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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

_______________

 

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, 2017

_______________

 

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

 

_______________

 

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, 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 ☒ Smaller reporting Company ☐ Emerging growth company ☐
  (Do not check if smaller reporting 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 June 30, 2017, the aggregate book value of the registrant’s Redeemable Common Shares, without par value, held by non-affiliates of the registrant was approximately $14.4 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, 2017, the number of Class A, Class B and Class C Redeemable Common Shares outstanding was 500; 8,501; and 3,771, respectively.

 

The number of Class A , Class B and Class C Redeemable Common Shares, without par value, outstanding as of March 23, 2018 was 500; 8,653; and 3,771, respectively.

_______________

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

 
 

 

 

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 ANALYSISOF FINANCIAL CONDITION AND RESULTS OFOPERATION 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 55
ITEM 9A. CONTROLS AND PROCEDURES 55
ITEM 9B. OTHER INFORMATION 56
  Part III  
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 56
ITEM 11. EXECUTIVE COMPENSATION 62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 77
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE  78
  Part IV  
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES  79
ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES  80
SIGNATURES 87

INDEX TO EXHIBITS

89

 

 

 
 

 

 

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, changes in existing laws or regulations, 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 health maintenance organization (“HMO”), participating provider organization (“PPO”) and indemnity plans for dental care services and vision benefit plans in Ohio, Kentucky and Indiana. In 2017, the Company offered low cost dental PPO plans to individuals and small groups on the federally facilitated market exchanges in Ohio, Indiana, Georgia, Pennsylvania, Tennessee, Kentucky, Illinois and Virginia (“the FFM exchanges”) and individual dental HMO and dental PPO plans in Ohio, Kentucky and Indiana. As of December 31, 2017, we had approximately 346,300 members in our dental benefit plans and approximately 40,300 members in our vision benefit plans. We market our products through a network of independent brokers and consultants.

 

We had approximately 3,000 providers participating in our Dental Care Plus dental HMO network, approximately 3,100 providers participating in our DentaSelect dental PPO network and approximately 2,200 providers participating in our Balanced Value dental PPO network at December 31, 2017. The Company has a network access agreement with a national dental network management company that has one of the largest networks of providers under contract in the United States. With this network access agreement, our Company dental PPO members now have access to approximately 2,800 additional providers in our operating territories and approximately 45,900 additional providers throughout the United States. The Company also has a network access arrangement with a national dental administration company for the dental PPO plans that it offered on the FFM exchanges in 2017. With this network access arrangement, FFM exchange members have access to approximately 10,900 providers across the eight FFM exchange states.

 

DCP Holding Company is the parent holding company, which includes wholly-owned subsidiaries Dental Care Plus, Inc., or Dental Care Plus, an Ohio corporation, Insurance Associates Plus, Inc., or Insurance Associates Plus, an Ohio corporation, and Adenta, Inc., or Adenta, a Kentucky corporation. A majority of our Redeemable Common Shares are owned by providers who also participate in one or more of our networks.

 

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

 

Business Segments

 

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

 

The results of our fully-insured dental HMO/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, interest expense, insurance expenses, assets or liabilities to our segments because these measures are not used to analyze the segments. See footnote 16 to our consolidated financial statements for financial information regarding our segments.

 

1

 

 

Managed Dental Benefits Market

 

The following table shows the estimated 2016 and 2015 dental enrollment statistics for the United States:

 

   

Estimated

           

Estimated

           

%

 
   

2016

   

% of

   

2015

   

% of

   

Change

 
   

Enrollment

   

Total

   

Enrollment

   

Total

    2015 to 2016  
                                         

Dental HMO

    11,405,719       6.9 %     11,383,454       7.2 %     0.2 %
                                         

Dental EPO

    1,049,140       0.6 %     838,576       0.5 %     25.1 %
                                         

Dental PPO

    132,988,202       81.0 %     128,322,139       81.5 %     3.6 %
                                         

Dental Indemnity

    10,494,506       6.4 %     10,170,538       6.5 %     3.2 %
                                         

Discount Dental

    7,763,854       4.7 %     6,476,006       4.1 %     19.9 %
                                         

Direct Reimbursement

    504,831       0.3 %     292,498       0.2 %     72.6 %
                                         

Total Commercial Dental

    164,206,252       100.0 %     157,483,211       100.0 %     4.3 %
                                         

Medicaid / SCHIP

    74,778,574               45,419,686               64.6 %
                                         

Other Public

    9,127,768               8,793,953               3.8 %
                                         

Total Publicly Funded Dental

    83,906,342               54,213,639               54.8 %
                                         

Unassigned

    1,013,187               -                  
                                         

Estimated Total Dental

    249,125,781               211,696,850               17.7 %

 

Source: NADP & Delta Dental Association Joint Dental Benefits Report, August 2017

 

According to the National Association of Dental Plans (“NADP”), in 2016 approximately 249.1 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 77% of the U.S. population. This enrollment level represents an increase of approximately 17.7% from the estimated 2015 enrollment level of 211.7 million persons. This enrollment increase is primarily due to a 54.8% increase in publicly funded dental enrollment and in part due to a 4.3% increase in commercial dental enrollment in 2016 resulting from increases in the dental EPO, PPO, dental indemnity, discount dental and direct reimbursement product categories.

 

2

 

 

The following table shows the estimated 2016 and 2015 dental enrollment statistics for Ohio and Kentucky, the two primary states in which we had group dental business:

 

   

Ohio

 
   

Estimated

           

Estimated

           

%

 
   

2016

   

% of

   

2015

   

% of

   

Change

 
   

Enrollment

   

Total

   

Enrollment

   

Total

    2015 to 2016  
                                         

Dental HMO

    283,392       3.2 %     370,504       5.4 %     -23.5 %
                                         

Dental EPO

    31,315       0.4 %     12,235       0.2 %     155.9 %
                                         

Dental PPO

    5,006,914       56.2 %     4,843,335       70.2 %     3.4 %
                                         

Dental Indemnity

    105,889       1.2 %     155,216       2.2 %     -31.8 %
                                         

Discount Dental

    167,954       1.8 %     102,978       1.5 %     63.1 %
                                         

Individual Exchange

    12,400       0.1 %                        
                                         

Medicaid / SCHIP

    2,910,351       32.7 %     1,196,578       17.3 %     143.2 %
                                         

Other Public

    389,787       4.4 %     218,822       3.2 %     78.1 %
                                         

Total Dental

    8,908,002       100.0 %     6,899,668       100.0 %     29.1 %

 

   

Kentucky

 
   

Estimated

           

Estimated

           

%

 
   

2016

   

% of

   

2015

   

% of

   

Change

 
   

Enrollment

   

Total

   

Enrollment

   

Total

   

2015 to 2016

 
                                         

Dental HMO

    134,492       3.9 %     138,779       4.1 %     -3.1 %
                                         

Dental EPO

    5,435       0.2 %     4,108       0.1 %     32.3 %
                                         

Dental PPO

    1,772,853       52.1 %     1,675,239       50.0 %     5.8 %
                                         

Dental Indemnity

    80,515       2.4 %     103,035       3.1 %     -21.9 %
                                         

Discount Dental

    36,332       1.1 %     28,721       0.9 %     26.5 %
                                         

Individual Exchange

    14,613       0.4 %                        
                                         

Medicaid / SCHIP

    1,230,475       36.2 %     1,298,654       38.8 %     -5.2 %
                                         

Other Public

    124,905       3.7 %     99,267       3.0 %     25.8 %
                                         

Total Dental

    3,399,620       100.0 %     3,347,803       100.0 %     1.5 %

 

Source: NADP & Delta Dental Association Joint Dental Benefits Reports dated August 2017 and September 2016

 

According to the NADP, total dental enrollment in Ohio increased 29.1% in 2016 compared to 2015. Total dental HMO enrollment in Ohio decreased 23.5% in 2016, compared to the national dental HMO increase of 0.2%. Total dental EPO enrollment in Ohio increased by 155.9% in 2016, compared to the national dental EPO increase of 25.1%. Total dental PPO enrollment in Ohio increased by 3.4% in 2016, compared to the national dental PPO increase of 3.6%. In Ohio, total dental indemnity enrollment decreased by 31.8%, whereas national dental indemnity enrollment increased by approximately 3.2%. Total discount dental enrollment in Ohio increased by 63.1%, whereas total discount dental enrollment in the United States increased by 19.9%. Medicaid / State Children’s Health Insurance Program (“SCHIP”) dental enrollment in Ohio increased by 143.2% in 2016, compared to the national Medicaid / SCHIP dental enrollment increase of 64.6%. Other publicly funded dental enrollment in Ohio increased by 78.1% in 2016, compared to the national other publicly funded dental enrollment increase of 3.8%.

 

Total dental HMO enrollment in Kentucky decreased 3.1% in 2016, while dental HMO enrollment in the United States increased by approximately 0.2%. Total dental EPO enrollment in Kentucky increased by 32.3% in 2016, compared to the national dental EPO increase of 25.1%. Total dental PPO enrollment in Kentucky increased by 5.8% in 2016, which represents a larger percentage increase than the national dental PPO increase of 3.6%. In Kentucky, total dental indemnity enrollment decreased by 21.9%, compared to an increase in national dental indemnity enrollment of 3.2%. Total discount dental enrollment in Kentucky increased by 26.5% in 2016, whereas total discount dental enrollment in the United States increased by 19.9%. Medicaid / SCHIP dental enrollment in Kentucky decreased by 5.2% in 2016, compared to the national Medicaid / SCHIP dental enrollment increase of 64.6%. Other publicly funded dental enrollment in Kentucky increased by 25.8% in 2016, compared to the national other publicly funded dental enrollment increase of 3.8%.

 

3

 

 

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:

 

2017

 

Membership

   

Premiums (000's)

   

Other Fees (000's)

   

Total Premium

Revenue (000's)

   

Percent of Total

Premium Revenue

 

Fully-Insured Dental HMO/IND

    159,500     $ 51,419             $ 51,419       47.8 %

Fully-Insured Dental PPO

    89,800       25,936               25,936       24.1 %

Self-Insured Dental

    97,000       28,002 (1)   $ 1,425 (2)     29,427       27.3 %

Other Products

    40,300       -       807 (3)     807       0.8 %

Total

    386,600     $ 105,357     $ 2,232     $ 107,589       100.00 %

 

2016

 

Membership

   

Premiums (000's)

   

Other Fees (000's)

   

Total Premium

Revenue (000's)

   

Percent of Total

Premium Revenue

 

Fully-Insured Dental HMO/IND

    167,000     $ 53,393             $ 53,393       50.6 %

Fully-Insured Dental PPO

    79,500       22,363               22,363       21.2 %

Self-Insured Dental

    95,500       27,676 (1)   $ 1,391 (2)     29,067       27.5 %

Other Products

    40,100       -       771 (3)     771       0.7 %

Total

    382,100     $ 103,432     $ 2,162     $ 105,594       100.00 %

 

2015

 

Membership

   

Premiums (000's)

   

Other Fees (000's)

   

Total Premium

Revenue (000's)

   

Percent of Total

Premium Revenue

 

Fully-Insured Dental HMO/IND

    158,200     $ 49,458             $ 49,458       50.3 %

Fully-Insured Dental PPO

    69,800       19,198               19,198       19.5 %

Self-Insured Dental

    98,000       27,505 (1)   $ 1,417 (2)     28,922       29.5 %

Other Products

    36,200       -       683 (3)     683       0.7 %

Total

    362,200     $ 96,161     $ 2,100     $ 98,261       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 products primarily consist of dental HMO, dental indemnity and dental PPO plans, with fully-insured products constituting 71.9% of our total premium revenues for 2017. Substantially all of our products are marketed to employer groups through brokers and consultants. In addition, our individual dental products are marketed on our website, sometimes with the assistance of brokers, and our exchange dental products are marketed on the government’s website at www.healthcare.gov. Our business model allows us to offer dental benefit products including broad networks of participating providers while at the same time promoting the use of private practice fee-for-service dentistry, a primary interest of our participating providers. The dental benefit products we offer currently vary depending on geographic markets.

 

We currently market our group dental products to employers in Ohio, Kentucky and Indiana. Our products may be offered to employer groups as “bundles,” where the subscribers are offered a combination of dental HMO, dental PPO and dental indemnity options, with various employer contribution strategies as determined by the employer. Individuals may become subscribers of our group dental plans through their employers and qualified family members of these subscribers become members through such individuals. Employers may pay for all or part of the premiums, and make payroll deductions for any premiums payable by the employees.

 

4

 

 

In 2017, we offered fully insured individual and small group dental PPO plans on the FFM exchanges. This business is included in our fully insured dental PPO segment. In 2017, we offered fully insured individual dental HMO and dental PPO plans in Ohio and Kentucky and dental PPO plans in Indiana. This business is included in our fully insured dental HMO and fully insured dental PPO segments.

 

Fully-Insured Dental HMO and Indemnity

 

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

 

Dental Care Plus- Under our group dental HMO, premiums are paid to Dental Care Plus by the employer, and members receive access to our HMO network. Plan designs range from full premium payments by the employer to shared contributions of varying proportions by the employer and its employees to full payment by the employees. Under our individual dental HMO, premiums are paid to Dental Care Plus by the individual subscriber, and the subscriber and his/her dependents receive access to our HMO network. Dental Care Plus offers a limited number of plan designs to the individual market.

 

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 plans with out-of-area members or members that require complete freedom of provider access. Plan designs range from full premium payments by the employer to shared contributions of varying proportions by the employer and its employees to full payment by the employees. Members are responsible for paying annual deductible amounts, co-payments and balance billings. Premium rates for DentaPremier are generally higher than premium rates for our dental HMO and PPO products.

 

For the year ended December 31, 2017, fully-insured dental HMO/IND premiums totaled approximately $51.4 million, or 47.8% of our total premiums and ASO fees.

 

Fully-Insured Dental PPO

 

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

 

DentaSelect- Our dental PPO product, DentaSelect, is underwritten and administered by Dental Care Plus. DentaSelect members have access to our proprietary PPO networks and the national provider 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. Plan designs range from full premium payments by the employer to shared contributions of varying proportions by the employer and its employees to full payment by the employees.

 

DentaTrust and DentaSpan– Our individual dental PPO product for the Ohio, Indiana, Georgia, Pennsylvania, Tennessee, Kentucky, Illinois and Virginia exchanges, DentaTrust, and our small group dental PPO product for the FFM exchanges, DentaSpan, are underwritten by Dental Care Plus and administered by two independent third party administrators (“TPAs”). Pediatric members under the age of 19 have pediatric oral health benefits that meet the requirements of the Affordable Care Act (“ACA”). Adult members have benefits that are subject to waiting periods on basic dental services and major dental services. All DentaTrust and DentaSpan members have out-of-network benefits.

 

For the year ended December 31, 2017, fully-insured dental PPO premiums totaled approximately $25.9 million, or 24.1% 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 providers according to our fee schedules. In the case of our dental PPO and dental indemnity products, employers pay claims from non-network providers 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, 2017, self-insured revenue totaled approximately $29.4 million, or 27.3% of our total premiums and ASO fees.

 

Corporate, All Other

 

We offer dental PPO, dental indemnity and vision PPO benefit plans 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, dental indemnity 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 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.

 

5

 

 

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 $807,000, or less than 1% of total premiums and ASO fees, for the year ended December 31, 2017.

 

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 2015, our quarterly healthcare services expense was above average in the first quarter, slightly above average in the second quarter, above average in the third quarter and lowest in the fourth quarter. In 2016, our quarterly healthcare services expense was above average in the first quarter, below average in the second quarter, above average in the third quarter and lowest in the fourth quarter. In 2017, our quarterly healthcare services expense was above average in the first quarter, below average in the second quarter, slightly higher than average in the third quarter and lowest in the fourth quarter. The following table shows these trends in tabular form:

 

   

2017

   

2016

   

2015

 
                                                 
   

$000’s

   

$PMPM

   

$000’s

   

$PMPM

   

$000’s

   

$PMPM

 
                                                 

First Quarter

  $ 21,425     $ 20.23     $ 21,047     $ 20.66     $ 19,320     $ 20.44  

Second Quarter

    20,383       19.24       19,795       19.26       19,143       20.03  

Third Quarter

    20,402       19.39       20,312       19.79       19,664       20.28  

Fourth Quarter

    19,398       18.59       19,346       18.88       18,557       19.04  

Calendar Year

  $ 81,608       19.37     $ 80,500       19.65     $ 76,684       19.93  

 

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

 

Business Strategy

 

Our objective is to become one of the leading providers of dental benefits in the Midwest. Our strategy is to continue increasing membership in all of our plans by gaining new employer groups and individual customers, acquiring other similar dental plans, adding more participating providers 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 providers into our dental PPO 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 providers who participate in one or more of our networks, and our providers are reimbursed on a fee-for-service basis, we often have a competitive advantage in recruiting and retaining providers for our networks.

 

We offer low cost dental PPO plans on the various federally facilitated exchanges. 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. We currently offer these exchange certified dental PPO plans on the Ohio, Indiana, Georgia, Pennsylvania, Tennessee, Kentucky, Illinois and Virginia exchanges.

 

Membership Retention- Employers generally contract with our dental plans for a period of one year. Continuous marketing and sales efforts are made to obtain contract renewals on an annual basis. The ability to obtain contract renewals depends on our premium rates, competitive bids received by employers from our competitors, and employee satisfaction with our plans, among other factors. The cost of replacing lost members is higher than retaining members. Accordingly, membership retention is a primary focus of our marketing efforts. We strive for consistent employer and broker contracts and fair, justified renewal pricing in order to increase retention rates. We achieved a group dental retention rate of approximately 92.1% in 2017, compared to retention rates of 94.8% and 98.4% in 2016 and 2015, 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.

 

6

 

 

Customer Service- We provide customer service to employer group administrators, members, and providers. 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 telephone 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 adapt to benefit changes sought by employer groups. Our system also allows for increased efficiencies and cost savings in the functional areas of 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.

 

During 2017, the Board of Directors established a Special Committee to consider strategic alternatives available to the Company, including consideration of certain third party proposals made to the Company.  The significant amount of work by the Special Committee and advisors to the Special Committee resulted in increased director compensation expense and professional expense during 2017.  The Special Committee is in preliminary discussions with a third party related to a potential change in control transaction.  There can be no assurance that these preliminary discussions will result in a definitive agreement, and consummation of any such transaction would be subject to approval of the shareholders, regulators and various other conditions.

 

Provider Networks

 

Our networks are important to the success of our dental HMO and dental PPO plans. We maintain networks comprised of providers who have contracted with our subsidiaries. As of December 31, 2017, we had contracts with 3,000 providers operating out of 6,584 office locations in our dental HMO network. Of these participating provider office locations, there are 3,448 in Ohio, 2,422 in Kentucky, 637 in Indiana, and 77 in other states. As of December 31, 2017, we had provider contracts with 3,134 providers operating out of 7,018 office locations in our DentaSelect dental PPO network. Of these participating provider office locations, there are 3,792 in Ohio, 2,471 in Kentucky, 654 in Indiana, and 101 in other states. As of December 31, 2017, we had provider contracts with 2,244 providers operating out of 5,624 office locations in our new Balanced Value dental PPO network. Of these participating provider office locations, there are 2,863 in Ohio, 2,058 in Kentucky, 624 in Indiana, and 79 in other states. We actively recruit providers in each of our markets. In some instances, we identify expansion area counties where additional providers are needed and locate providers in these expansion area counties by reviewing state dental licensure records. In other cases, new employer group customers request that we recruit specific providers to which their employees desire access.

 

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

 

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

 

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

 

The Company has a network access agreement with a national dental network management company that has one of the largest networks of providers under contract in the United States. With this network access agreement, our dental PPO members have access to approximately 2,800 additional providers in our operating territories and approximately 45,900 additional providers throughout the United States. The Company also has a network access arrangement with another national dental administration company for the dental PPO plans that we offered on the FFM exchanges in 2017. With this network access arrangement, FFM exchange members have access to approximately 10,900 providers across the eight FFM exchange states.

 

Employees

 

At December 31, 2017, we had 97 employees. We have no collective bargaining agreements with any unions and believe that our overall relations with our employees are good.

 

7

 

 

Agencies, Brokers and Consultants

 

Many of our employer groups and individual customers are represented by agencies, brokers and consultants who assist these customers in the design and purchase of health care products. We generally pay agencies, brokers and consultants a commission based on premiums collected, with commissions varying by market and premium volume, pursuant to our standard agreement. In addition to commissions based directly on premium volume for sales to particular customers, we also have programs that pay agents and brokers on other criteria. These include commission bonuses based on sales that attain certain levels or involve particular products. During 2017, approximately 54% of our business was generated by five independent agencies, one of which was responsible for generating approximately 17.8% of our total premium revenue.   

 

Utilization Review and Quality Assurance Policies

 

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

 

Each provider 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 provider. Such sanctions may include probation, suspension or expulsion as a participating provider, and may also affect the provider’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 providers 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 providers 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 provider 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 providers and performs credentialing and re-credentialing of each participating provider. The Clinical Affairs Committee also has oversight of the credentialing of new providers that apply to be participating providers in our provider networks. This committee also oversees the periodic re-credentialing of providers already in one or more of our existing provider networks and evaluates whether a provider should be terminated from one or more of the provider networks if an action is filed against the provider with a state dental board or other regulatory agency or the provider loses his/her medical malpractice insurance coverage due to an adverse claim. The Clinical Affairs Committee is also charged in part with determining whether all participating providers 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 provider network management companies with which we have a network access agreement perform credentialing and re-credentialing of each of their participating providers according to accepted industry standards.

 

Risk Management

 

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

 

Competition 

 

The marketing and sale of commercial 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. In group and individual dental insurance, 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 providers. 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, limitations on providers’ fees, and members are not restricted to participating providers. 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.

 

8

 

 

In 2017, our commercial dental membership in Southwestern Ohio decreased from approximately 234,500 members as of December 31, 2016 to approximately 232,600 members as of December 31, 2017. As of December 31, 2017 we had approximately 221,900 dental HMO/IND members and 10,700 dental PPO members in Southwestern Ohio. Dental membership in Northern Kentucky increased from approximately 24,800 members at December 31, 2016 to approximately 27,900 at December 31, 2017. As of December 31, 2017, all of the 27,900 members in Northern Kentucky were dental HMO/IND members. Our dental benefits market share of approximately 18% 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, 2017, we had 1,428 providers in our provider networks which represent approximately 95% of the licensed providers in Southwestern Ohio and Northern Kentucky.

 

In 2017, our commercial dental membership in the Dayton and Central Ohio markets decreased from approximately 43,000 members as of December 31, 2016 to approximately 39,200 members as of December 31, 2017. As of December 31, 2017, we had approximately 32,900 dental PPO members and approximately 6,300 dental HMO/IND members in the Dayton and Central Ohio markets. As of December 31, 2017, we had approximately 1,594 providers in our dental PPO provider network in the Dayton and Central Ohio markets.

 

In 2017, our commercial dental membership in Southern Kentucky decreased from approximately 25,100 members as of December 31, 2016 to approximately 24,900 members as of December 31, 2017. As of December 31, 2017, we had approximately 24,600 dental PPO members and approximately 300 dental HMO/IND members in Southern Kentucky. As of December 31, 2017, we had approximately 1,534 providers in our dental HMO provider network and 1,573 providers in our standard dental PPO provider network in Southern Kentucky.

 

In the exchange dental business, our main competitors are Humana, Anthem, TruAssure, Dentegra and Best Life. 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 exchange dental plans and vision benefit plans are competitively priced and include sufficient benefits to compete effectively.

 

Customers 

 

During 2017, approximately 10% of our total premium revenue was generated by five fully-insured employer groups. Also during 2017, 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, however, 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 outside of the FFM exchanges purchasing a policy selects a fully-insured dental HMO or PPO plan. These individual dental policies begin on an effective date and extend for 12 months. Individual subscribers may terminate their fully-insured policy with notice, however, 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 FFM exchanges selects a fully-insured dental PPO plan. An individual dental policy purchased on the FFM exchanges will begin on an effective date in a calendar year and extend until December 31 of that calendar year. An individual subscriber may terminate his/her 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.

 

9

 

 

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 which we do business 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 as 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 health insurance company and a dental HMO in Indiana. Dental Care Plus is also licensed as a life, accident and health company in Pennsylvania, as a life, accident and sickness company in Georgia, as an accident and health company in Tennessee, as a life and health insurance company in Illinois and Missouri, as an accident and sickness insurance company and a managed care health insurance plan in Virginia and a disability insurance company in Wisconsin and Michigan. 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, quarterly and annual financial statements prepared in accordance with SAP is used by the Ohio Department of Insurance and other state regulators to monitor solvency and compliance with various state financial regulatory requirements. Statutory data also 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 under SAP 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 four 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.

 

10

 

 

-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, 2017, 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 that 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

 

Each of our executive officers is appointed to serve a one-year term. Anthony A. Cook and Robert C. Hodgkins, Jr. are the only executive officers of the Company and the only employees who have an employment agreement with the Company.

 

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

 

Anthony A. Cook, MS, MBA, 67, 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, 58, 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.

 

11

 

 

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.

 

Adverse changes in economic conditions could adversely affect the Company’s business and results of operations.

 

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

 

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

 

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

 

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

 

During 2017, approximately 10% of our total premium revenue was generated by five fully-insured employer groups. Also during 2017, 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 2017, approximately 54% of our business was generated by five independent brokers, one of which was responsible for generating approximately 18% of our total premium revenue. If our relationship with any of these brokers were to terminate, our premium revenue could decrease materially.

 

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

 

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

 

12

 

 

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 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 2017, 2016 and 2015, A.M. Best affirmed our B+ (Good) rating. In July 2014, A.M. Best upgraded our rating to B+ (Good) with a stable outlook. In July 2013, A.M. Best upgraded our B (Fair) rating. Prior to July 2013, our B- (Fair) rating was annually affirmed in each year from 2006 through 2012. 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 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 brokers may lead to a loss of premium revenue.

 

If we fail to maintain contracts with an adequate number of providers, 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 provider 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 providers 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 may continue to offer premium concessions if employer groups sign up for their medical, dental or vision plans, which could result in the loss of employer groups and a decrease in our premium revenue.

 

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

 

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

 

Public Policy - It is not possible to predict with certainty the effect of fundamental public policy changes that could adversely affect the Company.  On March 23, 2010, the ACA was passed into law. Thus far, in the states in which we operate, the provisions of the ACA have been inconsistently implemented which makes it difficult for a stand-alone dental plan to enroll and retain membership. In accordance with the provisions of the ACA of 2010, effective January 1, 2014, the federal government imposed an annual assessment on all U.S. health insurers of approximately $8 billion in 2014. This annual assessment increases 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.

 

13

 

 

President Trump and Congress may legislate additional changes in health care policy that could materially affect our profitability and cash flow, our ability to retain or grow our business and our financial position. 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. If the federal government eliminates the FFM exchanges, this would have a material impact on our premium revenue, gross profit and earnings. During 2017, approximately 4.5% of our total premium revenue was generated through the FFM exchanges, which equates to approximately 12.8% of our total gross profit.

 

Privacy and Security of Personal Information – The Company is subject to several federal laws which govern the privacy and security of personal information.

 

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 those states in which we do business. 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 and 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 insurance regulatory agencies in those states in which we do business, and could further result in the suspension or revocation of Dental Care Plus’s Certificate of Authority in states in which we operate, monetary penalties, or the rehabilitation or liquidation of Dental Care Plus.

 

14

 

 

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 providers, employees and members of the Board of Directors. As of January 2014, non-provider individuals are eligible owners of our Class C voting common shares (with a limitation on the number of Class C shares that may be outstanding at any time as a percentage of Class A and Class B shares). We are able to offer non-voting preferred shares to institutional investors, but we believe that there are a limited number of institutional investors that will invest their capital with the Company without voting rights 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 and payment of dividends.

 

As a result of the aging and retirements of our provider 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, 2017, approximately 304 of our network provider shareholders were 60 years old or older and these shareholders owned, in the aggregate, 5,342 of our Class A and Class B Redeemable Common Shares. Pursuant to the Company’s Second Amended and Restated Code of Regulations (the “Code of Regulations”), retiring providers have the right to require the Company to repurchase such provider’s common shares on the terms contained in the Code of Regulations. Generally, we will be required to purchase the shares for a price equal to the book value of his or her common shares at the time of the redemption request and the repurchase will typically occur within three 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.

 

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 a more detailed discussion of risks associated with our investments, please refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk.

 

Maintaining our information technology platforms, managing technology initiatives and meeting data security requirements are significant challenges.

 

We purchased a perpetual license to use our dental administration and claims payment software in 2005. Our software maintenance agreement with the licensor extends to December 31, 2019. The company that supports and maintains our dental administration software is migrating to a new platform. We are in negotiations with the licensor for a long-term resolution for our support and maintenance needs. If we are not able to favorably obtain a long-term resolution with respect to our current software, we may need to select and convert to another dental administration software platform and any such transition could require a material capital expenditure.

 

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 criminal intent on committing cyber-crime. Increasing sophistication of cyber-criminals and terrorists make keeping up with new threats difficult and could result in a breach. We could also experience a breach by intentional or negligent conduct on the part of associates or other internal sources. Our systems may become vulnerable to damage or disruption due to circumstances beyond our control, such as from catastrophic events, power anomalies or outages, natural disasters, network failures, 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.

 

15

 

 

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 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 Shares. In addition, there are significant restrictions contained in the Company’s Code of Regulations on the ability to transfer the Class A, Class B and Class C Redeemable Common Shares.

 

Holders

 

As of December 31, 2017, there were 500 holders of Class A Redeemable Common Shares, 529 holders of Class B Redeemable Common Shares and 40 holders of Class C Redeemable Common Shares.

 

Dividend Policy

 

On February 8, 2017, our Board of Directors declared a $42.50 per share dividend for all holders of Class A, Class B and Class C Redeemable Common Shares of record on March 1, 2017, paid on March 24, 2017. With the dividend, the holders of restricted share units received an equivalent share based dividend. The Board of Directors have sole discretion as to whether to declare a 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 2017 we did not have any sale of unregistered securities.

 

Performance of Redeemable Common Shares

 

Pursuant to our Code of Regulations, the Company’s Redeemable Common Shares are sold and repurchased by the Company at book value. The book value of a Company Redeemable Common Share was $1,210, $1,110, $1,012, $997 and $894 at December 31, 2017, 2016, 2015, 2014, and 2013, respectively.

 

Purchases of Equity Securities

 

We did not repurchase or retire any Redeemable Common Shares during the three months ended December 31, 2017.

 

16

 

 

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)

 
                                         
   

2017

   

2016

   

2015

   

2014

   

2013

 

Premium revenue

  $ 107,589     $ 105,594     $ 98,261     $ 91,936     $ 86,363  

Investment income

    265       274       252       222       164  

Other income and realized gains, net

    -       128       3       92       61  

Net income

    1,829       1,989       958       1,341       1,282  

Total assets

    70,329       78,082       60,344       57,239       56,903  

Mortgage loan payable and capital lease obligations

    2,296       1,706       2,068       2,019       1,674  

Redeemable institutional preferred shares

    -       -       2,751       2,709       2,563  

Cash dividends declared, common and preferred

    547       510       481       425       392  

 

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

Headquartered in Cincinnati, Ohio, the Dental Care Plus Group offers to 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, Indiana, Pennsylvania, Georgia, Tennessee, Kentucky, Virginia and Illinois exchanges and individual dental HMO and PPO plans in Ohio, Kentucky and Indiana. As of December 31, 2017, we had approximately 386,600 members in our dental and vision benefit programs with approximately 3,000 providers participating in our Dental Care Plus dental HMO network, approximately 3,100 providers participating in our DentaSelect dental PPO network and approximately 2,200 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 45,900 additional providers throughout the United States. The Company also has a network access arrangement with a national dental administration company for the dental PPO plans that it offered on the FFM exchanges in 2017. With this network access arrangement, FFM exchange members have access to approximately 10,900 providers across the eight 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 PPO 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, interest expense, 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.

 

17

 

 

During 2017, the Board of Directors established a Special Committee to consider strategic alternatives available to the Company, including consideration of certain third party proposals made to the Company.  The significant amount of work by the Special Committee and advisors to the Special Committee resulted in increased director compensation expense and professional expense during 2017.  The Special Committee is in preliminary discussions with a third party related to a potential change in control transaction.  There can be no assurance that these preliminary discussions will result in a definitive agreement, and consummation of any such transaction would be subject to approval of the shareholders, regulators and various other conditions.

 

Profitability Strategy

 

Our strategy has focused 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.

 

In our original eight county service area, our non-exclusive dental HMO provider network includes approximately 95% of the dental providers in the market. This area, which we refer to as our original eight county service area, includes Butler, Clermont, Hamilton and Warren counties in Ohio, and Boone, Campbell, Kenton and Pendleton counties in Kentucky. In that market our dental HMO provides the broad provider access of a dental PPO along with effective utilization and cost control features. Because of the broad provider network and our professional support services to employers, our fully-insured dental HMO is priced higher than other dental HMOs and has premium rates more equivalent to competitor dental PPOs.

 

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

 

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

 

Highlights 

 

 

We had net income of approximately $1,829,000 for the year ended December 31, 2017 compared to net income of approximately $1,989,000 for the year ended December 31, 2016. This decrease in net income is primarily the result of higher deferred tax expense as a result of the U. S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”) which accounted for an approximate $692,000 increase in taxes, an increase in premium revenue of approximately $1,995,000 offset by an increase in healthcare services expense of approximately $1,108,000 in 2017. The increase in gross margin of approximately $887,000 was offset by an increase in insurance expenses of $552,000 in 2017. Our ratio of insurance expense to total premium revenue (“insurance expense ratio”) increased to 21.1% in 2017 from 21.0% in 2016.

 

 

Our ratio of healthcare services expense to premium revenue (“loss ratio”) decreased by approximately 0.3% from 76.2% in 2016 to 75.9% in 2017. The improved loss ratio impacted 2017 by approximately $26,000 in gross margin. The fully-insured dental HMO/IND and fully-insured dental PPO segments together represent approximately 71.9% of our total dental business.

 

 

Our dental and vision products grew by approximately 4,500 members, or 1.2%, from 382,100 members at December 31, 2016 to 386,600 members at December 31, 2017. This membership increase from December 31, 2016 is due to an increase in fully-insured dental PPO membership of approximately 10,300 members, an increase in self-insured dental membership of approximately 1,500 members and an increase in corporate, all other membership of approximately 200 members. This was offset by a decrease in fully-insured dental HMO/IND membership of approximately 7,500 members.

 

18

 

 

Comparison of Results of Operations for 2017 and 2016

 

The following table shows membership totals and revenues and expenses for our four business segments for the years ended December 31, 2017 and 2016 (dollars in thousands):

 

   

2017

   

2016

   

Change

 

Membership:

                       

Fully-insured dental HMO/IND

    159,500       167,000       (4.5 %)

Fully-insured dental PPO

    89,800       79,500       13.0 %

Self-insured dental

    97,000       95,500       1.6 %

Corporate, all other

    40,300       40,100       0.5 %

Total membership

    386,600       382,100       1.2 %
                         

Premium revenue:

                       

Fully-insured dental HMO /IND

  $ 51,419     $ 53,393       (3.7 %)

Fully-insured dental PPO

    25,936       22,363       16.0 %

Self-insured dental

    29,427       29,067       1.2 %

Corporate, all other

    807       771       4.7 %

Total premium revenue

    107,589       105,594       1.9 %
                         

Investment income:

                       

Corporate, All Other

    265       274       (3.3 %)
                         

Other income and realized gains, net:

                       

Corporate, All Other

    249       128       94.5 %

Total revenue

    108,103       105,996       2.0 %
                         

Healthcare services expense:

                       

Fully-insured dental HMO/IND

    38,522       39,995       (3.7 %)

Fully-insured dental PPO

    17,721       15,391       15.1 %

Self-insured dental

    25,365       25,114       1.0 %

Total healthcare services expense

    81,608       80,500       1.4 %
                         

Insurance expense

                       

Corporate, All Other

    22,695       22,143       2.5 %
                         

Income tax expense

                       

Corporate, All Other

    1,971       1,363       44.6 %

 

Summary

 

Net income was approximately $1,829,000 and $1,989,000 for 2017 and 2016, respectively. This decrease in net income is primarily the result of higher deferred tax expense as a result of the Tax Act which accounted for an approximate $692,000 increase in taxes, an increase in premium revenue of approximately $1,995,000 offset by an increase in healthcare services expense of approximately $1,108,000 in 2017. The increase in gross margin of approximately $887,000 was offset by an increase in insurance expenses of $552,000 in 2017. Our ratio of insurance expense to total premium revenue (“insurance expense ratio”) increased to 21.1% in 2017 from 21.0% in 2016.

 

Membership

 

Our fully-insured dental HMO/IND membership decreased by approximately 7,500 in 2017. 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 9,900 members is the result of employer groups that did not renew with the Company or reduced employee counts of retained employer groups. These decreases were offset by an increase of 10,100 members from new sales with employer groups and 2,300 members from new sales of individual HMO products in 2017. Some of our fully-insured dental HMO/IND membership losses were the result of corporate consolidations and employer groups moving to medical carriers to take advantage of medical/dental packaged savings.

 

19

 

 

Our fully-insured dental PPO membership increased by approximately 10,300 members in 2017. This membership increase is due to new sales in the Dayton and Central Ohio markets, the Southern Kentucky market and the Indiana market of approximately 11,600 members during 2017, offset by the loss of approximately 6,900 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 5,600 members is due to new sales of individual and on exchange dental PPO products in 2017.

 

Our self-insured dental membership increased by approximately 1,500 members in 2017. During 2017, approximately 10,000 members of an employer group converted from our fully-insured dental HMO/IND product to our self-insured dental product effective January 1, 2017, which was offset by a decrease of 8,500 members as a result of employer groups that did not renew with the Company. Some of our self-insured dental HMO/IND membership losses were the result of corporate consolidation and employer groups moving to other carriers.

 

Our corporate, all other membership increased slightly as a result of increased membership in our vision plan.

 

Revenue

 

   

(Amounts in thousands)

 
   

2017

   

2016

   

Total Dollar

Change

   

Member

Volume

Change

   

Rate

Change

 

Total Fully-Insured Dental HMO/IND Premium

  $ 51,419     $ 53,393     $ (1,974 )   $ (1,432 )   $ (542 )

 

Fully-insured dental HMO/IND premium revenue for 2017 decreased by approximately $1,974,000 compared to 2016. New fully-insured dental HMO/IND sales volume resulted in an increase in fully-insured dental HMO/IND premium revenue of approximately $1,813,000 that was offset by a decrease in fully-insured dental HMO/IND revenue of approximately $3,245,000 due to the conversion of an employer group to the self-insured product line in 2017. Fully-insured dental HMO/IND premium decreased by $542,000 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 $213,000 of this decrease. The fully-insured dental HMO/IND segment represented approximately 47.8% of our total dental business in 2017.

 

   

(Amounts in thousands)

 
   

2017

   

2016

   

Total Dollar

Change

   

Member

Volume

Change

   

Rate

Change

 

Total Fully-Insured Dental PPO Premium

  $ 25,936     $ 22,363     $ 3,573     $ 3,966     $ (393 )

 

Fully-insured dental PPO premium revenue for 2017 increased by approximately $3,573,000 compared to 2016. Fully-insured dental PPO revenue increased by approximately $3,966,000 due to an increase in fully-insured PPO group and individual membership in 2017, offset by a decrease of approximately $393,000 due to a decrease in premium rates for the year. The fully-insured dental PPO segment represented approximately 24.1% of our total dental business in 2017.

 

   

(Amounts in thousands)

 
   

2017

   

2016

   

Total Dollar

Change

   

Member

Volume

Change

   

Rate

Change

 

Self-Insured Claim Revenue

  $ 28,002     $ 27,676     $ 326     $ 135     $ 191  

Self-Insured ASO Fees

    1,425       1,391       34       7       27  

Total Self-Insured Revenue

  $ 29,427     $ 29,067     $ 360     $ 142     $ 218  

 

20

 

 

Self-insured dental revenue increased by approximately $360,000 due to new self-insured sales and an increase in membership for existing employer groups. Self-insured revenue increased by approximately $326,000 due to an increase in the self-insured claims revenue on a per member per month basis, as well as an increase of approximately $34,000 in self-insured administrative fee rates on a per member per month basis. The self-insured dental segment represented approximately 27.4% of our total dental business in 2017. The self-insured segment revenue has two components:

 

Self-Insured Claim Revenue - Self-insured claim revenue increased approximately $326,000 in 2017. The self-insured claim revenue increased by approximately $3,433,000 due to the conversion of fully-insured HMO/IND revenue to the self-insured product. This increase was offset by a decrease of approximately $3,298,000, as a result of the loss of employer groups in 2017. In addition, there was an increase in self-insured claim revenue of approximately $191,000 as a result of an increase in self-insured claim revenue on a PMPM basis in the 2017.

 

Self-Insured ASO Fees - Self-insured ASO fees increased approximately $34,000 in 2017. Self-insured ASO fees increased by approximately $27,000 due to an increase in the average self-insured ASO fee rates on a PMPM basis in 2017. In addition, there was an increase of approximately $7,000 due to a net membership increase with existing employer groups.

 

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 $36,000, to $807,000 in 2017 from $771,000 in 2016.

 

Investment Income

 

Investment income decreased approximately $9,000, to $265,000 in 2017 from $274,000 in 2016.

 

Other Income and Realized (Losses) Gains on Investments, Net

 

Other income and realized (losses) gains on investments increased approximately $171,000 to $249,000 in 2017 from $128,000 in 2016. The increase is primarily the result of realized gains due to the sale of investments in 2017 that did not occur in 2016, offset by a decrease in other income.

 

Healthcare Services Expenses

 

   

(Amounts in thousands)

 
   

2017

   

2016

   

Total Dollar

Change

   

Member Volume

Change

   

Utilization

and Fee

Schedule

Change

 

Total Fully-Insured Dental HMO/IND Healthcare Service Expense

  $ 38,522     $ 39,995     $ (1,473 )   $ (1,073 )   $ (400 )

 

Fully-insured dental HMO/IND healthcare services expense decreased $1,473,000 in 2017. Fully-insured dental HMO/IND healthcare services expense on a PMPM basis decreased by 1.0% from, $20.13 PMPM in 2016 to $19.93 PMPM in 2017. 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 $2,431,000, which was offset by a claim expense increase of approximately $1,358,000 due to new membership in the year. Lower healthcare services utilization resulted in a decrease in fully-insured dental HMO/IND healthcare services expense of approximately $828,000 in 2017 compared to 2016. This decrease was offset by an increase of approximately $428,000 attributable to fee schedule increases effective January 1, 2017.

 

   

(Amounts in thousands)

 
   

2017

   

2016

   

Total Dollar

Change

   

Member Volume

Change

   

Utilization

and Fee

Schedule

Change

 

Total Fully-Insured Dental PPO Healthcare Service Expense

  $ 17,721     $ 15,391     $ 2,330     $ 2,730     $ (400 )

 

Fully-insured dental PPO healthcare services expense increased by $2,330,000 in 2017. Fully-insured dental PPO healthcare services expense on a PMPM basis decreased 2.2%, from $16.25 PMPM in 2016 to $15.89 PMPM in 2017. An increase in fully-insured dental PPO membership resulted in an increase in fully-insured dental PPO healthcare services expense of $2,730,000. In addition, an increase of $91,000 is attributable to fee schedule increases effective January 1, 2017. These increases were offset by lower healthcare services utilization that resulted in a decrease of approximately $491,000 in the 2017 period compared to the 2016 period.

 

21

 

 

   

(Amounts in thousands)

 
   

2017

   

2016

   

Total Dollar

Change

   

Member Volume

Change

   

Utilization and

Fee Schedule

Change

 

Self-Insured Healthcare Services Expense

  $ 25,365     $ 25,114     $ 251     $ 123     $ 128  

 

Self-insured healthcare services expense increased by $251,000 in 2017. Self-insured healthcare services expense on a PMPM basis increased 0.5% from $21.66 PMPM in 2016 to $21.77 PMPM in 2017. An increase in self-insured dental membership due to the conversion of employer groups to our self-insured product resulted in an increase in claims expense of approximately $3,116,000. The increase was offset by a decrease of $2,993,000 due to the loss of self-insured groups in 2017. In addition, self-insured healthcare services expense increased approximately $252,000 attributable to fee schedule increases effective January 1, 2017. Lower healthcare services utilization resulted in a decrease in self-insured healthcare services expense of approximately $124,000 in 2017 compared to 2016.

 

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 $552,000 in 2017. Total insurance expenses as a percentage of total premium revenue, or the insurance expense ratio, was 21.1% for 2017, increasing 0.1% from the 2016 ratio of 21.0%. Salaries and wages increased by approximately $184,000 in 2017 primarily due to increased medical premiums. Other insurance expense increased by approximately $411,000 due to an increase in expenses related to the launch of the individual dental PPO product in our new states for 2018 and an increase in professional fees attributable primarily to services provided to the Special Committee in considering strategic alternatives available to the Company. These increases were offset by a slight decrease in commissions expense.

 

Income Taxes

 

Our effective tax rate for 2017 was 51.9% compared to the 40.7% effective tax rate in 2016. The increase in the effective tax rate in 2017 compared to 2016 is primarily the result of the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code beginning in 2018, which will reduce the corporate tax rate from 34% to 21%. The rate reduction required a remeasurement of the Company’s net deferred tax asset. The Tax Act accounts for approximately 18.2% of the 2017 effective rate. This was offset by a decrease in nondeductible federal premium tax that was not required in 2017. See Note 10 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.

 

22

 

 

Comparison of Results of Operations for 2016 and 2015   

 

The following table shows membership totals and revenues and expenses for our four business segments for the years ended December 31, 2016 and 2015 (dollars in thousands):

 

   

2016

   

2015

   

Change

 

Membership:

                       

Fully-insured dental HMO/IND

    167,000       158,200       5.6 %

Fully-insured dental PPO

    79,500       69,800       13.9 %

Self-insured dental

    95,500       98,000       (2.6 %)

Corporate, all other

    40,100       36,200       10.8 %

Total membership

    382,100       362,200       5.5 %
                         

Premium revenue:

                       

Fully-insured dental HMO /IND

  $ 53,393     $ 49,458       8.0 %

Fully-insured dental PPO

    22,363       19,198       16.5 %

Self-insured dental

    29,067       28,922       0.5 %

Corporate, all other

    771       683       12.9 %

Total premium revenue

    105,594       98,261       7.5 %
                         

Investment income:

                       

Corporate, All Other

    274       252       8.7 %
                         

Other income and realized gains, net:

                       

Corporate, All Other

    128       3       4166.7 %

Total revenue

    105,996       98,516       7.6 %
                         

Healthcare services expense:

                       

Fully-insured dental HMO/IND

    39,995       37,346       7.1 %

Fully-insured dental PPO

    15,391       14,384       7.0 %

Self-insured dental

    25,114       24,954       0.6 %

Total healthcare services expense

    80,500       76,684       5.0 %
                         

Insurance expense

                       

Corporate, All Other

    22,143       20,076       10.3 %
                         

Income tax expense

                       

Corporate, All Other

    1,363       798       70.8 %

 

Summary

 

Net income was approximately $1,989,000 and $958,000 for 2016 and 2015, respectively. This increase in net income is primarily the result of an increase in premium revenue of approximately $7,333,000 offset by an increase in healthcare services expense of approximately $3,816,000 in 2016. The increase in gross margin of approximately $3,517,000 was offset by an increase in insurance expenses of $2,067,000 in 2016. Our ratio of insurance expense to total premium revenue (“insurance expense ratio”) increased to 21.0% in 2016 from 20.4% in 2015.

 

Membership

 

Our fully-insured dental HMO/IND membership increased by approximately 8,800 in 2016. This membership increase is primarily attributable to an increase in fully-insured dental HMO membership resulting from new sales of approximately 11,500 members in the Cincinnati and Northern Kentucky markets during 2016. An increase of approximately 2,400 is due to an increase of new sales of our individual dental HMO product. These increases were offset by the loss of approximately 5,100 members due to employer groups that did not renew with the Company or reduced employee counts of retained employer groups. Some of our fully-insured dental HMO membership losses were the result of employer groups moving to medical carriers to take advantage of medical/dental package savings.

 

23

 

 

Our fully-insured dental PPO membership increased by approximately 9,700 members in 2016. This membership increase is due to new sales in the Dayton and Central Ohio markets and the Southern Kentucky market of approximately 10,600 members during 2016, 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 in these markets. The remaining increase of approximately 7,300 members is due to new sales of individual and on exchange dental PPO products in 2016.

 

Our self-insured dental membership decreased by approximately 2,500 members in 2016 as a result of a decrease in membership of existing employer groups in the last twelve months offset by the addition of new self-insured dental HMO and dental PPO employer groups in the Southwest Ohio and Northern Kentucky markets.

 

Our corporate, all other membership increased by approximately 3,900 members in 2016 as a result of increased membership in our vision plan.

 

Revenue

 

   

(Amounts in thousands)

 
   

2016

   

2015

   

Total Dollar

Change

   

Member

Volume

Change

   

Rate

Change

 

Total Fully-Insured Dental HMO/IND Premium

  $ 53,393     $ 49,458     $ 3,935     $ 2,548     $ 1,387  

 

Fully-insured dental HMO/IND premium rates negotiated with employer groups at their renewals resulted in an increase of approximately $1,387,000 in fully-insured dental HMO/IND premium revenue. An increase in fully-insured dental HMO/IND membership in 2016 resulted in an increase in fully-insured dental HMO/IND premiums of approximately $2,548,000. The membership increase is the result of new fully-insured employer group business as well as an increase in the fully-insured individual product membership. The fully-insured dental HMO/IND segment represented approximately 50.6% of our total dental business in 2016.

 

   

(Amounts in thousands)

 
   

2016

   

2015

   

Total Dollar

Change

   

Member

Volume

Change

   

Rate

Change

 

Total Fully-Insured Dental PPO Premium

  $ 22,363     $ 19,198     $ 3,165     $ 3,596     $ (431 )

 

Fully-insured dental PPO premium rates negotiated with employer groups at their renewals resulted in a decrease of approximately $431,000 in fully-insured dental PPO premium revenue. An increase in fully-insured PPO group membership in 2016 resulted in an increase in fully-insured dental PPO premiums of approximately $3,596,000. The increase in membership is the result of an increase in fully-insured dental PPO group membership as well as an increase in fully-insured on exchange dental PPO membership. The fully-insured dental PPO segment represented approximately 21.2% of our total dental business.

 

   

(Amounts in thousands)

 
   

2016

   

2015

   

Total Dollar

Change

   

Member

Volume

Change

   

Rate

Change

 

Self-Insured Claim Revenue

  $ 27,676     $ 27,505     $ 171     $ 115     $ 56  

Self-Insured ASO Fees

    1,391       1,417       (26 )     6       (32 )

Total Self-Insured Revenue

  $ 29,067     $ 28,922     $ 145     $ 121     $ 24  

 

Self-insured dental revenue increased by approximately $121,000 due to new self-insured sales and an increase in membership for existing employer groups. Self-insured revenue increased by approximately $24,000 due to an increase in the self-insured claims revenue on a per member per month basis, offset by a decrease in self-insured administrative fee rates on a per member per month basis. The self-insured dental segment represented approximately 27.5% of our total dental business in 2016. The self-insured segment revenue has two components:

 

Self-Insured Claim Revenue - Self-insured claim revenue slightly increased approximately $171,000, or 0.6%. Self-insured claim revenue increased by approximately $115,000 due to new self-insured sales. Also, self-insured claim revenue increased by approximately $56,000 primarily due to an increase in the self-insured claim revenue on a per member per month basis as a result of fee schedule increases effective January 1, 2016.

 

24

 

 

Self-Insured ASO Fees - Self-insured ASO fees decreased approximately $26,000, or 1.8%. Approximately $32,000 of this decrease is due to a decrease in average self-insured ASO fee rates for 2016 compared to 2015 and is slightly offset by an increase in membership for existing employer groups during 2016.

 

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 $88,000, or 12.9%, to $771,000 in 2016 from $683,000 in 2015.

 

Investment Income

 

Investment income increased approximately $22,000, or 8.7%, to $274,000 in 2016 from $252,000 in 2015. 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 2016.

 

Other Income and Realized (Losses) Gains on Investments, Net

 

Other income and realized (losses) gains on investments increased approximately $125,000 to $128,000 in 2016 from $3,000 in 2015. The increase is primarily the result of realized gains due to the sale of investments in 2016 that did not occur in 2015, offset by a slight decrease in other income.

 

Healthcare Services Expenses

 

   

(Amounts in thousands)

 
   

2016

   

2015

   

Total Dollar

Change

   

Member Volume

Change

   

Utilization

and Fee

Schedule

Change

 

Total Fully-Insured Dental HMO/IND Healthcare Service Expense

  $ 39,995     $ 37,346     $ 2,649     $ 1,924     $ 725  

 

Fully-insured dental HMO/IND healthcare services expense increased 7.1%. 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 $725,000 in 2016 for both existing and new fully-insured dental HMO/IND membership. Fully-insured dental HMO/IND healthcare services expense increased by approximately $196,000 due to fee schedule increases effective January 1, 2016 and by approximately $529,000 due to an increase in dental service utilization by our fully-insured dental HMO/IND members in 2016 compared to 2015. This increase in fully-insured dental HMO/IND healthcare services expense is also the result of an increase of approximately $1,924,000 due to an increase in fully-insured dental HMO/IND member months of 1.8% in 2016 compared to 2015.

 

   

(Amounts in thousands)

 
   

2016

   

2015

   

Total Dollar

Change

   

Member Volume

Change

   

Utilization

and Fee

Schedule

Change

 

Total Fully-Insured Dental PPO Healthcare Service Expense

  $ 15,391     $ 14,384     $ 1,007     $ 2,694     $ (1,687 )

 

Fully-insured dental PPO healthcare services expense increased 7.0%. This increase was primarily the result of an increase of approximately $2,694,000 related to the increase in fully-insured group and individual dental PPO membership. This increase in fully-insured dental PPO healthcare member volume change was offset by an overall decrease of approximately $1,687,000 due to a decrease in claims expense on a PMPM basis. Lower dental service utilization resulted in a decrease of approximately $2,029,000 offset by an increase in healthcare service expense of approximately $342,000 due to fee schedule increases effective January 1, 2016.

 

   

(Amounts in thousands)

 
   

2016

   

2015

   

Total Dollar

Change

   

Member Volume

Change

   

Utilization and

Fee Schedule

Change

 

Self-Insured Healthcare Services Expense

  $ 25,114     $ 24,954     $ 160     $ 104     $ 56  

 

25

 

 

Self-insured healthcare services expense increased slightly 0.6%, in 2016. An increase of 0.2% in self-insured member month volume in 2016 compared to 2015 resulted in an increase in self-insured healthcare services expense of approximately $104,000. Self-insured dental healthcare services expense increased by approximately $125,000 due to fee schedule increases effective January 1, 2016. These were offset by a decrease of approximately $69,000 due to an decrease in dental service utilization by our self-insured members in 2016 compared to 2015.

 

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 $2,067,000 in 2016. Total insurance expenses as a percentage of total premium revenue, or the insurance expense ratio, was 21.0% for 2016, increasing 0.6% from the 2015 ratio of 20.4%. Salaries and wages increased by approximately $1,255,000 in 2016 primarily due to the addition of new employees. Commissions expense increased approximately $118,000, due to the increase in total premium revenue in 2016 compared to 2015. Other insurance expense increased by approximately $694,000 due to an increase in expenses related to the launch of the individual dental PPO product in Indiana as well as the development of the on exchange dental PPO products for Illinois and Virginia for 2017.

 

Income Taxes

 

Our effective tax rate for 2016 was 40.7% compared to the 45.5% effective tax rate in 2015. The decrease in the effective tax rate in 2016 compared to 2015 is primarily the result of the lower impact of non-deductible expenses as compared to overall income before income taxes. Also, our 2016 and 2015 effective tax rates were higher than the federal statutory rate primarily due to the impact of permanent tax differences related to nondeductible federal premium tax, legal fees and meal and entertainment expenses. See Note 10 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 and Preferred Share redemptions, dividends, and payments on borrowings. Because premiums are collected in advance of claims payments, our business should normally produce positive operating cash flows during a period of increasing enrollment. Conversely, cash flows would be negatively impacted during a period of shrinking enrollment.

 

Cash increased $1,956,000, or 17.4%, for the year ended December 31, 2017 to approximately $13,177,000 at December 31, 2017 from approximately $11,221,000 at December 31, 2016. This cash increase is primarily the result of cash flow provided by operations of approximately $3,608,000. This increase was offset by a decrease in cash flow used in investing activities and financing activities of approximately $592,000 and $1,060,000, respectively.

 

Cash decreased $436,000, or 3.7%, for the year ended December 31, 2016 to approximately $11,221,000 at December 31, 2016 from approximately $11,657,000 at December 31, 2015. This cash decrease is primarily the result of cash flow used in investing activities and financing activities of approximately $2,209,000 and $1,909,000, respectively. These were offset by an increase in cash flow provided from operations of approximately $3,682,000. The change in cash for the years ended December 31, 2017, 2016 and 2015 is summarized as follows (in thousands):

 

   

2017

   

2016

   

2015

 

Net cash provided by operating activities

  $ 3,608     $ 3,682     $ 2,994  

Net cash used in investing activities

    (592 )     (2,209 )     (1,344 )

Net cash (used in) provided by financing activities

    (1,060 )     (1,908 )     817  

Increase (decrease) in cash and cash equivalents

  $ 1,956     $ (435 )   $ 2,467  

 

Cash Flows from Operating Activities

 

In 2017, approximately $3,608,000 was provided by operating activities. We had net income of approximately $1,829,000. Our non-cash deferred compensation activity was approximately $988,000 primarily due to current year vesting activity and an increase in current book value of our common shares in 2017. Deferred policy acquisition costs decreased by approximately $472,000 primarily as a result of the amortization of significant fully-insured multiyear contracts signed in 2016 offset by the increase in the fully-insured business renewed in January 2017. Other payables and accrued expenses decreased and resulted in a net decrease in cash flow from operating activities of approximately $163,000. A decrease in accounts receivable offset by a decrease in unearned premium revenue resulted in an increase of cash of approximately $168,000 in the 2017 period. We paid $1,376,000 of federal income taxes in the 2017 period that related to our 2016 extension payment and 2017 estimated tax payments. The remaining effects of changes in operating assets and liabilities that represent fluctuations are not significant and are consistent with 2016.

 

26

 

 

In 2016, approximately $3,682,000 was provided by operating activities. We had net income of approximately $1,989,000. Our non-cash deferred compensation activity was approximately $995,000 primarily due to current year vesting activity and an increase in current book value in 2016. Deferred policy acquisition costs increased by approximately $1,096,000 primarily as a result of the increase in the fully-insured business renewed in January 2016. Other payables and accrued expenses increased and resulted in a net increase in cash flow from operating activities of approximately $1,848,000. An increase in accounts receivable offset by an increase in unearned premium revenue resulted in a decrease of cash of approximately $641,000 in the 2016 period. We paid $1,069,000 of federal income taxes in the 2016 period that related to our 2015 extension payment and 2016 estimated tax payments. The remaining effects of changes in operating assets and liabilities that represent fluctuations are not significant and are consistent with 2015.

 

In 2015, approximately $2,994,000 was provided by operating activities. We had net income of approximately $958,000. An increase in premiums received in advance as well as an improvement in remittance of uncollected accounts receivable resulted in a favorable increase of cash of approximately $829,000 in 2015. Due to claims activity and the timing of our payments, our claims payable liability increased approximately $256,000. Our deferred compensation liability increased by approximately $748,000 primarily due to current year vesting activity for restricted share unit awards and an increase in current book value in 2015. Other payables and accrued expenses increased and resulted in a net increase in cash flow from operations of approximately $98,000. The remaining effects of changes in operating assets and liabilities that represent fluctuations are not significant and are consistent with 2014.

 

Cash Flows from Investing Activities

 

During 2017, we made purchases totaling approximately $4,167,000 of investment grade and non-investment grade corporate bonds, money markets and certificates of deposit in order to improve investment income. Also during 2017, we sold investment grade and non-investment grade corporate bonds, and certificates of deposit and maturities that together totaled approximately $3,967,000. In addition, in September 2017, we sold certain office equipment and computer equipment with a value of approximately $921,000 to a leasing company and entered into a capital lease agreement to lease back these same assets over a four year period. The remaining net cash used in investing activities during 2017 was primarily due to purchases of computer equipment and internally developed software development costs.

 

During 2016, we made purchases totaling approximately $5,336,000 of investment grade and non-investment grade corporate bonds, money markets and certificates of deposit in order to improve investment income. Also during 2016, we sold investment grade and non-investment grade corporate bonds, and certificates of deposit and maturities that together totaled approximately $3,676,000. The remaining net cash used in investing activities during 2016 was primarily due to purchases of computer equipment and internally developed software development costs.

 

During 2015, we made purchases totaling approximately $4,955,000 of investment grade and non-investment grade corporate bonds, money markets and certificates of deposit in order to improve investment income. Also during 2015, we sold investment grade and non-investment grade corporate bonds, and certificates of deposit and maturities that together totaled approximately $3,738,000. In addition, in December 2015, we sold certain office equipment and computer equipment with a value of approximately $347,000 to a leasing company and entered into a capital lease agreement to lease back these same assets over a four year period. The remaining net cash used in investing activities during 2015 was primarily due to purchases in building improvements, internally developed software development cost and computer equipment.

 

Cash Flows from Financing Activities

 

In 2017, we made scheduled principal payments of approximately $53,000 related to our office building mortgage and scheduled payments of approximately $278,000 related to our capital leases. During 2017, we repurchased Redeemable Common Shares with a book value (purchase price) of approximately $182,000. We also paid dividends of approximately $547,000 to holders of our Redeemable Common Shares.

 

In 2016, we made scheduled principal payments of approximately $50,000 related to our office building mortgage and scheduled payments of approximately $311,000 related to our capital leases. During 2016, we repurchased Redeemable Common Shares with a value of approximately $276,000. Also, we repurchased all of our Institutional Preferred Shares with a value of approximately $2,805,000, and including the 5% premium of approximately $119,000 paid to the holders of the 2012(A) and the 2013(A) series, the total price paid was approximately $2,924,000. We also paid dividends of approximately $442,000 to holders of our Redeemable Common Shares and approximately $68,000 to holders of our Redeemable Institutional Preferred Shares in 2016. During 2016, we issued approximately $2,280,000 of new Redeemable Common Shares.

 

27

 

 

In 2015, we made scheduled principal payments of approximately $49,000 related to our office building mortgage and scheduled payments of approximately $249,000 related to our capital leases. During 2015, we repurchased Redeemable Common Shares with a value of approximately $223,000. We also paid dividends of approximately $346,000 to holders of our Redeemable Common Shares and approximately $135,000 to holders of our Redeemable Institutional Preferred Shares in 2015. In addition, we issued approximately $1,932,000 of new Redeemable Common Shares during 2015.

 

Contractual Obligations and Other Commitments

 

A summary of our future commitments as of December 31, 2017 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)

  $ 97,504     $ 194,362     $ 991,957             $ 1,283,823  

Capital lease and interest

    480,987       612,168       187,386               1,280,541  

Operating leases

    360,120       298,728       8,376               667,224  

Claims payable

    3,576,185                               3,576,185  

Total

  $ 4,514,796     $ 1,105,258     $ 1,187,719             $ 6,807,773  

 

 

(1)

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

 

A mortgage note, secured by the land and the office building, accrues interest based on the 30-day LIBOR rate plus 1.95%. The note requires us to make principal payments of $4,600 per month in 2018 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, 2017, 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, 2017. The Company also entered into a capital lease agreement with a leasing company in 2017 that obligates the Company to pay lease payments over a four year period for each capital lease. Under these capital lease agreements, the Company is required to have a minimum tangible net worth equal to or greater than $2,500,000 at the end of each fiscal year. At December 31, 2017, the Company was in compliance with this minimum tangible net worth requirement.

 

As of December 31, 2017, we believe our most significant other commitments are:

 

Deferred Compensation – We expect to pay our deferred compensation liability to the Company directors and employees as they retire or otherwise terminate their association with the Company in future years.

 

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

 

Redeemable Common Shares – Pursuant to the Company’s Code of Regulations, holders of Class A, Class B and Class C shares have the right to require the Company to repurchase such holder’s common shares on the terms contained in the Code of Regulations.

 

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 $13.9 million at December 31, 2017. Our consolidated cash and short term investments increased by approximately $2.2 million from approximately $11.7 million as of December 31, 2016. This increase in cash and short term investments from December 31, 2016 to December 31, 2017 is the result of cash provided by operating activities of approximately $3.6 million. This increase was offset by cash used for investing and financing activities of approximately $1.6 million.

 

We have an annually renewable agreement with a commercial bank for a $500,000 working capital line of credit. Interest is payable at a variable rate of LIBOR plus 2.50%. The Company did not have any interest expense for the line of credit in 2017, 2016 or 2015. As of December 31, 2017 and 2016, there was no amount outstanding on this line of credit.

 

28

 

 

We have an annually renewable agreement with a commercial bank for a $1,000,000 working capital line of credit. Interest is payable at a variable rate of LIBOR plus 2.50%. The Company did not have any interest expense for the line of credit in 2017, 2016 or 2015. As of December 31, 2017 and 2016, there was no amount outstanding on this line of credit.

 

We believe our cash, short term investments and working capital lines of credit together are sufficient to meet our short term and long term liquidity needs. We are obligated to make payments related to our contractual obligations such as our building mortgage and our operating leases and other commitments (see contractual obligations and other commitments). We will also be obligated in certain circumstances to repurchase the redeemable shares of our Class A, Class B and Class C shareholders who die and our Class A and Class B shareholders who become permanently disabled, or retire. Our Board considers limitations on the amount of share redemptions each year. While we are not able to estimate future redeemable share redemptions, we repurchased approximately $182,000, $276,000, and $223,000, of Redeemable Common Shares in the years ended December 31, 2017, 2016, and 2015, 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.

 

Regulatory Capital and Surplus Requirements

 

Our largest subsidiary, Dental Care Plus, operates in states that regulate its payment of dividends and debt service on inter-company loans, as well as other inter-company cash transfers and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid by Dental Care Plus, without prior approval by state regulatory authorities, is limited based on statutory income and statutory capital and surplus. Dividends cannot exceed in any one year the lesser of: (i) 10% of net worth (as of the preceding December 31), or (ii) net income for the prior year, and only if net worth exceeds $250,000 and only out of positive retained earnings. There were no dividends declared or paid by Dental Care Plus during 2017, 2016 or 2015. Even if prior approval is not required, prior notification must be provided to state insurance departments before paying a dividend.

 

Dental Care Plus, an Ohio-domiciled insurance company dually licensed as a life and health insurer and a specialty health insuring corporation, is able to underwrite dental indemnity, dental PPO, dental HMO, and vision benefit products as well as other life and health insurance products in Ohio. The minimum required capital and surplus for Dental Care Plus licensed as a life and health insurance company in Ohio was $2.5 million at December 31, 2017.

 

We maintained aggregate statutory capital and surplus of approximately $14.8 million as of December 31, 2017 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 2018 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/or future capital raising activities.

 

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 in the states in which we currently do business. We file our annual statement and RBC reporting with the Ohio Department of Insurance and the NAIC. Dental Care Plus’s statutory annual statements for the year ended December 31, 2017 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, 2017, 2016, and 2015, respectively, such changes increased or (decreased), net of related income tax effects, by the following amounts:

 

   

For Years ended December 31,

 
   

2017

   

2016

   

2015

 

Changes in:

                       

Changes in fair value of interest rate swap, net of tax

  $ 9,043     $ 7,471     $ (8,687 )

Change in fair value of investments, net of tax

    43,866       33,373       (164,497 )

Reclassification adjustment for (gains) losses included in net income, net of tax

    (34,397 )     (19,433 )     38,891  
                         

Total

  $ 18,512     $ 21,411     $ (134,293 )

 

29

 

 

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.

 

   

2017

           

2016

         
                                 

IBNR

  $ 2,054,182       57.4 %   $ 1,441,149       38.5 %

Reported claims in process

    1,461,739       40.9 %     2,238,464       59.8 %

Other healthcare services expenses payable

    60,264       1.7 %     63,938       1.7 %

Total claims payable liability

  $ 3,576,185       100 %   $ 3,743,551       100 %

 

Between December 31, 2016 and December 31, 2017, our claims payable liability estimate decreased by approximately $167,400 or 4.5%, primarily due to lower fully-insured dental HMO/IND utilization in December 2017 compared to December 2016 offset by an increase in fully-insured dental PPO membership at December 31, 2017 compared to December 31, 2016.

 

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.

 

30

 

 

When developing our estimate for claims payable liability as of December 31, 2017, we considered actual paid claim data from January 2018. As a result, we are able to use the completion factors approach for all historical months in 2017, including December 2017. 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, 2017 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

   

12/31/2017

 
           
(0.50%)     $ 3,786,648  
0%    (estimate used)   $ 3,576,185  
0.50%     $ 3,333,094  

 

(a)     Reflects estimated potential changes in incurred claims payable liability caused by changes in completion factors for all months prior to December 31, 2017.

 

Recognition of Premium Revenue

 

Fully-Insured—Membership contracts are written on an annual basis and are subject to cancellation by the employer group upon thirty days written notice. The Company’s unearned premium revenue was approximately $36,818,000 and $46,955,000 at December 31, 2017 and 2016, respectively, and primarily relates to the estimated premium revenue associated with the remaining contract periods. Related amounts recorded in accounts receivable were approximately $35,281,000 and $45,687,000 at December 31, 2017 and 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 consolidated balance sheets. Premiums received in advance were approximately $1,536,000 and $1,268,000 at December 31, 2017 and 2016, respectively. Management has determined that as of December 31, 2017 and 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.

 

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

 

Healthcare Services Expense

 

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

 

Income Taxes

 

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

 

31

 

 

Recently Issued Accounting Standards

 

Refer to Note 2 of the consolidated financial statements for further information on recently issued accounting standards.

 

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, 2017, our investment portfolio included approximately $181,000 of an institutional money market fund. Our portfolio also included approximately $8,259,000 of investment grade and non-investment grade corporate bonds and $1,152,000 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 $284,000 decrease in fair value, whereas a 100 basis point decrease in interest rates would result in an approximate $299,000 increase in fair value. At December 31, 2017, the investment grade and non-investment grade corporate bonds and the certificates of deposit with amortized cost of approximately $8,240,000 and $1,150,000, 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 2017 and 2016.

 

At December 31, 2017, we had a mortgage note with a bank with an outstanding principal balance of $1,095,000 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.

 

32

 

 

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:

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of DCP Holding Company and subsidiaries (the "Company") as of December 31, 2017 and 2016, 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, 2017, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting 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.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

 /s/ Deloitte & Touche LLP

 

Cincinnati, OH

 

March 30, 2018

 

 

We have served as the Company’s auditor since 2002.

 

33

 

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2017 AND 2016

 

   

2017

   

2016

 

ASSETS

               
                 

INVESTMENTS:

               

Fixed maturities, available for sale at fair value, amortized cost of $8,790,000 and $8,825,000 at December 31, 2017 and 2016, respectively

  $ 8,810,056     $ 8,824,420  

Short-term investments, available for sale at fair value, cost of $781,000 and $513,000 at December 31, 2017 and 2016, respectively

    781,951       512,989  

Total investments

    9,592,007       9,337,409  

CASH AND CASH EQUIVALENTS

    13,177,193       11,221,951  

ACCRUED INVESTMENT INCOME

    80,904       78,662  

ACCOUNTS RECEIVABLE, including uncollected premiums of $1,118,996 and $1,018,391, net of allowance of $45,809 and $41,092 at December 31, 2017 and 2016, respectively

    36,400,634       46,705,170  

DEFERRED ACQUISITION COSTS

    2,636,858       3,109,117  

PROPERTY AND EQUIPMENT, net of depreciation and amortization of $3,684,537 and $3,531,436 at December 31, 2017 and 2016, respectively

    3,661,598       2,756,999  

OTHER ASSETS

    4,780,001       4,872,499  

TOTAL ASSETS

  $ 70,329,195     $ 78,081,807  
                 

LIABILITIES, REDEEMABLE SHARES AND SHAREHOLDERS’ EQUITY

               

CLAIMS PAYABLE

  $ 3,576,185     $ 3,743,551  

UNEARNED PREMIUM REVENUE

    36,818,123       46,954,609  

OTHER PAYABLES AND ACCRUALS

    7,175,048       7,334,165  

MORTGAGE LOAN PAYABLE

    1,095,200       1,148,000  

CAPITAL LEASE OBLIGATIONS

    1,200,925       558,114  

DEFERRED COMPENSATION

    4,821,982       4,051,078  

TOTAL LIABILITIES

    54,687,463       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, 500 and 506 shares at December 31, 2017 and 2016, respectively

    605,143       561,439  

Class B Redeemable Common Shares, no par value—authorized, 120,000 shares; issued and outstanding, 8,653 and 8,604 shares at December 31, 2017 and 2016, respectively

    10,472,602       9,546,686  

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

    4,563,987       4,184,165  

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

    15,641,732       14,292,290  

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

               

TOTAL LIABILITIES, REDEEMABLE SHARES AND SHAREHOLDERS’ EQUITY

  $ 70,329,195     $ 78,081,807  

 

See notes to consolidated financial statements.

 

34

 

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

 

   

2017

   

2016

   

2015

 
                         

REVENUES

                       

Premium revenue

  $ 107,589,114     $ 105,594,134     $ 98,261,441  

Investment income

    264,891       274,220       251,756  

Realized gains (losses) on investments, net

    249,300       75,849       (58,926 )

Other income

            51,920       62,304  

Total revenues

    108,103,305       105,996,123       98,516,575  
                         

EXPENSES

                       

Healthcare services expense

    81,607,541       80,500,160       76,683,963  

Insurance expense:

                       

Salaries and benefits expense

    9,206,665       9,022,484       7,766,987  

Commission expenses and other acquisition costs

    5,495,576       5,538,688       5,420,357  

Other insurance expense

    7,992,967       7,582,136       6,888,760  

Total insurance expense

    22,695,208       22,143,308       20,076,104  

Total expenses

    104,302,749       102,643,468       96,760,067  
                         
                         

INCOME BEFORE INCOME TAX

    3,800,556       3,352,655       1,756,508  
                         

PROVISION (BENEFIT) FOR INCOME TAX:

                       

Current

    1,502,404       1,552,952       1,101,048  

Deferred

    468,718       (189,468 )     (302,625 )
                         

INCOME TAX EXPENSE

    1,971,122       1,363,484       798,423  
                         

NET INCOME

  $ 1,829,434     $ 1,989,171     $ 958,085  
                         

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

                       

Change in the fair value of interest rate swap, net of income tax of $4,659, $3,848, and ($4,475), respectively

    9,043       7,471       (8,687 )

Change in the fair value of investments, net of income tax of $22,599, $17,193, and ($84,741), respectively

    43,866       33,373       (164,497 )

Reclassification adjustment for (gains) losses included in net income, net of income tax of ($17,720), ($10,011) and $20,035, respectively

    (34,397 )     (19,433 )     38,891  

Total other comprehensive income (loss)

    18,512       21,411       (134,293 )
                         

TOTAL COMPREHENSIVE INCOME

  $ 1,847,946     $ 2,010,582     $ 823,792  

 

See notes to consolidated financial statements.

 

35

 

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF REDEEMABLE SHARES AND SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016, AND 2015

 

   

Redeemable Common Shares

   

Redeemable Preferred Shares

   

Shareholders' Equity

         
                                                                                                                         
   

Class A

   

Class B

   

Class C

   

 

Institutional Preferred

2010-Series

   

 

Institutional Preferred

2012-Series

   

 

Institutional Preferred

2013-Series

           

 

         
   

Number of

           

Number of

           

Number of

           

Number of

           

Number of

           

Number of

           

Retained

   

Accumulated 

Other

Comprehensive

         
   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Earnings

   

Income (Loss)

   

Total

 
                                                                                                                         

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                          
                                                                                                                         

Net Income

                                                                                                    958,085               958,085  

Other comprehensive income, net

                                                                                                            (134,293 )     (134,293 )

Dividends declared and paid

                                                                                                    (481,089 )             (481,089 )

Redeemable Shares issued

                    510       501,329       1,684       1,545,816                                                                          

Redeemable Shares repurchased

    (15 )     (14,971 )     (211 )     (210,298 )                                                                                        

Accretion of shares to redemption value

            7,858               130,570               162,788               6,342               18,307               16,838       (476,996 )     134,293       (342,703 )

Balance at December 31, 2015

    516       522,045       8,142       8,237,390       2,005       2,028,490       300       420,515       1,000       1,213,791       1,000       1,116,442                          
                                                                                                                         

Net Income

                                                                                                    1,989,171               1,989,171  

Other comprehensive loss, net

                                                                                                            21,411       21,411  

Dividends declared and paid

                                                                                                    (510,413 )             (510,413 )

Redeemable Shares issued

                    661       665,053       1,766       1,728,874                                                                          

Redeemable Shares repurchased

    (10 )     (10,294 )     (199 )     (206,321 )                     (300 )     (428,819 )     (1,000 )     (1,237,758 )     (1,000 )     (1,138,487 )                        

Extinguishment cost of redeemable preferred shares

                                                                                                    (118,800 )             (118,800 )

Accretion of shares to redemption value

            49,688               850,564               426,801               8,304               23,967               22,045       (1,359,958 )     (21,411 )     (1,381,369 )

Balance at December 31, 2016

    506       561,439       8,604       9,546,686       3,771       4,184,165                                                                          
                                                                                                                         

Net Income

                                                                                                    1,829,434               1,829,434  

Other comprehensive loss, net

                                                                                                            18,513       18,513  

Dividends declared and paid

                                                                                                    (547,443 )             (547,443 )

Redeemable Shares issued

                    196       217,474                                                                                          

Redeemable Shares repurchased

    (6 )     (6,547 )     (147 )     (161,989 )                                                                                        

Accretion of shares to redemption value

            50,251               870,431               379,822                                                       (1,281,991 )     (18,513 )     (1,300,504 )
                                                                                                                         

Balance at December 31, 2017

    500     $ 605,143       8,653     $ 10,472,602       3,771     $ 4,563,987             $               $               $       $       $       $    

 

See notes to consolidated financial statements.

 

36

 

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

 

   

2017

   

2016

   

2015

 
                         

CASH FLOWS FROM OPERATING ACTIVITIES:

                       

Net income

  $ 1,829,434     $ 1,989,171     $ 958,085  

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

                       

Depreciation and amortization

    460,612       504,302       484,438  

Realized (gains) losses on investments, net

    (249,300 )     (75,849 )     58,926  

Deferred income tax (benefit)

    468,718       (189,468 )     (302,625 )

Deferred compensation

    988,378       994,708       747,825  

Effects of changes in operating assets and liabilities:

                       

Accrued investment income

    (2,242 )     (3,405 )     (5,795 )

Accounts receivable

    10,304,536       (14,964,004 )     834,988  

Deferred acquisition costs

    472,259       (1,096,513 )     37,724  

Other assets

    (197,913 )     (138,296 )     (167,554 )

Claims payable

    (167,366 )     490,205       255,733  

Unearned premium revenue

    (10,136,486 )     14,323,492       (5,651 )

Other payables and accruals

    (162,548 )     1,847,987       97,946  
                         

Net cash provided by operating activities

    3,608,082       3,682,330       2,994,040  
                         

CASH FLOWS FROM INVESTING ACTIVITIES:

                       

Purchases of investments

    (4,167,448 )     (5,335,774 )     (4,955,458 )

Sales of investments

    3,477,096       3,475,750       3,038,165  

Maturities of investments

    490,000       200,000       700,000  

Acquisition of property and equipment

    (1,312,949 )     (549,083 )     (471,904 )

Proceeds from the sale of property and equipment

    920,752               346,823  

Investment, other

                    (2,000 )
                         

Net cash used in investing activities

    (592,549 )     (2,209,107 )     (1,344,374 )
                         

CASH FLOWS FROM FINANCING ACTIVITIES:

                       

Mortgage loan repayments

    (52,800 )     (50,400 )     (49,200 )

Repayment of capital lease

    (277,941 )     (311,342 )     (248,845 )

Repurchase of redeemable common shares

    (182,107 )     (275,773 )     (223,176 )

Repurchase of redeemable preferred shares

            (2,805,064 )        

Redeemable shares issued

            2,280,066       1,932,356  

Extinguishment cost of redeemable preferred shares

            (118,800 )        

Issuance cost of redeemable shares

            (116,833 )     (112,419 )

Dividends paid

    (547,443 )     (510,413 )     (481,089 )
                         

Net cash (used in) provided by financing activities

    (1,060,291 )     (1,908,559 )     817,627  
                         

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    1,955,242       (435,336 )     2,467,293  
                         

CASH AND CASH EQUIVALENTS—Beginning of year

    11,221,951       11,657,287       9,189,994  
                         

CASH AND CASH EQUIVALENTS—End of year

  $ 13,177,193     $ 11,221,951     $ 11,657,287  
                         

SUPPLEMENTAL CASH FLOW INFORMATION:

                       

Cash paid for interest

  $ 71,000     $ 70,000     $ 68,000  

Cash paid for income taxes

    1,376,000       1,429,000       963,000  
                         

NON-CASH INVESTING AND FINANCING ACTIVITIES:

                       

Redeemed common shares (in other payables and accruals)

  $ 11,871     $ 25,443     $ 84,618  

Capital lease obligation

    920,752               346,823  

Purchased property and equipment (included in other payables and accruals)

    23,700               8,823  

 

See notes to consolidated financial statements.

 

37

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

AS OF DECEMBER 31, 2017 AND 2016 AND FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

 

 

 

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. 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 dental health maintenance organization (“HMO”), participating provider organization (“PPO”) and indemnity plans for dental care services and vision benefit plans. As of December 31, 2017, we had approximately 346,300 members in our dental benefits plans and approximately 40,300 members in our vision benefit plans with approximately 3,000 providers participating in our dental HMO network, approximately 3,100 providers participating in our DentaSelect dental PPO network and approximately 2,200 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 45,900 additional providers throughout the United States. The Company also has a network access arrangement with a national dental administration company for the dental PPO plans that it offered on the FFM exchanges in 2017. With this network access arrangement, FFM exchange members have access to approximately 10,900 providers across the eight FFM exchange states. 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.

 

38

 

 

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 capitalizes the costs of computer software developed or obtained for internal use in accordance generally accepted accounting principles. Capitalized computer software costs consist of purchased software licenses, implementation costs, development costs and payroll-related costs for certain projects that qualify for capitalization. The Company expenses costs related to preliminary project assessment, training and application maintenance as incurred, and amortizes the capitalized computer software costs on a straight-line basis over the estimated useful life of the software upon being placed in service.

 

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 $1,838,000 and $1,850,000 at December 31, 2017 and 2016, 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 exceeds the fair value of identifiable assets acquired less liabilities assumed. 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 define-life intangible assets are subject to amortization and periodic impairment reviews whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review for impairment of the Company’s intangible assets requires management to predict the estimated cash flows that will be generated by the long-lived asset over its remaining estimated useful life.

 

Deferred Acquisition Costs— Deferred acquisition costs are those incremental direct costs related to the successful acquisition of new and renewal business. These incremental direct costs are those that are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. Such incremental direct costs include commissions, costs of contract issuance and underwriting, state premium taxes and other costs the Company incurs to successfully acquire new business or renew existing business. The Company defers policy acquisition costs and amortizes them over the estimated life of the contracts, which are short-duration in nature, in proportion to premiums earned. The Company capitalized deferred acquisition costs of approximately $4,508,000, $5,877,000, and $4,358,000, and amortized approximately $4,980,000, $4,780,000, and $4,396,000 of these capitalized costs for the years ended December 31, 2017, 2016, and 2015, respectively. The amortization of these costs are recorded in commission expenses and other acquisition costs included in the consolidated statements of comprehensive income.

 

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

 

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

 

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

 

39

 

 

On June 30, 2016, the Company delivered written notice to the holders of its (i) Redeemable Institutional Preferred Shares – 2010 Series, (ii) Redeemable Institutional Preferred Shares – 2012 Series, and (iii) Redeemable Institutional Preferred Shares – 2013 Series (collectively, the “Preferred Shares”), pursuant to which the Company exercised its right to redeem all of the Preferred Shares. The “Call Price” for each Preferred Share is 100% of the Adjusted Book Value per Preferred Share (as defined in the Company’s Articles of Incorporation), plus all accrued, but unpaid, dividends on each Preferred Share plus a 5% premium payable to holders of the 2012 Series and 2013 Series Preferred Shares. The holders of the Preferred Shares and the Company agreed to close the redemption on June 30, 2016, and on such date, the aggregate price paid for redemption of the Preferred Shares by the Company was approximately $2,924,000.          

 

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

 

Premium Revenue

 

Fully-Insured—Membership contracts are written on an annual or multi-year basis and are subject to cancellation by the employer group upon thirty days written notice. The Company’s unearned premium revenue was approximately $36,818,000 and $46,955,000 at December 31, 2017 and 2016, respectively, and primarily relates to the estimated premium revenue associated with the remaining contract periods. Related unbilled amounts recorded in accounts receivable were approximately $35,281,000 and $45,687,000 at December 31, 2017 and 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 consolidated balance sheets. Premiums received in advance were approximately $1,537,000 and $1,268,000 at December 31, 2017 and 2016, respectively. Management has determined that as of December 31, 2017 and 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 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 (Losses) 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 14). Realized gains (losses) on investments is primarily made up of realized investment gains, losses and other than temporary impairments of investment grade and non-investment grade corporate bonds.

 

Healthcare Services Expense— Healthcare services expense is recognized on a monthly basis. In the case of the fully-insured dental HMO and indemnity (“dental HMO/IND”) and dental PPO segments, healthcare services expense is calculated by taking the paid claims associated with the fully-insured membership and adjusting this amount for the change in the claims payable liability determined using actuarial estimates. For the self-insured dental segment, the healthcare services expense is based solely on the paid claims for the self-insured membership. The Company incurred claim costs related to dental care providers amounting to approximately $81,608,000, $80,500,000, and $76,684,000, for the years ended December 31, 2017, 2016, and 2015, respectively.

 

40

 

 

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.

 

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

 

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

 

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

 

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

 

During 2017, 2016, and 2015, five fully-insured customers accounted for approximately 10%, of the Company’s total premium revenue. Additionally, two self-insured customers accounted for approximately 11% of the Company’s total revenue during each of the years 2017, 2016, and 2015, respectively.

 

The Company had one customer that had a balance of approximately 25% and 24% of the uncollected premium receivable balance at December 31, 2017 and 2016, 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 InstrumentsCertain financial instruments are required to be recorded at fair value. The Company primarily bases fair value for investments in fixed-maturity securities (including federally-insured certificates of deposits, investment grade corporate bonds and non-investment grade corporate bonds) on quoted market prices or on prices from a pricing vendor, an outside resource that supplies securities pricing, dividend, corporate action and descriptive information to support pricing, securities operations, research and portfolio management. The Company obtains and reviews the pricing service’s valuation methodologies and validates these prices using various inputs, including quotes from other independent regulatory sources. When deemed necessary, the Company validates prices by replicating a sample using a discounted cash flow model. Changes in assumptions or estimation methods could affect the fair value estimates.

 

New Accounting Guidance In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers. The new guidance requires that an entity recognize revenue for the transfer of goods or services to a customer at an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The new guidance also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. Insurance contracts are not included in the scope of this new guidance and therefore our fully-insured dental HMO/IND and fully-insured dental PPO segments are not impacted. The effective date of ASU 2014-09 is for annual reporting periods beginning after December 15, 2017. We adopted the standard on January 1, 2018 using the modified retrospective approach. Upon adopting the guidance, the cumulative effect will be presented as an adjustment to beginning retained earnings of approximately $53,000.

 

We have reached conclusions on our key accounting assessments related to the standard and have finalized our accounting policies. Based on our assessment, revenue recognition for our self-insured dental segment will not materially change.  Based on our assessment of ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), issued by the FASB in March 2016, the Company acts as a principal and as such will continue to record self-insured dental revenue on a gross basis.

 

41

 

 

In preparation for adoption of the standard, we have implemented internal controls and revised business processes to prepare financial information in accordance with the standard. These new processes and procedures ensure data utilized for financial reporting is complete and accurate and is assessed in accordance with the guidelines of the standard.

 

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. 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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 introduces 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.

 

 

2.

INVESTMENTS

 

The Company owned certificates of deposit insured by the Federal Deposit Insurance Corporation (“FDIC”) with an amortized cost of $1,150,000 and $1,090,000 at December 31, 2017 and 2016. The certificates of deposit included in short-term and fixed maturities investments are classified as available-for-sale and are carried at fair value. The Company also invests in money market funds included in short-term investments and are classified as available-for-sale, with a cost and fair value of approximately $181,000 and $223,000 at December 31, 2017 and 2016, respectively. The Company invested in corporate bonds with an amortized cost of approximately $8,240,000 and $8,025,000 at December 31, 2017 and 2016, respectively. The investment and non-investment grade corporate bonds included in fixed maturity investments are classified as available-for-sale and are carried at fair value.

 

The Company owned corporate bonds at December 31, 2017, which consist primarily of investment grade securities. At December 31, 2017, total bond fair value was approximately $8,259,000, which consists of approximately $7,588,000 with a credit rating of BBB- or better. The remaining securities, totaling approximately $671,000, had a credit rating of between BB+ and B. The weighted average yield-to-cost of the Company’s corporate bonds was approximately 3.22% at December 31, 2017. The weighted average maturity of the Company’s corporate bonds was 5.24 years at December 31, 2017.

 

42

 

 

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

 

   

Available-for-Sale

 
   

Amortized

   

Fair

   

% of Total

 

December 31, 2017

 

Cost

   

Value

   

Fair Value

 

Maturity dates occurring:

                       

Less than 1 year

  $ 600,000     $ 600,767       6.4 %

Years 1-5

    5,326,884       5,320,683       56.5 %

Years 5-10

    3,313,024       3,340,138       35.5 %

Due after ten years

    150,374       149,236       1.6 %
                         

Total

  $ 9,390,282     $ 9,410,824       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 December 31, 2017 and 2016, as fixed maturities and short-term investments were as follows:

 

   

Available-for-Sale

 
   

Cost or

   

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

December 31, 2017

 

Cost

   

Gain

   

Loss

   

Value

 
                                 

Money market fund

  $ 181,183                     $ 181,183  
                                 

Certificates of deposit, short term

    600,000     $ 782     $ (15 )     600,767  
                                 

Certificates of deposit, fixed maturities

    550,000       983               550,983  
                                 

Corporate bonds, fixed maturities

    8,240,282       73,769       (54,977 )     8,259,074  
                                 

Total investments

  $ 9,571,465     $ 75,534     $ (54,992 )   $ 9,592,007  

 

   

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 at December 31, 2017 and 2016 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 year ended December 31, 2017 and 2016. The Company had six other-than-temporarily impaired securities which were recorded as a realized loss of approximately $111,000 for the year ended December 31, 2015. The Company had no investments in a material unrealized loss position for greater than one year as of December 31, 2017 and 2016.

 

43

 

 

The following table provides realized investments gains and losses for the years ended December 31, 2017, 2016 and 2015:

 

   

2017

   

2016

   

2015

 
                         

Gross realized gains

  $ 249,831     $ 147,513     $ 80,199  
                         

Gross realized losses

    (531 )     (71,664 )     (28,073 )
                         

Other than temporary impairments

                    (111,052 )
                         

Total realized gains (losses) on investments, net

  $ 249,300     $ 75,849     $ (58,926 )

 

 

3.    PROPERTY AND EQUIPMENT

 

Property and equipment at December 31 were summarized as follows:

 

   

2017

   

2016

 

Land

  $ 364,000     $ 364,000  

Building and building improvements

    2,712,196       2,504,775  

Furniture and equipment

    4,269,939       3,419,660  

Total property and equipment

    7,346,135       6,288,435  
                 

Less accumulated depreciation and amortization

  $ (3,684,537 )   $ (3,531,436 )
                 
                 

Total property and equipment - net

  $ 3,661,598     $ 2,756,999  

 

The Company had depreciation expense of approximately $432,000, $484,000, and $449,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

 

 

4.    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, 2017 and 2016. There has not been any impairment on goodwill. Identifiable and amortizable intangible assets amounted to approximately $41,000 net of approximately $199,000 of accumulated amortization at December 31, 2017 and to approximately $50,000 net of approximately $190,000 of accumulated amortization at December 31, 2016. Amortization expense was approximately $9,000, $15,000 and $15,000 for each of the three years ended December 31, 2017, 2016 and 2015. The provider network intangible asset of approximately $41,000 at December 31, 2017 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. The membership intangible assets (net of individual memberships written-off in the year of acquisition) has been fully amortized over its 11 year useful life at December 31, 2017. The remaining weighted-average amortization period for these intangible assets is approximately 8 years. Goodwill and intangible assets are included in other assets in the accompanying consolidated balance sheets at December 31, 2017 and 2016.

 

 

5.    DEFERRED COMPENSATION PLAN

 

In accordance with the 2006 Dental Care Plus Management Equity Incentive Plan and the Dental Care Plus, Inc. and DCP Holding Company Deferred Compensation Plan (the “Plans”), Company directors and certain key employees elected to defer portions of their director fees and employee compensation, as applicable. The Company recorded expense of approximately $56,000, $61,000, and $141,000 related to deferred director fees and deferred employee compensation for the years ended December 31, 2017, 2016 and 2015, respectively. Directors and key employees who elect to defer cash compensation may request that the Company invest this compensation in a mutual fund investments or phantom shares of the Company. The deferred cash compensation is included in the deferred compensation liability at December 31, 2017 and 2016.

 

The Plans also provide for the directors and key employees to receive share awards based on the book value of the Redeemable Common Shares. Subsequent to 2010, a director will receive Class B Redeemable Common Shares upon vesting of these share awards. A key employee may elect to defer receiving such amounts until termination of employment and vesting requirements are met. If a key employee does not elect to defer receiving his or her share awards, the individual will receive Class B Redeemable Common Shares upon vesting. If the share awards are deferred, these deferred amounts will be paid in cash when deferred obligations are payable at an amount equal to the values of Class B Redeemable Common Shares. 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 183 and 170 of these non-vested awards outstanding at December 31, 2017 and 2016, respectively. The number of awards expected to vest approximates the total non-vested awards outstanding.     

 

44

 

 

The deferred compensation expense related to these awards is recorded ratably during the applicable vesting period. The Company recorded deferred compensation expense of approximately $956,000, $710,000, and $597,000, with a deferred tax benefit of approximately $325,000, $241,000, and $203,000, related to deferred share awards and the change in the value of phantom shares for the years ended December 31, 2017, 2016, and 2015, respectively. As of December 31, 2017, there is approximately $175,000 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 1.69 years.

 

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

 

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 December 31, 2017 and 2016, the deferred compensation liability was approximately $4,822,000 and $4,051,000, respectively.

 

The maximum aggregate number of share based awards that may be issued under the Plans are 15,000 Class B Common Shares. In 2017, the non-employee members of the Board were granted a total of 196 share based awards. In 2017, key employees were granted 99 share based awards. The equivalent share based dividend in February 2017 granted approximately 86 share based awards to individuals. As of December 31, 2017, the Company has granted a total of 4,936 share awards, net of share based dividends, forfeitures and rescinded share awards of which 3,065 are outstanding.

 

The following is a summary of activity of non-vested awards for the years ended December 31, 2017 and 2016:

 

   

Individual Director's

Share Awards

   

Weighted

Average Grant

Date Fair

Value

   

Key Employee Share Awards

   

Fair Value at December 31,

2017

 
                                 

Non-vested awards at January 1, 2017

                    169.7          

Granted

    196.0     $ 1,110       99.0          

Vested

    (196.0 )     1,110       (80.9 )        

Forfeited

                    (5.2 )        

Non-vested awards at December 31, 2017

                    182.6     $ 1,247  

 

   

Individual Director's

Share Awards

   

Weighted

Average Grant

Date Fair

Value

   

Key Employee Share Awards

   

Fair Value at December 31,

2016

 
                                 

Non-vested awards at January 1, 2016

                    157.4          

Granted

    228.0     $ 1,012       89.0          

Vested

    (228.0 )     1,012       (76.7 )        

Non-vested awards at December 31, 2016

                    169.7     $ 1,131  

 

45

 

 

The following is a summary of activity of vested awards for the years ended December 31, 2017 and 2016:

 

   

Individual Director's

Awards

   

Weighted

Average

Vested price

   

Key Employee Awards

   

Fair Value at December 31,

2016

 
                                 

Vested awards at January 1, 2017

    906.3     $ 1,131       1,347.9          
                                 

Share based dividend

    34.8       1,126       51.6          

Vested during the year

    196.0       1,247       80.9          

Redeemed vested awards

                    (0.9 )        

Converted to Redeemable Common Shares

    (196.0 )     1,247                  
                                 

Vested awards at December 31, 2017

    941.1       1,247       1,479.5     $ 1,247  

 

   

Individual Director's

Awards

   

Weighted

Average

Vested price

   

Key Employee Awards

   

Fair Value at December 31,

2015

 
                                 

Vested awards at January 1, 2016

    872.6     $ 1,040       1,222.3          
                                 

Share based dividend

    33.7       1,025       48.9          

Vested during the year

    228.0       1,131       76.7          

Converted to Redeemable Common Shares

    (228.0 )     1,131                  
                                 

Vested awards at December 31, 2016

    906.3       1,131       1,347.9     $ 1,131  

 

 

6.

LIABILITY FOR CLAIMS PAYABLE

 

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

 

   

2017

   

2016

   

2015

 
                         

Balance—January 1

  $ 3,743,551     $ 3,253,346     $ 2,997,613  
                         

Net incurred claims related to:

                       

Current year

    56,312,068       55,449,347       51,683,686  

Prior years

    (69,607 )     (63,522 )     45,917  
                         

Net incurred claims

    56,242,461       55,385,825       51,729,603  
                         

Net paid claims related to:

                       

Current year

    52,778,058       51,721,965       48,438,729  

Prior years

    3,631,769       3,173,655       3,035,141  
                         

Net paid claims

    56,409,827       54,895,620       51,473,870  
                         

Balance—December 31

  $ 3,576,185     $ 3,743,551     $ 3,253,346  

 

46

 

 

Reconciliation of claims payable liability to unpaid claims and claim adjustment expenses are as follows:

 

   

2017

   

2016

 
                 

Net outstanding liabilities

               

Dental HMO claims payable

  $ 2,321,842     $ 2,585,627  

Dental PPO claims payable

    1,194,079       1,093,986  
                 

Unallocated claims adjustment expenses

    60,264       63,938  
                 

Total gross liability for unpaid claims and claim adjustment expense

  $ 3,576,185     $ 3,743,551  

 

Substantially all of the incurred but not reported (“IBNR”) balance for dental HMO and dental PPO as of December 31, 2017 relates to the current year. At December 31, 2017 and 2016, the IBNR balance included in the total claims payable liability was approximately $2,054,000 and $1,441,000, respectively. The following is information about fully insured dental healthcare expense incurred and fully insured healthcare expense paid as of December 31, 2017:

 

Cumulative Fully-Insured Dental HMO Claims Incurred

         
   

(Unaudited)

   

 

   

 

   

Claim

 

Dental Claim Year

 

2015

      2016         2017    

Frequency

 
                                 

2015

  $ 37,376,156     $ 37,453,888     $ 37,454,566       248,484  

2016

            39,921,664       39,891,781       267,882  

2017

                    38,546,241       242,486  
           

Total

    $ 115,892,588          

 

Cumulative Fully-Insured Dental HMO Claims Paid

         
   

(Unaudited)

   

 

   

 

 

Dental Claim Year

 

2015

       2016       2017  
                         

2015

  $ 35,259,523     $ 37,452,963     $ 37,454,566  

2016

            37,336,962       39,890,033  

2017

                    36,226,147  
           

Total

    $ 113,570,746  
                         
   

Liabilities for dental HMO claims payable

    $ 2,321,842  

 

Cumulative Fully-Insured Dental PPO Claims Incurred

         
   

(Unaudited)

   

 

   

 

   

Claim

 

Dental Claim Year

 

2015

       2016        2017    

Frequency

 
                                 

2015

  $ 14,449,265     $ 14,352,688     $ 14,339,572       94,522  

2016

            15,463,744       15,461,629       105,939  

2017

                    17,728,742       114,112  
           

Total

    $ 47,529,943          

 

Cumulative Fully-Insured Dental PPO Claims Paid

 
   

(Unaudited)

   

 

   

 

 

Dental Claim Year

 

2015

       2016       2017  
                         

2015

  $ 13,366,515     $ 14,337,446     $ 14,339,572  

2016

            14,385,000       15,459,881  

2017

                    16,536,411  
           

Total

    $ 46,335,864  
                         
   

Liabilities for dental PPO claims payable

    $ 1,194,079  

 

47

 

 

 

7.

DEBT

 

The Company has a mortgage note with a bank, secured by the land and the office building with interest payable based on the 30-day LIBOR rate plus 1.95%. As a result of the mortgage note having a variable interest rate that adjusts monthly with the 30-day LIBOR rate, the carrying value of the mortgage note of $1,095,000 approximates fair value. The Company also entered into an interest rate swap agreement that effectively changed the interest rate related to the mortgage note with a commercial bank from a variable rate based on the 30-day LIBOR rate plus 1.95% to a fixed rate of 3.90% for the 10-year period through December 22, 2022. Under this mortgage, the Company is required to have a minimum tangible net worth equal to or greater than $3,500,000 at the end of each fiscal year and a debt service ratio of at least 1:1. The mortgage note fair value disclosure is classified as Level 2 in the fair-value hierarchy.

 

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

 

Years Ending

       

December 31

       
         

2018

  $ 55,200  

2019

    57,600  

2020

    58,800  

2021

    61,200  

2022 and thereafter

    862,400  
         

Total mortgage payable

  $ 1,095,200  

 

The Company enters into sale-leaseback transactions with a leasing company for the sale of fixed assets. There is no gain or loss on any sales. The Company does not retain the benefits and risk to the property sold and risk of ownership is transferred to the leasing company. The Company sold approximately $921,000 and $347,000 in 2017 and 2015, respectively. The Company also enters into capital lease agreements with the leasing company that obligates the Company to pay lease payments related to the respective assets sold. The Company entered into lease payments for sold assets totaling approximately $999,000 and $373,000 in 2017 and 2015, respectively. 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, 2017, future required payments under all outstanding capital leases are as follows:

 

2018

  $ 480,987  

2019

    354,552  

2020

    257,616  

2021

    187,386  
         

Total

    1,280,541  
         

Less imputed interest

    (79,616 )
         

Present value of minimum lease payments

  $ 1,200,925  

 

 

8.

DERIVATIVE

 

The Company entered into an interest rate swap agreement (cash flow hedge) used to manage the Company’s interest rate risk. The swap agreement effectively changed the interest rate related to the Company’s mortgage note with a commercial bank from a variable rate based on the 30-day LIBOR rate plus 1.95% to a fixed rate of 3.90% for the 10-year period through December 22, 2022. The Company’s risk management policy is to not enter into derivatives for speculative purposes. The notional amount decreases in direct correlation to the principal reduction of the mortgage and was approximately $1,095,000 and $1,148,000 at December 31, 2017 and 2016, respectively. The Company believes that the risk of nonperformance by the counter party to this agreement is not material to the financial statements. At December 31, 2017 and 2016, the fair value of this agreement was approximately $7,000 and ($7,000), respectively. The agreement will terminate upon maturity of the mortgage loan payable (Note 7).

 

The amounts included in other comprehensive income (loss) related to the interest rate swap was $9,043, $7,471, and $(8,687), net of income tax expense (benefit) of $4,659, $3,848, and $(4,475), during 2017, 2016 and 2015, respectively.

 

 

9.

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, 2017. As of December 31, 2017 and 2016, there was no amount outstanding on this line of credit. The $500,000 working capital line of credit expires in July 2018. The Company expects to renew this line of credit at its maturity.

 

48

 

 

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, 2017. At December 31, 2017 and 2016, there was no amount outstanding on this line of credit. The $1,000,000 working capital line of credit expires in July 2018. The Company expects to renew this line of credit at its maturity.

 

 

10.

FEDERAL INCOME TAXES

 

The components of the provision for income taxes are summarized as follows for the years ended December 31, 2017, 2016 and 2015, respectively:

 

   

2017

   

2016

   

2015

 
                         

Current tax expense:

                       

Federal

  $ 1,464,411     $ 1,520,374     $ 1,075,126  

State and local

    37,993       32,578       25,922  
                         

Total current tax expense

    1,502,404       1,552,952       1,101,048  
                         

Deferred tax benefit

                       

Federal

    477,341       (180,068 )     (295,047 )

State and local

    (8,623 )     (9,400 )     (7,578 )
                         

Total deferred tax benefit

    468,718       (189,468 )     (302,625 )
                         

Total provision for income taxes

  $ 1,971,122     $ 1,363,484     $ 798,423  

 

Deferred tax assets and liabilities are comprised of the following:

 

   

2017

   

2016

 

Deferred tax assets:

               

Unearned premiums

  $ 64,532     $ 86,212  

Net operating loss

    13,061       25,231  

Recapitalization intangible

    29,792       48,234  

Accrued vacation

    62,170       87,028  

Accrued commissions

    192,291       429,267  

Deferred compensation

    961,463       1,281,799  

Legal Fees

    81,364          

Accrued professional fees

    38,784       47,430  

Unrealized loss on investments

    21,308       30,774  

Other, net

    75,898       87,968  
                 

Gross deferred tax assets

    1,540,663       2,123,943  
                 

Valuation Allowance

    (29,792 )     (48,234 )
                 

Gross deferred tax assets, net of valuation allowance

    1,510,871       2,075,709  
                 

Deferred tax liabilities:

               

Deferred policy acquisition costs

    96,483       163,923  

Prepaid insurance

    74,503       125,784  

Property and equipment

    200,739       160,033  

Identifiable intangible assets

    8,566       17,134  
                 

Gross deferred tax liabilities

    380,291       466,874  
                 

Net deferred tax asset

  $ 1,130,580     $ 1,608,835  

 

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 $38,415, $74,209, and $86,226, of net operating loss carry forwards to utilize in future years at December 31, 2017, 2016, and 2015, respectively. These losses will expire between 2019 and 2025. Net deferred tax assets are included in other assets in the accompanying consolidated balance sheets at December 31, 2017 and 2016.

 

49

 

 

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

 

                           

2017

   

2016

   

2015

 
                           

Effective Tax

   

Effective Tax

   

Effective Tax

 
   

2017

   

2016

   

2015

   

Rate

   

Rate

   

Rate

 
                                                 

Provision computed at statutory rate

  $ 1,292,189     $ 1,139,903     $ 597,213       34.0 %     34.0 %     34.0 %

State and local taxes

    29,323       23,101       9,309       0.8       0.7       0.5  

Nondeductible meals, entertainment and legal expense

    11,143       26,899       23,156       0.3       0.8       1.3  

Tax Act adoption impact

    691,921                       18.2                  

Nondeductible federal premium tax

            189,558       168,745               5.7       9.7  

Other—net

    (53,454 )     (15,977 )             (1.4 )     (0.5 )        
                                                 

Provision for income taxes

  $ 1,971,122     $ 1,363,484     $ 798,423       51.9 %     40.7 %     45.5 %

 

In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code beginning in 2018, which will reduce the corporate tax rate from 34% to 21%. The rate reduction required a remeasurement of the Company’s net deferred tax assetThese items resulted in an estimated increase in our 2017 tax expense of approximately $692,000.

 

The Tax Act is subject to further clarification and interpretation by the U.S. Treasury Department and the Internal Revenue Service. For example, the Tax Act changes the way that companies calculate their insurance claims and reserves for tax purposes, including revaluing those tax basis liabilities as of January 1, 2018, based on a methodology and discount factors that have not been published. The resulting transitional deferred tax liability and offsetting increase in the Company’s insurance claims and reserves deferred tax assets, were recorded at December 31, 2017 using reasonable estimates based on available information and should be considered provisional in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”). Because the established transition liability was completely offset by an increase in related deferred tax assets, any adjustment to the provisional amount will not impact the Company’s effective tax rate. In accordance with SAB 118, the insurance claims and reserves transitional deferred tax liability (and offsetting adjustment to the related deferred tax assets) and any other changes in deferred taxes resulting from clarification and interpretation of the Tax Act provided during 2018 will be recorded in the period in which the guidance is published.

 

 

11.

ACCOUNTING FOR UNCERTAIN TAX POSITIONS

 

For the years ended December 31, 2017, 2016, and 2015, 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 2013 remain open to examination by the Internal Revenue Service (“IRS”), and tax years subsequent to 2012 remain open to other state and local tax authorities.

 

 

12.

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 $91,000, $89,000, and $83,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

 

50

 
 

 

 

13.   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:

 

   

2017

   

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

    66,465       22,599       43,866       50,566       17,193       33,373  

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

    (52,117 )     (17,720 )     (34,397 )     (29,444 )     (10,011 )     (19,433 )

Effect on other comprehensive income

    14,348       4,879       9,469       21,122       7,182       13,940  

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

  $ 972     $ 335     $ 637     $ (13,376 )   $ (4,544 )   $ (8,832 )
                                                 

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 before reclassification

    13,702       4,659       9,043       11,319       3,848       7,471  

Effect on other comprehensive income

    13,702       4,659       9,043       11,319       3,848       7,471  

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

  $ 7,005     $ 2,381     $ 4,624     $ (6,697 )   $ (2,278 )   $ (4,419 )
                                                 

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

    14,348       4,879       9,469       21,122       7,182       13,940  

Change in unrealized gains, net, on interest rate swap

    13,702       4,659       9,043       11,319       3,848       7,471  

Effect on other comprehensive income

    28,050       9,538       18,512       32,441       11,030       21,411  

Accumulated other comprehensive income (loss), end of period

  $ 7,977     $ 2,716     $ 5,261     $ (20,073 )   $ (6,822 )   $ (13,251 )

 

   

2015

 
   

Before Tax

   

Income Tax

   

Net

 

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

  $ 155,814     $ 52,980     $ 102,834  

Other comprehensive (loss) before reclassification

    (249,238 )     (84,741 )     (164,497 )

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

    58,926       20,035       38,891  

Effect on other comprehensive (loss)

    (190,312 )     (64,706 )     (125,606 )

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

  $ (34,498 )   $ (11,726 )   $ (22,772 )
                         

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

  $ (4,854 )   $ (1,651 )   $ (3,203 )

Other comprehensive (loss) before reclassification

    (13,162 )     (4,475 )     (8,687 )

Effect on other comprehensive (loss)

    (13,162 )     (4,475 )     (8,687 )

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

  $ (18,016 )   $ (6,126 )   $ (11,890 )
                         

Accumulated other comprehensive income, beginning of period

  $ 150,960     $ 51,329     $ 99,631  

Change in unrealized (losses), net, on investments available for sale

    (190,312 )     (64,706 )     (125,606 )

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

    (13,162 )     (4,475 )     (8,687 )

Effect on other comprehensive (loss)

    (203,474 )     (69,181 )     (134,293 )

Accumulated other comprehensive (loss), end of period

  $ (52,514 )   $ (17,852 )   $ (34,662 )

 

51

 
 

 

 

14.

LEASE INCOME

 

The Company leases space in its building to unrelated parties under non-cancelable leases. The Company did not have any lease income for the year ended December 31, 2017. Income recorded by the Company under non-cancelable leases amounted to approximately $52,000 for the year ended December 31, 2016, and approximately $62,000 for the year ended December 31, 2015. Such amounts are recorded as other income in the accompanying consolidated statements of comprehensive income.

 

 

15.

COMMITMENTS AND CONTINGENCIES

 

Leases—The Company leases certain software, equipment and office space under non-cancelable operating leases. Rent expense under all operating leases was approximately $324,000, $206,000, and $168,000, for the years ended December 31, 2017, 2016 and 2015, respectively.

 

At December 31, 2017, future approximate minimum annual lease payments under non-cancelable operating leases are as follows:

 

2018

  $ 360,000  

2019

    260,000  

2020

    39,000  

2021

    8,000  
         

Total

  $ 667,000  

 

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

 

 

16.   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 $25,981,000, $25,094,000, and $21,577,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

 

Listed below is financial information required for each reportable segment for the years ended December 31, 2017, 2016 and 2015 (amounts in thousands):

 

   

Fiscal Year Ended

   

Fiscal Year Ended

 
   

December 31, 2017

   

December 31, 2016

 
                                                 
   

Revenues-

   

Healthcare

           

Revenues-

   

Healthcare

         
   

External

   

Services

           

External

   

Services

         
   

Customers

   

Expense

   

Total

   

Customers

   

Expense

   

Total

 

Reportable segments:

                                               

Fully-insured dental HMO/Indemnity

  $ 51,419     $ 38,522     $ 12,897     $ 53,393     $ 39,995     $ 13,398  

Fully-insured dental PPO

    25,936       17,721       8,215       22,363       15,391       6,972  

Self-insured dental

    29,427       25,365       4,062       29,067       25,114       3,953  

Corporate, all other

    807               807       771               771  

Total

  $ 107,589     $ 81,608       25,981     $ 105,594     $ 80,500       25,094  
                                                 

Investment income

                    265                       274  

Realized gains on investments, net

                    249                       76  

Other income

                                            52  
                                                 

Insurance expense

                    22,695                       22,143  
                                                 

Income before income tax

                  $ 3,800                     $ 3,353  
                                                 

Total assets-corporate

                  $ 70,329                     $ 78,082  

 

52

 

 

   

Fiscal Year Ended

 
   

December 31, 2015

 
                         
   

Revenues-

   

Healthcare

         
   

External

   

Services

         
   

Customers

   

Expense

   

Total

 

Reportable segments:

                       

Fully-insured dental HMO/Indemnity

  $ 49,458     $ 37,346     $ 12,112  

Fully-insured dental PPO

    19,198       14,384       4,814  

Self-insured dental

    28,922       24,954       3,968  

Corporate, all other

    683               683  

Total

  $ 98,261     $ 76,684       21,577  
                         

Investment income

                    252  

Realized losses on investments, net

                    (59 )

Other income

                    62  
                         

Insurance expense

                    20,076  
                         

Income before income tax

                  $ 1,756  

 

Inter-segment revenues were not significant for 2017, 2016, or 2015.

 

 

17.

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 $33,291,000, $38,256,000, and $38,248,000, in 2017, 2016, and 2015, respectively. The Company had claims payable liability to related party providers of approximately $1,487,000 and $1,779,000 at December 31, 2017 and 2016, respectively.

 

Seven of our Board members are also participating providers and as a group received approximately $183,000, $201,000, and $191,000 in directors’ fees for the years ended December 31, 2017, 2016, and 2015, respectively.

 

 

18.

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.

 

 

53

 

 

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, 2017 and 2016 (amounts in thousands):

 

    December 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

          $ 551     $ 551             $ 805     $ 805  

Investment grade corporate bonds

            7,588       7,588               7,363       7,363  

Non-investment grade corporate bonds

            671       671               657       657  

Short-term investments

                                               

Money market funds

  $ 181               181     $ 223               223  

Federally-Insured certificates of deposit

            601       601               290       290  

Deferred compensation investments (a)

                                               

Equity mutual fund investments

    1,194               1,194       729               729  

State guarantee fund deposits (b)

                                               

Government securities

    1,763               1,763       1,775               1,775  

Federally-Insured certificates of deposit

            75       75               75       75  

Interest rate swap (b)

            7       7                          

Total

  $ 3,138     $ 9,493     $ 12,631     $ 2,727     $ 9,190     $ 11,917  
                                                 

Liabilities

                                               

Interest rate swap (c)

                                  $ 7     $ 7  

Total

  $ -     $ -     $ -     $ -     $ 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 money market funds, 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 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, 2017 and 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 years ended December 31, 2017 and 2016. As of December 31, 2017 and 2016, the Company did not have any assets or liabilities classified as Level 3 of the fair value hierarchy.

 

 

19.   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-provider individuals are eligible to purchase Class C voting Redeemable Common Shares, when offered. The maximum percentage of Class C Common Shares outstanding at any time as a proportion of all voting Common Shares is 40%. The book value of a Common Share was approximately $1,210 and $1,110 at December 31, 2017 and 2016, respectively. In 2017, 2016, and 2015, the Board declared a per share cash dividend for all Class A, Class B and Class C Redeemable Common Shares in the amounts of $42.50, $40.47, and $39.86, 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 into under certain circumstances. As of December 31, 2017 and 2016, no Class D Redeemable Common Shares were issued or are outstanding.

 

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. In June 2016, Company exercised its right to redeem all of the Preferred Shares and as of December 31, 2017 and 2016 there were no issued or outstanding Preferred Shares.

 

54

 

 

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, 2016 and 2015, no 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 Dental Care Plus in 2017, 2016, or 2015. During 2017, the total dividend that the Dental Care Plus subsidiary may declare without prior regulatory approval is approximately $1,480,000.

 

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 $2,108,000, $1,653,000, and $710,000 for the years ended December 31, 2017, 2016 and 2015, respectively. Statutory-basis equity was approximately $14,800,000, and $12,271,000 at December 31, 2017 and 2016, respectively.

 

 

20.

QUARTERLY DATA (UNAUDITED)

 

A summary of our unaudited quarterly results of operations for the years ended December 31, 2017 and 2016 is as follows (amounts in thousands):

 

   

2017

 
   

March 31

   

June 30

   

September 30

   

December 31

   

Total

 

Premium revenue

  $ 27,098     $ 26,789     $ 27,339     $ 26,363     $ 107,589  

Gross profit

    5,673       6,407       6,937       6,964       25,981  

Income before income taxes

    239       786       1,583       1,192       3,800  

 

   

2016

 
   

March 31

   

June 30

   

September 30

   

December 31

   

Total

 

Premium revenue

  $ 26,562     $ 26,112     $ 26,734     $ 26,186     $ 105,594  

Gross profit

    5,515       6,317       6,422       6,840       25,094  

Income before income taxes

    497       696       1,157       1,003       3,353  

 

 

21.

SUBSEQUENT EVENTS

 

In accordance with the provisions of the Patient Protection and Affordable Care Act of 2010, the federal government imposed an annual assessment on all U.S. health insurers of approximately $14.3 billion in 2018 . This annual assessment will increase each year. 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 2018, the Company established a liability for the federal premium tax of approximately $867,000 that is payable to the United States Treasury in September 2018, along with an offsetting asset that will be amortized during 2018.
     

 

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, 2017. 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.

 

55

 

 

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, 2017, 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, 2017. 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 about our Board of Directors

 

The following sets forth information about our directors as of March 23, 2018.

 

Name

 

Age

 

Position/Office Held With the Company

 

 

 

 

 

Stephen T. Schuler, DMD

 

70

 

Director and Chairman of the Board

Anthony A. Cook, MS, MBA

 

67

 

Director and Chief Executive Officer

James E. Kroeger, MBA, CPA

 

62

 

Director

Donald J. Peak, CPA

 

64

 

Director

Michael J. Carl, DDS

 

58

 

Director

Fred H. Peck, DDS

 

57

 

Director

Molly M. Rogers, MBA, CPA

 

60

 

Director

Jack M. Cook, MHA

 

73

 

Director

David A. Kreyling, DMD

 

64

 

Director

James T. Foley

 

72

 

Director

Ronald L. Poulos, DDS

 

52

 

Director

 

56

 

 

Dr. Stephen T. Schuler, DMD was engaged in oral and maxillofacial surgery in the Northern Kentucky area from 1974 through 2016. Dr. Schuler retired from active practice on December 31, 2016. He is the founder and past President of Oral Facial Surgery Associates, PSC in Crestview Hills, Kentucky. He is also a past President of the Kentucky Board of Dentistry, a past President of the Kentucky Society of Oral and Maxillofacial Surgery and a past Chairman of the Board of Kentucky Dental Association. Dr. Schuler is presently the Chairman of the Board of Directors of the Company and serves on the Finance and Corporate Affairs Committees. Dr. Schuler was the Vice Chairman of Dental Care Plus from 2001 to 2005 and the Vice Chairman of the Company from the reorganization of Dental Care Plus through 2005. He became the Chairman of the Board of the Company effective January 2006. In addition to his industry experience and qualifications described above, the Company believes Dr. Schuler should continue to serve as a director because he is a licensed, practicing oral and maxillofacial surgeon with many years of relevant experience and a strong working knowledge of the dental benefits industry. He works on a daily basis with many dental providers and member patients of the Company and understands the specific needs and concerns of both dental providers and members. Since his nomination to the Company’s Board of Directors in 1998, Dr. Schuler has served on nearly every board committee. He has a thorough knowledge of all facets of the Company’s business.

 

Mr. Anthony A. Cook, MS, MBA has been President and Chief Executive Officer of Dental Care Plus since February 2001 and, upon reorganization of Dental Care Plus, also assumed this position for 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 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. In addition to his industry experience and qualifications described above, the Company believes Mr. Cook should continue to serve as a director because of his strong knowledge of the managed dental benefits industry and because the Board believes it is appropriate for a company’s CEO to serve as a director.

 

James E. Kroeger, MBA, CPA has been the Head of Internal Audit at American Modern Insurance Group since 2004. Prior to joining American Modern Insurance Group, he was a Firm Director in the Audit and Assurance practice of Deloitte & Touche LLP in Cincinnati, Ohio. He was with Deloitte for approximately 25 years, specializing in auditing insurance and health care entities, and developed a deep technical expertise in the insurance industry. Mr. Kroeger currently is the Chairman of the Audit Committee. Mr. Kroeger was recruited to serve on the Company’s Board of Directors in 2006 when the Company filed its initial Form 10 with the U.S. Securities and Exchange Commission and has been designated as the Audit Committee’s financial expert in accordance with SEC regulations. In addition to his industry experience and qualifications described above, the Company believes Mr. Kroeger should continue to serve as a director because of his extensive experience in auditing publicly-traded insurance companies, his technical expertise in the insurance industry and his significant experience with SEC regulations and financial reporting requirements. Since becoming a Board member in 2006, Mr. Kroeger has been instrumental in the establishment of a strong internal audit function for the Company. He possesses the requisite experience and skill to continue to serve as the Chairman of the Company’s Audit Committee.

 

Donald J. Peak, CPA has been the Director of Operations for BLOC Ministries, Inc. since June 2016. Prior to that Mr. Peak was the Director of Operations - Finance for UC Health from July 2011 until May 2016. In addition, Mr. Peak was the Director of Reimbursement and Financial Analysis for Deaconess Long Term Care from 2009 to 2011. Before 2009, he was a shareholder, board member and President / CEO of D.J. Peak Consulting, Inc. and PDMB, Inc., two closely held corporations. Mr. Peak was also previously employed by Deloitte & Touche and Ernst & Whinney. Mr. Peak received a Bachelor of Science degree from Indiana State University. He is currently a member of the American Institute of Certified Public Accountants and the Healthcare Financial Management Association. Mr. Peak is presently Chairman of the Board’s Finance Committee. In addition to his industry experience and qualifications described above, the Company believes Mr. Peak should continue to serve as a director because he has over 15 years of experience as an owner, board member and officer of privately held companies and has over 30 years of experience with healthcare finance. He is also very knowledgeable in the area of information technology that is a key success factor for the Company as we strive to use information technology to increase productivity and reduce administrative costs.     

 

Michael J. Carl, DDS has been engaged in the private practice of general dentistry in Cincinnati, Ohio since 1986. He has served as Vice President and President of the Cincinnati Dental Society. Previously he was also a member of the Cincinnati Dental Society Nominating and Peer Review Committees. Previously Dr. Carl has been a delegate with the Ohio Dental Association. He is a member of the American and International College of Dentists and the Pierre Fauchard Society. He is also a member of the Alpha Omega Dental Fraternity and served as its President in 2001. Dr. Carl graduated from Ohio State University in 1985, which was followed by a general practice residency at Mt. Sinai Hospital in Cleveland, Ohio in 1985 and 1986. He is a member of the Cincinnati Dental Association, Ohio Dental Association and the American Dental Association. Dr. Carl currently provides dental services to the residents of four local area nursing homes and participates in the Ohio Dental Options program. He has served on the Company’s Board of Directors since 2004, has served as Treasurer since 2012 and currently serves on the Company’s Audit and Clinical Affairs Committees. In addition to his industry experience and qualifications described above, the Company believes Dr. Carl should continue to serve as a director because of the perspective he brings to the Board as a Cincinnati-based general dentist who has been highly active in many key Cincinnati and Ohio dental organizations and associations.

 

57

 

 

Dr. Fred H. Peck, DDS has been engaged in the private practice of general dentistry in the Cincinnati, Ohio area since 1986. Dr. Peck was first nominated to serve on the Board of Directors of Dental Care Plus in 1988 and has been a director of Dental Care Plus and the Company continuously since that time. He was also the Treasurer of Dental Care Plus from 1990 to 2012 and the Treasurer of the Company from 2004 to 2012. Dr. Peck was the Chairman of the Company’s Utilization Review and Quality Assurance Committee from 1989 through 2009 and became the Chairman of the Board’s Clinical Affairs Committee in July 2009. In addition to his industry experience and qualifications described above, the Company believes Dr. Peck should continue to serve as a director because he brings to the Board an exceptional level of clinical expertise. He is a long standing member of the Cincinnati Dental Society Scientific Program Committee and served as Chairman of this committee in 2001 and 2008. He is an Accredited Member of the American Academy of Cosmetic Dentistry and is a lecturer for the University of Cincinnati Hospital dental residents in cosmetic dentistry and the Raymond Walter Dental Hygiene Program in cosmetic dentistry.

 

Ms. Molly M. Rogers, MBA, CPA has been an Assistant Professor of Accounting at the Carl H. Lindner College of Business at the University of Cincinnati since 2012. She has also served as the Director of Reimbursement at St. Elizabeth Healthcare (SEH) from 2000 to 2013. Before joining SEH, she served as a consultant to SEH, as well as Johnson & Johnson and other local health care agencies. From 1987 to 1998, she was an Assistant Professor of Finance in the Masters of Health Administration Program at Xavier University. Ms. Rogers was employed by the accounting firm of Ernst & Whinney for eight years previous to her position with Xavier University. She is a Board member of the Carmel Manor Nursing Home and the Treasurer of the Indoor Clay Tennis Club. She has also served on several community boards and is a licensed Certified Public Accountant. Ms. Rogers currently serves on the Board’s Audit and Finance Committees. In addition to her industry experience and qualifications described above, the Company believes Ms. Rogers should continue to serve as a director because she brings to the Board of Directors an excellent background in accounting and finance in the health care industry and a unique perspective relative to provider fee schedule and reimbursement issues. She is an effective member of the Company’s Finance and Audit Committees.

 

Mr. Jack M. Cook, MHA is a retired health care executive. He was a senior consultant with the Compass Group in Cincinnati from 2001 through 2009. Mr. Cook served as President and Chief Executive Officer of The Health Alliance of Greater Cincinnati, President of The Christ Hospital and founding president of the managed care network Healthspan since his recruitment to Cincinnati in 1983 until 2001. He also served on the Board and the Audit Committee of a local bank from 1992 through 2004. He attended the University of North Carolina and Duke University, earning a B.S. degree in Business and a Master’s degree in Hospital Administration. Mr. Cook is presently Chairman of the Board’s Corporate Affairs Committee. In addition to his industry experience and qualifications described above, the Company believes Mr. Cook should continue to serve as a director because of his experience as the CEO of a local hospital / hospital system for over 25 years where he developed strong skills and experience in organizational governance and management, board relations, and financial and marketing management.

 

David A. Kreyling, DMD has been engaged in the private practice of general dentistry in the Florence, Kentucky area since 1980 and has served as President of the Northern Kentucky Dental Society. Dr. Kreyling currently serves on the Finance and Corporate Affairs Committees. In addition to his industry experience and qualifications described above, the Company believes Dr. Kreyling should continue to serve as a director because he is a representative of our Northern Kentucky area dentists. Dr. Kreyling has also developed strong finance and benefits and compensation skills and experience during his prior terms as a Director.

 

James T. Foley is the Founder and CEO of The Foley Group, a private business consulting firm. From 2011 through 2013, Mr. Foley was President of PIVOTek, a manufacturer of prefabricated bathrooms units for hospitals, which was a Joint Venture company involving Grote Enterprises. Prior to assuming the role at PIVOTek, Mr. Foley was President of Grote Enterprises from 2003 to 2011. Grote operates a family of businesses and joint ventures including CINFAB, T.J. Dyer Company, Commercial HVAC and Grote Construction Services. Mr. Foley was President of CINFAB, Inc. from 2002 through 2003, where he was responsible for the operations and financial performance of this sheet metal fabrication business. From 2000 to the beginning of 2002, Mr. Foley was the President and owner of Moraine Molded Plastics, Inc., a custom plastic injection molding and assembly business. From 1994 to 1998, Mr. Foley was a Vice President at Computer Technology Corporation, a company specialized in the development, manufacturing and marketing of sophisticated computer software and hardware for factory automation control. In addition, Mr. Foley was Vice President of Marketing, Sales and Operations for Mutual Manufacturing & Supply Company from 1987 through 1994 and worked for Aim Packaging, Inc. and Anchor Hocking Corporation in various positions from 1970 through 1987. Mr. Foley has a Bachelor’s degree in Economics from Xavier University and served in the United States Army for two years. Mr. Foley currently serves on the Company’s Finance and Corporate Affairs Committees. The Company believes Mr. Foley should continue to serve as a director because of his extensive business experience in a variety of industries and his success and effectiveness as an executive focused on strategic planning, product planning and development, product and market segment management, sales and marketing management and operations management.

 

58

 

 

Ronald L. Poulos, DDS has been engaged in the private practice of pediatric dentistry in Cincinnati, Ohio since 1998. Dr. Poulos became a board certified pediatric dentist in 2001. He is an active member of the American Academy of Pediatric Dentistry, the American Dental Association, the Ohio Dental Association and the Cincinnati Dental Society. In addition, Dr. Poulos has been the Treasurer of the Cincinnati east side dental study club since 2005 and was a board member of the Childrens’ Dental Care Foundation from 2006 through 2012. Dr. Poulos currently serves on the Corporate Affairs and Clinical Affairs Committees. In addition to his industry experience and qualifications described above, the Company believes Dr. Poulos should continue to serve as a director because he represents the pediatric dental specialty and because he is well known to many of the dentist shareholders on the east side of Cincinnati.

 

Board Leadership Structure and Risk Oversight

 

Our Board of Directors consists of five dentist directors and six non-dentist directors. The Chairman of the Board is required to be a dentist director. The President and Chief Executive Officer is a non-dentist director and not permitted to serve as Chairman of the Board. Company risk management is the responsibility of the CEO and the CFO. The Board of Directors has delegated the responsibility for risk oversight to the Audit Committee.

 

Meetings and Committees

 

Our Board of Directors held a total of twelve meetings during 2017 and also took certain actions by written consent. All incumbent directors during the last year attended 75% or more of the aggregate of (i) the total number of meetings of the Board of Directors (held during the period for which she or he has been a director) and (ii) the total number of meetings held by all committees on which he or she served. We invite, but do not require, our directors to attend the Annual Meeting. All of our directors attended the 2017 Annual Meeting of Shareholders.

 

Our Board appoints committees to help carry out its duties. In particular, Board committees work on key issues in greater detail than would be possible at full Board meetings. Each committee reviews the results of its meetings with the full Board. Our Board of Directors had four standing committees during 2017: Audit, Finance, Clinical Affairs and Corporate Affairs.

 

Audit Committee. The Audit Committee’s members are James E. Kroeger, MBA, CPA, Chairman, Molly M. Rogers, MBA, CPA, and Michael J. Carl, DDS. The Committee met six times in 2017 and conducted an Audit Committee educational session focused on the new revenue recognition accounting standards and revenue auditing and testing. The Audit Committee is responsible for facilitating the Board of Directors’ financial oversight responsibilities for DCP Holding Company. The Committee is also responsible for appointing, retaining, compensating, overseeing, evaluating and terminating the Company’s independent auditors. The Audit Committee alone has the authority to approve all audit engagement fees and terms, as well as all non-audit engagements with the independent auditors. The independent auditors report directly to the Audit Committee. The Audit Committee also prepares the Audit Committee Report as it appears in this Report. The Board of Directors has determined that Mr. Kroeger is an “audit committee financial expert”, as defined under Regulation S-K Item 407(d)(5). In addition, Mr. Kroeger meets the independence standards applicable to Audit Committee members under the SEC’s rules for companies listed on The Nasdaq Stock Market. Mr. Kroeger and Ms. Rogers are “independent” as such term is defined for audit committee members by the listing standards of The Nasdaq Stock Market. The Audit Committee has a charter that includes its risk assessment duties and responsibilities. Periodically the Audit Committee discusses with senior management the Company’s significant financial and non-financial risks and the steps management has taken to monitor and mitigate such risks. The charter is not available on the Company’s website.

 

Finance Committee. The Finance Committee’s members are Donald J. Peak, CPA, Chairman, Stephen T. Schuler, DMD, David A. Kreyling, DMD, James T. Foley, and Molly M. Rogers, MBA, CPA. The Committee met twelve times in 2017. The Finance Committee is responsible for assisting the Board of Directors in fulfilling its responsibilities for reviewing and monitoring financial performance, budget development and strategic financial planning of the Company and its subsidiaries. The Finance Committee also: (a) provides advice and counsel as requested by management in the review of opportunities for investment in businesses anticipated to contribute to the Company’s growth and profit objectives; (b) provides advice and counsel as requested by management in the review of decisions on significant investment in the Company’s business, such as real estate, buildings, equipment and technology; and (c) reviews and makes a recommendation to the full Board regarding the Company’s investment to the extent a business or investment opportunity is financially or strategically material to the Company.

 

Clinical Affairs Committee. The Clinical Affairs Committee’s members are Fred H. Peck, DDS, Chairman, Michael Carl, DDS, and Ronald L. Poulos, DDS. The Committee met twelve times during 2017. 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. 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 of our existing provider networks and evaluates whether a dentist should be terminated from one of the provider networks if an action is filed against the dentist with a state department of insurance or other regulatory agency or the provider loses his 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 of Directors for consideration and appropriate action.

 

59

 

 

Corporate Affairs Committee. The Corporate Affairs Committee’s (the “Committee”) members are Jack M. Cook, MHA, Chairman, James T. Foley, David A. Kreyling, DMD, Ronald L. Poulos, DDS, and Stephen T. Schuler, DMD. The Committee does not have a charter. Jack M. Cook and James T. Foley are “independent” as such term is defined by the listing standards of The Nasdaq Stock Market. The Committee met six times during 2017. The Corporate Affairs Committee is responsible for the following functions:

 

1) Benefits and Compensation - The Committee is responsible for discharging the responsibilities of the Board with respect to the compensation of our executive officers. The Committee sets performance goals and objectives for the chief executive officer and the other executive officers, evaluates their performance with respect to those goals and sets their compensation based upon the evaluation of their performance. In evaluating executive officer pay, the Committee periodically retains the services of a compensation consultant and considers recommendations from the Chief Executive Officer and the Chairman of the Board with respect to goals and compensation of the other executive officers. The Committee also periodically reviews director compensation. All decisions with respect to executive and director compensation are approved by the Committee. The Committee is responsible for administering our management equity incentive plans. The Committee also periodically reviews compensation and equity-based plans and makes its recommendations to the Board with respect to those plans.

 

The Committee: (a) reviews and establishes the compensation and benefits for the Company’s Named Executive Officers (defined below) and reports these decisions to the Board of Directors; (b) reviews the compensation and benefits for the Company’s other senior executive officers; (c) reviews the design of and administers, as appropriate, the Company’s broad-based incentive plans; (d) determines and establishes the appropriate retirement and severance packages and benefits to be given by the Company to our Named Executive Officers; (e) monitors the conformity of the aforementioned compensation and incentive packages with various laws and regulatory considerations pertaining to compensation matters; and (f) prepares the Report of the Corporate Affairs Committee for inclusion in this Annual Report.

 

2) Corporate Governance - The Corporate Affairs Committee: (a) reviews the independence and other qualifications of Board members; (b) considers questions of possible conflicts of interest among Board members or management and DCP Holding Company and its subsidiaries; (c) monitors all other activities of Board members or management that could interfere with such individuals’ duties to DCP Holding Company; (d) provides periodic review of Board performance and compensation and reports its findings to the Board; and (e) makes recommendations to the Board concerning the composition, size, structure and activities of the Board and its committees.

 

3) Nominating - Another function of the Corporate Affairs Committee is to recommend to the full Board of Directors persons to be nominated for election as directors. The Corporate Affairs Committee considers nominees recommended by holders of Common Shares (each an “Eligible Nominating Shareholder”), provided that such nominations are submitted in writing to Stephen T. Schuler, DMD, 100 Crowne Point Place, Sharonville, Ohio 45241, not later than February 1 preceding the Annual Meeting. In its evaluation, the Committee does not distinguish between nominees identified by the Committee and nominees recommended by shareholders.

  

Director Nomination Process

 

The Corporate Affairs Committee has adopted a policy regarding director nominations (the “Policy”). The Policy establishes qualifications and factors for selection of persons to be nominated to serve as directors. Those factors reflect the Corporate Affairs Committee’s belief that a candidate for the Board should demonstrate experience or expertise needed to offer meaningful and relevant advice and guidance to management, possess the proven ability to exercise sound business judgment, and have consistently demonstrated the highest personal integrity and ethics. The Corporate Affairs Committee evaluates candidates taking into consideration, among other things, the current composition of the Board, the Company’s operations and its plan for the future, long-term interests of the Company and its shareholders, and the need to maintain a balance of knowledge, experience, and capabilities. The Policy is subject to periodic review and amendment by the Corporate Affairs Committee in consultation with other independent directors serving on the Company’s Board.

 

60

 

 

The Policy provides that the Corporate Affairs Committee will consider candidates who are duly recommended in writing by Eligible Nominating Shareholders. Each such submission must include a statement of the qualifications of the nominee, a consent signed by the nominee evidencing a willingness to serve as a director if elected, and a commitment by the nominee to meet personally with the Corporate Affairs Committee. In addition, in order for a recommendation to be considered by the Corporate Affairs Committee, the recommendation notice must contain, at a minimum, the following: the name, address, and telephone number of the Eligible Nominating Shareholder making the recommendation; the full legal name, address and telephone number of the individual being recommended, together with a reasonably detailed description of the background, experience and qualifications of that individual; a written acknowledgment by the individual being recommended that he or she has consented to that recommendation and consents to the Company’s undertaking of an investigation into that individual’s background, experience and qualifications in the event that the Committee desires to do so; any information not already provided about the person’s background, experience and qualifications necessary for the Company to prepare the disclosure required to be included in the Company’s annual report about the individual being recommended; the disclosure of any relationship of the individual being recommended with the Company or any of its subsidiaries or affiliates, whether direct or indirect; the disclosure of any relation of the individual being recommended with the Eligible Nominating Shareholder, whether direct or indirect; and, if known to the Eligible Nominating Shareholder, any material interest of such Eligible Nominating Shareholder or individual being recommended in any proposals or other business to be presented at the Company’s Annual Meeting of Shareholders (or a statement to the effect that no material interest is known to such Eligible Nominating Shareholder).

 

 The Corporate Affairs Committee determines, and reviews with the Board of Directors on an annual basis, the desired skills and characteristics for directors as well as the composition of the Board of Directors as a whole. This assessment considers the directors’ qualifications and independence, as well as diversity, age, skill and experience in the context of the needs of the Board of Directors. With respect to diversity considerations, the Committee seeks representation from general dentistry, dental specialists and oral surgeons for the dentist director seats on the Board. For the non-dentist director positions, the Committee looks for experience with key business areas such as corporate governance, financial reporting, risk management, insurance regulation, health care reimbursement and information technology. The Committee assesses the current directors relative to these diversity criteria and determines the qualifications needed from a new director candidate. In addition, the Committee periodically assesses the Board diversity criteria relative to the Company’s current needs and business environment.

 

At a minimum, directors should share the values of the Company and should possess the following characteristics: high personal and professional integrity; the ability to exercise sound business judgment; an inquiring mind; and the time available to devote to Board of Directors’ activities and the willingness to do so. In addition to the foregoing considerations, generally with respect to nominees recommended by shareholders, the Corporate Affairs Committee will evaluate such recommended nominees considering the additional information regarding them contained in the recommendation notices. When seeking candidates for the Board of Directors, the Committee may solicit suggestions from incumbent directors and management. Ultimately, the Corporate Affairs Committee will recommend to the Board of Directors prospective nominees who the Corporate Affairs Committee believes will be effective, in conjunction with the other members of the Board of Directors, in collectively serving the long-term interests of the Company’s shareholders.

 

In 2012, the Corporate Affairs Committee retained a professional search firm to identify and evaluate prospective nominees to stand for election to the Board of Directors The Committee has not retained a professional search firm for this purpose since 2012.

 

Communications with the Board of Directors and Access to Corporate Governance Documents

 

Our Board of Directors has adopted a charter for the Audit Committee describing the authority and responsibilities delegated to the Audit Committee by our Board of Directors. Our Board has also adopted a Code of Ethics for our senior financial officers. The Audit Committee charter is included as an exhibit to our proxy statement for our annual meeting of shareholders each year.  A copy of our Code of Ethics is available without charge to our shareholders on written request directed to Secretary, DCP Holding Company, 100 Crowne Place, Cincinnati, Ohio 45241.

 

If you wish to communicate with the Board of Directors, you should mail a written statement of the purpose and substance of your desired communication to: DCP Holding Company, 100 Crowne Point Place, Cincinnati, Ohio 45241, Attention: Corporate Secretary. Your communication will be reviewed to determine its appropriateness by our Corporate Secretary. Our Corporate Secretary reserves the right not to forward to directors any abusive, threatening or otherwise inappropriate materials.

 

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REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

 

The primary role of the Audit Committee is to provide oversight and monitoring of DCP Holding Company’s management and the independent registered public accounting firm and their activities with respect to DCP Holding Company’s financial reporting process. In accordance with its written charter, the Audit Committee assists the Board of Directors in fulfilling its responsibility relating to corporate accounting, reporting practices of the Company, and the quality and integrity of the financial reports and other financial information provided by the Company to any governmental body or to the public. Management is responsible for the financial statements and the reporting process, including the system of internal controls. The independent registered public accounting firm is responsible for expressing an opinion on the conformity of the audited financial statements with generally accepted accounting principles in the United States of America. In the performance of its oversight function, the Audit Committee has:

  

 

reviewed and discussed the Company’s audited financial statements for the year ended December 31, 2017, with management;

 

 

discussed with Deloitte & Touche LLP the matters required to be discussed by Statement on Auditing Standards No. 114, as amended (AICPA Professional Standards, Vol. 1 AU Section 380) as adopted by the Public Company Accounting Oversight Board in Rule 3200T;

 

 

received from Deloitte & Touche LLP the written disclosures and letter from Deloitte & Touche LLP required by the Public Company Accounting Oversight Board regarding Deloitte & Touche LLP’s communications with the Audit Committee concerning independence; and

 

 

discussed with Deloitte & Touche LLP any relationships that may affect their objectivity and independence.

  

Based upon the review and discussions described in this Report, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, for filing with the Securities and Exchange Commission.

 

  THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
   
  James E. Kroeger, MBA, CPA, Chairman
  Michael J. Carl, DDS
  Molly M. Rogers, MBA, CPA

  

Section 16(a) Beneficial Ownership Report Compliance

 

Section 16(a) of the Exchange Act requires our executive officers, directors and persons who own more than 10% of DCP Holding Company’s Common Shares to file initial reports of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the SEC. These executive officers, directors and 10% shareholders are also required by SEC rules to furnish us with copies of all such forms that they file.  Based on our review of the copies of such forms received by us, we believe that during fiscal 2017 all Section 16(a) filing requirements applicable to our executive officers, directors and 10% shareholders were complied with.

 

ITEM 11.     EXECUTIVE COMPENSATION

 

REPORT OF CORPORATE AFFAIRS COMMITTEE

 

 The Corporate Affairs Committee has reviewed and discussed the Compensation Discussion and Analysis (the “CD&A”) with management for the year ended December 31, 2017. Based on the reviews and discussions referred to above, the Committee recommended to the Board that the CD&A be included in this Annual Report.

 

By the Corporate Affairs Committee of the Board of Directors:

 

Jack M. Cook, MHA, Chairman

Ronald L. Poulos, DDS

James T. Foley

David A. Kreyling, DMD

Stephen T. Schuler, DMD

 

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Compensation Discussion and Analysis

 

The Corporate Affairs Committee of the Board (the “Committee”) oversees DCP Holding Company’s executive officer compensation and equity-based programs. The Committee reviews and establishes the compensation and benefits for DCP Holding Company’s executive officers named in the Summary Compensation Table of this annual report (the “Named Executive Officers”) and reviews the principles and strategies that guide the design of compensation plans and benefit programs for all of the Company’s senior executive officers. The Committee is composed entirely of non-employee members of the Board.

 

Executive Summary
     The compensation program for the Company’s Named Executive Officers is closely linked to Company performance. In 2017, the Company achieved total operating revenue of approximately $107.6 million and net operating income of approximately $4.3 million. If this high level of Company performance continues, the Named Executive Officers may continue to be entitled to increased levels of compensation under the short-term and long-term incentive compensation awards made by the Committee.

 

Objectives of Compensation Program

      The Company’s compensation programs are designed to help recruit, retain and motivate a group of talented and diverse executives, rewarding them for profitable corporate performance and providing incentives for them to create short-term and long-term corporate stability and growth. Accordingly, the key components of the Company’s compensation package for its executives are base salary, benefits, short-term and long-term incentive cash compensation and other long-term incentives comprised of restricted share or unit awards. The level of these compensation components for the Company’s Named Executive Officers is determined by the Committee.

 

The Committee’s philosophy is that the Company will achieve its best results if its executives act and are rewarded as business owners. Ownership is not only about owning stock, but is also about being accountable for business results. Owners take initiative and responsibility for the assets of the business, including its employees. As executives progress to higher levels at the Company, their responsibilities and rewards will progress as well. Executive compensation programs affect all employees by setting general levels of compensation and helping to create an environment of goals, rewards and expectations. Because we believe the performance of every employee is important to our success, we are mindful of the effect of executive compensation and incentive programs on all of our employees.

 

We believe that the compensation of our executives should reflect their success as a management team, rather than individuals, in attaining key operating objectives, such as growth of membership, growth of operating revenue, growth of operating earnings and earnings per share and growth or maintenance of market share and long-term competitive advantage, and ultimately, in attaining an increased book value for our Common Shares. We believe that the performance of the executives in managing our Company, considered in light of general economic and specific company, industry and competitive conditions, should be the basis for determining their overall compensation. We seek to have the long-term performance of our Common Shares reflected in executive compensation through our management equity incentive plan.

 

Elements of Compensation; Determination of Amounts

Elements of compensation for our executives include: salary, short-term and long-term incentive compensation, health, disability and life insurance, limited perquisites and restricted share unit awards. Base salaries are typically set for our executive officers at the regularly scheduled November meeting of our Corporate Affairs Committee. At this meeting, the Committee also approves and adopts performance measures under the management equity incentive plan for the new fiscal year and typically grants restricted share unit awards to all of our executives and certain other eligible employees. These executives and other eligible employees have the option to elect to defer their restricted share unit awards under the Company’s deferred compensation plan.

 

At the beginning of each fiscal year, including 2017, it has been the practice of the Committee to review the history of all the elements of each executive’s total compensation and compare the compensation of the executives with that of the executives in an appropriate market comparison group. At the fall meeting referred to above, Anthony A. Cook, our CEO, makes compensation recommendations to the Committee with respect to the executives who report to him. Such executives are not present at the time of these deliberations. The Chairman of the Board then makes compensation recommendations to the Committee with respect to Mr. Cook, who is absent from that meeting. The Committee may accept or adjust such recommendations and also determines the Chairman of the Board’s compensation.

 

We pay each element of compensation to attract and retain the executive talent, reward annual performance and provide incentive for a balanced focus on long-term strategic goals as well as short-term performance. The amount of each element of compensation is determined by or under the direction of the Committee, which uses the following factors, among others, to determine the amount of salary and other benefits to pay each executive:

 

 

 

performance against corporate and individual objectives for the previous year;

 

 

 

difficulty of achieving desired results in the coming year;

 

 

 

value of their unique skills and capabilities to support long-term performance of the Company;

 

 

 

performance of their general management responsibilities; and

 

 

 

contribution as a member of the executive management team.

 

63

 

 

These elements fit into our overall compensation objectives by helping to secure the future potential of our operations, facilitating our entry into new markets, providing proper compliance and regulatory guidance, and helping to create a cohesive team.

 

Our policy for allocating between long-term and currently paid compensation is to ensure adequate base compensation to attract and retain personnel, while providing incentives to maximize long-term value for our Company and our shareholders. Likewise, we provide cash compensation in the form of base salary to meet competitive salary norms and reward good performance on an annual basis and in the form of bonus compensation to reward superior performance against specific short-term goals. Historically, we have provided restricted share unit non-cash compensation to reward increased share value and as a means to retain the executive officer. The following items of corporate performance may be taken into account in setting compensation policies:

 

 

 

membership, operating revenue and corporate earnings compared to our financial plan for that year;

 

 

 

achievement of our strategic objectives; and

 

 

 

the book value of our Common Shares.

 

Following our 2017 annual meeting, the Committee also considered the results of the say-on-pay vote and determined that no significant change to the compensation program elements was warranted. The Company currently intends to seek a shareholder advisory vote on executive compensation on an annual basis.

 

Compensation Consultant

 

Every two years, with the assistance of an independent executive compensation consultant that reports directly to the Committee, the Committee evaluates the Company’s plans and programs for the CEO against current and emerging compensation practices in the insurance industry, legal and regulatory developments and corporate governance trends. In 2016, the Committee engaged the Compensation Service Group (“CSG”), an independent compensation consultant, to evaluate the external competitiveness of Company’s compensation program for the CEO. CSG utilized two data sources for this analysis: 1) published compensation surveys and 2) proxy statements of SEC-reporting companies with what CSG believed, generated comparable revenue and net income.

 

Annually, Mr. Cook, with the assistance of Employers Resource Association, evaluates the Company’s plans and programs for the Company’s executive staff against the current and emerging compensation practices in the insurance industry. This review provides assurance that the Company’s compensation programs are designed to help attract and retain the talent necessary to maintain its long history of strong growth, profitability and shareholder returns.

 

The Committee annually examines the ongoing competitiveness of the Company’s executive compensation programs, reviews both Company and individual executive performance and reports compensation levels for each Named Executive Officer to the Board. The Committee works to ascertain and establish competitive levels of base compensation, short-term incentive compensation and long-term incentive awards for the Named Executive Officers of DCP Holding Company. Annually, the Committee:

 

 

 

Reviews compensation levels of the Named Executive Officers against independent surveys of managed care organizations and health insurance companies provided by our compensation consultants. As a part of this work, the Committee validates that total compensation paid is appropriate based on an analysis that compares the Company’s performance to the performance reported in these independent surveys. The Committee does not benchmark compensation of our Named Executive Officers against any comparator group.

       

  

 

Ensures that a significant portion of the total compensation packages for the CEO and CFO are performance-based and that compensation opportunities are designed to create incentives for above-target performance and consequences for below-target performance.

       

 

 

Approves the base salary compensation for the Named Executive Officers.

       

 

 

Approves the target level of performance-based compensation for the Named Executive Officers and the Company performance goals that must be achieved in order for the Named Executive Officers to receive all or a portion of their performance-based compensation.

       

  

 

Approves long-term incentive awards, if any, in the form of grants of restricted share units under the management equity incentive plan and the deferred compensation plan.

 

64

 

 

While the Committee is solely responsible for establishing the compensation level and components for Mr. Cook, Mr. Cook is responsible for evaluating the compensation level of the other Named Executive Officer(s) and making compensation recommendations to the Committee. Mr. Cook is also involved in establishing individual and departmental objectives and goals with the other Named Executive Officer(s) and evaluating their performance on an annual basis.

 

Named Executive Officer Compensation

 

Base Salaries

It is the goal of the Committee to establish salary compensation for our executives based on our Company’s operating performance relative to companies of comparable size in our industry over a three to five year period. In setting base salaries for fiscal 2017, the Committee reviewed the research provided by our compensation consultants in 2016 with respect to the salary compensation of officers with comparable qualifications, experience and responsibilities at comparable companies designated by the compensation consultant. The Committee established our target for the total compensation level for the Named Executive Officers of DCP Holding Company at the midpoint of the range of compensation for comparable positions from the independent surveys of companies within the health insurance industry provided by our compensation consultants. We believe that this gives us the opportunity to attract and retain talented managerial employees both at the senior executive level and below. The Committee, in determining the base salaries for both Mr. Cook and Robert C. Hodgkins, Jr., our CFO, considered several factors, including, but not limited to, the compensation payable to the chief executive officers and chief financial officers of various other companies, including other specialty insurance companies with comparable asset size and premium income. For 2017, the Committee increased the base salary for Mr. Cook from $427,000 to $441,500 and for Mr. Hodgkins from $258,677 to $269,014 in order to establish these base salaries at the appropriate point in the range of compensation for CEO and CFO positions at comparable companies. For 2018, the Committee increased the base salary for Mr. Cook to $454,745 and for Mr. Hodgkins to $277,084.

 

Short Term Non-Equity Incentive Compensation

The Company has a management non-equity incentive plan which is designed to reward our executives for the achievement of shorter-term financial goals, principally annual increases in plan membership, operating revenue and net operating income. These corporate goals are established at levels that the Committee determines are achievable but also a significant challenge for the executive management team. It is the practice of the Committee to establish these Company performance goals prior to the beginning of the applicable performance year. It is our general philosophy that management be rewarded for their performance as a team in the attainment of these goals, rather than individually. We believe that this is important to aligning our executives and promoting teamwork. As discussed above, the compensation structure is designed to promote the continued growth, profitability and long term financial health of the business.

 

In 2011, the Committee and Company management undertook an analysis of our compensation policies and practices and determined that risks arising from our compensation policies and practices for all of our employees are not reasonably likely to have a material adverse effect on us. However, as a result of our analysis and our compensation objective of achieving an appropriate balance between revenue growth and profitability, the Committee modified the short term management non-equity incentive compensation parameters. For 2016, each executive was eligible to receive thirty percent (30%) of his or her award based on the performance of the Company relative to the established operating revenue goal and fifty percent (50%) of his or her award based on the performance of the Company relative to the established net operating income goal. The remaining twenty percent (20%) of these awards under the plan are granted at the discretion of the Committee in the case of Mr. Cook and at the discretion of the Committee and Mr. Cook in the case of Mr. Hodgkins, based upon achievement by the individual of pre-established individual performance objectives. In December 2016, the Committee established the corporate goals for 2017 of:

 

 

Target operating revenue of $109,491,594 for 2017, with a threshold level of $98,542,435 and a maximum level of $142,339,072

 

Target net operating income of $4,261,098 for 2017, with a threshold level of $3,195,824 and a maximum level of approximately $5,539,427

 

65

 

 

These target levels corresponded to our achievement of 100% of the operating revenue and 100% of the net operating income as set forth in our financial plan for fiscal 2017. Under the terms of this plan, the target bonus payable for Mr. Cook was established at 30% of his fiscal 2017 base salary. The target bonus amount for Mr. Hodgkins was established at 20% of his fiscal 2017 base salary.

 

The Company’s total operating revenue for 2017 was $107,589,114. This operating revenue exceeded the threshold level of $98,542,435 but was less than the target level of $109,491,594. The Company’s net operating income for 2017 was $4,320,009. This net operating income exceeded the target level of $4,261,098 but was less than the maximum level of $5,539,427. In addition, the Committee evaluated the performance of Mr. Cook relative to the achievement of his position-specific performance objectives, and Mr. Cook evaluated the performance of the other Named Executive Officer relative to his position-specific performance objectives. Based on these performance results, on March 8, 2018, the Committee awarded Mr. Cook a non-equity incentive compensation payment equal to 31.0% of his base salary. The Committee also awarded non-equity incentive compensation to Mr. Hodgkins equal to 30.2% of his base salary.

 

In December 2017, the Committee established the corporate goals for 2018 of:

 

 

Target operating revenue of $112,576,623 for 2018, with a threshold level of $101,318,961 and a maximum level of $146,349,610

 

Target net operating income of $4,710,351 for 2018, with a threshold level of $3,532,763 and a maximum level of approximately $6,123,456

 

These target levels corresponded to our achievement of 100% of the operating revenue and 100% of the net operating income as set forth in our financial plan for fiscal 2018. Under the terms of this plan, the target bonus payable for Mr. Cook was established at 30% of his fiscal 2018 base salary. The target bonus amount for Mr. Hodgkins was established at 20% of his fiscal 2018 base salary.

 

Long Term Non-Equity Incentive Compensation

In 2007, the Committee established a long term non-equity incentive compensation arrangement for Mr. Cook. This long-term non-equity incentive arrangement is intended to motivate Mr. Cook to achieve long term success for the Company as well as assist in the retention of Mr. Cook. This long-term non-equity incentive arrangement is designed to reward Mr. Cook for increasing the aggregate book value of our Common Shares over the four year period from 2008 through 2011 and was included in Mr. Cook’s employment contract for 2008. Mr. Cook’s employment contracts for 2009 and 2010 also included similar long term non-equity incentive arrangements for the period from 2009 through 2012 and 2010 through 2013, respectively. Mr. Cook’s employment contract for 2011 included a long term non-equity incentive arrangement for the period from 2011 through 2014 whereby Mr. Cook is rewarded for increasing the aggregate book value of the Common and Preferred Shares over the four year period, adjusted for any Common Share dividends paid or provider withhold paid during the four-year period.

 

In 2011, the Committee changed from this long term non-equity incentive compensation arrangement to a long term equity incentive compensation arrangement for Mr. Cook for the three year period from 2012 – 2014 and for the three year period from 2013 – 2015. The Committee also made Mr. Hodgkins eligible to participate in these long term equity incentive compensation arrangements (see Long Term Equity Incentive Compensation). Then, in 2013, the Committee decided to discontinue the long term equity incentive compensation arrangement and to resume the long term non-equity incentive compensation arrangement for both Mr. Cook and Mr. Hodgkins. The Committee made this decision in order to eliminate the dilutive effect of additional outstanding RSUs on the return on equity of the Company’s Common Shareholders.

 

Mr. Cook’s and Mr. Hodgkins’s employment contracts for 2017 and 2018 included a long term non-equity incentive arrangement for the period from 2017 through 2019 and from 2018 through 2020 whereby Mr. Cook and Mr. Hodgkins are rewarded for increasing the adjusted book value per Common Share over the three year period, adjusted for any Common Share dividends paid or provider withhold paid during the three-year period. The following is a summary of the results relative to these long term non-equity incentive compensation programs.

 

2008 – 2011 Period

The threshold level for the aggregate book value of Common Shares was not achieved for the four year period. Accordingly, no incentive compensation was paid to Mr. Cook.

 

2009 – 2012 Period

The threshold level for the aggregate book value of Common Shares was not achieved for the four year period. Accordingly, no incentive compensation was paid to Mr. Cook.

 

66

 

 

2010 – 2013 Period

The threshold level for the aggregate book value of Common Shares was not achieved for the four year period. Accordingly, no incentive compensation was paid to Mr. Cook.

 

2011 – 2014 Period

The maximum level for the aggregate book value of Common and Preferred Shares was achieved for the four year period. Mr. Cook received a payment related to this incentive compensation of $23,417 in March 2014 and $117,087 was paid to Mr. Cook in March 2015.

 

2014 – 2016 Period

For the 2014 – 2016 period, the performance metric was changed from the aggregate book value of the Common and Preferred Shares to the aggregate book value of the Common Shares. The maximum level for the aggregate book value of the Common Shares was achieved for the three year period. Mr. Cook received a payment of $181,350, and Mr. Hodgkins received a payment of $106,650 in March 2017.

 

2015 – 2017 Period

For the 2015– 2017 period, the performance metric was the aggregate book value of the Common Shares. The target level for the aggregate book value of the Common Shares was $12,173,466. The maximum level for the aggregate book value of the Common Shares was achieved for the three year period. Mr. Cook received a payment of $194,997, and Mr. Hodgkins received a payment of $111,499 in March 2018.

 

2016 – 2018 Period

For the 2016 – 2018 period, the performance metric was the adjusted book value per Common Share. The target level for the adjusted book value per Common Share at December 31, 2018 is $1,346.60. At this time, the expected level for the adjusted book value per Common Share as of December 31, 2018 is the target level. Accordingly, the Company has established a compensation liability to Mr. Cook and to Mr. Hodgkins based on the target level of performance. If the target level is achieved as of December 31, 2018, the amount payable to Mr. Cook will be $64,050 and the amount payable to Mr. Hodgkins will be $38,802. In 2017, the Company increased the bonus payable liability related to this long term incentive compensation arrangement for Mr. Cook by $21,350 and for Mr. Hodgkins by $12,934. These amounts are included in the non-equity incentive compensation for Mr. Cook and Mr. Hodgkins in the Summary Compensation Table.

 

2017 – 2019 Period

For the 2017 – 2019 period, the performance metric was the adjusted book value per Common Share. The target level for the adjusted book value per Common Share at December 31, 2019 is $1,476.82. At this time, the expected level for the adjusted book value per Common Share as of December 31, 2019 is the target level. Accordingly, the Company has established a compensation liability to Mr. Cook and to Mr. Hodgkins based on the target level of performance. If the target level is achieved as of December 31, 2019, the amount payable to Mr. Cook will be $66,225 and the amount payable to Mr. Hodgkins will be $40,352. In 2017, the Company increased the bonus payable liability related to this long term incentive compensation arrangement for Mr. Cook by $22,075 and for Mr. Hodgkins by $13,451. These amounts are included in the non-equity incentive compensation for Mr. Cook and Mr. Hodgkins in the Summary Compensation Table.

 

2018 – 2020 Period

For the 2018 – 2020 period, the performance metric was the adjusted book value per Common Share. The target level for the adjusted book value per Common Share at December 31, 2020 is $1,610.90. At this time, the expected level for the adjusted book value per Common Share as of December 31, 2020 is the target level. Accordingly, the Company has established a compensation liability to Mr. Cook and to Mr. Hodgkins based on the target level of performance. If the target level is achieved as of December 31, 2020, the amount payable to Mr. Cook will be $68,212 and the amount payable to Mr. Hodgkins will be $41,563.

 

Management Equity Incentive Plan

 

Our Management Equity Incentive Plan is the primary vehicle for offering long-term incentive compensation. We also regard our Management Equity Incentive Plan as a key retention tool. With respect to long-term incentive awards, the Committee implemented the 2006 DCP Holding Company Management Equity Incentive Plan, as amended, which ties a portion of executive compensation to restricted share unit awards that increase in value with the value of the Company’s Common Shares.

 

Retention Incentive Plan

 

In 2017, the Committee granted to the Named Executive Officers a number of restricted share units (“RSUs”) with a book value at the beginning of the year equal to approximately 5% of each individual’s base salary. These grants were approved at the regularly scheduled meeting of the Committee which was held in December 2016 to be effective January 2, 2017. The Committee apprised the Board of Directors of these grants in December 2016. A Named Executive Officer must be a Company employee for more than one year before becoming eligible to receive RSU grants. These RSUs vest over the course of a four year period, with 10% vesting in year one, 20% vesting in year two, 30% vesting in year three and 40% vesting in year four. There are no performance criteria associated with the vesting of these RSUs. The only requirement for vesting is that the individual is an employee of the Company at the end of the applicable vesting year. The Committee made no grants of RSUs for 2018 as of the date of this Report.

 

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Long Term Equity Incentive Plan

 

Mr. Cook’s employment contract for 2012 included a long term equity incentive arrangement for the period from 2012 through 2014 whereby Mr. Cook is awarded restricted share units (“RSUs”) in lieu of cash for achieving the Company’s long term performance objectives. In addition the Committee decided to extend this long term equity incentive plan to Mr. Hodgkins, the CFO. This long term equity incentive plan was approved by the Board of Directors in February 2012. The parameters of Mr. Cook’s and Mr. Hodgkins’s long term equity incentive arrangements for the period from 2012 through 2014 are shown below.

 

 

 

Level

 

Three Year Average %

Increase in Adjusted

Book Value of

Common and

Preferred Shares

   

Resultant Adjusted

Book Value of the

Company’s Common

and Preferred Shares at

12/31/2014

   

 

 

Anthony Cook

 

 

Restricted Share

Units

 

   

 

 

Robert Hodgkins

 

 

Restricted Share

Units

 

 

Threshold

    10%     $ 8,326,110       25       15  

Target

    12%     $ 8,788,569       76       46  

Stretch

    14%     $ 9,267,843       127       77  

Maximum

    16%     $ 9,764,232       229       139  

 

The adjusted book value of the Company’s Common and Preferred Shares as of December 31, 2014 was $12,869,694. Given that the adjusted book value of the Common and Preferred Shares is greater than the maximum level shown above, the 229 RSUs awarded to Mr. Cook and the 139 RSUs awarded to Mr. Hodgkins associated with the maximum performance level are now fully vested.

 

Mr. Cook’s employment contract for 2013 included a long term equity incentive arrangement for the period from 2013 through 2015 whereby Mr. Cook is awarded RSUs in lieu of cash for achieving the Company’s long term performance objectives. In addition the Committee decided to extend this long term equity incentive plan to Mr. Hodgkins, the CFO. This long term equity incentive plan was approved by the Board of Directors in February 2013. The parameters of Mr. Cook’s and Mr. Hodgkins’s long term equity incentive arrangements for the period from 2013 through 2015 are shown below.

 

 

 

 

 

Level

 

Three Year Average %

Increase in Adjusted

Book Value of

Common and

Preferred Shares

   

Resultant Adjusted

Book Value of the

Company’s Common

and Preferred Shares at

12/31/2015

   

 

 

Anthony Cook

 

 

Restricted Share

Units

 

   

 

 

Robert Hodgkins

 

 

Restricted Share

Units

 

 

Threshold

    10%     $ 10,977,866       24       14  

Target

    12%     $ 11,587,612       71       41  

Stretch

    14%     $ 12,219,527       118       69  

Maximum

    16%     $ 12,874,010       213       124  

 

The adjusted book value of the Company’s Common and Preferred Shares as of December 31, 2015 was $14,467,962. Given that the adjusted book value of the Common and Preferred Shares is greater than the maximum level shown above, the 213 RSUs awarded to Mr. Cook and the 124 RSUs awarded to Mr. Hodgkins associated with the maximum performance level are now fully vested.

 

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Deferred Compensation Plan

 

Because of the evolution of regulatory, tax and accounting treatment of equity incentive programs and because it is important to us to retain our named executive officers, we determined that it is important to provide our executive officers with the ability to elect to receive the value of their vested RSUs as deferred compensation in lieu of taxable restricted share awards. Accordingly, the Company has established the DCP Holding Company Deferred Compensation Plan. Under the terms of the deferred compensation plan, our executives can elect to defer a portion of their cash compensation and their granted RSUs as they vest. Because deferred cash compensation and deferred RSUs can appreciate in value on a tax-deferred basis, we believe that this is a more efficient way to reward them for and motivate them toward superior long-term performance.

 

To measure the amount of our obligation to each participant under the plan, we maintain a separate bookkeeping record for each participant, which we refer to as an “account.” Participants may direct the investment of the portion of the account allocable to that participant in certain mutual funds, or the participant may direct the investment to our tracking shares. We then credit or debit the participant’s account with earnings or losses based upon the performance results of the notional investment options selected by the participant. The participant may change the allocation of his or her account among the investment alternatives then available under the plan.  For management employees, we pay deferred balances upon retirement, termination from employment, death or disability, or at a fixed date determined by the participant.  We pay deferred balances in cash. A Named Executive Officer may defer receipt of Common Shares that otherwise would be issued on the date that RSUs vest until after the person has a separation from service or until a fixed future date. 

 

Perquisites

 

We limit the perquisites that we make available to our executives. Our executives are entitled to few benefits that are not otherwise available to all of our employees. In this regard it should be noted that we do not provide pension arrangements, post-retirement health coverage, or similar benefits for our executives or employees.

 

The perquisites we provided in fiscal 2017 are as follows: The Named Executive Officers each received a monthly car allowance and Mr. Cook was authorized to be reimbursed for club membership fees.

 

Our health and insurance plans are the same for all employees. In general, our employees that have elected the high deductible health plan with the health saving account pay approximately 22% of the health premium due and receive employer health savings account contributions. Our employees who elect the traditional PPO health plan pay approximately 35% of the health premium due. Employees that elect to not participate in the Company’s health insurance plan receive a monthly health care cost allowance of $200.00. All employees who participated in our 401(k) plan received matching funds equal to 50% of the first 4% of their base salary that they elect to contribute into the 401(k) plan. All of our Named Executive Officers participated in our 401(k) plan and received matching funds. All employees are allowed to receive cash for unused vacation time in accordance with the provisions of the Company’s Employee Handbook.

 

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SUMMARY COMPENSATION TABLE

 

Name and Principal Position

 

Year

 

Salary
($)

   

Share
Awards
($)

(1)

   

Non-Equity
Incentive Plan
Compensation
($)

(2)

   

All Other
Compensation
($)

(3)

   

Total

($)

 
                                   

Named Executive Officers

                                           
                                             

Anthony A. Cook
President & CEO

 

2017

  $ 441,500     $ 22,191     $ 245,135     $ 19,116     $ 727,942  
                                             
   

2016

    427,000       20,234       383,220       26,905       857,359  
                                             
   

2015

    411,060       20,927       254,010       29,613       715,610  

Robert C. Hodgkins, Jr.,
Vice President & CFO

 

2017

    269,014       13,315       144,786       16,342       443,457  
                                             
   

2016

    258,677       12,141       209,337       16,228       496,383  
                                             
   

2015

    247,775       12,955       125,979       16,147       402,856  

 

(1)

This table includes the aggregate grant date fair values of restricted share unit (“RSU”) awards in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 for 2017 and prior years. For 2017, includes the following RSU awards related to the Retention Incentive Plan with a grant date fair value of $1,109.56 per RSU: Anthony Cook, 20 RSUs and Robert Hodgkins, 12 RSUs.

   

(2)

The 2017 non-equity incentive plan compensation for Mr. Cook is equal to 31.0% of his base salary for the short term non-equity incentive plan portion and 24.6% of his base salary for the long term non-equity incentive plan portion. The 2017 non-equity incentive plan compensation for Mr. Hodgkins is equal to 30.2% of his base salary for the short term non-equity incentive plan portion and 23.6% of his base salary for the long term non-equity incentive plan portion. See “Short Term Non-Equity Incentive Compensation” and “Long Term Non-Equity Incentive Compensation” in Compensation Discussion and Analysis.

 

(3)

For 2017 includes:

Car allowances for: Anthony Cook, $6,000, and Robert Hodgkins, $6,000.

Health care credits for: Anthony Cook, $2,560 and Robert Hodgkins, $4,942.

401(k) matching contributions for: Anthony Cook, $4,115 and Robert Hodgkins, $5,400.

Club membership fees for: Anthony Cook, $6,441.

  

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GRANTS OF PLAN-BASED AWARDS

 

         

Estimated

Future Payouts

Under Non-Equity

Incentive Plan Awards

 

     

Estimated

Future Payouts

Under Equity

Incentive Plan Awards

 

         
Name Board Approval
Date
Grant
Date
    Threshold
($)
      Target
($)(1)
      Maximum
($)
      Threshold
($)
      Target
($)
(2)
      Maximum
($)
     

Grant Date Fair Value of Share Award

($)(3)

 
                                                             

Anthony A. Cook,
President and
Chief Executive Officer

12/14/16

1/2/17

                              24,206             22,191  
  5/2/17       44,150       66,225       110,375                                  
  12/13/17       68,212       136,424       272,847                                  

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

12/14/16

 

 

1/2/17

                              14,523             13,315  
  5/2/17       26,901       40,352       67,254                                  
  12/13/17       41,563       69,271       124,688                                  

 

(1)

The long term non-equity incentive compensation plans for Mr. Cook and Mr. Hodgkins for the three year period from 2017 – 2019 were approved on May 2, 2017. The target amounts for this long term non-equity incentive compensation plan were established at 15% of the 2017 base salaries of Mr. Cook and Mr. Hodgkins of $441,500 and $269,014, respectively. The long term non-equity incentive compensation is based on the growth in the adjusted book value per Common Share from January 1, 2017 through December 31, 2019 (See Long Term Non-Equity Incentive Compensation)

 

On December 13, 2017, the short term non-equity incentive plan compensation target amount for Anthony Cook was established at 30% of his fiscal 2018 base salary of $454,745 or $136,424 for the short term non-equity incentive plan for 2018. The short term non-equity incentive plan compensation target amount was established at 25% of his fiscal 2018 base salary for Mr. Hodgkins. These performance target levels correspond to our achievement of 100% of operating revenue and 100% of net operating income as set forth in our financial plan for fiscal 2018. (See Short Term Non-Equity Incentive Compensation)

   

(2)

Represents the current book value of the RSUs granted to the Named Executive Officers pursuant to the Company’s Retention Incentive Plan component of the 2006 Dental Care Plus Management Equity Incentive Plan in January 2017: Anthony A. Cook, 20 shares and Robert C. Hodgkins, Jr., 12 shares. Because each Named Executive Officer elected to defer receipt of these shares pursuant to the Company’s Deferred Compensation Plan, the shares are treated as phantom shares pursuant to the Company’s Deferred Compensation Plan. Each phantom share is the economic equivalent to one Class B Common Share and under the Deferred Compensation Plan will be settled in cash when each Named Executive Officer terminates his status as an employee of the Company. The RSUs vest over a period of 4 years on the anniversary of the date of grant as follows: January 2017 grants - 10% 2017, 20% 2018, 30% 2019, 40% 2020. (See Retention Incentive Plan on)

 

 

(3)

The amounts relative to the Retention Incentive Plan reflected above assume a grant date fair value per Class B Common Share for the January 2017 grants of $1,109.56 as of December 31, 2016.

 

71

 

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

   

Restricted Share Unit Awards

 
       

Name

 

 

Equity Incentive Plan Awards:
Number of Unearned Shares, Units or
Other Rights that Have Not Vested

(#)(1)

 

   

 

Equity Incentive
Plan Awards:
Market or Payout
Value of Unearned Shares,
Units or Other Rights
That Have Not Vested
($)(2)

 

 

Anthony A. Cook,
President & CEO

    40.4     $ 48,896  

Robert C. Hodgkins, Jr.,
Vice President & CFO

    24.4       29,531  

 

(1)

Reflects the number of granted and unvested restricted share units (“RSUs”) at December 31, 2017 under the Retention Incentive Plan.

Anthony A. Cook

Retention Incentive Plan

2015 grant, 8.4 RSUs unvested; 2016 grant, 14.0 RSUs unvested; 2017 grant, 18.0 RSUs unvested

 

Robert C. Hodgkins, Jr.

Retention Incentive Plan

2015 grant, 5.2 RSUs unvested; 2016 grant, 8.4 RSUs unvested; 2017 grant, 10.8 RSUs unvested

   
   

(2)

The values of the granted and unvested RSUs are based on the book value of a Class B Common Share at December 31, 2017 of $1,210.29. Depending on the Company’s performance, the book value will be different at the time of vesting. For example, the book value of the Class B Common Share was $632.94, $701.78, $815.27, $894.29, $996.53, $1,011.72, and $1,109.56 on December 31, 2011, December 31, 2012, December 31, 2013, December 31, 2014, December 31, 2015, and December 31, 2016, respectively.

 

 

(See Management Equity Incentive Plan)

 

OPTIONS EXERCISES AND RESTRICTED SHARE UNITS VESTED

 

 

   

Restricted Share Unit Awards

 
       

Name

 

 

 

Number of
RSUs
Acquired on
Vesting (#)(1)

 

   

Value
Realized on
Vesting ($) (2)

 

 

Anthony A. Cook,
President & CEO

    21.5     $ 26,021  

Robert C. Hodgkins, Jr.,
Vice President & CFO

    12.7       15,371  

 

(1)

All RSUs acquired on vesting were deferred by the named individuals shown when granted.

(2)

The values of the granted and vested restricted share units (“RSUs”) are based on the book value of a Class B Common Share at December 31, 2017 of $1,210.29.

 

72

 

 

Post-Employment Compensation

 

Pension Benefits

 

We do not provide pension arrangements or post-retirement health coverage for our executives or employees. Our executive officers are eligible to participate in our 401(k) contributory defined contribution plan. In any plan year, we will contribute to each participant a matching contribution equal to 50% of the first 4% of the participant’s compensation that has been contributed to the plan. All Named Executive Officers participated in our 401(k) plan during fiscal 2017 and received matching contributions.

 

Non-Qualified Deferred Compensation

 

     

Executive

   

Registrant

   

Aggregate

           

Aggregate

 
     

Contributions

   

Contributions in

   

Earnings in

    Aggregate    

Balance at Last

 
     

in Last Fiscal

   

Last Fiscal

   

Last Fiscal

   

Withdrawals/

   

Fiscal

 

Name and Principal Position

   

Year-End (3)

   

Year-End

   

Year-End

   

Distributions

   

Year-End (3)

 
                                 

Anthony A. Cook,

Cash (1)

  $ 201,660     $     $ 87,398     $     $ 840,426  

President and Chief Executive Officer

RSUs (2)

    26,201             68,739             841,742  
                                           

Robert C. Hodgkins, Jr.,

Cash (1)

    128,265             21,669             291,230  

Vice President and Chief Financial Officer

RSUs (2)

    15,371             42,366             518,276  

 

(1)

  

Includes salary and bonus compensation deferred at the election of the Named Executive Officers.

(2)

 

Includes granted RSUs that vested in 2017 at the December 31, 2017 book value of $1,210.29 and the increase in the value of vested RSUs in 2017. The terms of the Company’s deferred compensation plan are discussed in Compensation Discussion & Analysis.

(3)

 

The following table provides additional detail on amounts that are reported in the Nonqualified Deferred Compensation table above and that also are reported as compensation in the Summary Compensation Table of this annual report:

 

Name

 

Amounts Included as Contributions and
Earnings in Nonqualified Deferred
Compensation in Fiscal 201
7 Table and
as Fiscal 201
7 Compensation in the
Summary Compensation Table (1)

   

Amount Included in Aggregate Balance at
December 31, 201
7 in Nonqualified Deferred Compensation Table and
Reported in the

Summary Compensation Table
for Prior Years (2)

 

Anthony A. Cook

               

Cash

  $ 201,660     $ 663,036  

Deferred RSUs

  $ 2,421     $ 399,099  
                 

Robert C. Hodgkins, Jr.

               

Cash

  $ 128,265     $ 197,404  

Deferred RSUs

  $ 1,331     $ 245,276  

 

 

(1)

Amounts include the cash compensation deferred by Anthony A. Cook and Robert C. Hodgkins, Jr. in 2017 that was invested in certain mutual funds and the grant date fair value of the 10% of RSUs granted in 2017 to Anthony A. Cook and Robert C. Hodgkins, Jr. that also vested in 2017.

 

(2)

Amounts include the cash compensation deferred by Anthony A. Cook and Robert Hodgkins prior to 2017 that was invested in certain mutual funds and the portion of the RSU deferred compensation associated with RSUs that were granted prior to 2017 to Anthony A. Cook and Robert C. Hodgkins, Jr..

 

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Other Post-Employment Payments

 

All of our employees are employees-at-will and as such do not have employment agreements with us, except in the case of Anthony A. Cook, President and Chief Executive Officer, and Robert C. Hodgkins, Jr., Vice President and Chief Financial Officer. We also do not provide post-employment health coverage or other benefits; provided, however, upon termination of employment each Named Executive Officer is entitled to a lump sum payment for unused vacation time based on the Named Executive Officer’s current salary.

 

Employment Agreements

 

In May 2017, we executed a Twelfth Amended and Restated Employment Agreement with Anthony A. Cook for the year from January 1, 2017 through December 31, 2017 and in February 2018, we executed a Thirteenth Amended and Restated Employment Agreement with Anthony A. Cook for the year from January 1, 2018 through December 31, 2018 that is automatically extended for additional one year periods on the same terms and conditions unless on or prior to November 15th of any year the Company or Mr. Cook provides written notice to the other party of termination of the Employment Agreement at the end of the current one-year term. This agreement provides for certain benefits upon an involuntary termination of employment, other than for cause. In the event that the Company is sold, transferred and/or merged with another entity, it will be not be deemed an event of good cause to terminate Mr. Cook. The benefits to be received by Mr. Cook whose employment is terminated without good cause include: receipt of a severance pay for up to 8 months at Mr. Cook’s then current monthly salary, eligibility to receive a bonus pro-rated through the date of termination, and continuation of health, life and disability benefits for eight months after the termination of employment.

 

If a termination of the employment of Mr. Cook without good cause, or change in control, had occurred as of December 31, 2017, we estimate that the value of the benefits under his employment agreement and our management equity incentive plan (as discussed below) would have been as follows:

 

Name

 

Severance Pay

(1)

   

Continuation of

Benefits (2)

   

Accelerated

Vesting of RSUs

(3)

   

Potential LTIC Cash

Payment (4)

   

Total

 
                                         

Anthony A. Cook, President & CEO

  $ 811,385     $ 94,790     $ 48,896     $ 217,125     $ 1,172,196  

 

(1)

  

In the event that the Company terminates Mr. Cook's employment agreement without good cause, or Mr. Cook terminates his employment agreement for good reason, such as a material breach by the Company of any provision of the agreement or if Mr. Cook is assigned duties that are materially inconsistent with his skill, position, and background, Mr. Cook is entitled to severance pay. Mr. Cook is also entitled to severance pay in the event of a change of control. A "change of control" means: (a) a change in the majority of the members of the Board of Directors, unless pursuant to the recommendation of the Corporate Affairs Committee of the Board; (b) the acquisition of the Company by another corporation or entity and (c) the sale, lease or other disposition of all or substantially all of the assets of the Company. In accordance with Mr. Cook’s employment agreement, severance pay is based on up to 8 months of his 2017 base salary; assumes payout of bonus at target. Mr. Cook would receive payment related to his assets in the deferred compensation plan.

(2)

 

Also in accordance with Mr. Cook’s 2017 employment agreement, continuation of benefits is based on continuation of 401(k) match, all medical, dental, vision and disability benefits, and payment of accrued vacation time as of December 31, 2017.

(3)

 

 

 

(4)

 

Under our management equity incentive plan, on the date a change of control occurs, the restrictions applicable to all RSUs lapse and these awards fully vest. If a change of control had occurred on December 31, 2017, Mr. Cook would have received accelerated vesting with respect to 40.4 unvested RSUs, with a value of $48,896. The value for accelerated vesting of RSUs is determined by multiplying the per share book value of our common shares on December 31, 2017 of $1,210.29 by the number of RSUs as to which vesting would accelerate.

 

Under Mr. Cook’s 2016 employment agreement, in the event of a change in control, the adjusted book value per Common Share at December 31, 2017 shall be deemed the portion of the enterprise value of the company allocated to Common Shares divided by the total number of Common Shares outstanding. If this amount is equal to or greater than $1,498.91, Mr. Cook would receive a cash payment of $106,750.

     
    Under Mr. Cook’s 2017 employment agreement, in the event of a change in control, the adjusted book value per Common Share at December 31, 2017 shall be deemed the portion of the enterprise value of the company allocated to Common Shares divided by the total number of Common Shares outstanding. If this amount is equal to or greater than $1,643.86, Mr. Cook would receive a cash payment of $110,375.

 

74

 

 

In May 2017, we executed the Second Amended and Restated Employment Agreement with Robert C. Hodgkins, Jr. for the year from January 1, 2017 through December 31, 2017 and in February 2018, we executed a Third Amended and Restated Employment Agreement with Robert C. Hodgkins, Jr. for the year from January 1, 2018 through December 31, 2018 that is automatically extended for additional one year periods on the same terms and conditions unless on or prior to November 15th of any year the Company or Mr. Hodgkins provides written notice to the other party of termination of the Employment Agreement at the end of the current one-year term. This agreement provides for certain benefits upon an involuntary termination of employment, other than for cause. In the event that the Company is sold, transferred and/or merged with another entity, it will be not be deemed an event of good cause to terminate Mr. Hodgkins. The benefits to be received by Mr. Hodgkins whose employment is terminated without good cause include: receipt of a severance pay for up to 8 months at Mr. Hodgkins’s then current monthly salary, eligibility to receive a bonus pro-rated through the date of termination, and continuation of health, life and disability benefits for eight months after the termination of employment.

 

If a termination of the employment of Mr. Hodgkins without good cause, or change in control, had occurred as of December 31, 2017, we estimate that the value of the benefits under his employment agreement and our management equity incentive plan (as discussed below) would have been as follows:

 

Name

 

Severance Pay

(1)

   

Continuation of

Benefits (2)

   

Accelerated

Vesting of RSUs

(3)

   

Potential LTIC Cash Payment (4)

   

Total

 
                                         

Robert C. Hodgkins, Jr.,

Vice President & CFO

  $ 485,068     $ 70,976     $ 29,531     $ 131,924     $ 717,499  

 

(1)

 

In the event that the Company terminates Mr. Hodgkins's employment agreement without good cause, or Mr. Hodgkins terminates his employment agreement for good reason, such as a material breach by the Company of any provision of the agreement or if Mr. Hodgkins is assigned duties that are materially inconsistent with his skill, position, and background, Mr. Hodgkins is entitled to severance pay. Mr. Hodgkins is also entitled to severance pay in the event of a change of control. A "change of control" means: (a) a change in the majority of the members of the Board of Directors, unless pursuant to the recommendation of the Corporate Affairs Committee of the Board; (b) the acquisition of the Company by another corporation or entity and (c) the sale, lease or other disposition of all or substantially all of the assets of the Company. In accordance with Mr. Hodgkins’s employment agreement, severance pay is based on up to 8 months of his 2017 base salary; assumes payout of bonus at target. Mr. Hodgkins would receive payment related to his assets in the deferred compensation plan.

(2)

 

Also in accordance with Mr. Hodgkins’s 2017 employment agreement, continuation of benefits is based on continuation of 401(k) match, all medical, dental, vision and disability benefits, and payment of accrued vacation time as of December 31, 2017.

     

(3)

 

 

Under our management equity incentive plan, on the date a change of control occurs, the restrictions applicable to all RSUs lapse and these awards fully vest. If a change of control had occurred on December 31, 2017, Mr. Hodgkins would have received accelerated vesting with respect to 24.4 unvested RSUs, with a value of $29,531. The value for accelerated vesting of RSUs is determined by multiplying the per share book value of our common shares on December 31, 2017 of $1,210.29 by the number of RSUs as to which vesting would accelerate.

     
(4)   Under Mr. Hodgkins’s 2016 employment agreement, in the event of a change in control, the adjusted book value per Common Share at December 31, 2017 shall be deemed the portion of the enterprise value of the company allocated to Common Shares divided by the total number of Common Shares outstanding. If this amount is equal to or greater than $1,498.91, Mr. Hodgkins would receive a cash payment of $64,670.
     
    Under Mr. Hodgkins’s 2017 employment agreement, in the event of a change in control, the adjusted book value per Common Share at December 31, 2017 shall be deemed the portion of the enterprise value of the company allocated to Common Shares divided by the total number of Common Shares outstanding. If this amount is equal to or greater than $1,643.86, Mr. Hodgkins would receive a cash payment of $67,254.

 

DIRECTOR COMPENSATION

 

Name

 

Fees Earned
or Paid in
Cash

($)

   

Stock Awards

($)(1)

   

Total

($)

 
                   

Stephen T. Schuler, DMD,
Chairman of the Board

  $ 59,000     $ 19,972     $ 78,972  

Ronald L. Poulos, DDS,
Vice Chairman of the Board

    25,000       19,972       44,972  

Michael J. Carl, DDS,
Treasurer

    25,000       19,972       44,972  

David A. Kreyling, DMD
Secretary

    25,000       19,972       44,972  

Mark E. Bronson, DDS

    10,415       8,876       19,291 (2)

Jack M. Cook, MHA

    27,500       19,972       47,472  

James T. Foley

    35,000       19,972       54,972  

Robert E. Hamilton, DDS

    10,415       8,876       19,291 (2)

James E. Kroeger, MBA, CPA

    44,800       19,972       64,772  

Donald J. Peak, CPA

    30,000       19,972       49,972  

Fred H. Peck, DDS

    27,500       19,972       47,472  

Molly Meakin- Rogers, MBA, CPA

    25,000       19,972       44,972  

 

(1)

This table includes the aggregate grant date fair values of restricted share unit (“RSU”) awards in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 for 2017 and prior years. For 2017, director compensation includes an award of eighteen (18) RSUs for each non-employee director with a grant date fair value of $1,109.56.

(2)

Term as Director expired with 2017 Annual Meeting

 

75

 

 

Overview of Director Compensation and Procedures

 

      Director compensation is the responsibility of the Corporate Affairs Committee (the “Committee”). The director compensation objectives and principles established by the Committee are that: (1) directors should be appropriately compensated for their time and effort; and (2) director compensation should be approached on an overall basis, should motivate behavior and be aligned with the long-term interest of the shareholders. The Committee reviews the level of compensation of our directors every two years. To determine how appropriate the current level of compensation for our directors is, we have historically obtained data from a number of different sources including:

 

 

 

publicly available survey data describing director compensation ranges for reporting companies;

 

 

 

information obtained from the National Association of Corporate Directors.

 

The Committee has determined that the compensation of our directors for 2016 is within the bottom quartile of the compensation of directors of companies of comparable size in our industry based upon these sources.

 

Director Compensation

 

We compensated non-employee members of the Board through a combination of cash and equity-based compensation. For 2017, each non-employee member of the Board received total compensation of $44,972, with the exception of the Chairman of the Board who received $78,972, the Chairman of the Audit Committee who received $64,772, the Chairman of the Finance Committee who received $49,972, the Chairmen of the Corporate Affairs Committee and the Clinical Affairs Committee who both received $47,472, and James T. Foley who received $54,972. Dr. Bronson and Dr. Hamilton only received $19,291 because they only served on the Board for the first 5 months of 2017.

 

In 2017, the Board of Directors of the Company formed a Special Committee consisting of Stephen T. Schuler, James T. Foley, James E. Kroeger and Anthony A. Cook to evaluate and make recommendations to the Board regarding strategic alternatives available to the Company. In 2017, Stephen T. Schuler received $10,000, James T. Foley received $9,800 and James E. Kroeger received $9,800 for serving on the Special Committee. These amounts are included in the totals above.

 

Our directors may defer receipt of some or all of their annual fees earned under The DCP Holding Company / Dental Care Plus, Inc. Deferred Compensation Plan (the “Plan”). Under this Plan, directors may either invest deferred compensation in DCP Holding Company stock equivalents or in a tax-managed mutual fund.

 

In December 2016, our non-employee directors each were granted a restricted share unit award for 2017 entitling each of them to receive 18 restricted share units with a book value of $1,109.56 per unit as of December 31, 2016. All twelve non-employee directors elected not to defer this compensation. The vesting of these restricted share unit awards was conditioned upon the attendance by each director of at least 75% of their scheduled meetings during 2017. In January 2018, DCP Holding Company management determined that all twelve non-employee directors met the 75% attendance requirement for 2017. Accordingly, all of these restricted share awards for these twelve non-employee directors are now fully vested. As of the date of this Report, no restricted share awards have been granted to our non-employee directors for 2018.

 

Compensation Committee Interlocks and Insider Participation

 

Our Corporate Affairs Committee currently consists of Jack M. Cook, MHA, James T. Foley, David A. Kreyling, DMD, Ronald L. Poulos, DDS, and Stephen T. Schuler, DMD. No interlocking relationship exists between any member of our Board of Directors or Corporate Affairs Committee and any member of the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. No member of the Corporate Affairs Committee is or was formerly an officer or an employee of DCP Holding Company.

 

76

 

 

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

 

Security Ownership Of Certain Beneficial Owners And Management

 

The following table sets forth the beneficial ownership of the Common Shares of DCP Holding Company as of March 23, 2018 for the following: (1) each of our Named Executive Officers; (2) each of our directors; and (3) our directors and executive officers as a group. No person beneficially owns more than 5% of DCP Holding Company’s Common Shares.

 

   

Number of Common Shares Beneficially Owned

   

Percent of Common Shares

Owned

 
             

NAME OF BENEFICIAL OWNER

               

Michael J. Carl

    137       1.06%  

Jack M. Cook

    163       1.26%  

James T. Foley

    119       *  

David A. Kreyling

    137       1.06%  

James E. Kroeger

    137       1.06%  

Donald J. Peak

    137       1.06%  

Fred H. Peck

    137       1.06%  

Ronald L. Poulos

    82       *  

Molly M. Rogers

    211       1.63%  

Stephen T. Schuler

    200       1.55%  

Anthony A. Cook

    0       *  

Robert C. Hodgkins, Jr.

    0       *  
                 

Directors / Officers as a group

    1,668       12.91%  
                 
*     Less than one percent (1%)     12,924          

 

77

 

 

In December 2005, we adopted the 2006 Dental Care Plus Management Equity Incentive Plan for our directors, Named Executive Officers. 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 2017, the non-employee members of the Board were granted a total of 196 RSUs. In 2016, Named Executive Officers were granted 99 restricted share units.

 

As of December 31, 2017, the Company granted a total of 4,936 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

                10,064  

TOTAL

                10,064  

 

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

 

Review, Approval or Ratification of Transactions with Related Persons

 

A related party transaction is a transaction required to be disclosed pursuant to Item 404 of Regulation S-K or any other similar transaction involving (i) the Company and the Company’s subsidiaries and (ii) any Company employee, officer, director (including a nominee), 5% shareholder or an immediate family member of any of the foregoing without regard to the dollar amount involved.

 

It is also the policy of the Company that a related party transaction as defined above will not be prohibited merely because it is required to be disclosed or because it involves related parties. Instead, it must be disclosed in advance to the Company and then may be approved by the Corporate Affairs Committee or, under certain circumstances, by the Board of Directors, if it does not present any improper conflicts of interest.

 

The Corporate Affairs Committee of the Board of Directors is responsible for applying the Company’s policies and procedures relative to related party transactions. The Audit Committee has been assigned the responsibility of monitoring potential related party transactions and reporting them to the Corporate Affairs Committee. The development of the Company’s policies and procedures relative to related party transactions and the Company’s adherence to these policies are documented in the meeting minutes of the Board of Directors and the Corporate Affairs and Audit Committees.

 

Transactions with Related Persons

 

Seven members of the Company’s Board of Directors are participating providers in the Company’s dental plans. One dentist director, Ronald Poulos, received claims payments of $441,925 in 2017. The payments made to Dr. Poulos were for dentist claims that he submitted as a participating dentist in the Company’s dental plans and were made on the same terms as those applicable to other participating dentists. The seven dentist directors combined received claims payments of $698,658 in the aggregate in 2017.

 

Director and Executive Officer Agreements and Compensation

      See the sections titled “Director Compensation” and “Executive Compensation” for more information regarding compensation of our directors and executive officers.

 

Employment Agreements

      We have entered into employment agreements with our executive officers. For more information regarding these agreements, see the section titled “Executive Compensation” below.

  

Independence of the Board of Directors

      Our Board of Directors has determined that each of the following members is an “independent director” as defined by the listing standards of The Nasdaq Stock Market: Jack M. Cook, James T. Foley, James E. Kroeger, Donald J. Peak, and Molly M. Rogers. The following directors are not an “independent director” as defined by the listing standards of The Nasdaq Stock Market due to their status as a participating provider with Dental Care Plus, Inc. or status as an employee of the Company: Michael Carl, David A. Kreyling, Fred H. Peck, Ronald L. Poulos, Stephen T. Schuler, and Anthony A. Cook.

 

78

 

 

ITEM 14.     PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The following table sets forth the fees paid or accrued by us for services provided by Deloitte & Touche LLP, our independent registered public accounting firm, for each of our last two fiscal years:

 

   

Fiscal Years Ended

 
   

2016

   

2017

 

Audit Fees (1)

  $ 304,550     $ 350,250  

Audit Related Fees (2)

    63,140       65,028  

Tax Compliance and Consulting Fees

           

All Other Fees

           

Total

  $ 367,690     $ 415,278  

 

(1) Includes professional services rendered for audits of the Company’s consolidated financial statements and a statutory audit of our insurance subsidiary.

 

(2) Includes assurance and related services such as the 2017 service organization report (under SSAE 18), and consents and reviews of reports filed with the SEC.

 

 Audit Committee Pre-Approval Policies and Procedures

 

The Audit Committee’s policy is to pre-approve all audit and non-audit services by category, including audit-related services, tax services and other permitted non-audit services, if any, to be provided by the independent registered public accounting firm to the Company. In accordance with the policy, the Audit Committee regularly reviews and receives updates on specific services provided by the independent registered public accounting firm.

 

All services rendered by Deloitte & Touche LLP to the Company are permissible under applicable laws and regulations. During 2017, all services performed by Deloitte & Touche LLP were approved by the Audit Committee in accordance with the Committee’s pre-approval policy.

 

We have not selected our independent registered public accounting firm for 2018. The Audit Committee of the Board of Directors will make this selection later in the year after the completion of all 2017 related procedures.

 

79

 

 

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 33
  Consolidated Balance Sheets as of December 31, 2017 and 2016 34
  Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016, and 2015 35
  Consolidated Statements of Redeemable Shares and Shareholders’ Equity for the Years Ended December 31, 2017, 2016, and 2015 36
  Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016, and 2015 37
  Notes to the Consolidated Financial Statements 38
     
     
  (2) Financial Statement Schedules:  
     
  Schedule I- Summary of Investments - Other than Investments in Related Parties as of December 31, 2017 80
  Schedule II-Condensed Balance Sheets of Parent Company as of December 31, 2017 and 2016 81
  Schedule II-Condensed Statements of Comprehensive Income of Parent Company for the Years Ended December 31, 2017, 2016, and 2015 82
  Schedule II-Condensed Statements of Cash Flows of the Parent Company for the Years Ended December 31, 2017, 2016, and 2015 83
  Schedule II-Notes to Condensed Financial Statements 84
  Schedule III-Supplementary Insurance Information for the Years Ended December 31, 2017, 2016, and 2015 85
  Schedule IV-Reinsurance for the Years Ended December 31, 2017, 2016 and 2015 86
  Schedule V-Valuation and Qualifying Accounts for the Years Ended December 31, 2017, 2016, and 2015 86
     
     
  (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, 2017

(amounts in thousands)

 

Type of Investment

 

Amortized Cost

   

Fair Value

   

Balance Sheet

 
                         

Fixed Maturities:

                       

Bonds:

                       

All other corporate bonds

  $ 8,240     $ 8,259     $ 8,259  
                         

Certificates of deposit

    1,150       1,152       1,152  
                         

Total Fixed Maturities

  $ 9,390     $ 9,411     $ 9,411  
                         

Other short-term investments:

                       

Money Market Fund

  $ 181     $ 181     $ 181  
                         

Total Investments

  $ 9,571     $ 9,592     $ 9,592  

 

80

 
 

 

 

DCP HOLDING COMPANY (Parent Only)

 

Schedule II - Condensed Financial Information of Registrant

Condensed Balance Sheets

As of December 31, 2017 and 2016

 

   

2017

   

2016

 

ASSETS

               
                 

INVESTMENTS

  $ 1,502,159     $ 1,454,893  

CASH AND CASH EQUIVALENTS

    2,106,093       2,282,239  

ACCRUED INVESTMENT INCOME

    16,574       14,273  

INTERCOMPANY RECEIVABLES

            279,567  

INTERCOMPANY NOTE RECEIVABLE

    80,000       230,000  

PROPERTY

    1,892,564       1,647,158  

INVESTMENT IN SUBSIDIARIES

    16,013,535       13,294,165  

DEFERRED INCOME TAX

    1,197,612       1,592,103  

OTHER ASSETS

    1,563,982       1,167,343  

TOTAL ASSETS

  $ 24,372,519     $ 21,961,741  
                 

LIABILITIES, REEDEMABLE SHARES, AND SHAREHOLDERS’ EQUITY

               

OTHER PAYABLES AND ACCRUALS

  $ 2,609,127     $ 2,470,373  

INTERCOMPANY PAYABLES

    204,478          

MORTGAGE LOAN PAYABLE

    1,095,200       1,148,000  

DEFERRED COMPENSATION

    4,821,982       4,051,078  

TOTAL LIABILITIES

    8,730,787       7,669,451  
                 

COMMITMENTS AND CONTINGENCIES

               
                 

REDEEMABLE SHARES:

               

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

    605,143       561,439  

Class B Redeemable Common Shares, no par value—authorized, 120,000 shares; issued and outstanding, 8,653 and 8,604 shares at December 31, 2017 and 2016, respectively

    10,472,602       9,546,686  

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

    4,563,987       4,184,165  

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

    15,641,732       14,292,290  
                 

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

               
                 

TOTAL LIABILITIES, REDEEMABLE SHARES AND SHAREHOLDERS' EQUITY

  $ 24,372,519     $ 21,961,741  

 

This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8, Page 33 and the notes to the Condensed Financial Statements.

 

81

 

 

DCP HOLDING COMPANY (Parent Only)

       

Schedule II - Condensed Financial Information of Registrant

Condensed Statements of Comprehensive Income

For the Years ended December 31, 2017, 2016 and 2015

 

   

2017

   

2016

   

2015

 
                         

REVENUES

                       

Management fees from subsidiaries

  $ 13,750,044     $ 13,358,327     $ 12,156,360  

Investment income

    54,731       61,486       58,814  

Realized gains (losses) on investments, net

    216,128       771       (85,104 )

Administrative fees

    928,446       939,849       881,507  

Total revenues

    14,949,349       14,360,433       13,011,577  
                         

EXPENSES

                       

Insurance expense:

                       

Salaries and benefit expense

    9,344,355       9,151,483       7,886,437  

Other insurance expense

    5,398,489       5,161,794       4,962,068  

Total expenses

    14,742,844       14,313,277       12,848,505  
                         
                         

INCOME BEFORE INCOME TAX

    206,505       47,156       163,072  
                         

PROVISION (BENEFIT) FOR INCOME TAX:

                       

Current

    388,500       347,948       323,078  

Deferred

    392,735       (310,054 )     (244,242 )
                         

Total

    781,235       37,894       78,836  
                         

Income before undistributed income of subsidiaries

    (574,730 )     9,262       84,236  
                         

Undistributed income of subsidiaries

    2,404,164       1,979,909       873,849  
                         

NET INCOME

  $ 1,829,434     $ 1,989,171     $ 958,085  
                         

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

                       

Change in the fair value of investments

    36,996       9,491       (71,531 )

Reclassification adjustment for gains included in undistributed income

    (21,893 )     (49,551 )     (17,278 )

Total other comprehensive income held by subsidaries

    15,103       (40,060 )     (88,809 )
                         

Change in the fair value of interest rate swap

    9,043       7,471       (8,687 )

Change in the fair value of investments

    6,870       23,882       (92,966 )

Reclassification adjustment for losses

    (12,504 )     30,118       56,169  
                         

TOTAL COMPREHENSIVE INCOME

  $ 1,847,946     $ 2,010,582     $ 823,792  

 

This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8, Page 33 and the notes to the Condensed Financial Statements.

 
82

 
 

DCP HOLDING COMPANY (Parent Only)

           

Schedule II - Condensed Financial Information of Registrant

Condensed Statements of Cash Flows

For the Years ended December 31, 2017, 2016 and 2015

 

   

2017

   

2016

   

2015

 
                         

CASH FLOWS FROM OPERATING ACTIVITIES:

                       

Net income

  $ 1,829,434     $ 1,989,172     $ 958,085  

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

                       

Depreciation and amortization

    143,057       108,917       107,521  

Realized (gains) losses on investments,net

    (216,128 )     (771 )     85,104  

Undistributed income of subsidiaries

    (2,404,164 )     (1,979,910 )     (873,849 )

Deferred income taxes benefit

    392,735       (310,054 )     (244,242 )

Deferred compensation

    988,378       994,708       747,825  

Effects of changes in operating assets and liabilities:

                       

Accrued investment income

    (2,301 )     1,654       (4,762 )

Intercompany accounts receivable

    279,567       (7,478 )     299,916  

Intercompany accounts payable

    204,478                  

Other assets

    (192,451 )     (143,868 )     (183,671 )

Other payables and accruals

    159,023       495,981       (112,467 )
                         

Net cash provided by operating activities

    1,181,628       1,148,351       779,460  
                         

CASH FLOWS FROM INVESTING ACTIVITIES:

                       

Purchases of investments

    (1,028,229 )     (834,738 )     (1,188,956 )

Sale and maturities of investments

    982,876       829,806       559,715  

Acquisition of property and equipment

    (380,071 )             (10,174 )

Investment in subsidiary

    (500,000 )     (500,000 )        

Subsidiary dividends

    200,000       200,000          

Investment, other

                    (2,000 )
                         

Net cash (used in) provided by investing activities

    (725,424 )     (304,932 )     (641,415 )
                         

CASH FLOWS FROM FINANCING ACTIVITIES:

                       

Mortgage loan repayments

    (52,800 )     (50,400 )     (49,200 )

Repurchase of redeemable common shares

    (182,107 )     (275,773 )     (223,176 )

Repurchase of redeemable preferred shares

            (2,805,064 )        

Redeemable shares issued

            2,280,066       1,932,356  

Extinguishment cost of redeemable preferred shares

            (118,800 )        

Issuance cost of redeemable shares

            (116,833 )     (112,419 )

Repayment of intercompany loan from subsidiary

    150,000                  

Dividends paid

    (547,443 )     (510,413 )     (481,089 )
                         

Net cash (used in) provided by financing activities

    (632,350 )     (1,597,217 )     1,066,472  
                         

(DECREASE) INCREASE IN CASH

    (176,146 )     (753,798 )     1,204,517  
                         

CASH AND CASH EQUIVALENTS—Beginning of year

    2,282,239       3,036,037       1,831,520  
                         

CASH AND CASH EQUIVALENTS—End of year

  $ 2,106,093     $ 2,282,239     $ 3,036,037  
                         

SUPPLEMENTAL CASH FLOW INFORMATION:

                       

Cash paid for interest

  $ 46,600     $ 46,500     $ 48,300  
                         

NON-CASH INVESTING AND FINANCING ACTIVITIES:

                       

Redeemed common shares (in other payables and accruals)

  $ 11,871     $ 25,443     $ 84,618  

 

This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8, Page 33 and the notes to the Condensed Financial Statements.

 

83

 

 

SCHEDULE II - PARENT COMPANY FINANCIAL INFORMATION

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

 

1.

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

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

 

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

 

2.

TRANSACTIONS WITH SUBSIDIARIES

 

Management Fee

 

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

 

Salaries and benefit expense

 

Salary and benefit expense includes dental benefit expense of approximately $138,000, $134,000, and $119,000, for the years ended December 31, 2017, 2016 and 2015, respectively. These amounts eliminate in consolidation.

 

Investments in subsidiaries and dividends

 

In 2017 and 2016, the parent company received a dividend from the Adenta, Inc. subsidiary in the amount of $200,000. There were no dividends declared or paid to the parent company in 2015.

 

In 2017 and 2016, the parent company advanced $500,000 into Dental Care Plus, Inc. There were no investment in subsidiaries in 2015.

 

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 $1,376,000, $1,429,000, and $963,000, for the years ended December 31, 2017, 2016, and 2015. 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 2017 and 2016.

 

Reconciliation of Investment in Subsidiaries

               
   

2017

   

2016

 
                 

Investment in Subsidiaries—January 1

  $ 13,294,165     $ 11,054,315  
                 

Undistributed income of subsidiaries

    2,404,164       1,979,910  

Total other comprehensive income held by subsidiaries

    15,206       (40,060 )

Dividends from subsidiaries

    (200,000 )     (200,000 )

Investment in subsidiaries

    500,000       500,000  
                 

Increase in Investment in Subsidiary

    2,719,370       2,239,850  
                 

Investment in Subsidiaries—December 31

  $ 16,013,535     $ 13,294,165  

 

84

 
 

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

Schedule III - Supplementary Insurance Information

For each of the Three Years in the Period ended December 31, 2017

(amounts in thousands)

 

   

2017

   

2016

   

2015

 
                         

Deferred policy acquisition cost (a)

  $ 2,637     $ 3,109     $ 2,013  
                         

Claims payable (a)

  $ 3,576     $ 3,744     $ 3,253  
                         

Unearned premium (a)

  $ 36,818     $ 46,955     $ 32,631  
                         

Other policy claims and benefits payable (a)

  $ 3,850     $ 4,299     $ 3,271  
                         

Premium revenues

                       

Fully-insured dental HMO/ Indemnity

  $ 51,419     $ 53,393     $ 49,458  

Fully-insured dental PPO

    25,936       22,363       19,198  

Self-insured dental

    29,427       29,067       28,922  

Corporate, All Other

    807       771       683  
    $ 107,589     $ 105,594     $ 98,261  
                         

Investment income (a)

  $ 265     $ 274     $ 252  
                         

Future policy benefits, losses, claims and expense losses

                       

Fully-insured dental HMO/ Indemnity

  $ 38,522     $ 39,995     $ 37,346  

Fully-insured dental PPO

    17,721       15,391       14,384  

Self-insured dental

    25,365       25,114       24,954  
    $ 81,608     $ 80,500     $ 76,684  
                         

Amortization of deferred policy acquisition cost (a)

  $ 4,980     $ 4,780     $ 4,396  
                         

Other operating expense (a)

  $ 17,715     $ 17,363     $ 15,680  
                         

Premium written

                       

Fully-insured dental (a)

  $ 66,950     $ 90,488     $ 68,057  

 

(a)

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

 

 

85

 
 

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

Schedule IV- Reinsurance

For each of the Three Years in the Period ended December 31, 2017

(amounts in thousands)

 

   

2017

   

2016

   

2015

 
                         

Gross earned premium amounts

                       

Fully-insured dental HMO/Indemnity

  $ 51,419     $ 53,393     $ 49,458  

Fully-insured dental PPO

    25,936       22,363       19,198  

Self-insured dental

    29,427       29,067       28,922  

Corporate, All Other

    807       771       683  
    $ 107,589     $ 105,594     $ 98,261  
                         

Assumed (ceded) amounts from other companies

  $       $       $    
                         

Net earned premium amounts

                       

Fully-insured dental HMO/Indemnity

  $ 51,419     $ 53,393     $ 49,458  

Fully-insured dental PPO

    25,936       22,363       19,198  

Self-insured dental

    29,427       29,067       28,922  

Corporate, All Other

    807       771       683  
    $ 107,589     $ 105,594     $ 98,261  

 

 

 

DCP HOLDING COMPANY AND SUBSIDIARIES

                 

Schedule V - Valuation and Qualifying Accounts

For the Years Ended December 31, 2017, 2016, and 2015

 

Description

 

Balance at

beginning of

period

   

Charged to

costs and

expenses

   

Deductions

   

Balance at

end of

period

 
                                 

Year ended December 31, 2017:

                               

Allowance for Uncollectible Accounts Receivable

  $ 41,092       128,543       123,827     $ 45,808  

Year ended December 31, 2016:

                               

Allowance for Uncollectible Accounts Receivable

  $ 14,715       99,084       72,707     $ 41,092  

Year ended December 31, 2015:

                               

Allowance for Uncollectible Accounts Receivable

  $ 13,488       72,482       71,255     $ 14,715  

 

86

 
 

 

 

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 30, 2018

 

/s/ Robert C. Hodgkins, Jr.

   

Robert C. Hodgkins, Jr.

   

Vice President and Chief Financial Officer

   

(Principal Financial and Accounting Officer)

     

March 30, 2018

 

/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 30, 2018

 

/s/ Stephen T. Schuler

   

Stephen T. Schuler

   

Chairman of the Board of Directors

     

March 30, 2018

 

/s/ Ronald Poulos

   

Ronald Poulos

   

Vice-Chairman of the Board of Directors

     

March 30, 2018

 

/s/ David A. Kreyling

   

David A. Kreyling

   

Secretary

     

March 30, 2018

 

/s/ Michael J. Carl

   

Michael Carl

   

Treasurer

     

March 30, 2018

 

/s/ Fred H. Peck

   

Fred H. Peck

   

Assistant Treasurer

     

March 30, 2018

 

/s/ Jack M. Cook

   

Jack M. Cook

   

Director

 

87

 

 

March 30, 2018

 

/s/ Donald J. Peak

   

Donald J. Peak

   

Director

     

March 30, 2018

 

/s/ James E. Kroeger

   

James E. Kroeger

   

Director

     

March 30, 2018

 

/s/ Molly Meakin-Rogers

   

Molly Meakin-Rogers

   

Director

     

March 30, 2018

 

/s/ James T. Foley

   

James Foley

   

Director

 

88

 

 

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

Twelfth Amended and Restated DCP Holding Company Employment Agreement with Anthony A. Cook effective January 1, 2017 (incorporated by reference to Exhibit 10.1 and 10.2 to the Company’s Form 8-K current report filed on May 5, 2017)*

10.2

Thirteenth Amended and Restated DCP Holding Company Employment Agreement with Anthony A. Cook effective January 1, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K current report filed on February 16, 2018)*

10.3

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)*

10.4 

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)*

10.5

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)*

10.6 

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)*

10.7

Preferred Stock Purchase Agreement (incorporated by reference to the Company’s Form 8-K current report filed on July 21, 2010)

10.8

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)

10.9

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)

10.10

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)*.

10.11

Long Term Incentive Compensation Agreement between DCP Holding Company and Robert C. Hodgkins, Jr. effective January 1, 2015 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K current report filed on May 19, 2015)*

10.12

Long Term Incentive Compensation Agreement between DCP Holding Company and Robert C. Hodgkins Jr. effective January 1, 2016 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K current report filed on June 3, 2016)*

10.13

Second Amended and Restated DCP Holding Company Employment Agreement entered into effective January 1, 2017 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 filed May 5, 2017)*

10.14

Third Amended and Restated DCP Holding Company Employment Agreement entered into effective January 1, 2018 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 filed February 16, 2018)*

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, 2017 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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