HomeMy WebLinkAboutRESPONSE - RFP - 7649 DENTAL ADMINISTRATOR (19)Colorado Dental Service, Inc.
Consolidated Financial Statements
(With Independent Auditor’s Report Thereon)
December 31, 2012
Contents
Independent Auditor’s Report on the Financial Statements 1-2
Financial Statements
Consolidated balance sheets 3
Consolidated statements of operations and changes in reserves 4
Consolidated statements of cash flows 5
Notes to consolidated financial statements 6-17
Independent Auditor’s Report on the Supplementary Information 18
Supplementary Information
Consolidating balance sheet—December 31, 2012 19
Consolidating statement of operations and changes in reserves—year ended
December 31, 2012
20
Consolidating balance sheet—December 31, 2011 21
Consolidating statement of operations and changes in reserves—year ended
December 31, 2011
22
1
Independent Auditor’s Report
The Board of Trustees
Colorado Dental Service, Inc.
Report on the Financial Statements
We have audited the accompanying consolidated balance sheets of Colorado Dental Service, Inc., d/b/a
Delta Dental of Colorado (the Company), as of December 31, 2012 and 2011, and the related
consolidated statements of operations and changes in reserves, and cash flows for the years then ended
and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America;
this includes the design, implementation and maintenance of internal control relevant to the preparation
and fair presentation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We did not audit the financial statements of Delta Dental of Colorado Foundation, Inc. (the
Foundation), a consolidated entity controlled by the Company, which statements reflect total assets
constituting 19 percent and 15 percent, respectively, of consolidated total assets at December 31, 2012
and 2011, and total revenues constituting 3 percent and 1 percent, respectively, of consolidated total
revenues for the years then ended. Those statements were audited by other auditors, whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts included for the Foundation, is
based solely on the report of the other auditors. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no
such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
2
Opinion
In our opinion, based on our audits and the report of the other auditors, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of the Company
as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then
ended in accordance with accounting principles generally accepted in the United States of America.
Minneapolis, Minnesota
April 30, 2013
3
Colorado Dental Service, Inc.
Consolidated Balance Sheets
December 31, 2012 and 2011
(In Thousands)
Assets 2012 2011
Cash and Investments
Cash and cash equivalents $ 10,298 $ 13,245
Marketable securities (Notes 2 and 8) 85,283 72,335
95,581 85,580
Accounts Receivable, net (less allowance for doubtful accounts of
$175 and $356 at December 31, 2012 and 2011, respectively) (Note 3) 13,579 15,239
Property and Equipment, net (Note 4) 4,363 3,009
Prepaid Expenses and Other 1,023 918
Total assets $ 114,546 $ 104,746
Liabilities and Reserves
Liabilities
Losses:
Risk plans (Note 6) $ 4,737 $ 5,185
Self-funded plans 5,659 6,536
Loss adjustment expenses 200 200
10,596 11,921
Advanced and unearned premiums 1,965 1,808
Accounts payable and accrued liabilities (Note 5) 7,677 9,974
Total liabilities 20,238 23,703
Commitments and Contingencies (Notes 5 and 7)
Reserves (Notes 1 and 9)
Unassigned, undesignated 70,180 64,548
Board-designated 3,314 2,510
Foundation reserves 20,814 13,985
Total reserves 94,308 81,043
Total liabilities and reserves $ 114,546 $ 104,746
See Notes to Consolidated Financial Statements.
4
Colorado Dental Service, Inc.
Consolidated Statements of Operations and Changes in Reserves
Years Ended December 31, 2012 and 2011
(In Thousands)
2012 2011
Revenues:
Premiums:
Risk plans $ 138,364 $ 129,535
Premium equivalents:
Self-funded plans 136,160 125,616
Administration fees—self-funded plans 10,196 10,182
146,356 135,798
Total revenues from operations 284,720 265,333
Investment income 3,105 2,470
Net realized gains on investments 1,123 1,858
Other 213 212
Total revenues 289,161 269,873
Expenses:
Losses:
Risk plans (Note 6) 111,676 106,409
Self-funded plans 136,160 125,616
Loss adjustment expenses 3,814 3,897
251,650 235,922
Grants and community benefit programs 3,179 5,477
General and administrative expenses 23,746 22,176
Total expenses 278,575 263,575
Revenues over expenses 10,586 6,298
Other changes in reserves:
Net change in unrealized gains on investments 2,441 (451)
Net change in unrecognized net periodic benefit cost (Note 5) 238 (90)
Net increase 13,265 5,757
Reserves at beginning of year 81,043 75,286
Reserves at end of year $ 94,308 $ 81,043
See Notes to Consolidated Financial Statements.
5
Colorado Dental Service, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2012 and 2011
(In Thousands)
2012 2011
Cash Flows From Operating Activities
Revenues over expenses 10,586 $ 6,298
Adjustments to reconcile revenues over expenses to net cash
provided by operating activities:
Depreciation expense 920 1,001
Net loss on disposal of property and equipment 144 -
Net amortization of bond premium and discount 51 47
Net realized gain on investments (1,123) (1,858)
Net unrealized gains on trading securities (155) -
Increase in unrecognized net periodic benefit cost 238 (90)
Changes in operating assets and liabilities:
Accounts receivable 1,660 (2,701)
Prepaid expenses and other (105) (233)
Liabilities for losses and loss adjustment expenses (1,325) 672
Advanced and unearned premiums 157 27
Accounts payable and accrued liabilities (2,297) 5,237
Net cash provided by operating activities 8,751 8,400
Cash Flows From Investing Activities
Purchase of property and equipment (2,418) (403)
Purchase of other-than-trading fixed-income securities (8,885) (2,664)
Purchase of other-than-trading equity securities (6,076) (11,939)
Sale of other-than-trading equity securities 810 5,540
Sales and maturities of other-than-trading fixed-income securities 7,474 6,704
Net change in trading securities (2,603) -
Net cash used in investing activities (11,698) (2,762)
Net increase (decrease) in cash and cash equivalents (2,947) 5,638
Cash and Cash Equivalents at Beginning of Year 13,245 7,607
Cash and Cash Equivalents at End of Year $ 10,298 $ 13,245
See Notes to Consolidated Financial Statements.
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
6
Note 1. Summary of Operations and Significant Accounting Policies
Operations: Colorado Dental Service, Inc., d/b/a Delta Dental of Colorado (the Company), is a Colorado
licensed, tax-exempt dental service corporation offering risk and self-funded dental plans to subscribers.
The Company administers the self-funded plans for a fee.
The Delta Dental Plan of Colorado Foundation, Inc. (the Foundation) was established so that the
Company could provide support to a 501(c)(3) charitable organization. The Foundation sponsors
programs that prevent dental disease and advance the science and practice of dentistry. The Foundation
is funded primarily by annual contributions from the Company. During 2012 and 2011, the Company
pledged funding of $6,515,000 and $3,631,000, respectively.
The Company has no ownership of the Foundation, but does have a controlling interest via majority
representation on the Foundation’s Board. Accordingly, the financial position, results of operations, and
cash flows of the Foundation are consolidated with those of the Company. Foundation reserves, which
are shown as a separate component of reserves in the accompanying consolidated balance sheets,
include a $2 million endowment designated by the Company’s Board of Trustees.
In December 2010, the Company’s Board of Trustees approved the creation of the Delta Dental of
Colorado Fund (the Fund), with an initial appropriation of $3,000,000. At the discretion of the Board of
Trustees, the Company will use the Fund to provide oral health benefits to the community and promote
oral health care throughout the state of Colorado. In 2012, the Board of Trustees appropriated an
additional $3,000,000 into the Fund. During the years ended December 31, 2012 and 2011, the Company
incurred $2,196,000 and $490,000, respectively, of oral health benefits and administrative expenses
related to the Fund. At December 31, 2012, the remaining balance of the Fund of $3,314,000 is shown as
a Board-designated component of reserves in the accompanying consolidated balance sheets.
Basis of presentation: The accompanying consolidated financial statements include the accounts of the
Company and of the Foundation (combined hereafter, the Company). All significant intercompany
transactions and balances have been eliminated in consolidation.
Recognition of risk plan premiums and self-funded revenue: Risk plan premium revenue and claims
expense are recognized in the period incurred. Risk plan contracts are typically written for one- to two-
year periods, and thereafter may be renewed on a yearly basis. Risk plan premiums are recognized as
revenue in the period to which the coverage is applicable. Policy acquisition costs, principally
commissions, are charged to operations as incurred.
Additionally, self-funded revenues represent amounts for which the Company is paid a fee by certain
employer groups and is reimbursed for actual claims by these groups through administrative service
contracts (ASCs). Under ASCs, the Company provides access to its network of dental providers to group
members, and the members receive an insurance card designating them as plan members. The
Company negotiates contractual discounts with the dental providers included in the network, provides the
list of services covered in product offerings, processes the claims pursuant to the terms of the employer
group’s plan, and monitors the quality of the dental services provided. The Company is responsible for
paying the dental provider the contracted amount and billing that amount plus its administrative service
fee to the employer group on a periodic basis. The Company mitigates its credit risk under ASCs by
performing credit checks of the employer groups and, in certain cases, collecting advance deposits. The
Company does not assume underwriting risk under ASCs.
Amounts received from the employer groups (including the administrative fee) and claims paid by the
Company under ASCs are recorded on a gross basis and separately presented as a component of
revenue and expenses, respectively, in the consolidated statements of operations and changes in
reserves. Receivables and liabilities for claims under such contracts are also separately presented.
Accounts receivable have been separately identified in Note 3, and accrued losses and loss adjustment
expenses are separately presented in the consolidated balance sheets.
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
7
Note 1. Summary of Operations and Significant Accounting Policies (Continued)
Management recognizes that, depending on the terms of the contract, revenues derived and claims
incurred under arrangements similar to ASCs may be presented by other plans on a net basis.
Management has evaluated the criteria of revenue recognition and believes that gross reporting is
appropriate based on the specific ASC terms, management’s consideration of the Financial Accounting
Standards Board’s (FASB) codification on revenue recognition, including certain factors mentioned
above, and general industry practice of other Delta Dental plans.
During 2011, the Company’s Board of Trustees approved a premium credit of $3,500,000 to substantially
all groups and individuals who paid fully insured risk premiums for the 2011 premium year. The
Company’s consolidated financial statements include this $3,500,000 as a reduction of risk premiums and
self-funded premium equivalents for 2011, and as a component of accounts payable and accrued
liabilities as of December 31, 2011. Substantially all of the calculated premium credits were issued in
2012. As of December 31, 2012, an accrued liability of $120,000 remains, primarily for groups who
deferred receipt of the refund until 2013.
Losses and loss adjustment expenses: Liabilities for losses and loss adjustment expenses represent
the estimated ultimate net cost of all reported and unreported claims incurred through December 31 and
are based on historical experience. Those estimates are subject to the effects of trends in claim severity
and frequency. Although considerable variability is inherent in such estimates, management believes that
the liabilities for losses and loss adjustment expenses are adequate. The estimates are continually
reviewed and adjusted as necessary as experience develops or new information becomes known; such
adjustments are included in current operations.
Cash and cash equivalents: The Company considers all highly liquid investments with an initial maturity
of three months or less at the date of purchase to be cash equivalents.
The Company maintains cash and cash equivalents in accounts that frequently exceed insured limits. To
date, the Company has not experienced any losses on such accounts.
Investments: Each of the consolidating entities has a separately managed investment portfolio. The
Company has designated its investments (which consist of fixed-income securities and equity securities)
held at December 31, 2012 and 2011, as other-than-trading. Accordingly, such investments are carried at
fair value, with the unrealized gains and losses reported as other changes in reserves. Realized gains
and losses, and declines in fair value judged to be other than temporary, are recognized as part of
revenues over expenses in the consolidated statements of operations and changes in reserves.
In 2011, the Company presented the Foundation investments as other than-than-trading with reporting
similar to the Company’s investments. During 2012, the Company determined the Foundation investment
portfolio was managed consistent with a trading portfolio and, therefore, changed the classification of the
Foundation’s investments (which consist of fixed-income securities and equity securities) and reporting
for the consolidated financial statements. Accordingly, such investments are carried at fair value, with the
unrealized gains and losses reported as a component of investment income in the consolidating
statement of operations and changes in reserves. Realized gains and losses are recognized as part of
revenues over expenses in the consolidated statements of operations and changes in reserves.
A description of the Company’s accounting policies for determining the fair value of investments is
included in Note 8, Fair Value of Financial Instruments.
The cost of investments sold is based on the specific-identification method. Interest, dividends,
amortization of premiums, and accretion of discounts on investments are included in investment income.
Amortization and accretion is computed using the scientific (constant yield) interest method.
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
8
Note 1. Summary of Operations and Significant Accounting Policies (Continued)
At December 31, 2012 and 2011, U.S. Treasury bonds with a par value of $1,500,000 were held in a
custodial account owned by the Company. This account has been pledged to the Colorado Division of
Insurance to satisfy regulatory requirements. The Company receives the investment income earned on
the bonds. At December 31, 2012 and 2011, the bonds had a fair value of $2,316,000 and $2,344,000,
respectively.
Property and equipment: Property and equipment is carried at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets
(three to 10 years). The cost of maintenance and repairs is charged to expense as incurred.
Income taxes: The Company is exempt from federal income taxes under the provisions of
Section 501(c)(4) of the Internal Revenue Code.
The Company adopted certain provisions of the income taxes topic of the FASB codification as of
January 1, 2009. The provisions clarify the accounting for uncertainty in income taxes recognized in an
organization’s financial statements and prescribe a recognition threshold and measurement standard for
the financial statement recognition and measurement of an income tax position taken or expected to be
taken in a tax return. The Company has reviewed its tax positions for all open tax years and has
concluded that the adoption of the provisions did not have an impact on their consolidated financial
statement presentation. Generally, the Company is no longer subject to federal income tax return
examinations for the years prior to 2009.
Other changes in reserves: Other changes in reserves for the years ended December 31, 2012 and
2011, consisted of the change in unrealized gains and losses on the Company’s other-than-trading
investment portfolio and the change in the funded status of the Company’s defined benefit health plan.
Use of estimates: The preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from the estimates.
Reclassifications: Certain amounts in the prior year’s consolidated financial statements have been
reclassified to conform to the current year’s presentation, with no impact on reserves or revenues over
expenses.
Subsequent events: The Company has evaluated subsequent events through April 30, 2013, the date
these consolidated financial statements were available to be issued. Effective April 15, 2013, the
Company amended their office space lease (see Note 7). Except for the lease, no additional subsequent
event disclosures or adjustments were determined to be required by the Company.
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
9
Note 2. Investments
The following is a summary of the investments at December 31:
2012 (In Thousands)
Cost/ Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Other-than-trading securities:
Fixed-income securities:
U.S. Treasury notes and U.S.
government agency bonds $ 17,256 $ 1,660 $ (4) $ 18,912
Corporate bonds 17,941 2,299 (50) 20,190
Mortgage- and asset-backed securities 2,071 226 - 2,297
37,268 4,185 (54) 41,399
Equity securities 25,133 6,896 (25) 32,004
Total other-than-trading securities $ 62,401 $ 11,081 $ (79) 73,403
Trading securities:
Fixed-income securities:
U.S. Treasury notes and U.S.
government agency bonds $ 101 $ 1 $ - 102
Corporate bonds 1,780 48 (19) 1,809
Mortgage- and asset-backed securities 151 3 - 154
2,032 52 (19) 2,065
Equity securities 9,693 507 (385) 9,815
Total trading securities $ 11,725 $ 559 $ (404) 11,880
Total investments $ 85,283
2011 (In Thousands)
Cost/ Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Other-than-trading securities:
Fixed-income securities:
U.S. Treasury notes and U.S.
government agency bonds $ 13,646 $ 2,327 $ - $ 15,973
Corporate bonds 21,069 2,181 (47) 23,203
Mortgage- and asset-backed securities 3,067 286 - 3,353
Total fixed-income securities 37,782 4,794 (47) 42,529
Equity securities 26,248 4,167 (609) 29,806
Total investments $ 64,030 $ 8,961 $ (656) $ 72,335
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
10
Note 2. Investments (Continued)
The amortized cost and estimated fair value of debt securities at December 31, 2012, by contractual
maturity, are shown below:
Amortized Fair
Cost Value
(In Thousands)
Due in one year or less $ 6,213 $ 6,217
Due after one year through five years 12,009 12,707
Due after five years through 10 years 15,439 17,943
Due after 10 years 3,417 4,146
Mortgage-backed securities 2,222 2,451
$ 39,300 $ 43,464
Expected maturities will differ from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or repurchase penalties.
Proceeds from the sales of investments during 2012 and 2011 were approximately $4,888,000 and
$6,481,000, respectively. Gross realized gains on the sale of investments were approximately $1,123,000
and $1,858,000 for the years ended December 31, 2012 and 2011, respectively. There were no gross
realized losses on the sale of investments for the years ended December 31, 2012 and 2011.
As of December 31, 2012 and 2011, unrealized losses on other-than-trading securities totaled
approximately $79,000 and $656,000, respectively. As of December 31 of each year, the unrealized
losses were considered to be temporarily impaired in accordance with the Company’s investment policy.
Because the Company has the ability and intent to hold the securities for a reasonable period of time
sufficient for a forecasted recovery of fair value, the Company does not consider these investments to by
other-than-temporarily impaired. No impairments were recognized in 2012 or 2011.
The following tables illustrate the gross unrealized losses and fair value of other-than-trading investments
with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by
investment type and length of time that individual securities have been in a continuous unrealized loss
position at December 31, 2012 and 2011.
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
2012 (in thousands):
U.S. Treasury notes
and U.S. government
agency bonds $ 2,007 $ (4) $ - $ - $ 2,007 $ (4)
Corporate bonds 500 (1) 595 (49) 1,095 (50)
Equity securities 3,270 (25) - - 3,270 (25)
Total $ 5,777 $ (30) $ 595 $ (49) $ 6,372 $ (79)
Less Than 12 Months Greater Than 12 Months Total
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
11
Note 2. Investments (Continued)
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
2011 (in thousands):
Corporate bonds $ 2,105 $ (47) $ - $ - $ 2,105 $ (47)
Equity securities 6,376 (609) - - 6,376 (609)
Total $ 8,481 $ (656) $ - $ - $ 8,481 $ (656)
Less Than 12 Months Greater Than 12 Months Total
Note 3. Accounts Receivable
Net accounts receivable at December 31 are summarized as follows:
2012 2011
(In Thousands)
Risk plans $ 2,477 $ 3,176
Self-funded plans:
Paid claims 5,443 5,439
Incurred but not reported claims 5,659 6,536
Other - 88
$ 13,579 $ 15,239
Note 4. Property and Equipment
At December 31, the components of property and equipment were as follows:
2012 2011
(In Thousands)
Property and equipment, at cost:
Computer software and hardware $ 6,788 $ 9,733
Leasehold improvements 1,604 1,066
Furniture and fixtures 1,111 2,195
9,503 12,994
Less accumulated depreciation 5,140 9,985
Property and equipment, net $ 4,363 $ 3,009
The Company has internal-use software that was developed to support the processing of claims with its
current administrative services provider. The software was initially placed in service in 2009, and the
Company has subsequently added additional components. The Company has incurred approximately
$3,705,000 and $3,460,000 as of December 31, 2012 and 2011, respectively, for the development of
internal-use software. Depreciation expense on the internal-use software was $520,000 and $475,000 in
2012 and 2011, respectively.
In 2012, the Company began work on an office space redesign project, which included an inventory of
existing office equipment, computer hardware, furniture, leasehold improvements, and other property and
equipment. As a result of this inventory, the Company wrote off $5,909,000 of property and equipment.
These assets had a remaining book value of $144,000 at the time of disposal, which was recorded to
administrative expenses in 2012.
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
12
Note 5. Retirement and Management Incentive Plans
The Company sponsors a defined contribution benefit plan that covers substantially all eligible
employees. For 2012 and 2011, the Company’s contributions to the plan were based on 4.0 percent of an
employee’s monthly compensation. For the years ended December 31, 2012 and 2011, benefit expense
was approximately $336,000 and $309,000, respectively.
For 2012 and 2011, the Company also matches the employee’s contribution, up to 4.0 percent of an
employee’s compensation, to an employee’s savings plan. For the years ended December 31, 2012 and
2011, benefit expense under this plan was approximately $259,000 and $256,000, respectively.
The Company sponsors an unfunded defined benefit health plan (the Plan) that provides postretirement
dental benefits to employees who have retired from active service, have attained age 50, and have at
least 20 years of service.
A summary of assets and obligations of the Plan is as follows at December 31, 2012 and 2011:
2012 2011
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 597 $ 473
Service cost 43 38
Interest cost 25 23
Change in assumptions (137) 82
Actuarial gain (112) (16)
Benefits paid (5) (3)
Benefit obligation at end of year 411 597
Plan assets - -
Unfunded status of Plan at December 31 $ 411 $ 597
Items not yet reflected in net periodic benefit cost $ 622 $ 384
Net change in unrecognized net periodic benefit cost 238 (90)
The unfunded status of the Plan at December 31, 2012 and 2011, is recognized in the accompanying
consolidated balance sheets in accounts payable and accrued liabilities.
The expense recognized by the Company for the Plan is as follows for the years ended December 31,
2012 and 2011:
2012 2011
(In Thousands)
Components of net periodic benefit cost:
Service cost $ 43 $ 38
Interest cost 25 23
Amortization of prior service cost recognized 15 15
Amortization of gains (32) (38)
Total net periodic benefit cost $ 51 $ 38
Weighted-average assumptions as of December 31:
Discount rate 3.75% 4.17%
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
13
Note 5. Retirement and Management Incentive Plans (Continued)
Assumed dental cost trend rates have a significant effect on the amounts reported for the dental plan. For
measurement purposes, a 4.0 percent and 6.0 percent annual rate of increase in the per capita cost of
covered dental care benefits was assumed for 2012 and 2011, respectively. A one percentage point
change in assumed dental cost trend rates would result in the following:
One One
Percentage Percentage
Point Point
Increase Decrease
(In Thousands)
Service and interest cost $ 52 $ 34
Postretirement benefit obligation 496 344
The Company has incentive bonus plans (Bonus Plans) for the benefit of its employees, including senior
executives. The total amount of incentive awards to be made under the Bonus Plans for any plan year
depends on performance standards established by the Board of Trustees. The Board of Trustees
authorizes the total amount of bonus awards, if any, to be made to the eligible employees for any plan
year. For the years ended December 31, 2012 and 2011, the Company expensed $851,000 and
$557,000, respectively, in conjunction with the Bonus Plans.
The Company also sponsors a long-term incentive program for the benefit of senior executives and
certain members of management. The total amount of incentive awards is determined by the Company’s
achievement of designated performance results over a three-year period, with the latest period ending in
2014. For the years ended December 31, 2012 and 2011, the Company expensed $265,000 and
$275,000, respectively, in conjunction with the long-term executive compensation plan.
Note 6. Liabilities for Losses
Activity in the liabilities for losses for the Company’s risk plans for the years ended December 31 is
summarized as follows:
2012 2011
(In Thousands)
Liabilities for losses at beginning $ 5,185 $ 5,161
Add provision for losses occurring in:
Current year 111,724 105,820
Prior years (48) 589
Net incurred losses during the current year 111,676 106,409
Paid related to:
Current year 107,079 101,035
Prior years 5,045 5,350
Total paid 112,124 106,385
Liabilities for losses at end of year $ 4,737 $ 5,185
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
14
Note 6. Liabilities for Losses (Continued)
The foregoing table indicates favorable development in prior-year claims of $48,000 in 2012 compared to
what was accrued at December 31, 2011. The above table indicates adverse development of $589,000 in
the December 31, 2010, claim reserves, which emerged in 2011. This was due in large part to
coordination of benefits requests from multiple states related to Medicaid members (see Note 7). The
Company was unaware of the potential liability for these claims until late 2011.
Note 7. Commitments and Contingencies
The Company leases its office space. Effective April 15, 2013, the lease was amended, extending the
term to October 31, 2020. The amended lease includes a change in the leased space and future rental
payments, as well as providing for certain tenant improvement allowances to be paid by the landlord. The
Company also pays for its prorated share of taxes, maintenance and insurance. The following is a
schedule of future minimum rental payments required on the office lease after the amendment:
Minimum
Rental
Year Ending December 31, Payments
(In Thousands)
2013 $ 602
2014 573
2015 587
2016 601
2017 484
Thereafter 2,216
$ 5,063
Rent expense, including common area maintenance costs, for the years ended December 31, 2012 and
2011, was $639,000 and $585,000, respectively.
In the normal course of business, the Company is a party to various claims and litigation. Management is
of the opinion that the outcome of these matters will not have a material adverse effect on the financial
condition of the Company.
During 2011, a number of states contacted the Company requesting refunds for dental claim payments
made from 2007 to 2011 for individuals enrolled in that state’s Medicaid program. Although those states
had paid dental claims for the Medicaid participants, those individuals were determined to also be eligible
members of the Company, either through group or individual coverage, at the time the claim was
incurred. During 2012, the Company paid $1,457,000 of claims related to these Medicaid refunds, of
which $1,152,000 was related to self-funded plans. Claims paid on behalf of self-funded plans were billed
and collected from the plan. The Company’s liability for loss and loss adjustment expenses at December
31, 2012 and 2011, includes an estimate for unpaid Medicaid claims, including those applicable to fiscal
year 2012 and prior. However, at December 31, 2012, the Company cannot reasonably estimate the
amount of claims that the states may request to be reimbursed for claims incurred subsequent to
December 31, 2012.
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
15
Note 7. Commitments and Contingencies (Continued)
Patient Protection and Affordable Care Act: The passage at the federal level of the Patient Protection
and Affordable Care Act (ACA) during 2010 represents significant changes to the current U.S. health care
system. The legislation is far reaching and is intended to expand access to health insurance coverage
over time by increasing the eligibility thresholds for most state Medicaid programs and providing certain
other individuals and small businesses with tax credits to subsidize a portion of the cost of health
insurance coverage. The legislation includes a requirement that most individuals obtain health insurance
coverage, beginning in 2014, and also a requirement that certain large employers offer coverage to their
employees or pay a financial penalty. This health insurance coverage is required to offer or include
pediatric dental benefits.
The federal legislation also imposes new regulations on the health insurance industry, including, but not
limited to, guaranteed coverage requirements, prohibitions on some annual and all lifetime limits on
amounts paid on behalf of the Company’s members, increased restrictions on rescinding coverage,
establishment of minimum medical loss ratio requirements, a requirement to cover preventive services on
a first-dollar basis, the establishment of state insurance exchanges and essential benefit packages, and
greater limitations on how the Company prices certain of its products.
Also, the State of Colorado has passed legislation that will set up a state-based exchange called Connect
for Health Colorado that will operationalize all aspects of the ACA.
Some of the provisions of the ACA and the Colorado legislation (Health Care Reform) became effective in
2010, while other provisions will become effective over the next several years. These changes could
impact the Company through potential disruption to the employer-based market, potential cost shifting in
the health care delivery system to insurance companies, and limitations on the ability to increase
premiums to meet costs. The Company will need to dedicate material resources and incur material
expenses to implement and comply with Health Care Reform at both the state and federal levels,
including implementing and complying with the future regulations that will provide guidance on and
clarification of significant portions of the legislation. The Health Care Reform law and regulations are
likely to have significant effects on the Company’s future operations, which in turn, could impact the value
of its business model and results of operations.
In addition, federal and state regulatory agencies may further restrict the Company’s ability to obtain new
product approvals, implement changes in premium rates, or impose additional restrictions, under new or
existing laws that could adversely affect the Company’s business, cash flows, financial condition and
results of operations.
In July 2011, the FASB issued guidance on fees to be paid to the federal government by health and
dental insurers as mandated by the Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Reconciliation Act. The objective of this guidance is to address how health
and dental insurers should recognize and amortize such fees. These amendments specify that the liability
for the fee should be estimated and accrued in the applicable calendar year in which the fee is payable,
with a corresponding deferred cost. The deferred cost is amortized to expense, using the straight-line
method, over the calendar year in which it is payable, unless another method more appropriately
allocates the fee. These amendments are effective for calendar years beginning after December 31,
2013, when the fee initially becomes effective. The Company is currently evaluating the impact of this
guidance on its consolidated financial statements.
Note 8. Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents,
accounts receivable and liabilities approximate fair value because of the short-term nature of these items.
These assets and liabilities are not listed in the tables below.
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
16
Note 8. Fair Value of Financial Instruments (Continued)
The Company holds certain assets that are required to be measured at fair value on a recurring basis.
The valuation techniques used to measure fair value under the fair value measurements and disclosures
topic of the FASB codification are based on the level of judgment associated with the inputs used to
measure their fair value. The definitions of the levels are as follows:
Level 1: Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the
measurement date.
Level 2: Inputs are other than quoted prices included in Level 1 that are observable for the asset or
liability through corroboration with market data at the measurement date.
Level 3: Inputs are unobservable and reflect management’s best estimate of what market participants
would use in pricing the asset or liability at the measurement date.
Equity securities are valued at the latest quoted sales prices or official closing prices taken from the
primary market in which each security trades. Investments in mutual funds are valued at the net asset
value (NAV) per share determined as of the close of the New York Stock Exchange on each valuation
date. Investments in bonds are valued using the latest bid or trade prices or using valuation
methodologies that consider such factors as security prices, yields, maturities, and ratings, both as
furnished by independent pricing services. If pricing services are unable to provide valuations, debt
securities are valued at the most recent bid quotation or evaluated price, as applicable, obtained from a
broker/dealer or a widely used quotation system and are generally classified as Level 2.
The following tables set forth the Company’s assets that are measured and recognized at fair value on a
recurring basis as of December 31, 2012 and 2011, under the appropriate level of the fair value
hierarchy. Investments are classified in their entirety based on the lowest level of input that is significant
to the fair value measurement.
Level 1 Level 2 Level 3 Total
Fixed-income securities:
U.S. Treasury notes and
government agency bonds $ - $ 19,014 $ - $ 19,014
Corporate bonds:
Domestic - 19,364 - 19,364
International - 2,635 - 2,635
Mortgage- and asset-backed securities - 2,451 - 2,451
Total fixed-income securities - 43,464 - 43,464
Equity securities:
Domestic 30,973 - - 30,973
International 10,846 - - 10,846
Total equity securities 41,819 - - 41,819
Total assets $ 41,819 $ 43,464 $ - $ 85,283
2012 (In Thousands)
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
17
Note 8. Fair Value of Financial Instruments (Continued)
Level 1 Level 2 Level 3 Total
Fixed-income securities:
U.S. Treasury notes and
government agency bonds $ - $ 15,973 $ - $ 15,973
Corporate bonds:
Domestic - 23,147 - 23,147
International - 56 - 56
Mortgage- and asset-backed securities - 3,353 - 3,353
Total fixed-income securities - 42,529 - 42,529
Equity securities:
Domestic 23,840 - - 23,840
International 5,966 - - 5,966
Total equity securities 29,806 - - 29,806
Total assets $ 29,806 $ 42,529 $ - $ 72,335
2011 (In Thousands)
Note 9. Surplus Reserves and Statutory Insurance Accounting Practices
There are differences in accounting practices for financial statements presented in accordance with
generally accepted accounting principles (GAAP) and those presented on the statutory basis. At
December 31, 2012 and 2011, these differences resulted in the Company’s surplus for statutory
purposes being $28,181,000 and $20,090,000, respectively, less than the reserve balance on a GAAP
basis. The differences are due to the carrying values of investments and to certain assets, including
certain equipment and intangible assets, investments in excess of prescribed limitations, and prepaid
expenses, not being admitted as an asset for statutory purposes.
The Company is subject to risk-based capital (RBC) requirements promulgated by the National
Association of Insurance Commissioners (NAIC). The RBC standards establish uniform minimum capital
requirements for insurance companies. The RBC formula applies various weighting factors to financial
balances or various levels of activities based on the perceived degree of risk. At December 31, 2012, the
Company’s reserves and unassigned funds exceeded the minimum amounts required of all RBC action
levels.
18
Independent Auditor’s Report on the Supplementary Information
To the Board of Trustees
Colorado Dental Service, Inc.
We have audited the consolidated financial statements of Colorado Dental Service, Inc., d/b/a Delta
Dental of Colorado (the Company), as of and for the years ended December 31, 2012 and 2011, and
have issued our report thereon, dated April 30, 2013, which contained an unmodified opinion on those
consolidated financial statements. We did not audit the financial statements of Delta Dental of Colorado
Foundation, Inc. (the Foundation), a consolidated entity controlled by the Company. Those statements
were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for the Foundation, is based solely on the report of the other auditors.
Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements
as a whole. The consolidating information is presented for purposes of additional analysis rather than to
present the balance sheets and results of operations of the individual companies and is not a required
part of the consolidated financial statements. Such information is the responsibility of management and
was derived from and relates directly to the underlying accounting and other records used to prepare the
consolidated financial statements. The consolidating information has been subjected to the auditing
procedures applied in the audits of the consolidated financial statements and certain additional
procedures, including comparing and reconciling such information directly to the underlying accounting
and other records used to prepare the consolidated financial statements, or to the consolidated financial
statements themselves, and other additional procedures in accordance with auditing standards generally
accepted in the United States of America. In our opinion, the information is fairly stated in all material
respects in relation to the consolidated financial statements as a whole.
Minneapolis, Minnesota
April 30, 2013
19
Colorado Dental Service, Inc.
Consolidating Balance Sheet
December 31, 2012
(In Thousands)
Assets Company Foundation Eliminations Consolidated
Cash and Investments
Cash and cash equivalents $ 7,082 $ 3,216 $ - $ 10,298
Marketable securities 73,403 11,880 - 85,283
80,485 15,096 - 95,581
Accounts Receivable, net 13,673 6,515 (6,609) 13,579
Property and Equipment, net 4,363 - - 4,363
Prepaid Expenses and Other 903 120 - 1,023
Total assets $ 99,424 $ 21,731 $ (6,609) $ 114,546
Liabilities and Reserves
Liabilities
Losses:
Risk plans $ 4,737 $ - $ - $ 4,737
Self-funded plans 5,659 - - 5,659
Loss adjustment expenses 200 - - 200
10,596 - - 10,596
Advanced and unearned premiums 1,965 - - 1,965
Accounts payable and accrued
liabilities 13,369 917 (6,609) 7,677
Total liabilities 25,930 917 (6,609) 20,238
Reserves
Unassigned, undesignated 70,180 - - 70,180
Board-designated 3,314 - - 3,314
Foundation reserves - 20,814 - 20,814
Total reserves 73,494 20,814 - 94,308
Total liabilities and reserves $ 99,424 $ 21,731 $ (6,609) $ 114,546
20
Colorado Dental Service, Inc.
Consolidating Statement of Operations and Changes in Reserves
Year Ended December 31, 2012
(In Thousands)
Company Foundation Eliminations Consolidated
Revenues:
Premiums:
Risk plans $ 138,364 $ - $ - $ 138,364
Premium equivalents:
Self-funded plans 136,160 - - 136,160
Administration fees—self-funded
plans 10,196 - - 10,196
Total revenues from
operations 284,720 - - 284,720
Investment income 2,268 837 - 3,105
Net realized gain on investments 875 248 - 1,123
Other 189 6,539 (6,515) 213
Total revenues 288,052 7,624 (6,515) 289,161
Expenses:
Losses:
Risk plans 111,676 - - 111,676
Self-funded plans 136,160 - - 136,160
Loss adjustment expenses 3,814 - - 3,814
251,650 - - 251,650
Grants and community benefit
programs 9,155 539 (6,515) 3,179
General and administrative expenses 23,490 256 - 23,746
Total expenses 284,295 795 (6,515) 278,575
Revenues over expenses 3,757 6,829 - 10,586
Other changes in reserves:
Net change in unrealized gains on
other-than-trading securities 2,441 - - 2,441
Net change in unrecognized net
benefit cost 238 - - 238
Net gain 6,436 6,829 - 13,265
Reserves at beginning of year 67,058 13,985 - 81,043
Reserves at end of year $ 73,494 $ 20,814 $ - $ 94,308
21
Colorado Dental Service, Inc.
Consolidating Balance Sheet
December 31, 2011
(In Thousands)
Assets Company Foundation Eliminations Consolidated
Cash and Investments
Cash and cash equivalents $ 10,546 $ 2,699 $ - $ 13,245
Marketable securities 63,388 8,947 - 72,335
73,934 11,646 - 85,580
Accounts Receivable, net 15,294 3,631 (3,686) 15,239
Property and Equipment, net 3,009 - - 3,009
Prepaid Expenses and Other 916 2 - 918
Total assets $ 93,153 $ 15,279 $ (3,686) $ 104,746
Liabilities and Reserves
Liabilities
Losses:
Risk plans $ 5,185 $ - $ - $ 5,185
Self-funded plans 6,536 - - 6,536
Loss adjustment expenses 200 - - 200
11,921 - - 11,921
Advanced and unearned premiums 1,808 - - 1,808
Accounts payable and accrued
liabilities 12,366 1,294 (3,686) 9,974
Total liabilities 26,095 1,294 (3,686) 23,703
Reserves
Unassigned, undesignated 64,548 - - 64,548
Board-designated 2,510 - - 2,510
Foundation reserves - 13,985 - 13,985
Total reserves 67,058 13,985 - 81,043
Total liabilities and reserves $ 93,153 $ 15,279 $ (3,686) $ 104,746
22
Colorado Dental Service, Inc.
Consolidating Statement of Operations and Changes in Reserves
Year Ended December 31, 2011
(In Thousands)
Company Foundation Eliminations Consolidated
Revenues:
Premiums:
Risk plans $ 129,535 $ - $ - $ 129,535
Premium equivalents:
Self-funded plans 125,616 - - 125,616
Administration fees—self-funded
plans 10,182 - - 10,182
Total revenues from
operations 265,333 - - 265,333
Investment income 2,238 232 - 2,470
Net realized gain on investments 945 913 - 1,858
Other 199 3,644 (3,631) 212
Total revenues 268,715 4,789 (3,631) 269,873
Expenses:
Losses:
Risk plans 106,409 - - 106,409
Self-funded plans 125,616 - - 125,616
Loss adjustment expenses 3,897 - - 3,897
235,922 - - 235,922
Grants and community benefit
programs 6,257 2,851 (3,631) 5,477
General and administrative expenses 22,123 53 - 22,176
Total expenses 264,302 2,904 (3,631) 263,575
Revenues over expenses 4,413 1,885 - 6,298
Other changes in reserves:
Net change in unrealized gains on
investments 735 (1,186) - (451)
Net change in unrecognized net
benefit cost (90) - - (90)
Net gain 5,058 699 - 5,757
Reserves at beginning of year 62,000 13,286 - 75,286
Reserves at end of year $ 67,058 $ 13,985 $ - $ 81,043