HomeMy WebLinkAboutRESPONSE - RFP - 7649 DENTAL ADMINISTRATOR (21)Colorado Dental Service,
Inc.
Consolidated Financial Statements
(With Independent Auditor’s Report Thereon)
December 31, 2013
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 6-18
Independent Auditor’s Report on the Supplementary Information 19
Supplementary Information
Consolidating balance sheet—December 31, 2013 20
Consolidating statement of operations and changes in reserves—year ended
December 31, 2013
21
Consolidating balance sheet—December 31, 2012 22
Consolidating statement of operations and changes in reserves—year ended
December 31, 2012
23
1
Independent Auditor’s Report
The Board of Trustees
Colorado Dental Service, Inc.
Denver, Colorado
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Colorado Dental Service, Inc.,
d/b/a Delta Dental of Colorado (the Company), which comprise the consolidated balance sheets as of
December 31, 2013 and 2012; 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 Plan of Colorado Foundation, Inc. (the
Foundation), a consolidated entity controlled by the Company, which statements reflect total assets
constituting 20 percent and 19 percent, respectively, of consolidated total assets at December 31, 2013
and 2012, and total revenues constituting 2 percent and 3 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 from 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, 2013 and 2012, and the results of their operations and their cash flows for the years
then ended in accordance with accounting principles generally accepted in the United States of America.
Minneapolis, Minnesota
April 23, 2014
3
Colorado Dental Service, Inc.
Consolidated Balance Sheets
December 31, 2013 and 2012
(In Thousands)
Assets 2013 2012
Cash and Investments
Cash and cash equivalents $ 5,595 $ 10,298
Marketable securities (Notes 2 and 8) 98,346 85,283
103,941 95,581
Accounts Receivable, net (less allowance for doubtful accounts of
$250 and $175 at December 31, 2013 and 2012, respectively) (Note 3) 15,432 13,579
Property and Equipment, net (Note 4) 5,195 4,363
Prepaid Expenses and Other 986 1,023
Total assets $ 125,554 $ 114,546
Liabilities and Reserves
Liabilities
Losses:
Risk plans (Note 6) $ 5,204 $ 4,737
Self-funded plans 5,593 5,659
Loss adjustment expenses 200 200
10,997 10,596
Advanced and unearned premiums 1,914 1,965
Accounts payable and accrued liabilities (Note 5) 10,006 7,677
Total liabilities 22,917 20,238
Commitments and Contingencies (Notes 5 and 7)
Reserves (Notes 1 and 9)
Unassigned, undesignated 76,410 70,180
Board-designated 1,385 3,314
Foundation reserves 24,842 20,814
Total reserves 102,637 94,308
Total liabilities and reserves $ 125,554 $ 114,546
See Notes to Consolidated Financial Statements.
4
Colorado Dental Service, Inc.
Consolidated Statements of Operations and Changes in Reserves
Years Ended December 31, 2013 and 2012
(In Thousands)
2013 2012
Revenues:
Premiums:
Risk plans $ 146,011 $ 138,364
Premium equivalents:
Self-funded plans 142,770 136,160
Administration fees—self-funded plans 10,078 10,196
152,848 146,356
Total revenues from operations 298,859 284,720
Investment income 4,992 3,105
Net realized gains on investments 1,371 1,123
Other 211 256
Total revenues 305,433 289,204
Expenses:
Losses:
Risk plans (Note 6) 119,148 111,676
Self-funded plans 142,770 136,160
Loss adjustment expenses 4,251 3,814
266,169 251,650
Grants and community benefit programs 4,661 3,065
General and administrative expenses 28,487 23,903
Total expenses 299,317 278,618
Revenues over expenses 6,116 10,586
Other changes in reserves:
Net change in unrealized gains on other-than-trading securities 2,156 2,441
Net change in unrecognized net periodic benefit cost (Note 5) 57 238
Net increase 8,329 13,265
Reserves at beginning of year 94,308 81,043
Reserves at end of year $ 102,637 $ 94,308
See Notes to Consolidated Financial Statements.
5
Colorado Dental Service, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2013 and 2012
(In Thousands)
2013 2012
Cash Flows From Operating Activities
Revenues over expenses $ 6,116 $ 10,586
Adjustments to reconcile revenues over expenses to net cash
provided by operating activities:
Depreciation expense 1,282 920
Net loss on disposal of property and equipment - 144
Net amortization of bond premium and discount 66 51
Net realized gains on investments (1,371) (1,123)
Net unrealized gains on trading securities (1,959) (155)
Other-than-temporary impairment 480 -
Changes in operating assets and liabilities:
Accounts receivable (1,853) 1,660
Prepaid expenses and other 37 (105)
Liabilities for losses and loss adjustment expenses 401 (1,325)
Advanced and unearned premiums (51) 157
Accounts payable and accrued liabilities 2,386 (2,059)
Net cash provided by operating activities 5,534 8,751
Cash Flows From Investing Activities
Purchase of property and equipment (2,114) (2,418)
Purchase of other-than-trading fixed-income securities (6,692) (8,885)
Purchase of other-than-trading equity securities (8,005) (6,076)
Sale of other-than-trading equity securities 4,903 810
Sales and maturities of other-than-trading fixed-income securities 2,641 7,474
Net change in trading securities (970) (2,603)
Net cash used in investing activities (10,237) (11,698)
Net decrease in cash and cash equivalents (4,703) (2,947)
Cash and Cash Equivalents at Beginning of Year 10,298 13,245
Cash and Cash Equivalents at End of Year $ 5,595 $ 10,298
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 2013 and 2012, the Company
pledged funding of $3,628,000 and $6,515,000, 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, 2013 and 2012, the Company
incurred $1,929,000 and $2,196,000, respectively, of oral health benefits and administrative expenses
related to the Fund. At December 31, 2013, the remaining balance of the Fund of $1,385,000 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
revenues 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.
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. Delta
Dental of Colorado has designated its investments (which consist of fixed-income securities and equity
securities) held at December 31, 2013 and 2012, 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.
The Foundation investment portfolio is managed consistent with a trading portfolio and, therefore, such
investments are carried at fair value, with the unrealized gains and losses reported as a component of
investment income in the consolidated statements 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.
At December 31, 2013 and 2012, 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, 2013 and 2012, the bonds had a fair value of $2,084,000 and $2,316,000,
respectively.
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
8
Note 1. Summary of Operations and Significant Accounting Policies (Continued)
Investment credit risk: The Company invests in a professionally managed portfolio of securities, which
includes common stocks and debt securities of publicly traded companies; obligations of the U.S.
government, government agencies and corporations; mutual funds; and money market funds. Such
investments are inherently exposed to various risks, such as interest rate, market and credit risks. Due to
the level of risks associated with these investments and the level of uncertainty related to the potential
changes in the value of such investments, it is at least reasonably possible that changes in risk factors in
the near term could affect the carrying value of individual investments and the related amounts reported
in the Company’s consolidated financial statements, and such amounts could be material.
Accounts receivable: Accounts receivable are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management
determines the allowance for doubtful accounts by regularly evaluating individual customer receivables
and considering a customer’s financial condition and credit history, and current economic conditions.
Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable
previously written off are recorded when received.
Property and equipment: Property and equipment are 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). Leasehold improvements are amortized over the lesser of the useful life or term of the
lease. 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. Generally, the Company is no longer subject to federal
income tax return examinations for the years prior to 2010.
Revenues over expenses: Revenues over expenses is the Company’s performance indicator. Other
changes in reserves for the years ended December 31, 2013 and 2012, which are excluded from the
performance indicator, 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 revenues 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 23, 2014, the date
these consolidated financial statements were available to be issued.
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
9
Note 2. Investments
The following is a summary of the investments at December 31:
2013 (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 $ 12,743 $ 995 $ (45) $ 13,693
Corporate bonds 22,791 1,268 (165) 23,894
Mortgage- and asset-backed securities 1,387 131 - 1,518
Total fixed-income securities 36,921 2,394 (210) 39,105
Equity securities 29,659 10,983 (9) 40,633
Total other-than-trading securities $ 66,580 $ 13,377 $ (219) 79,738
Trading securities:
Fixed-income securities:
Corporate bonds $ 1,457 $ 27 $ (22) 1,462
Mortgage- and asset-backed securities 130 2 (2) 130
1,587 29 (24) 1,592
Equity securities 14,907 2,375 (266) 17,016
Total trading securities $ 16,494 $ 2,404 $ (290) 18,608
Total investments $ 98,346
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
10
Note 2. Investments (Continued)
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 $ 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
Total fixed-income securities 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 $ 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
The amortized cost and estimated fair value of debt securities at December 31, 2013, by contractual
maturity, are shown below:
Amortized Fair
Cost Value
(In Thousands)
Due in one year or less $ 2,851 $ 2,874
Due after one year through five years 17,692 18,330
Due after five years through 10 years 13,661 14,288
Due after 10 years 2,787 3,556
Mortgage-backed securities 1,517 1,649
$ 38,508 $ 40,697
Expected maturities will differ from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
11
Note 2. Investments (Continued)
Proceeds from the sales of investments during 2013 and 2012 were approximately $6,383,000 and
$4,888,000, respectively. Gross realized gains on the sale of investments were approximately $1,983,000
and $1,123,000 for the years ended December 31, 2013 and 2012, respectively. There were gross
realized losses of $132,000 and $-0- on the sale of investments for the years ended December 31, 2013
and 2012, respectively.
As of December 31, 2013 and 2012, unrealized losses on other-than-trading securities totaled
approximately $219,000 and $79,000, 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 be
other-than-temporarily impaired. An impairment loss of approximately $480,000 was taken on one equity
security in 2013 and was recorded as a realized loss on the consolidated statement of operations and
changes in reserves. No impairments were recognized in 2012.
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, 2013 and 2012.
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
2013 (in thousands):
U.S. Treasury notes $ - $ - $ 1,964 $ (45) $ 1,964 $ (45)
Corporate bonds 4,117 (132) 468 (33) 4,585 (165)
Equity securities - - 3,759 (9) 3,759 (9)
Total $ 4,117 $ (132) $ 6,191 $ (87) $ 10,308 $ (219)
Less Than 12 Months Greater Than 12 Months Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
2012 (in thousands):
U.S. Treasury notes $ 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
Note 3. Accounts Receivable
Net accounts receivable at December 31 are summarized as follows:
2013 2012
(In Thousands)
Risk plans $ 3,973 $ 2,477
Self-funded plans:
Paid claims and administrative fees 5,866 5,443
Incurred but not reported claims 5,593 5,659
$ 15,432 $ 13,579
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
12
Note 4. Property and Equipment
At December 31, the components of property and equipment were as follows:
2013 2012
(In Thousands)
Property and equipment, at cost:
Computer software and hardware $ 6,567 $ 6,788
Leasehold improvements 1,699 1,604
Furniture and fixtures 1,990 1,111
10,256 9,503
Less accumulated depreciation 5,061 5,140
Property and equipment, net $ 5,195 $ 4,363
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
$4,202,000 and $3,705,000 as of December 31, 2013 and 2012, respectively, for the development of
internal-use software. Depreciation expense on the internal-use software was $638,000 and $520,000 in
2013 and 2012, respectively.
Note 5. Retirement and Management Incentive Plans
The Company sponsors a defined contribution benefit plan that covers substantially all eligible
employees. For 2013 and 2012, 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, 2013 and 2012, benefit expense
was approximately $325,000 and $336,000, respectively.
For 2013 and 2012, 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, 2013 and
2012, benefit expense under this plan was approximately $271,000 and $259,000, 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.
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
13
Note 5. Retirement and Management Incentive Plans (Continued)
A summary of assets and obligations of the Plan is as follows at December 31, 2013 and 2012:
2013 2012
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 411 $ 597
Service cost 27 43
Interest cost 15 25
Change in assumptions (81) (137)
Actuarial gain (14) (112)
Benefits paid (5) (5)
Benefit obligation at end of year 353 411
Plan assets - -
Unfunded status of Plan at December 31 $ 353 $ 411
Items not yet reflected in net periodic benefit cost $ 679 $ 622
Net change in unrecognized net periodic benefit cost 57 238
The unfunded status of the Plan at December 31, 2013 and 2012, 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,
2013 and 2012:
2013 2012
(In Thousands)
Components of net periodic benefit cost:
Service cost $ 27 $ 43
Interest cost 15 25
Amortization of prior service cost recognized 15 15
Amortization of gains (48) (32)
Total net periodic benefit cost $ 9 $ 51
Weighted-average assumptions as of December 31:
Discount rate 4.67% 3.75%
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
14
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 annual rate of increase in the per capita cost of covered dental
care benefits was assumed for 2013 and 2012. 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 $ 49 $ 31
Postretirement benefit obligation 424 297
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, 2013 and 2012, the Company expensed $943,000 and
$851,000, 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
2015. For the years ended December 31, 2013 and 2012, the Company expensed $424,000 and
$265,000, 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:
2013 2012
(In Thousands)
Liabilities for losses at beginning $ 4,737 $ 5,185
Add provision for losses occurring in:
Current year 119,163 111,724
Prior years (15) (48)
Net incurred losses during the current year 119,148 111,676
Paid related to:
Current year 113,959 107,079
Prior years 4,722 5,045
Total paid 118,681 112,124
Liabilities for losses at end of year $ 5,204 $ 4,737
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
15
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:
Minimum
Rental
Years Ending December 31, Payments
(In Thousands)
2014 $ 573
2015 587
2016 601
2017 485
2018 775
Thereafter 1,455
$ 4,476
Rent expense, including common area maintenance costs and amortization of deferred rent related to the
tenant improvement allowance, for the years ended December 31, 2013 and 2012, was $609,000 and
$639,000, 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.
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 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, a
requirement to cover preventive services on a first-dollar basis, the establishment of state insurance
exchanges and essential benefit packages, greater limitations on how the Company prices certain of its
products, and certain new taxes (assessment fees) to be borne by the Company.
In 2013, the State of Colorado set up a state-based exchange called Connect for Health Colorado that
will operationalize all aspects of the ACA.
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
16
Note 7. Commitments and Contingencies (Continued)
Some of the provisions of the ACA and the Colorado legislation (Health Care Reform) became effective in
2010 through 2013, 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 addressing the recognition and classification of assessment fees
to be paid to the federal government by health and dental insurers as mandated by the Patient Protection
and Affordable Care Act, as well as the Health Care and Education Reconciliation Act. This guidance
specifies that the liability for the fee should be estimated and recorded in full once the entity provides
qualifying insurance during the applicable calendar year in which the fee is payable, with a corresponding
deferred cost amortized to expense. 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 anticipates that their share of this
assessment will be approximately $1,460,000 based on 2013 levels of insurance and market share.
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.
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.
Colorado Dental Service, Inc.
Notes to Consolidated Financial Statements
17
Note 8. Fair Value of Financial Instruments (Continued)
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, 2013 and 2012, 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 $ - $ 13,693 $ - $ 13,693
Corporate bonds:
Domestic - 21,265 - 21,265
International - 4,091 - 4,091
Mortgage- and asset-backed securities - 1,648 - 1,648
Total fixed-income securities - 40,697 - 40,697
Equity securities:
Domestic 40,509 - - 40,509
International 17,140 - - 17,140
Total equity securities 57,649 - - 57,649
Total assets $ 57,649 $ 40,697 $ - $ 98,346
2013 (In Thousands)
Level 1 Level 2 Level 3 Total
Fixed-income securities:
U.S. Treasury notes $ - $ 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
18
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, 2013 and 2012, these differences resulted in the Company’s surplus for statutory
purposes being $35,368,000 and $28,181,000, 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, 2013, the
Company’s reserves and unassigned funds exceeded the minimum amounts required of all RBC action
levels.
19
Independent Auditor’s Report on the Supplementary Information
To the Board of Trustees
Colorado Dental Service, Inc.
Denver, Colorado
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, 2013 and 2012, and
have issued our report thereon, which contains an unmodified opinion on those consolidated financial
statements. See pages 1 and 2. We did not audit the financial statements of Delta Dental Plan 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
financial position, results of operations, and cash flows 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 23, 2014
20
Colorado Dental Service, Inc.
Consolidating Balance Sheet
December 31, 2013
(In Thousands)
Assets Company Foundation Eliminations Consolidated
Cash and Investments
Cash and cash equivalents $ 2,518 $ 3,077 $ - $ 5,595
Marketable securities 79,738 18,608 - 98,346
82,256 21,685 - 103,941
Accounts Receivable, net 15,514 3,628 (3,710) 15,432
Property and Equipment, net 5,195 - - 5,195
Prepaid Expenses and Other 884 102 - 986
Total assets $ 103,849 $ 25,415 $ (3,710) $ 125,554
Liabilities and Reserves
Liabilities
Losses:
Risk plans $ 5,204 $ - $ - $ 5,204
Self-funded plans 5,593 - - 5,593
Loss adjustment expenses 200 - - 200
10,997 - - 10,997
Advanced and unearned premiums 1,914 - - 1,914
Accounts payable and accrued
liabilities 13,143 573 (3,710) 10,006
Total liabilities 26,054 573 (3,710) 22,917
Reserves
Unassigned, undesignated 76,410 - - 76,410
Board-designated 1,385 - - 1,385
Foundation reserves - 24,842 - 24,842
Total reserves 77,795 24,842 - 102,637
Total liabilities and reserves $ 103,849 $ 25,415 $ (3,710) $ 125,554
21
Colorado Dental Service, Inc.
Consolidating Statement of Operations and Changes in Reserves
Year Ended December 31, 2013
(In Thousands)
Company Foundation Eliminations Consolidated
Revenues:
Premiums:
Risk plans $ 146,011 $ - $ - $ 146,011
Premium equivalents:
Self-funded plans 142,770 - - 142,770
Administration fees—self-funded
plans 10,078 - - 10,078
Total revenues from
operations 298,859 - - 298,859
Investment income 2,399 2,593 - 4,992
Net realized gain (loss) on investments 1,402 (31) - 1,371
Other 211 3,665 (3,665) 211
Total revenues 302,871 6,227 (3,665) 305,433
Expenses:
Losses:
Risk plans 119,148 - - 119,148
Self-funded plans 142,770 - - 142,770
Loss adjustment expenses 4,251 - - 4,251
266,169 - - 266,169
Grants and community benefit
programs 6,583 1,743 (3,665) 4,661
General and administrative expenses 28,031 456 - 28,487
Total expenses 300,783 2,199 (3,665) 299,317
Revenues over expenses 2,088 4,028 - 6,116
Other changes in reserves:
Net change in unrealized gains on
other-than-trading securities 2,156 - - 2,156
Net change in unrecognized net periodic
benefit cost 57 - - 57
Net gain 4,301 4,028 - 8,329
Reserves at beginning of year 73,494 20,814 - 94,308
Reserves at end of year $ 77,795 $ 24,842 $ - $ 102,637
22
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
23
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 6,582 (6,515) 256
Total revenues 288,052 7,667 (6,515) 289,204
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 9,155 425 (6,515) 3,065
General and administrative expenses 23,490 413 - 23,903
Total expenses 284,295 838 (6,515) 278,618
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