We had a net income of approximately $1,318,000 for the year ended December 31, 2012 compared to a net income of approximately $591,000 for the year ended December 31, 2011. This increase in net income is primarily the result of an increase in premium revenue of approximately $3,926,000, to $80,153,000 in 2012 from $76,227,000 in 2011, offset by an increase in healthcare services expense of approximately $1,385,000, to $63,736,000 in 2012 from $62,351,000 in 2011. This increase in gross margin of approximately $2,541,000 was offset by an increase in insurance expenses of $1,492,000, to $14,609,000 in 2012 from $13,117,000 in 2011. Our ratio of insurance expense to total premium revenue (“insurance expense ratio”) increased to 18.2% in 2012 from 17.2% in 2011.
Fully-insured dental HMO/IND premium increased approximately $1,317,000 in 2012 compared to 2011. Fully-insured dental HMO/IND premium rates negotiated with employer groups at their renewals resulted in an increase of approximately $776,000 in fully-insured dental HMO/IND premium revenue. An increase in fully-insured dental HMO/IND membership in 2012 resulted in an increase in fully-insured dental HMO/IND premiums of approximately $541,000. The fully-insured dental HMO/IND segment represented approximately 54.7% of our total dental business in 2012.
Fully-insured dental PPO premium increased approximately $1,872,000 in 2012 compared to 2011. Fully-insured dental PPO premium rates negotiated with employer groups at their renewals resulted in an increase of approximately $902,000 in fully-insured dental PPO premium revenue. An increase in fully-insured dental PPO membership in 2012 resulted in an increase in fully-insured dental PPO premiums of approximately $970,000. The fully-insured dental PPO segment represented approximately 14.3% of our total dental business in 2012.
Our corporate, all other membership increased by approximately 2,900 members in 2011. The increase is primarily due to an increase of approximately 3,400 members in our vision plan, offset by a decrease of approximately 500 dental indemnity members that shifted into the fully-insured segment at renewal.
This increase in cash and short term investments from December 31, 2011 to December 31, 2012 is primarily due to the net cash provided by operating activities of approximately $1,362,000 and cash provided by financing activities of approximately $448,000, offset by the cash used in investing activities of $256,000.
We operate as a holding company in a highly regulated industry. We are primarily dependent upon management fees that we receive from our subsidiaries. We receive over 99% of our management fees from our subsidiary, Dental Care Plus. We also receive dividends from our subsidiaries from time to time. The dividends from our subsidiary, Dental Care Plus, are subject to regulatory restrictions.
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 2012, Dental Care Plus paid an ordinary dividend in the amount of $360,000 to DCP Holding Company that did not require prior approval by the Ohio Department of Insurance. There were no dividends declared or paid by Dental Care Plus during 2011 or 2010. Even if prior approval is not required, prior notification must be provided to state insurance departments in Ohio, Kentucky and Indiana before paying a dividend.
Between December 31, 2011 and December 31, 2012, our IBNR estimate decreased by approximately $73,000 or 4.1%, primarily due to a 1.4% decrease in fully-insured dental HMO/IND claims on a per member per month basis in 2012 compared to 2011. Also, our IBNR estimate at December 31, 2012 has decreased due to a decrease in fully-insured dental HMO/IND utilization in December 2012 compared to December 2011. In addition, the fully-insured dental PPO claims on a per member per month basis decreased by 0.5% in 2012 compared to 2011. Reported claims in process at December 31, 2012 was approximately $367,000, or $587,000 lower than the reported claims in process at December 31, 2011. This decrease was the result of the payment of provider claims that occurred on December 31, 2012 that reduced reported claims in process to its lowest possible level. The final payment of provider claims in 2012 occurred on December 31, 2012, whereas the final payment of provider claims in 2011 occurred on December 26, 2011. Accordingly, there were five days less of reported claims in process at December 31, 2012 as compared to December 31, 2011.
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 (the “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 shall be (i) in respect of the dividend payable in 2012, 5% of the per share issue price, prorated based on the number of days which the Shares were outstanding in 2012; and (ii) in respect of the dividends payable in 2013 and all years thereafter, 5% of the book value of the Shares on December 31 of the preceding year, prorated based on the number of days which the Shares were outstanding in the preceding year. In the event of any liquidation, dissolution or winding up of the Company, any merger or consolidation resulting in a change of control of the Company, or any sale, lease, transfer or other disposition of substantially all of the assets of Company, the investor will have the right to receive a cash payment in an amount equivalent to the consideration the investor would have otherwise received if the investor had the ability to convert each Share to 1.2 Class B Common Shares.
premium revenue in the accompanying consolidated balance sheets. Premiums received in advance were approximately $1,196,000 and $1,237,000 at December 31, 2012 and 2011, respectively. Management has determined that as of December 31, 2012 and 2011, respectively, no premium deficiency reserve is required. The Company’s premium deficiency reserve analysis includes an allocation of investment income.
The Plans also provide for the directors and key employees to receive share awards based on the book value of the Redeemable Common Shares and to elect to defer receiving such amounts until termination of board membership or employment and vesting requirements are met. If a director or 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 at redemption. 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. In 2012, the Company established a long-term incentive compensation program for named executive officers pursuant to which an officer may receive an award of up to 45% of such officer’s base salary in the form of share awards which will vest if established Company performance criteria are achieved over a three year period.
At December 31, 2012, future approximate minimum annual lease payments under non-cancelable operating leases are as follows: