Our ratio of healthcare service expense to premium revenue (“loss ratio”) increased by 0.9%, to 83.6% in 2010 from 82.7% in 2009. This loss ratio increase is primarily due to an increase in new fully-
Our dental and vision products grew by approximately 10,700 members, or 3.9%, from 277,200 members at December 31, 2009 to 287,900 members at December 31, 2010. This membership increase from December 31, 2009 is due to an increase in fully-insured dental membership of approximately 18,200 members and an increase in corporate, all other membership of approximately 1,400 members, offset by a decrease in self-insured membership of approximately 8,900 members. The decrease in self-insured membership is primarily due to one large self-insured employer group with approximately 7,500 members that converted from self-insured to fully-insured effective January 1, 2010 along with a decrease of approximately 1,400 members resulting from self-insured dental HMO groups that did not renew with the Company or reduced their employee counts in 2010.
The following chart shows membership totals and revenues and expenses for our three business segments for the years ended December 31, 2010 and 2009 (in thousands, except for membership data and percentage change):
Our corporate, all other membership increased by approximately 1,400 members in 2010. The increase is primarily due to an increase of approximately 3,200 members in our vision plan, offset by a decrease of approximately 1,400 dental PPO members that converted into the fully-insured segment with the commencement of the Company’s reinsurance agreement with a third party insurance carrier effective July 1, 2010 and a decrease of approximately 400 dental PPO members related to employer groups that did not renew their dental benefit contracts.
Self-Insured Claim Revenue-Self-insured claim revenue decreased $1,601,000, or 6.8%, to $21,850,000 in 2010 from $23,451,000 in 2009. Self-insured claim revenue decreased by $2,087,000 due to the conversion of the large employer group to the fully-insured dental HMO product discussed above. This decrease was offset by an increase in self-insured revenue of $326,000 due to higher other self-insured member month volume in 2010 compared to 2009 and by an increase of $160,000 attributable to an increase in dental service utilization by our self-insured members in 2010 compared to 2009.
Self-Insured ASO Fees-Self-insured ASO fees decreased $79,000, or 6.3%, to $1,173,000 in 2010 from $1,252,000 in 2009. Self-insured ASO fees decreased by $111,000 due to the conversion of the large employer group to the fully-insured dental HMO product discussed above. This decrease was offset by an increase in self-insured revenue of $17,000 due to higher other self-insured member month volume in 2010 compared to 2009 and by an increase attributable to a slight increase in self-insured ASO fee rates in 2010.
Fully-insured healthcare services expense increased $6,298,000 in 2010 compared to 2009. A net increase in fully-insured membership volume of 10.6% in 2010 resulted in an increase in fully-insured dental healthcare services expense of $5,403,000. Approximately $1,700,000 of the volume-related fully-insured healthcare services expense increase was the result of a large employer group converting from our self-insured dental HMO
The fully-insured dental PPO healthcare services expense increased by $3,454,000, or 59.3%, to $9,278,000 in 2010 from $5,824,000 in 2009. Approximately $2,559,000 of this increase is attributable to the 43.9% increase in fully-insured dental PPO member months in 2010 compared to 2009. Approximately $895,000 of this increase is attributable to an increase in fully-insured dental PPO healthcare services expense on a per member per month basis of approximately 10.7% in 2010.
Consolidated insurance expenses decreased $217,000 in 2010. Total insurance expenses as a percentage of total premium revenue, or the insurance expense ratio, was 16.6% for 2010, decreasing 1.5% from the 2009 ratio of 18.1%. Board of Director expense decreased by $188,000, or 38.6%, primarily due to a 50% reduction in total director compensation, which consists of cash and deferred share awards compensation and was approved by the Board in August of 2010. In addition, advertising expense in 2010 decreased by $231,000, or 67.9%, and promotional expense decreased by $42,000, or 17.5%, as part of an initiative to reduce discretionary expenses. Legal fees decreased by $88,000, or 30.6%, after the completion of state insurance department filings in 2009.
Our effective tax rate for 2010 was 65.2% compared to the 26.8% effective tax rate in 2009. Our 2010 effective tax rate was much higher than the federal statutory rate primarily due to the amount of our pre-tax income and the impact of permanent tax differences. Our 2009 effective tax rate was lower than the federal statutory rate primarily due to our pre-tax net loss and permanent tax differences and applicable state and local taxes. See Note 5 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.
Net income (loss) on redeemable shares was $(289,000) and $615,000 for the years ended December 31, 2009 and 2008, respectively. Basic earnings (loss) per redeemable common share was $(37.27) and $72.71 at December 31, 2009 and 2008, respectively. The decrease in net income on redeemable shares primarily resulted
Total self-insured revenue decreased $748,000 in 2009 compared to 2008. Self insured revenue decreased by $5,119,000 due to the loss of the member month volume associated with the large self-insured employer group discussed above. This decrease was offset by an increase in self-insured revenue of $2,250,000 due to new self-insured sales and by an increase of $2,121,000 attributable to an increase in self-insured ASO fee rates, a provider fee schedule increase implemented in April of 2009, an increase in dental service utilization by our self-insured members in 2009 compared to 2008 and the run out claims of the self-insured group that did not renew its contract. The self-insured segment revenue has two components:
Self-Insured Claim Revenue-Self-insured claim revenue decreased $651,000, or 2.7%, to $23,451,000 in 2009 from $24,102,000 in 2008. Self-insured claim revenue decreased by $4,848,000 due to the loss of the member month volume associated with the large self-insured employer group discussed above. This decrease was offset by an increase of $2,131,000 related to new self-insured sales and an increase of $2,066,000 related to an increase in dental service utilization by our self-insured members in 2009 compared to 2008, a provider fee schedule increase implemented in April of 2009 and the run out claims of the self-insured group that did not renew its contract.
Self-Insured ASO Fees-Self-insured ASO fees decreased $97,000, or 7.2%, to $1,252,000 in 2009 from $1,349,000 in 2008. This decrease is primarily attributable to the decrease of $271,000 related to the loss of the member month volume associated with the large self-insured employer group discussed above. This decrease was offset by an increase of $119,000 related to new self-insured sales and an increase of $55,000 related to a small increase in the average self-insured ASO fee rates.
Investment income decreased $124,000, or 55.6%, to $99,000 in 2009 from $223,000 in 2008. This decrease is primarily attributable to a decrease in short-term investment interest rates during 2009. In 2008 and 2009, we invested in Federal Deposit Insurance Corporation (“FDIC”) insured certificates of deposit and money market funds.
Fully-insured healthcare services expense increased $5,442,000 in 2009 compared to 2008. A net increase in fully-insured membership volume of 10.4% in 2009 resulted in an increase in fully-insured dental healthcare services expense of $3,455,000. An increase in fully-insured dental healthcare services of $1,987,000 is primarily the result of an increase in fully-insured dental healthcare services expense on a per member per month basis of
4.7% in 2009 for both our new and existing fully-insured membership. A higher percentage of our fully-insured members received dental services in 2009. Also, we believe that certain of our subscribers and their dependents received preventive and basic dental services in 2009 prior to losing their coverage. The fully-insured segment represents approximately 64% of our total dental business in 2009.
Self-insured healthcare services expense decreased by $726,000 in 2009. Self-insured healthcare services expense decreased by $4,428,000 due to the loss of the member month volume associated with the large self-insured employer group discussed above. This decrease in self-insured healthcare services expense was offset by an increase of $1,946,000 related to new self-insured employer groups and an increase of $1,756,000 related to an increase in dental service utilization by our self-insured members in 2009 compared to 2008, a provider fee schedule increase implemented in April of 2009 and the run out claims of the self-insured group that did not renew its contract.
In 2010, we generated $876,000 of cash in operating activities. This level of cash flow from operating activities is higher than the cash flow generated from operating activities in 2009. We had a net income of $12,000 in 2010 compared to a net loss of $(289,000) in 2009. In addition to our 2010 net income, other sources of cash include: non-cash depreciation and amortization expense of $505,000, an increase in deferred compensation liabilities of $132,000, an increase in claims payable of $460,000, and an increase in unearned premium of $8,572,000 that was offset by an increase in unbilled accounts receivable of $8,076,000. Both unbilled accounts receivable and unearned premium increased as a result of the conversion of a large employer group from the self-insured segment to the fully-insured segment and the renewal of a large employer group on a multi-year contract, both effective January 1, 2010. The increase in our claims payable is primarily due to the fact that there was a significant increase in fully-insured membership at December 31, 2010 compared to December 31, 2009. These sources of cash were offset by cash uses such as an increase in accounts receivable of $95,000, an increase in deferred policy acquisition costs of $877,000 and an increase in other assets of $99,000. Also, we had a non-cash tax benefit related to deferred income taxes of $93,000.
In 2008, we generated $1,660,000 of cash in operating activities. This level of cash flow from operating activities is consistent with the cash flow generated from operating activities in 2006. We realized net income of $615,000. In addition to our 2008 net income, we recognized depreciation and amortization of $446,000. With the conversion of our fully-insured employer group contracts to be non-cancelable by the Company, there was an increase in unearned premium of approximately $20.9 million that was offset by an increase in accounts receivable of approximately $20.8 million. Other sources of cash include: an increase in deferred income taxes, a decrease in accounts receivable, an increase in claims payable, an increase in accounts payable and other accrued expenses, an increase in deferred compensation and other minor changes to operating assets and liabilities totaling $1,701,000. These sources of operating cash were offset by an increase in deferred policy acquisition costs of $1,196,000.
In 2010, we invested $151,000 in building improvements, office equipment and computer equipment and software. In December of 2010, we entered into a sale-leaseback transaction with a leasing company where we received $323,000 in cash in exchange for certain fixed assets on our balance sheet and subsequently entered into a capital lease agreement whereby we are obligated to pay lease payments totaling $339,000 related to these assets over a three year period. Under this capital lease agreement, we are required to have a minimum tangible net worth equal to or greater than $2,500,000 at the end of each fiscal year, and we were in compliance with this covenant at December 31, 2010. Also in 2010, approximately $5.4 million of our investments in FDIC insured certificates of deposit and money market funds either matured or were liquidated to fund operations. We also invested approximately $7.3 million in additional FDIC insured certificates of deposit, investment grade corporate bonds and money market funds. Collectively, this resulted in a decrease in cash from investment activities of approximately $1.7 million.
In 2008, we invested $321,000 in building improvements, office equipment and computer equipment and software. Our investment in a new telephone system represented $133,000 of this amount. Also in 2008, approximately $18.9 million of our investments in FDIC insured certificates of deposit and money market funds either matured or were liquidated to fund operations. We also invested approximately $20.2 million in additional FDIC insured certificates of deposit and money market funds.
Our mortgage note matures in June 2013. The note requires us to make principal payments of $10,000 per month, and bears interest at a variable rate of 30-day LIBOR plus 1.75%. At the maturity date of the mortgage note in 2013, the expected outstanding balance of the note of $600,000 must be repaid or refinanced. Our revolving note matures on December 15, 2011 and requires us to make monthly interest payments at a variable rate of 30-day LIBOR plus 1.75%.
In December of each year our Board evaluates the projected pre-tax income of our dental HMO plans, capital and surplus requirements prescribed by the Ohio Department of Insurance and factors impacting our A.M. Best financial strength rating, such as the ratio of our projected fully-insured premium revenue to our projected capital and surplus level. In addition, the Board considers the capital expenditures needed to support strategic objectives for the coming years (such as the implementation and improvements to the dental plan administration system, expansion of office space and acquisition of office equipment for new employees) and our estimated federal income tax liability. After considering these and any other factors deemed relevant, the Board determines the amount of the provider withhold that may be paid to participating dental providers, if any. Each participating dental provider’s share of the provider withhold payment is based on the proportionate amount of claims submitted by such participating dental provider in relation to the total claims submitted by all participating dental providers in a given year, expressed as a percentage, and is not related to or dependent upon any such provider’s holdings of shares in the Company. Payments authorized by the Board are accrued in the fourth quarter of the fiscal year. The Board did not authorize any return of withhold for the years ended December 31, 2010 or 2009. The Board authorized amounts of return of withhold amounting to $464,000 for the year ended December 31, 2008.
(1) Our swap interest payments are based on a fixed rate of 4.95%. We estimate that we will receive swap interest payments totaling $23,000 based on a variable rate of LIBOR plus 1.75% or 2.01%.
At December 31, 2010, future approximate minimum annual lease payments under non-cancelable operating leases are as follows:
Our consolidated cash and short term investments were approximately $7.0 million at December 31, 2010. Our consolidated cash and short term investments decreased by approximately $1,000,000 from approximately $8.0 million as of December 31, 2009.
In 2006, we entered into an annually renewable agreement with a commercial bank for a $500,000 working capital line of credit. In July 2010, we renewed the $500,000 working capital line of credit. Interest was at a variable rate of LIBOR plus 2.50% and was 2.88% at December 31, 2010. The Company did not have any interest expense for the line of credit in 2010 or 2009. As of December 31, 2010 and 2009, there was no amount outstanding on this line of credit.
In 2008, we entered into an annually renewable agreement with a commercial bank for a $1,000,000 working capital line of credit. In August 2010, we renewed this working capital line of credit for $915,000, and the commercial bank also issued an irrevocable letter of credit in the amount of $85,000. Interest was payable at a variable rate of LIBOR plus 2.50% and was 2.88% at December 31, 2010. The Company did not have any interest expense for the line of credit in 2010 or 2009. As of December 31, 2010 and 2009 there was no amount outstanding on this line of credit.
On December 30, 2010, we renewed our revolving note with a commercial bank in the amount of $700,000 collateralized by a second mortgage on our office building. As of December 31, 2010, there was a principal balance outstanding of $650,000 related to this revolving note. This revolving note matures on December 15, 2011, is annually renewable and requires us to make monthly interest payments at a variable rate of 30-day LIBOR plus 1.75%. Under this revolving note, we are required to have a minimum tangible net worth equal to or greater than $2,500,000 at the end of each fiscal year, and we were in compliance with this covenant at December 31, 2010. We are planning on renewing this revolving note in December of 2011.
disabled, or retire. Our Board of Directors establishes limitations on the amount of share redemptions each year. While we are not able to estimate future redeemable share redemptions, we repurchased $61,000, $172,000, and $68,000 of redeemable common shares in the years ended December 31, 2010, 2009, and 2008, 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.
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 can not 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. Under these restrictions, no dividends may be paid by Dental Care Plus in 2011 without prior regulatory approval. There were no dividends declared or paid by Dental Care Plus during 2010, 2009 or 2008. Even if prior approval is not required, prior notification must be provided to state agencies in Ohio, Kentucky and Indiana before paying a dividend.
Most states rely on risk-based capital requirements, or RBC, to define the required levels of equity. RBC is a model developed by the NAIC to monitor an entity’s solvency. This calculation indicates recommended minimum levels of required capital and surplus and signals regulatory measures should actual surplus fall below these recommended levels. RBC has been adopted by Ohio, Kentucky and Indiana, the three states in which we currently do business. We file our annual statement and RBC reporting with the Ohio Department of Insurance and the NAIC. Dental Care Plus’s statutory annual statements for the year ended December 31, 2010 filed with the Ohio Department of Insurance reflected total adjusted capital in excess of Company Action Level RBC.
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, 2010, 2009, and 2008, respectively, such changes increased or (decreased), net of related income tax effects, by the following amounts:
The fair market value of the variable-to-fixed interest rate swap contract (net of income tax effects) decreased by $2,644 at December 31, 2010 due to a slight decrease in prevailing interest rates during 2010. The fair market value of the variable-to-fixed interest rate swap contract (net of income tax effects) increased by $9,462 at December 31, 2009 due to an increase in prevailing interest rates during 2009. The fair market value of the variable-to-fixed interest rate swap contract (net of income tax effects) decreased by $42,885 at December 31, 2008 due to a decrease in prevailing interest rates during 2008. The fair market value of the variable-to-fixed interest rate swap contract was a liability of $27,639 and $23,633 and is included in other payables and accruals at December 31, 2010 and 2009, respectively.
We have classified all certificate of deposit investments and money market mutual fund investments as “available-for-sale.” Accordingly, these investments are carried at fair value, based on quoted market prices, and unrealized gains and losses, net of applicable income taxes, are reported in a separate caption of shareholders’ equity. We invest our excess cash in FDIC insured bank certificates of deposit and money market funds. Each certificate of deposit with an original cost of $100,000 to $200,000 is invested with a separate FDIC-insured financial institution. The quoted market prices of these certificates of deposit are the amounts we would receive if we liquidated them as of December 31, 2010. We have classified all investment grade corporate bonds as held-to-maturity based on our intent and ability to hold the securities to maturity. Held-to-maturity investments are recorded at amortized cost. The amortized cost of held-to-maturity investments is adjusted for amortization of premiums and accretion of discounts to maturity using the effective-yield method of amortization. Such amortization is included in investment income. We recognize gains and losses when these securities mature or are sold using the specific identification method. Our investment grade corporate bonds have added an element of market risk in 2010 that we did not have in 2009. We do not believe that this added market risk is material. There have been no material changes in exposures to market risk for the year ended December 31, 2010.
We follow a consistent and systematic process for recognizing impairments on securities that sustain other-than-temporary declines in value. The decision to impair a security incorporates both quantitative criteria and qualitative information. The impairment review process considers a number of factors including, but not limited
Accounts receivable represent uncollected premiums related to coverage periods prior to the balance sheet date, and are stated at the estimated collectible amounts, net of an allowance for bad debts. We regularly monitor the timing and amount of our premium collections, and maintain an allowance for estimated losses. The amount of the allowance is based primarily on our historical experience and any customer-specific collection issues that are identified.
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 statement of operations 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 “completions 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 used by management to estimate the IBNR and reported claims in process components of our claims payable liability.
(a) Reflects estimated potential changes in incurred claims payable liability caused by changes in completion factors for all months prior to December 31, 2010.
The annual provider withhold payment authorized by the Board is recorded in December of the applicable year, resulting in a corresponding increase of claims expense and claims payable liability. Depending on the amount of the provider withhold payment authorized, there may be a material increase in the claims payable liability at year end. At both December 31, 2010 and 2009 no provider withhold payment was authorized by the Board. Safeguarding the financial condition and liquidity of the Company is a material factor considered in the provider withhold payment practices adopted by the Board.
Deferred acquisition costs are those costs that vary with and are primarily related to the acquisition of new and renewal business. Such costs include commissions, costs of contract issuance and underwriting, premium taxes and other costs the Company incurs to acquire new business or renew existing business. The Company
defers policy acquisition costs and amortizes them over the estimated life of the contracts, which are short-duration in nature, in proportion to premiums earned. The Company capitalized deferred acquisition costs of $4,363,000, $2,787,000 and $2,632,000 and amortized $3,487,000, $2,742,000 and $1,436,000 of these capitalized costs for the years ended December 31, 2010, 2009 and 2008, respectively. These amounts are recorded in commission expense and other acquisition costs included in the consolidated statements of operations.
The Company’s Class A and Class B redeemable common shares are owned by participating providers, Company directors and employees. Only participating providers in our service area that includes all counties located in Ohio and Kentucky are eligible to own Class A voting redeemable common shares (See Note 10). All participating providers, Company directors and Company employees are eligible to own the Class B non-voting redeemable common shares. The Company’s Class A and Class B 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 upon their death, permanent disability or retirement. The Company records Class A and Class B common shares as Redeemable Common Shares in the consolidated balance sheet outside of permanent shareholders’ equity at the redemption value of the common shares. Accordingly, the Company records any net income (loss) or other comprehensive income (loss) that formerly was recorded as a change to Shareholders’ Equity 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 security.
Premium revenue is recognized in the period during which dental or vision coverage is provided to the covered individuals. Payments received from customers in advance of the related period of coverage, as well as unbilled accounts receivable, are reflected on the accompanying consolidated balance sheets as unearned premium revenue. The Company’s unearned premium revenue was $29,531,000 and $20,959,000 at December 31, 2010 and 2009, respectively for the estimated premium revenue associated with the remaining contract periods and related amounts recorded in unbilled accounts receivable. Enrollment changes not yet reflected on employer group invoices, also known as retroactive membership adjustments, are estimated based on available data and are reflected in revenue for the current periods.
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 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. At the end of each year, our Board of Directors determines, in its sole discretion, how much if any of the provider withhold can be paid out to participating providers. Provider withhold payments authorized by our Board during the fiscal year are recorded as an increase to healthcare services expense.
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2010
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 insurance products. As of June 1, 2008, the Company transitioned the majority of its employer groups with dental PPO products underwritten by a third-party insurance carrier to dental PPO products underwritten by Dental Care Plus.
The accounting policies of the Company conform to accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The accompanying 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 financial statements are summarized below.
Goodwill and Intangible Assets- Goodwill arises in business combinations when the purchase price of net assets less liabilities assumed acquired exceeds the fair value. As with tangible and other intangible assets, periodic impairment reviews are required, at least annually, as well as when events or circumstances change. Management uses judgment in assessing goodwill for impairment. Management reviews the recorded value of our goodwill annually, or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value. Professional judgment must be exercised in determining future cash flows, timing and business valuation comparables or selecting discount rates to be used in any valuation assessments.
Deferred Acquisition Costs-Deferred acquisition costs are those costs that vary with and are primarily related to the acquisition of new and renewal business. Such costs include commissions, costs of contract issuance and underwriting, premium taxes and other costs the Company incurs to acquire new business or renew existing business. The Company defers policy acquisition costs and amortizes them over the estimated life of the contracts, which are short-duration in nature, in proportion to premiums earned. The Company capitalized deferred acquisition costs of approximately $4,363,000, $2,787,000 and $2,632,000 and amortized approximately $3,487,000, $2,742,000 and $1,436,000 of these capitalized costs for the year ended December 31, 2010, 2009 and 2008, respectively. These amounts are recorded in commission expense and other acquisition costs included in the consolidated statements of operations.
Redeemable Provider Preferred Shares-The Board of Directors (“Board”) authorized and approved for issuance Provider Preferred Shares-2009 Series (“Provider Preferred Shares”) that includes 5,000 preferred shares of the 100,000 preferred shares authorized. These Provider Preferred Shares may only be purchased by participating dentists in the Company’s dental plans or retired participating dentists that own at least 12 redeemable Common Shares (Class A and/or B). The Provider Preferred Shares are considered to be redeemable preferred shares due to the fact that the shareholders have the option to require the Company to repurchase these shares upon their death, permanent disability or retirement. The Company records the Provider Preferred Shares as redeemable Provider Preferred Shares in the consolidated balance sheets outside of shareholders’ equity at the redemption value of the preferred shares. Accordingly, Provider Preferred Shares are participating securities that share in the net income (loss) or other comprehensive income (loss) as a change to the redemption value of the redeemable Provider Preferred Shares to accrete (dilute) the carrying value to the redemption value at the end of each reporting period. Under this method, the end of the reporting period is treated as if it were also the redemption date for the securities. Redeemable Provider Preferred Shares are entitled to a cumulative cash dividend equal to 5% of the year end book value of the redeemable Provider Preferred Shares.
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 $29,531,000 and $20,959,000 at December 31, 2010 and 2009, respectively, and relates to the estimated premium revenue associated with the remaining contract periods. Related amounts recorded in unbilled accounts receivable were approximately $28,061,000 and $19,985,000 at December 31, 2010 and 2009, 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 $1,470,000 and $974,000 at December 31, 2010 and 2009, respectively. Management has determined that as of December 31, 2010 and 2009, respectively, no premium deficiency reserve is required. The Company’s premium deficiency reserve analysis includes an allocation of investment income. Enrollment changes not yet reflected on employer group invoices, also known as retroactive membership adjustments, are estimated based on available data and are reflected in revenue for the current periods.
During 2010, 2009 and 2008, four fully-insured customers accounted for approximately 10%, 9% and 9%, respectively, of the Company’s total revenue. Additionally, two self-insured customers accounted for approximately 11%, 11% and 13% of the Company’s total revenue during 2010, 2009 and 2008, respectively.
In February 2010, the FASB issued guidance that amends the Subsequent Events topic by removing the requirement for a Commission registered company to disclose a date, in both issued and revised financial statements, through which that company had evaluated subsequent events. Accordingly, the Company removed the related disclosure. The adoption did not have a material impact on the Company’s consolidated financial statements.
At December 31, 2010 and 2009, maturity dates for fixed maturity and short-term investments (excluding the money market fund) were:
The components of the provision (benefit) for income taxes are summarized as follows as of December 31, 2010, 2009 and 2008, respectively:
The following is a summary of activity of nonvested awards for the year ended December 31, 2010:
There have been no restricted share awards granted that would have a dilutive effect on the Company’s basic earnings per share for the years ended December 31, 2010, 2009 and 2008.
When Redeemable Common shares are offered by the Company, providers in the Company’s service area have the option to purchase one share of voting Class A Redeemable Common Shares of the Company. The area we refer to as our service area includes all counties located in Ohio and Kentucky. All participating providers along with Company directors and employees have the option to purchase one or more non-voting Class B Redeemable Common Shares of the Company, when offered. Accordingly, prospective shareholders may make a subscription payment per share equal to the book value of a common share, which was approximately $633 and $636 at December 31, 2010 and 2009, respectively.
value at the beginning of the dividend period. At December, 31, 2010, this dividend payable liability of approximately $7,000 was established in accordance with the Stock Purchase Agreement and is included in other accruals in the accompanying consolidated balance sheets.
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 Department, 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. Under these restrictions, no dividends may be paid by Dental Care Plus in 2011 without prior regulatory approval. There were no dividends declared or paid by any subsidiaries during 2010, 2009 or 2008.
In 2003, the Company purchased land and an office building and in connection therewith, the Company executed a mortgage note, secured by the land and the office building, with a bank in the amount of $1,800,000. Interest is payable based on the 30-day LIBOR rate plus 1.75% and was 2.01% and 1.98% at December 31, 2010 and 2009, respectively. At the maturity date of the mortgage note in 2013, the expected outstanding balance of the note of $600,000 must be repaid or refinanced.
At December 31, 2010, future required payments under the capital lease are as follows:
In 2003, the Company entered into an interest rate swap agreement (“Agreement”) (cash flow hedge) with an original notional amount of $1,500,000. The Agreement is used to manage the Company’s interest rate risk. The swap agreement effectively changed the interest rate related to $1,500,000 of the Company’s $1,800,000 mortgage note with a commercial bank from a variable rate based on the 30-day LIBOR rate plus 1.75% to a fixed rate of approximately 4.95% for the 10-year period through June 12, 2013. The Company’s risk management policy is to not enter into derivatives for speculative purposes. The notional amount decreases $10,000 per month in direct correlation to the principal reduction of the mortgage. The Company believes that the risk of nonperformance by the counter party in conjunction with this arrangement is not material to the financial statements. The fair value of this Agreement at December 31, 2010 and 2009 was a liability of approximately $28,000 and $24,000, respectively. These amounts are included in other payables and accruals in the accompanying consolidated balance sheets. The amount included in other comprehensive income (loss) related to the interest rate swap was ($2,644), $9,462, and ($42,885), net of income tax expense (benefit) of ($1,362), $4,874, and ($22,093) during 2010, 2009 and 2008, respectively. The agreement will terminate upon maturity of the mortgage loan payable (Note 11).
The Company leases space in its building to unrelated parties under non-cancelable leases. Income recorded by the Company under non-cancelable leases amounted to approximately $62,000 $66,000 and $47,000 for the years ended December 31, 2010, 2009 and 2008, respectively. Such amounts are recorded as other income in the accompanying consolidated statements of operations. As of December 31, 2010, approximate future minimum annual lease income under non-cancelable leases is $44,000 for 2011.
In August 2010, the Company renewed an annually renewable agreement with a commercial bank for a $500,000 working capital line of credit. Interest was payable at a variable rate of LIBOR plus 2.50% and was 2.88% at December 31, 2010. The Company did not have any interest expense for the line of credit in the 2010 period or the 2009 period. As of December 31, 2010 and 2009, there was no amount outstanding on this line of credit. The $500,000 working capital line of credit renewal expires in July 2011.
In 2009, the Company renewed an annually renewable agreement with a commercial bank for a $1,000,000 working capital line of credit. In August 2010, the Company renewed the working capital line of credit for $915,000 with interest payable at a variable rate of LIBOR plus 2.50%. The $915,000 working capital line of credit renewal expires in August 2011. Interest was payable at a variable rate of LIBOR plus 2.50% and was 2.88% at December 31, 2010. The Company did not have any interest expense for the line of credit for the years ended December 31, 2010, 2009 and 2008. As of December 31, 2010 and 2009, there was no amount outstanding on this line of credit. In addition, we obtained an irrevocable letter of credit for $85,000 with interest payable on
The results of the fully-insured and self-insured dental segments are measured by gross profit. The Company does not allocate insurance expense, investment and other income, assets or liabilities to these segments. These items are assigned to the remainder of the Company’s business, which it identifies as corporate, all other. The Company’s gross profit was approximately $12,373,000, $12,169,000, and $12,617,000 for the years ended December 31, 2010, 2009 and 2008, respectively.
The Company’s providers, who are also shareholders, submitted claims of approximately $41,207,000, $42,152,000 and $41,666,000 in 2010, 2009 and 2008, respectively. The Company had claims payable liability to related party providers of approximately $1,834,000 and $1,705,000 at December 31, 2010 and 2009, respectively.
Seven of our Board members are also participating providers and as a group received approximately $141,000, $155,000 and $151,000 in directors’ fees for the years ended December 31, 2010, 2009, and 2008, respectively.
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, 2010 and 2009 (amounts in thousands):
The Company measures fair value using the following valuation methodologies. The Company uses quoted market prices to determine the fair value of the deferred compensation investments and certain state fund guarantee deposits; such items are classified as Level 1 of the fair-value hierarchy. Examples include government securities and exchange-traded equity securities. The Company obtains prices from independent vendors to determine the fair value of the majority of its short-term investments and investments portfolio. The remainder of the short-term investments and investments portfolio and the remainder of the state fund guarantee deposits are fair valued using a discounted cash flow method whereby the significant observable inputs include the maturity date, the interest rate yield and the issuer’s credit rating; such items are classified as Level 2 of the fair-value hierarchy. Examples include brokered and non-brokered certificates of deposit. 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.
A summary of our unaudited quarterly results of operations for the years ended December 31, 2010 and 2009 is as follows (amounts in thousands, except for per share results):