Headquartered in Cincinnati, Ohio, the Dental Care Plus Group offers to Ohio, Kentucky, Indiana, Michigan and Tennessee 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 FFM exchanges and individual dental HMO and PPO plans in Ohio, Kentucky and Indiana. As of December 31, 2018, we had approximately 408,200 members in our dental and vision benefit programs with approximately 3,000 providers participating in our Dental Care Plus dental HMO network, approximately 3,200 providers participating in our DentaSelect dental PPO network and approximately 2,300 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 46,400 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 2018. With this network access arrangement, FFM exchange members have access to approximately 12,700 providers across the eleven FFM exchange states.
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.
Our ratio of healthcare services expense to premium revenue (“loss ratio”) decreased by approximately 1.0% from 75.9% in 2017 to 74.9% in 2018. The fully-insured dental HMO/IND and fully-insured dental PPO segments together represent approximately 70.6% of our total dental business.
The annual federal premium tax assessment was suspended for calendar year 2017, but was reinstated in 2018. Operating costs associated with the federal premium tax was approximately $802,000 in 2018. This fee is not deductible for federal income tax purposes. The annual federal premium tax assessment is suspended for calendar year 2019.
The following table shows membership totals and revenues and expenses for our four business segments for the years ended December 31, 2018 and 2017 (dollars in thousands):
Net income was approximately $2,557,000 and $1,829,000 for 2018 and 2017, respectively. The increase in net income was primarily a result in lower income tax expense of approximately $1,057,000, an increase in premium revenue of approximately $4,725,000 and an increase in investment income of approximately $68,000. These improvements were offset by an increase in healthcare services expense of approximately $2,464,000, an increase in insurance expenses of $2,285,000 and an increase in realized losses on investments of approximately $374,000.
Our fully-insured dental HMO/IND membership decreased by approximately 800 members, or 0.5%, in 2018. This membership decrease is a result of approximately 2,700 fully-insured dental HMO/IND members converting to our self-insured dental product in 2018 as well as a loss of approximately 11,200 members with employer groups that did not renew with the Company or reduced employee counts of retained employer groups. In addition, some of our fully-insured dental HMO/IND membership losses were the result of corporate consolidations and employer groups moving to medical or other ancillary carriers to take advantage of multi-line packaged savings. These decreases were offset by an increase of 11,100 members from new sales of employer groups and a net increase of 2,000 members from new sales of individual HMO products.
Our fully-insured dental PPO membership increased by approximately 11,300 members, or 12.6% in 2018. 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 10,400 members during 2018, offset by the loss of approximately 7,700 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 8,600 members is due to new sales of individual and on exchange dental PPO products in 2018.
Our corporate, all other membership increased by approximately 1,200 members, or 3.0%, in 2018 as a result of increased membership in our vision plan.
Self-Insured ASO Fees - Self-insured ASO fees increased approximately $127,000 in 2018. Self-insured ASO fees increased by approximately $29,000 due to an increase in the average self-insured ASO fee rates on a PMPM basis in 2018. In addition, there was an increase of approximately $98,000 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 $271,000, to $1,078,000 in 2018 from $807,000 in 2017.
Other income and realized (losses) gains on investments decreased approximately $374,000 to ($125,000) in 2018 from $249,000 in 2017. The decrease is primarily the result of realized losses from the deferred compensation equity mutual fund investments included in other assets in 2018. In addition, there were investments gains due to the sale of investments in 2017 that did not occur in 2018.
Fully-insured dental HMO/IND healthcare services expense decreased $737,000 in 2018. Fully-insured dental HMO/IND healthcare services expense on a PMPM basis slightly decreased from $19.93 PMPM in 2017 to $19.92 PMPM in 2018. A decrease in fully-insured dental HMO/IND membership resulted in a decrease in fully-insured dental HMO/IND healthcare services expense of $731,000 and a slight decrease in healthcare services utilization resulting in an increase of approximately $6,000 in 2018 compared to 2017.
Fully-insured dental PPO healthcare services expense increased by $1,123,000 in 2018. Fully-insured dental PPO healthcare services expense on a PMPM basis decreased 5.7%, from $15.89 PMPM in 2017 to $14.98 PMPM in 2018. An increase in fully-insured dental PPO membership resulted in an increase in fully-insured dental PPO healthcare services expense of $2,273,000. These increases were offset by lower healthcare services utilization that resulted in a decrease of approximately $1,150,000 in 2018 compared to 2017.
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):
Our corporate, all other membership increased slightly as a result of increased membership in our vision plan.
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.
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.
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 slightly increased $32,000, or 0.2%, for the year ended December 31, 2018 to approximately $13,209,000 at December 31, 2018 from approximately $13,177,000 at December 31, 2017. This cash increase is primarily the result of cash flow provided by operations of approximately $2,370,000. This increase was offset by a decrease in cash flow used in investing activities and financing activities of approximately $1,150,000 and $1,188,000, respectively.
In 2018, we had net income of approximately $2,557,000. A decrease in billed accounts receivable resulted in an increase in cash of approximately $3,891,000 in 2018. A reconciling difference to net income was our non-cash deferred compensation expense of approximately $427,000, which is primarily the result of the vesting of our cash and share awards in 2018. Deferred policy acquisition costs increased by approximately $203,000 as a result of the increase in the fully-insured business renewed in January 2018. Cash from operating activities also decreased approximately $802,000 as the result of the reinstatement of the federal premium tax in 2018. There was no federal premium tax in 2017. In future years after the 2019 moratorium, the federal premium tax increase will be based on a graduated year-over-year percentage increase of premium revenue earned as a result of the Affordable Care Act. Other payables and accrued expenses decreased, resulting in a net decrease in cash flow from operations of approximately $538,000. The remaining effects of changes in operating assets and liabilities that represent fluctuations are not significant and are consistent with 2017.
In 2017, approximately $3,608,000 was provided by operating activities. We had net income of approximately $1,829,000. A reconciling difference to net income was our non-cash deferred compensation expense of approximately $988,000, which is primarily the result of the vesting of our share awards 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.
In 2016, approximately $3,682,000 was provided by operating activities. We had net income of approximately $1,989,000. A reconciling difference to net income was our non-cash deferred compensation expense of approximately $995,000, which is primarily the result of the vesting of our share awards 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.
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 $4,800 per month in 2019 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, 2018, 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, 2018. 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, 2018, the Company was in compliance with this minimum tangible net worth requirement.
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 2018, 2017 or 2016. As of December 31, 2018 and 2017, there was no amount outstanding on this line of credit.
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 2018, 2017 or 2016. As of December 31, 2018 and 2017, there was no amount outstanding on this line of credit.
Our largest subsidiary, Dental Care Plus, operates in states that regulate its payment of dividends and debt service on inter-company loans, as well as other inter-company cash transfers and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid by Dental Care Plus, without prior approval by state regulatory authorities, is limited based on statutory income and statutory capital and surplus. Dividends cannot exceed in any one year the lesser of: (i) 10% of net worth (as of the preceding December 31), or (ii) net income for the prior year, and only if net worth exceeds $250,000 and only out of positive retained earnings. In December 2018, Dental Care Plus declared a dividend payable to the DCP Holding Company in the amount of approximately $1,470,000, payable January 2019. There were no dividends declared or paid by Dental Care Plus in 2017 or 2016. Even if prior approval is not required, prior notification must be provided to state insurance departments before paying a dividend.
Between December 31, 2017 and December 31, 2018, our claims payable liability estimate decreased by approximately $963,400 or 26.9%, primarily due to lower reported claims in process in December 2018 compared to December 2017 offset by an increase in fully-insured dental PPO membership at December 31, 2018 compared to December 31, 2017.
When developing our estimate for claims payable liability as of December 31, 2018, we considered actual paid claim data from January 2019. As a result, we are able to use the completion factors approach for all historical months in 2018, including December 2018. 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, 2018 within variance ranges historically experienced. Based on historical experience, the completion factors we use to estimate outstanding IBNR and reported claims in process are reliable for predicting actual claims paid at future times, with a variance range of approximately one-half of one percent, plus or minus.
(a) Reflects estimated potential changes in incurred claims payable liability caused by changes in completion factors for all months prior to December 31, 2018.
Refer to Note 1 of the consolidated financial statements for further information on recently issued accounting standards.
We have audited the accompanying consolidated balance sheets of DCP Holding Company and subsidiaries (the "Company") as of December 31, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
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.
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 $1,849,000 and $1,838,000 at December 31, 2018 and 2017, 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.
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 $33,149,000 and $36,818,000 at December 31, 2018 and 2017, respectively, and primarily relates to the estimated premium revenue associated with the remaining contract periods. Related unbilled amounts recorded in accounts receivable were approximately $31,151,000 and $35,281,000 at December 31, 2018 and 2017, 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 $1,998,000 and $1,537,000 at December 31, 2018 and 2017, respectively. Management has determined that as of December 31, 2018 and 2017, respectively, no premium deficiency reserve is required. The Company’s premium deficiency reserve analysis includes an allocation of investment income.
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 $84,071,000, $81,608,000, and $80,500,000, for the years ended December 31, 2018, 2017, and 2016, respectively.
During 2018, 2017, and 2016, five fully-insured customers accounted for approximately 10%, of the Company’s total premium revenue. Additionally, two self-insured customers accounted for approximately 12%, 11% and 11% of the Company’s total revenue during each of the years 2018, 2017, and 2016, respectively.
The Company had one customer that had a balance of approximately 17% and 25% of the uncollected premium receivable balance at December 31, 2018 and 2017, respectively.
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. The adoption increased retained earnings as of January 1, 2018 by $53,000 as a result of an increase of $548,000 in premium revenue and $495,000 of healthcare services expense. For the year ended December 31, 2018, application of the new standard resulted in premium revenues that were $548,000 lower and healthcare services expense that were $495,000 lower than amounts that would have been recognized under the previous standard.
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. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 and ASU 2018-11, Targeted Improvements to Topic 842. ASU 2018-10 makes narrow-scope amendments to certain aspects of the new leasing standard while ASU 2018-11 provides relief from costs of implementing certain aspects of the new leasing standard. 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 Company will adopt the ASU on January 1, 2019. The impact of the adopted ASU is not expected to be material on the Company’s consolidated financial position, cash flows and results of operations.
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 Company will adopt the ASU on January 1, 2019. The adoption of these standards is not expected to have a material impact on the Company’s consolidated financial position, cash flows and results of operations.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 clarifies the fair value measurement disclosure requirements of ASC 820 by adding, eliminating and modifying disclosures. The effective date of ASU 2018-13 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 the Company’s consolidated financial position, cash flows and results of operations, but it is not expected to have a significant impact.
The Company owned certificates of deposit insured by the Federal Deposit Insurance Corporation (“FDIC”) with an amortized cost of $900,000 and $1,150,000 at December 31, 2018 and 2017. 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 $454,000 and $181,000 at December 31, 2018 and 2017, respectively. The Company invested in corporate bonds with an amortized cost of approximately $8,453,000 and $8,240,000 at December 31, 2018 and 2017, 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.
Investments classified as fixed maturities and short-term investments at December 31, 2018 and 2017 were as follows:
The following table provides realized investments gains and losses for the years ended December 31, 2018, 2017 and 2016:
The Company had depreciation expense of approximately $484,000, $432,000, and $484,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
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 Plans also provide for the directors and key employees to receive cash retention awards or share awards. Share awards are based on the book value of the Redeemable Common Shares. In 2018, key employees were granted cash retention awards. The cash retention awards may be subject to deferral elections upon vesting. Prior to 2018, key employees received share based awards and from 2010 until 2018, directors received 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 a cash payment for the cash retention award or Class B Redeemable Common Shares for the share based awards, upon vesting. If the cash retention or share awards are deferred, these deferred amounts will be paid in cash when deferred obligations are payable. 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 72 and 183 of these non-vested share awards outstanding at December 31, 2018 and 2017, respectively. The number of share awards expected to vest approximates the total non-vested awards outstanding.
The deferred compensation expense related to the cash retention and share awards are recorded ratably during the applicable vesting period. The Company recorded deferred compensation expense of approximately $394,000, $956,000, and $710,000, with a deferred tax benefit of approximately $83,000, $325,000, and $241,000, related to cash retention awards, deferred share awards and the change in the value of phantom shares for the years ended December 31, 2018, 2017, and 2016, respectively. As of December 31, 2018, there is approximately $94,000 of total unrecognized compensation cost related to non-vested share awards under the Plans. That cost is expected to be recognized over a weighted average period of 1.35 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.
The maximum aggregate number of share based awards that may be issued under the Plans are 15,000 Class B Common Shares. As of December 31, 2018, the Company has granted a total of 4,936 share awards, net of share based dividends, forfeitures and rescinded share awards of which 3,059 are outstanding.
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 $1,040,000 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.
At December 31, 2018, future required payments under all outstanding capital leases are as follows:
The amounts included in other comprehensive income related to the interest rate swap was $7,885, $9,043, and $7,471, net of income tax expense of $2,096, $4,659, and $3,848, during 2018, 2017 and 2016, respectively.
For the years ended December 31, 2018, 2017, and 2016, 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 2014 remain open to examination by the Internal Revenue Service (“IRS”), and tax years subsequent to 2013 remain open to other state and local tax authorities.
Leases-The Company leases certain software, equipment and office space under non-cancelable operating leases. Rent expense under all operating leases was approximately $389,000, $324,000, and $206,000, for the years ended December 31, 2018, 2017 and 2016, respectively.
At December 31, 2018, future approximate minimum annual lease payments under non-cancelable operating leases are as follows:
Listed below is financial information required for each reportable segment for the years ended December 31, 2018, 2017 and 2016 (amounts in thousands):
The Company’s providers, who are also shareholders, submitted claims of approximately $33,893,000, $33,291,000, and $38,256,000, in 2018, 2017, and 2016, respectively. The Company had claims payable liability to related party providers of approximately $1,081,000 and $1,487,000 at December 31, 2018 and 2017, respectively.
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.
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, 2018 and 2017 there were no issued or outstanding Preferred Shares.
GAAP differs in certain respects from the accounting practices prescribed or permitted by state insurance regulatory authorities (“statutory-basis”), a non-GAAP basis of accounting. The statutory-basis net income for Dental Care Plus was approximately $1,677,000, $2,108,000, and $1,653,000 for the years ended December 31, 2018, 2017 and 2016, respectively. Statutory-basis equity was approximately $14,449,000, and $14,800,000 at December 31, 2018 and 2017, respectively.
As discussed on the Company’s Current Report on Form 8-K filed with the Commission on March 14, 2019, the Company entered into Agreement with DentaQuest, LLC dated March 12, 2019 pursuant to which the Company will be merged with a subsidiary of DentaQuest, LLC and our shareholders will receive cash in exchange for their Company commons shares (the “Merger”). The Merger is subject to approval of our shareholders, regulatory approval and other customary conditions.