the Company’s 2016 Annual Report on Form 10-K filed with the SEC for a description of contractual obligations, other commitments and off-balance sheet arrangements. We have had no significant changes in these items in 2017.

 

Financial Condition

 

Our consolidated cash and short term investments were approximately $10.6 million and $11.7 million as of March 31, 2017 and December 31, 2016, respectively. We expect to generate positive cash flow from operations during the balance of 2017. Based on total expenses for the three months ended March 31, 2017, we estimate that we had approximately 36 days of cash and short term investments on hand at March 31, 2017. In addition, the Company has access to approximately $9.0 million of fixed maturity investments that are classified as available-for-sale and two working capital lines of credit discussed below.

 

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%. The Company also entered into an interest rate swap agreement that effectively changed the interest rate related to the mortgage note with a commercial bank from a variable rate based on the 30-day LIBOR rate plus 1.95% to a fixed rate of 3.90% for the 10-year period through December 22, 2022.      

 

We have an annually renewable agreement with a commercial bank for a $500,000 working capital line of credit. Interest is payable at a variable rate of LIBOR plus 2.50%. We did not have any interest expense for the line of credit in the 2017 quarter or the 2016 quarter. As of March 31, 2017 and December 31, 2016, there was no amount outstanding on this line of credit. The $500,000 working capital line of credit expires in July 2017. We expect to renew this line of credit at its maturity.

 

We have 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%. We did not have any interest expense for the line of credit in the 2017 quarter or the 2016 quarter. At March 31, 2017 and December 31, 2016, there was no amount outstanding on this line of credit. The $1,000,000 working capital line of credit expires in July 2017. We expect to renew this line of credit at its maturity.

 

Under the mortgage note and each of the renewable lines of credit, the Company is required to have a debt service ratio of at least 1:1 at the end of each quarter and a minimum tangible net worth equal to or greater than $3,500,000 at the end of each fiscal year. The Company was in compliance with these covenants at March 31, 2017 and December 31, 2016.

 

We believe our premium revenues, cash, investments and working capital lines of credit are sufficient to meet our short term and long term liquidity needs. In the short term, we are obligated to make payments related to our contractual obligations such as our healthcare services expense, building mortgage, and our capital and operating leases and other commitments, including payment of certain director’s deferred compensation obligations. In the long term, we will continue to be obligated to make payments related to our other contractual obligations. We will also be obligated in certain circumstances to repurchase the Redeemable Common Shares and make future payments to key employees and directors related to their deferred compensation obligations. Our Board of Directors establishes limitations on the amount of share redemptions each year. While we are not able to estimate future redemptions of our Redeemable Common Shares, we believe our cash balances, investment securities, operating cash flows, and borrowing capacity, taken together, provide adequate resources to fund ongoing operating and regulatory requirements and capital expenditures in the next twelve months.

 

 
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Our largest subsidiary, Dental Care Plus Inc., (“DCP”), operates in states that regulate its payment of dividends and debt service on inter-company loans, as well as other inter-company cash transfers and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid by DCP, without prior approval by state regulatory authorities, is limited based on statutory income and statutory capital and surplus. Even if prior approval is not required, prior notification must be provided to state insurance departments before paying a dividend. During 2017, the total dividend that the DCP subsidiary may declare without prior regulatory approval is approximately $1,227,000. There were no dividends declared or paid by DCP in 2017 or 2016.

 

A.M. Best Company assigns a rating to companies based on their ability to meet their ongoing obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions. In July 2016, A.M. Best Company affirmed our financial strength rating at B+ (Good) with a stable outlook based on DCP’s positive operating performance and improved capitalization. Our A.M. Best rating is a measure of our financial strength relative to other insurance companies and is not a recommendation to buy, sell or hold securities. The rating assigned by A.M. Best Company is based, in part, on the ratio of our fully-insured premium revenue to our statutory capital and surplus.

 

We attempt to reduce overall risk by maintaining a well-diversified fixed-maturity portfolio of investments. We invest in certificates of deposits, investment grade corporate bonds, non-investment grade corporate bonds, and money market funds, targeting what we believe to be optimal risk-adjusted after-tax yields. Risk, in this context, includes interest rate, call, reinvestment rate, credit and liquidity risk. We typically do not make a concerted effort to alter duration on a portfolio basis in response to anticipated movements in interest rates. By continually investing in certificates of deposits, money market funds and investment and non-investment grade corporate bonds, we believe the portfolio mitigates the impact of adverse economic factors.

 

Our regulated subsidiary’s state of domicile has statutory risk-based capital, or RBC, requirements for health and other insurance companies largely based on the NAIC’s RBC Model Act. These RBC requirements are intended to measure capital adequacy, taking into account the risk characteristics of an insurer’s investments and products. The NAIC sets forth the formula for calculating the RBC requirements, which are designed to take into account asset risks, insurance risks, interest rate risks and other relevant risks with respect to an individual insurance company’s business. In general, an insurance company must submit a report of its RBC level to the state insurance department or insurance commissioner, as appropriate, at the end of each calendar year. Our subsidiary’s risk-based capital as of December 31, 2016, which was the most recent date for which reporting was required, was in excess of all mandatory RBC thresholds.

 

Critical Accounting Policies

 

Liability for Claims Payable

 

We estimate liabilities for both incurred but not reported (“IBNR”) and reported claims in process by employing actuarial methods that are commonly used by health insurance actuaries and meet actuarial standards of practice. These actuarial standards of practice require that claim liability estimates be adequate under moderately adverse circumstances. The Company’s consulting actuary assists us in making these estimates. Since our liability for claims payable is based on actuarial estimates, the amount of claims eventually paid for services provided prior to the balance sheet date could differ from the estimated liability. Any such differences are recognized in the condensed consolidated statements of comprehensive income for the period in which the differences are identified. Historically, such differences have not been material.

 

We develop our estimate for the claims payable liability using actuarial methodologies and assumptions, primarily based on historical claim payments and claim receipt patterns, as well as historical dental cost trends. Depending on the period for which incurred claims are estimated, we apply a different method in determining our estimate. For periods prior to the most recent month, we calculate a “completion factor” which indicates the percentage of claims payable estimated for a prior period that have been paid as of the end of the current reporting period. We use the completion factor to determine historical patterns over a rolling 12-month period, made consistent by making adjustments for known changes in claims in process levels and known changes in claim payment processes. For the most recent month, we calculate a “claims trend factor” that estimates incurred claims primarily from a trend analysis based upon PMPM claims trends developed from our historical experience in the preceding months, adjusted for known provider contracting changes, changes in benefit levels, seasonality and consideration of any subsequent actual claims data available. When developing our estimate for claims payable liability as of March 31, 2017 and December 31, 2016, we considered actual paid claim data from April 2017 and January 2017. As a result, we were able to use the completion factors approach for all historical months at March 31, 2017 and December 31, 2016.

 

We have not changed the key actuarial methodologies used by management to estimate the IBNR and reported claims in process components of our claims payable liability during the periods presented, and management has not adjusted any of the key methodologies used in calculating the most recent estimate of the IBNR and reported claims in process components of our claims payable liability.

 

 
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The table below illustrates how our operating results are affected when there is a variance between estimated claims expense and actual claims expense. The table shows the sensitivity of the estimated fully-insured incurred claims payable liability to fluctuations in the expected completion factors that were used to estimate the claims payable liability as of March 31, 2017 within variance ranges historically experienced.

 

Completion Factor (a)

 
             
       

Estimated claims

 

(Decrease)

     

payable liability

 

Increase

     

as of

 

In Factor

     

3/31/2017

 
             
(0.5)%       $ 4,010,107  
0%  

(estimate used)

    3,725,134  
0.5%         3,509,821  

 

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

 

Based on historical experience, we believe the completion factors we use to estimate outstanding IBNR and reported claims in process are reliable for predicting actual claims paid at future times, with a variance range of approximately one-half of one percent, plus or minus.

 

Based on our healthcare services expense on a PMPM basis that adjusts the quarterly healthcare services expense for membership volume changes, we have observed that the utilization of our dental plan members is somewhat variable. In general, claims on a PMPM basis are lower in the second and fourth quarter than in the first quarter and the third quarter. The higher third quarter claim level on a PMPM basis is primarily due to the high level of dental services used in July and August by student members prior to returning to school. Use of dental services is lowest in the fourth quarter due to the holiday season and the fact that a portion of our members have already reached their maximum annual benefit level for the year. The following shows these trends in tabular form:

 

   

Healthcare Service Expense

 
                                 
   

2017

   

2016

 
                                 
   

$000’s

   

$PMPM

   

$000’s

   

$PMPM

 
                                 

First Quarter

  $ 21,425     $ 20.23     $ 21,047     $ 20.66  

Second Quarter

                    19,795       19.26  

Third Quarter

                    20,312       19.79  

Fourth Quarter

                    19,346       18.88  

 

 

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

 

Our portfolio includes approximately $7,991,000 and $8,020,000 of corporate bonds, approximately $178,000 and $223,000 of money market funds and approximately $1,143,000 and $1,095,000 of investments in FDIC-insured bank certificates of deposits at March 31, 2017 and December 31, 2016, respectively. We have instructed our investment manager to invest additional funds in shorter duration investment grade corporate bonds with maturities up to five years.

  

 
18

 

 

There is increased interest rate risk associated with our investment in longer duration investment grade and non-investment grade corporate bonds. We have evaluated the impact on the invested portfolio’s fair value considering an immediate 100 basis point change in interest rates. A 100 basis point increase in interest rates would result in an approximate $285,000 decrease in fair value, whereas a 100 basis point decrease in interest rates would result in an approximate $285,000 increase in fair value. The investment and non-investment grade corporate bonds as well as the certificates of deposits are all classified as available-for-sale.

 

At March 31, 2017 and December 31, 2016, we had a mortgage note with a bank with an outstanding principal balance of $1,135,000 and $1,148,000, respectively, with a variable rate based on LIBOR plus 1.95%. In December 2012, we entered into a variable to fixed interest rate swap contract that effectively eliminated the interest rate risk exposure on the entire outstanding loan principal. Management estimates that a 100 basis point increase in interest rates would not materially impact our annual pre-tax earnings.

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the design and effectiveness of the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2017. Based on the evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2017.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting (as defined in Securities Exchange Act Rules 13a-15(f) and 15(d)-15(f)) during the three months ended March 31, 2017 that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

 
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PART II. OTHER INFORMATION

 

ITEM 1.      LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

Certain factors may have a material adverse effect on our business, financial condition and results of operations and you should carefully consider them. It is not possible to predict or identify all such factors. For discussion of our potential risks or uncertainties, refer to Part I, Item 1A, Risk Factors, included in our 2016 Annual Report on Form 10-K. There have been no material changes to the risk factors disclosed in our 2016 Annual Report on Form 10-K.

 

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

 

We repurchased and retired 3 Class A and 54 Class B during the three months ended March 31, 2017 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

 

January 1 – January 31, 2017

    0       0       0       N/A       0       N/A  

February 1 – February 28, 2017

    0       0       0       N/A       0       N/A  

March 1 – March 31, 2017

    3       54       0     $ 1,099.61       0       N/A  

 

 

(a)

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

 

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.      MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5.      OTHER INFORMATION

 

None.

 

 
20

 

 

ITEM 6. EXHIBITS

 

Exhibits  
   
   

31.1

CEO certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

   

31.2

CFO certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

   

32

CEO and CFO certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

101

Financial information and Notes to Financial Statements for the three months ended March 31, 2017, formatted in XBRL (Extensible Business Reporting Language).

  ______________

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

DCP HOLDING COMPANY

 

 

May 12, 2017 

 

By: /s/ Anthony A. Cook                                     

 

 

    Anthony A. Cook    
   

President, Chief Executive Officer and Director

   
    Principal Executive Officer     
         
          
May 12, 2017   By: /s/ Robert C. Hodgkins, Jr.                               
    Robert C. Hodgkins, Jr.    
    Vice President and Chief Financial Officer    
    Principal Financial Officer    

 

 
21

 

 

INDEX TO EXHIBITS

 

Exhibit No.

 

Item

     

31.1

 

Certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002

     

31.2

 

Certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002

     

32

 

Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     

101

 

Financial information and Notes to Financial Statements for the three months ended March 31, 2017, formatted in XBRL (Extensible Business Reporting Language).

 


 

22