Our primary sources of cash are premiums, ASO fees, investment and other income, as well as the proceeds from the maturity or sale of our investment securities, from the sale of redeemable common and preferred shares, and from borrowings. Our primary uses of cash include disbursements for claims payments, insurance expense, interest expense, taxes, purchases of investment securities, capital expenditures, redeemable common shares redemptions, dividends, and payments on borrowings. Because premiums are collected in advance of claims payments, our business should normally produce positive operating cash flows during a period of increasing enrollment. Conversely, cash flows would be negatively impacted during a period of shrinking enrollment. Cash decreased $425,000, or 5.0%, for the year ended December 31, 2013 to approximately $8.1 million at December 31, 2013 from approximately $8.5 million at December 31, 2012. This cash decrease is primarily the result of an increase in our corporate bond investments of approximately $3.1 million and the investment in our office building and related equipment of approximately $601,000. These cash decreases due to investing activities were offset by strong profitability due to a lower fully-insured loss ratio in 2013. This loss ratio decrease is primarily due to an increase in fully-insured dental HMO/IND and fully-insured dental PPO premium rates in 2013 compared to 2012 and improved underwriting practices.
In 2012, we generated approximately $1,362,000 of cash from operating activities. This level of cash flow from operating activities is similar to the cash flow generated from operating activities in 2011. We had net income of approximately $1,318,000 in 2012 compared to net income of $591,000 in 2011. During 2012, we paid approximately $1,110,000 in federal tax payments as compared to $95,000 in 2011. In addition to our 2012 net income, we had non-cash depreciation and amortization expense of approximately $288,000 and an increase in deferred compensation liabilities of $542,000. The increase in deferred compensation liabilities is primarily due to the 16% increase in the book value of the common shares during 2012. These sources of cash were offset by cash uses such as a decrease in the claims payable liability of approximately $665,000. A decrease in accounts receivable of approximately $2,705,000 was offset by a decrease in unearned premium revenue of $2,665,000, resulting in a net cash increase of $40,000. This cash increase is attributable to a decrease in uncollected premiums of approximately $82,000 offset by a decrease of unearned premium revenue received in advance of approximately $42,000.
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, 2013.
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. Our reimbursement to our participating providers for in-network covered dental services under the dental PPO also became subject to a 10% withhold effective April 1, 2011. 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 is to 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.
The Company changed its reportable segments in the first quarter of 2012 to reflect management’s revised view of the business and to align the external financial reporting with a new operating and internal reporting model. The Company separated the fully-insured dental PPO product into its own segment as a result of recent revenue growth of the fully-insured dental PPO product and the unique sales and operations management considerations for this product in the Company’s expanding markets. All respective amounts related to the segment change are reflected in the consolidated financial statements.
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 $280,000 at December 31, 2013 and 2012. 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.
Management believes it is more likely than not that deferred tax assets 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 $110,265, $122,544, and $122,547 of net operating loss carry forwards to utilize in future years at December 31,
On September 13, 2013, the Internal Revenue Service released final tangible property regulations under Sections 162(a) and 263(a) of the Internal Revenue Code of 1986 (“Code”), regarding the deduction and capitalization of expenditures related to tangible property. The final regulations replace temporary regulations that were issued in December 2011. Also released were proposed regulations under Section 168 of the Code regarding dispositions of tangible property. These regulations generally apply to taxable years beginning on or after January 1, 2014.
The expected fair value of the awards is calculated by applying the three year historical average trend rate of the book value per redeemable common share over the respective vesting period. The weighted average grant date fair value of the awards granted in the years ended December 31, 2013 and 2012 were $957 and $743, respectively. At December 31, 2013 and 2012, the deferred compensation liability was approximately $2,063,000 and $1,613,000, 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, 2013 and 2012 (amounts in thousands):