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DCP HOLDING CO - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Forward-Looking statements


Portions of this report, including this discussion and the information contained
in the notes to the condensed consolidated financial statements, contain
forward-looking statements under the Private Securities Litigation Reform Act of
1995. You can identify forward-looking statements by words such as "may,"
"might," "will," "should," "could," "would," "expect," "plan," "anticipate,"
"believe," "estimate," "project," "predict," "intend," "potential," "likely will
result," or the negative of such terms or similar expressions. These
forward-looking statements reflect our current expectations and views about
future events and speak only as of the date of this report. The forward-looking
statements are subject to risks, uncertainties and other factors that could
cause actual events or results to differ materially from those expressed or
implied by the forward-looking statements. Important factors that could cause
actual results to differ materially from those in the forward-looking
statements, include, among others: claims costs exceeding our estimates, a
downgrade in our financial strength rating, competitive pressures, changes in
demand for dental benefits and other economic conditions, the loss of a
significant customer or broker, the occurrence or non-occurrence of
circumstances beyond our control and those items described in Item 1A - Risk
Factors of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2011. We do not undertake any obligation to publicly update or
revise any forward-looking statements to reflect future events, information or
circumstances that arise after the date this report is filed.

Overview


Headquartered in Cincinnati, Ohio, we offer dental HMO, dental indemnity, dental
PPO and vision PPO benefit plans and related services, primarily to employer
groups of two or more employees. As of September 30, 2012, we had approximately
296,500 members in our dental and vision benefit programs with approximately
2,700 dentists participating in our dental HMO network and approximately 2,900
dentists participating in our dental PPO network. Effective June 1, 2011, the
Company entered into a network leasing agreement with a national dental network
management company that has one of the largest PPO networks of dentists under
contract in the United States. With this network leasing agreement, Dental Care
Plus dental PPO members now have access to approximately 2,200 additional
dentists in Ohio, Kentucky and Indiana and approximately 38,500 additional
dentists throughout the United States.

We changed our reportable segments in the first quarter of 2012 to reflect
management's recent view of the business and to align our external financial
reporting with our new operating and internal reporting model. We have separated
the fully-insured dental PPO product into its own segment as a result of recent
revenue growth of the fully-insured dental PPO and the unique sales and
operations management considerations for this product in the Company's expanding
markets. All respective amounts related to the segment change have been
retrospectively adjusted throughout the financial statements.

We manage our business with four reportable segments: fully-insured dental HMO
and indemnity ("dental HMO/IND"), fully-insured dental PPO, self-insured dental,
and corporate, all other. Self-insured dental consists of the self-insured
dental HMO, self-insured dental PPO and self-insured dental indemnity products.
Corporate, all other primarily consists of revenue associated with our dental
and vision products underwritten by third-party insurance carriers and certain
other corporate activities. Our dental HMO/IND and PPO products and our vision
product line are primarily marketed to employer groups. The results of our
fully-insured dental HMO/IND, fully-insured dental PPO and self-insured dental
segments are measured by gross profit. We do not measure the gross profit of our
corporate, all other segment. We do not allocate investment and other income,
insurance expenses, assets or liabilities to our segments because these measures
are not used to analyze the segments. Our segments do not share overhead costs
or assets. We do, however, measure the contributions of each of our
fully-insured and self-insured segments to costs retained in our corporate, all
other segment.

Many factors have an effect on our results, but most notably our results are
influenced by our ability to establish and maintain a competitive and efficient
cost structure and to accurately and consistently establish competitive
premiums, ASO fees, and plan benefit levels that are commensurate with our
dental and administrative costs. Dental costs are subject to a high rate of
inflation due to many factors, including new higher priced technologies and
dental procedures, new dental service techniques and therapies, an aging
population, lifestyle choices, the tort system and government regulations.



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Strategy


Our strategy focuses on providing solutions to employers to the rising cost of
dental care by leveraging our growing networks of participating dentists and
deploying a variety of products that give employer groups and members more
choices. We strive to provide excellent customer service to our employers,
members and participating dentists. Additionally, we have increased the
diversification of our membership base, not only through our newer products, but
also by entering new geographic territories. We expect our dental PPO products
to be important components of growth in the years ahead.

In our original eight county service area, our non-exclusive dental HMO provider
network includes over 95% of the dental providers in the market. In that market,
our dental HMO provides the broad provider access of a dental PPO along with
effective utilization and cost control features.

Highlights

• We had net income of approximately $621,000 for the three months ended

September 30, 2012 compared to a net income of approximately $285,000 for

         the three months ended September 30, 2011, and we had a net income of
         approximately $811,000 for the nine months ended September 30, 2012

compared to a net income of approximately $166,000 for the nine months

ended September 30, 2011. The profitability improvement in 2012

year-to-date is primarily due to rate increases for fully-insured dental

HMO/IND and fully-insured dental PPO groups negotiated at renewal in 2011

         and the first three quarters of 2012.



• To date in 2012, our dental and vision product membership increased by

approximately 5,800 members to approximately 296,500 members at

September 30, 2012. This membership increase from December 31, 2011 is due

to an increase in fully-insured dental HMO/IND membership of approximately

1,600 members, an increase in fully-insured dental PPO membership of

approximately 3,000 members, an increase in self-insured membership of

approximately 1,500 members, offset by a decrease in corporate, all other

membership of approximately 300 members. The decrease in corporate, all

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         other membership is primarily due to a decrease in our vision PPO
         membership.



• Our ratio of healthcare services expense to premium revenue ("loss ratio")

decreased from 82.7% in the nine months ended September 30, 2011 to 80.7%

in the nine months ended September 30, 2012. This loss ratio decrease is

due primarily to premium rate increases negotiated with fully-insured

         dental HMO/IND and dental PPO employer groups at renewal.



• In January 2012, we sold 1,000 Redeemable Institutional Preferred Shares

         at a purchase price of $1,000 per share, for an aggregate purchase price
         of $1,000,000.



• In March 2012, we paid a dividend of $21.00 per share to all holders of

Redeemable Class A and Class B Common Shares. This was the first dividend

paid to the Redeemable Common Shareholders in the history of the Company.

Comparison of Results of Operations


The following is a discussion of our results of operations for the three months
ended September 30, 2012, (the "2012 quarter"), the three months ended
September 30, 2011, (the "2011 quarter"), the nine months ended September 30,
2012, (the "2012 period") and the nine months ended September 30, 2011, (the
"2011 period").



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The following table presents membership and financial data for our four reportable segments (dollar amounts in thousands):



                                              As of                        As of
                                        September 30, 2012           September 30, 2011          Change
Membership:
Fully-insured dental HMO/IND                        148,300                      146,800             1.0 %
Fully-insured dental PPO                             41,400                       38,300             8.1 %
Self-insured dental                                  84,400                       82,800             1.9 %
Corporate, all other                                 22,400                       22,700            (1.3 %)

Total membership                                    296,500                      290,600             2.0 %





                                          Three months ended           Three months ended
                                          September 30, 2012           September 30, 2011          Change
Premium revenue:
Fully-insured dental HMO/IND             $             10,952         $             10,719             2.2 %
Fully-insured dental PPO                                2,862                        2,370            20.8 %
Self-insured dental                                     6,426                        6,438            (0.2 %)
Corporate, all other                                      116                          121            (4.1 %)

Total premium revenue                                  20,356                       19,648             3.6 %

Investment income                                          34                           22            54.5 %

Realized gains on investments, net                         40                           15           166.7 %

Other income                                               18                           15            20.0 %

Total revenue                                          20,448                       19,700             3.8 %

Healthcare services expense:
Fully-insured dental HMO/IND                            8,204                        8,306            (1.2 %)
Fully-insured dental PPO                                2,350                        2,127            10.5 %
Self-insured dental                                     5,537                        5,566            (0.5 %)
Corporate, all other

Total healthcare service expense                       16,091                       15,999             0.6 %

Insurance expense                                       3,369                        3,253             3.6 %

Income tax expense                                        367                          163           125.2 %

Net Income on redeemable shares          $                621         $                285           117.9 %





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                                          Nine months ended           Nine months ended
                                         September 30, 2012          September 30, 2011          Change
Premium revenue:
Fully-insured dental HMO/IND             $            32,793         $            31,765             3.2 %
Fully-insured dental PPO                               8,420                       7,127            18.1 %
Self-insured dental                                   18,197                      18,015             1.0 %
Corporate, all other                                     367                         365             0.5 %

Total premium revenue                                 59,777                      57,272             4.4 %

Investment income                                         98                          76            28.9 %

Realized gains on investments, net                        40                          15           166.7 %

Other income                                              51                          46            10.9 %

Total revenue                                         59,966                      57,409             4.5 %

Healthcare services expense:
Fully-insured dental HMO/IND                          25,485                      25,357             0.5 %
Fully-insured dental PPO                               7,113                       6,503             9.4 %
Self-insured dental                                   15,654                      15,513             0.9 %
Corporate, all other

Total healthcare service expense                      48,252                      47,373             1.9 %

Insurance expense                                     10,435                       9,774             6.8 %

Income tax expense                                       468                          96           387.5 %

Net Income on redeemable shares          $               811         $               166           388.6 %



Summary

Fully-insured dental HMO/IND premium revenue increased by $1,028,000 in the 2012
period from the 2011 period, and fully-insured dental HMO/IND premium on a per
member per month ("PMPM") basis increased by 2.0%, from $24.16 PMPM in the 2011
period to $24.64 PMPM in the 2012 period due to rate increases obtained on
renewal business. Fully-insured dental PPO premium revenue increased by
$1,293,000 in the 2012 period from the 2011 period, and fully-insured dental PPO
premium on a PMPM basis increased by 7.9%, from $21.08 PMPM in the 2011 period
to $22.75 PMPM in the 2012 period due to rate increases obtained on renewal
business.

Fully-insured dental HMO/IND healthcare services expense increased by $128,000
in the 2012 period from the 2011 period, and fully-insured dental HMO/IND
healthcare services expense on a PMPM basis decreased by 0.7%, from $19.29 PMPM
in the 2011 period to $19.15 PMPM in the 2012 period. The lower level of dental
HMO/IND healthcare services expense on a PMPM basis resulted in a decrease in
healthcare services expense of $189,000. In addition, an increase in dental
HMO/IND healthcare services expense of $317,000 was the result of an increase in
membership volume in the 2012 period compared to the 2011 period.

Fully-insured dental PPO healthcare services expense increased by $610,000 in
the 2012 period from the 2011 period, and fully-insured dental PPO healthcare
services expense on a PMPM basis decreased by 0.1%, from $19.23 PMPM in the 2011
period to $19.22 PMPM in the 2012 period. This decrease is primarily the result
of the 10% withhold on in-network claims that was not implemented for the
in-network dental PPO product until April 1, 2011. The lower level of dental PPO
healthcare services expense on a PMPM basis resulted in a decrease in healthcare
services expense of $6,000 that was offset by an increase in dental PPO
healthcare services expense of $616,000 due to an increase in membership volume
in the 2012 period compared to the 2011 period.

Self-insured healthcare services expense increased by $141,000 in the 2012 period from the 2011 period. An increase in self-insured membership volume resulted in an increase of $382,000 in the 2012 period that was offset by a decrease in self-insured healthcare services expense of approximately $241,000 due to a 1.5% decrease in self-insured claims on a PMPM basis.

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Insurance expense increased by $660,000 in the 2012 period compared to the 2011
period. This insurance expense increase is primarily attributable to higher
broker commission expense, salaries and wages, advertising expense, accounting
and audit related expenses and professional consulting expenses in the 2012
period compared to the 2011 period. Insurance expense as a percentage of total
revenue, or the insurance expense ratio, was 17.4% for the 2012 period compared
to 17.0% for the 2011 period.

Membership

Our fully-insured dental HMO/IND membership increased by approximately 1,500
members as of September 30, 2012 from September 30, 2011. This membership
increase is primarily attributable to an increase of approximately 2,100
fully-insured dental HMO members offset by a decrease of approximately 600
fully-insured dental indemnity members. The increase in fully-insured dental HMO
membership is the result of new sales of approximately 12,100 members, offset by
the loss of approximately 10,000 members due to employer groups that did not
renew with the Company or reduced employee counts of retained employer groups. A
portion of the fully-insured dental HMO membership losses were the result of
corporate acquisitions where our employer group customers moved to the new
parent company benefit plans and some of our membership losses were the result
of employer groups moving to medical carriers to take advantage of
medical/dental package savings. The decrease in fully-insured dental indemnity
membership is primarily the result of the shift of these members to our
fully-insured dental PPO after the introduction of the national PPO network in
June 2011.

Our fully insured dental PPO membership increased by approximately 3,100 members
as of September 30, 2012 from September 30, 2011. The increase in fully-insured
dental PPO membership is the result of new sales in Ohio and Kentucky of
approximately 7,900 members, offset by the loss of approximately 4,700 members
due to employer groups that did not renew with the Company or reduced employee
counts of retained employer groups.

Our self-insured dental membership increased by approximately 1,600 members as
of September 30, 2012 from September 30, 2011. This increase is primarily due to
the addition of new self-insured dental HMO and dental PPO employer groups in
the last twelve months and growth within existing employer groups.

Our corporate, all other membership decreased by approximately 300 members as of
September 30, 2012 from September 30, 2011. Our vision plan membership decreased
by approximately 200 members. Also there was a decrease of approximately 100
dental indemnity members underwritten by a third party insurance carrier that
shifted into the fully-insured HMO/IND segment at renewal.

Revenue


Fully-insured dental HMO/IND premium revenue for the 2012 quarter increased by
approximately $233,000 compared to the 2011 quarter. Fully-insured dental
HMO/IND premium rate increases negotiated with employer groups at their renewals
resulted in an increase of approximately $108,000 in fully-insured dental
HMO/IND premium revenue. An increase in fully-insured HMO/IND membership in the
2012 quarter resulted in an increase in fully-insured dental HMO/IND premiums of
approximately $125,000.

Fully-insured dental HMO/IND premium revenue for the 2012 period increased by
approximately $1,028,000 compared to the 2011 period. Fully-insured dental
HMO/IND premium rate increases negotiated with employer groups at their renewals
resulted in an increase of approximately $631,000 in fully-insured dental
HMO/IND premium revenue. An increase in fully-insured HMO/IND membership in the
2012 period resulted in an increase in fully-insured dental HMO/IND premiums of
approximately $397,000. The fully-insured dental HMO/IND segment represents
approximately 54.8% of our total dental business.

Fully-insured dental PPO premium revenue for the 2012 quarter increased by
approximately $492,000 compared to the 2011 quarter. Fully-insured dental PPO
premium rate increases negotiated with employer groups at their renewals
resulted in an increase of approximately $267,000 in fully-insured dental PPO
premium revenue. An increase in fully-insured PPO membership in the 2012 quarter
resulted in an increase in fully-insured dental PPO premiums of approximately
$225,000.

Fully-insured dental PPO premium revenue for the 2012 period increased by
approximately $1,293,000 compared to the 2011 period. Fully-insured dental PPO
premium rate increases negotiated with employer groups at their renewals
resulted in an increase of approximately $619,000 in fully-insured dental PPO
premium revenue. An increase in fully-insured PPO membership in the 2012 period
resulted in an increase in fully-insured dental PPO premiums of approximately
$675,000. The fully-insured dental PPO segment represents approximately 14.1% of
our total dental business.



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Total self-insured dental revenue for the 2012 quarter increased approximately
$12,000 compared to the 2011 quarter. Self-insured dental revenue increased by
$104,000 due to new self-insured sales. This self-insured revenue increase was
offset by a decrease of approximately $117,000 due to a decrease in the
self-insured claims revenue on a PMPM basis as a result of lower dental service
utilization.

Total self-insured dental revenue for the 2012 period increased approximately
$182,000 compared to the 2011 period. Self-insured dental revenue increased by
$444,000 due to new self-insured sales. This self-insured revenue increase was
offset by a decrease of approximately $262,000 due to a decrease in the
self-insured claims revenue on a PMPM basis as a result of lower dental service
utilization. The self-insured dental segment represents approximately 30.4% of
our total dental business.

The self-insured segment revenue has two components:


Self-Insured Claim Revenue - Self-insured claim revenue for the 2012 quarter
decreased approximately $28,000, or 0.5%, to approximately $6,116,000 in the
2012 quarter from approximately $6,144,000 in the 2011 quarter. Self-insured
claim revenue increased by approximately $99,000 due to new self-insured sales.
This self-insured claims revenue increase was offset by a decrease of
approximately $128,000 primarily due to a decrease in the self-insured claims
revenue on a PMPM basis as a result of lower dental service utilization.

Self-insured claim revenue for the 2012 period increased approximately $150,000,
or 0.9%, to approximately $17,263,000 in the 2012 period from approximately
$17,113,000 in the 2011 period. Self-insured claim revenue increased by
approximately $422,000 due to new self-insured sales. This self-insured claims
revenue increase was offset by a decrease of approximately $273,000 primarily
due to a decrease in the self-insured claims revenue on a PMPM basis as a result
of lower dental service utilization.

Self-Insured ASO Fees - Self-insured ASO fees for the 2012 quarter increased
approximately $16,000, or 5.4%, to approximately $310,000 in the 2012 quarter
from approximately $294,000 in the 2011 quarter. Self-insured ASO fees increased
by approximately $5,000 due to the new self-insured product sales and by
approximately $11,000 due to an increase in average self-insured ASO fee rates
for the 2012 quarter compared to the 2011 quarter.

Self-insured ASO fees for the 2012 period increased approximately $32,000, or
3.6%, to approximately $934,000 in the 2012 period from approximately $902,000
in the 2011 period. Self-insured ASO fees increased by approximately $22,000 due
to the new self-insured product sales and by approximately $10,000 due to an
increase in average self-insured ASO fee rates for the 2012 period compared to
the 2011 period.

Corporate, all other premium revenue is primarily derived from the dental
indemnity product and the vision product that are underwritten by third-party
insurance carriers. In aggregate, corporate, all other premium revenue decreased
by approximately $5,000 in the 2012 quarter compared to the 2011 quarter. In
aggregate, corporate, all other premium revenue increased by approximately
$2,000 in the 2012 period compared to the 2011 period. The corporate, all other
segment represents approximately 0.6% of our total dental business.

Investment Income


Investment income for the 2012 quarter increased approximately $12,000 compared
to the 2011 quarter. Investment income for the 2012 period increased
approximately $22,000 compared to the 2011 period. These increases are primarily
attributable to an increase in the yield to maturity related to the current
investment grade corporate bond portfolio with a longer average duration than
the corporate bonds in place during the 2011 period and the 2012 period.

Healthcare Services Expense


Fully-insured dental HMO/IND healthcare services expense for the 2012 quarter
decreased approximately $102,000 compared to the 2011 quarter. An increase in
fully-insured dental HMO/IND membership resulted in an increase in fully-insured
dental HMO/IND healthcare services expense of $97,000. A decrease in
fully-insured dental HMO/IND healthcare services expense on a PMPM basis
resulted in a decrease in fully-insured dental HMO/IND healthcare services
expense of approximately $199,000. The decrease is primarily the result of lower
healthcare services utilization in the 2012 quarter compared to the 2011
quarter.

Fully-insured dental HMO/IND healthcare services expense for the 2012 period
increased approximately $128,000 compared to the 2011 period. An increase in
fully-insured dental HMO/IND membership resulted in an increase in fully-insured
dental HMO/IND healthcare services expense of $317,000. A decrease in
fully-insured dental HMO/IND healthcare services expense on a PMPM basis
resulted in an decrease in fully-insured dental HMO/IND healthcare services
expense of approximately $189,000. The decrease is primarily the result of lower
healthcare services utilization in the 2012 period compared to the 2011 period.



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Fully-insured dental PPO healthcare services expense for the 2012 quarter
increased approximately $223,000 compared to the 2011 quarter. This increase was
primarily the result of an increase in fully-insured dental PPO healthcare
services expense of approximately $201,000 related to the increase in
fully-insured dental PPO membership discussed above. This increase was also the
result of an increase in fully-insured dental PPO healthcare services expense of
approximately $22,000 related to an increase in fully-insured dental PPO
healthcare services expense on a PMPM basis from $18.82 in the 2011 quarter to
$19.00 in the 2012 quarter, due to higher healthcare services utilization in the
2012 quarter compared to the 2011 quarter.

Fully-insured dental PPO healthcare services expense for the 2012 period
increased approximately $610,000 compared to the 2011 period. This increase was
primarily the result of an increase in fully-insured dental PPO healthcare
services expense of approximately $616,000 that was the result of the increase
in fully-insured dental PPO membership discussed above. This increase was offset
by a decrease in fully-insured dental PPO healthcare services expense of
approximately $6,000 that was the result of a decrease in fully-insured dental
PPO healthcare services expense on a PMPM basis. This decrease is primarily
attributable to the introduction of a 10% provider withhold on the in-network
portion of the dental PPO product on April 1, 2011. This 10% provider withhold
was in effect for all nine months of the 2012 period but only for six months of
the 2011 period. The decrease in fully-insured dental PPO healthcare services
expense on a PMPM basis attributable to the 10% provider withhold for all nine
months of 2012 was offset by an increase due to higher healthcare services
utilization in the 2012 period compared to the 2011 period.

Self-insured dental healthcare services expense for the 2012 quarter decreased
approximately $29,000 compared to the 2011 quarter. The self-insured new sales
resulted in an increase in self-insured dental healthcare services expense of
approximately $90,000. Offsetting this increase was a decrease of approximately
$119,000 primarily due to a decrease in the self-insured healthcare services
expense on a PMPM basis as a result of lower dental service utilization.

Self-insured dental healthcare services expense for the 2012 period increased
approximately $141,000 compared to the 2011 period. The self-insured new sales
resulted in an increase in self-insured dental healthcare services expense of
approximately $382,000. Offsetting this increase was a decrease of approximately
$241,000 primarily due to a decrease in the self-insured healthcare services
expense on a PMPM basis as a result of lower dental service utilization.

Corporate, all other healthcare services expense is not recognized by the Company due to the fact that our other dental indemnity, dental PPO and vision PPO products are underwritten by third-party insurance carriers.

Insurance Expense


Consolidated insurance expense for the 2012 quarter increased approximately
$116,000 compared to the 2011 quarter. Consolidated insurance expense for the
2012 period increased approximately $661,000 compared to the 2011 period. The
higher consolidated insurance expense for both the 2012 quarter and the 2012
period was primarily due to higher broker commission expense on increased
premium revenues, salaries and wages, advertising expense, accounting and audit
related fees and professional consulting expenses. Insurance expense as a
percentage of total revenue, or the insurance expense ratio, was 16.5% for the
2012 quarter compared to 16.5% for the 2011 quarter and 17.4% for the 2012
period compared to 17.0% for the 2011 period.

Income Taxes


The Company calculates its year to date income tax provision by applying the
estimated annual effective tax rate for the year to pretax income. Our income
tax expense for the three months ended September 30, 2012 was approximately
$367,000 with an effective tax rate of 37.1%. Our income tax expense for the
three months ended September 30, 2011 was approximately $163,000 with an
effective tax rate of 36.4%. Our income tax expense for the nine months ended
September 30, 2012 was approximately $468,000 with an effective tax rate of
36.6%. Our income tax expense for the nine months ended September 30, 2011 was
approximately $96,000 with an effective tax rate of 36.6%.

Liquidity and Capital Resources and Changes in Financial Condition


Our primary sources of cash include receipts of premiums, ASO fees, investment
and other income proceeds from the sale or maturity of our investment
securities, as well as from the sale of redeemable common and preferred shares
and from borrowings. Our primary uses of cash include disbursements for claims
payments, insurance expense, interest expense, taxes, purchases of investment
securities, capital expenditures, redeemable common share redemptions and
payments on borrowings. Cash increased approximately $1,683,000, or 24.1%,
during the 2012 period to approximately $8,659,000 as of September 30, 2012 from
approximately $6,976,000 as of December 31, 2011. The change in cash for the
2012 and 2011 periods is summarized as follows (in thousands):



                                               Nine months ended              Nine months ended
                                              September 30, 2012              September 30, 2011
Net cash provided by operating
activities                                    $             1,094            $                459
Net cash provided by (used in)
investing activities                                           82                            (270 )
Net cash provided by (used in)
financing activities                                          507                            (313 )

Increase (decrease) in cash and cash
equivalents                                   $             1,683            $               (124 )





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Cash Flows from Operating Activities


In the 2012 period, approximately $1,094,000 was provided by operating
activities. We had net income of approximately $811,000. This income is
primarily attributable to an increase in our fully-insured dental HMO/IND and
fully-insured dental PPO premium revenue on a PMPM basis and lower healthcare
services expense utilization. In addition, in the 2012 period, our claims
payable liability increased by approximately $41,000 resulting in a cash balance
increase. Other payables and accrued expenses decreased by approximately
$105,000, primarily due to a decrease in accounts payable of approximately
$147,000, a decrease in our premium tax liability of approximately $83,000, and
a decrease in our federal income tax payable of approximately $167,000, offset
by an increase in accrued payroll, bonus and PTO of approximately $111,000, an
increase in accrued broker commissions of approximately $127,000 and an increase
in other accrued expenses of approximately $35,000. As disclosed in the
condensed consolidated statements of cash flows, we paid $635,000 of federal
income taxes in the 2012 period that related to our 2011 extension payment and
2012 estimated tax payments that was necessary because of our return to
profitability in 2011 and 2012. The remaining effects of changes in operating
assets and liabilities that represent fluctuations are not significant and are
consistent with the 2011 period.

Cash Flows from Investing Activities


In the 2012 period, we invested approximately $61,000 in building improvements,
furniture and fixtures and computer equipment. During the 2012 period, we made
purchases totaling approximately $884,000 of investment grade corporate bonds,
certificates of deposit and institutional money market funds in order to improve
investment income. In the 2012 period, we invested $40,000 in a joint venture.
Also during the 2012 period, we had certificate of deposit maturities and
institutional money market sales that together totaled approximately $1,067,000.

Cash Flows from Financing Activities


In the 2012 period, we made the scheduled principal payments of approximately
$90,000 related to our office building mortgage and scheduled payments of
approximately $80,000 related to our capital lease. During the 2012 period, we
repurchased previously redeemed Common Shares with a value of approximately
$101,000 and issued Redeemable Common Shares with a value of approximately
$23,000 to two members of the Board of Directors. In January 2012, we sold 1,000
Redeemable Institutional Preferred Shares at a purchase price of $1,000 per
share, for an aggregate purchase price of $1,000,000, to a large Ohio based
insurance company. We also paid dividends of approximately $177,000 to holders
of our Redeemable Common Shares and approximately $67,000 to holders of our
Redeemable Institutional Preferred Shares in the 2012 period.

Provider Withhold Funds


In most cases, our reimbursement to our participating providers for covered
dental services under the dental HMO and the dental PPO are generally subject to
a 10% withhold by us. The 10% withhold related to the dental PPO product was
effective April 1, 2011. The amounts withheld are not retained in a separate
fund and we have no obligation to pay any portion of the amounts withheld to the
providers. The dental providers have no vested rights in the amounts withheld
unless our Board of Directors authorizes that any amounts withheld shall be paid
to the providers, and then vesting is only to the extent of such amounts
authorized to be paid by the Board. Once authorized for payment by the Board,
such amounts are recorded as claims payable liabilities until paid.

In the 2012 and 2011 periods, we paid no withhold return to participating providers because a withhold return was not authorized by the Board of Directors.

Contractual Obligations, other Commitments and Off-balance Sheet Arrangements


Refer to the Company's 2011 Annual Report on Form 10-K filed with the SEC for a
description of contractual obligations, other commitments and off-balance sheet
arrangements. We have had no significant changes in these items in 2012.

Financial Condition


Our consolidated cash and short-term investments were approximately $9.0 million
as of September 30, 2012 and approximately $7.3 million as of December 31, 2011.
This increase is due to the increase in cash of approximately



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$1,683,000 during the 2012 period and the increase in short-term investments of
approximately $81,000 during the 2012 period. The increase in cash was primarily
due to the cash provided by operating activities of approximately $1,094,000,
cash provided financing activities of $507,000, and cash provided by investing
activities of approximately $82,000. We expect to generate positive cash flow
from operations during the balance of 2012. Based on total expenses for the nine
months ended September 30, 2012, we estimate that we had approximately 41 days
of cash and short-term investments on hand at September 30, 2012. In addition,
the Company has access to approximately $3.7 million of fixed maturity
investments that are classified as available-for-sale and two working capital
lines of credit discussed below.

We have an annually renewable agreement with a commercial bank for a $500,000
working capital line of credit. Interest is payable at a variable rate of LIBOR
plus 2.50% and was 2.74% and 2.88% at September 30, 2012 and December 31, 2011,
respectively. We did not have any interest expense or significant fees for the
line of credit in the 2012 period or the 2011 period. As of September 30, 2012
and December 31, 2011, there was no amount outstanding on this line of credit.
The $500,000 working capital line of credit expires in July 2013. We expect to
renew the working capital line of credit in July 2013.

We have an annually renewable second working capital line of credit for
$960,000. Interest is payable at a variable rate of LIBOR plus 2.50% and was
2.74% and 2.88% at September 30, 2012 and December 31, 2011, respectively. The
Company did not have any interest expense for the line of credit in the 2012
period or the 2011 period. At September 30, 2012 and December 31, 2011, there
was no amount outstanding on this line of credit. The $960,000 working capital
line of credit in August 2013. In addition, the Company obtained an irrevocable
letter of credit for $40,000, with interest payable on all outstanding amounts
at a variable rate of the prime rate of borrowing plus 6.00%. We expect to renew
the working capital line of credit and the irrevocable letter of credit in
August 2013.

On December 16, 2011, we renewed our revolving note with a commercial bank in
the amount of $750,000 collateralized by a second mortgage on our office
building. As of September 30, 2012, there was a principal balance outstanding of
$650,000 related to this revolving note. This revolving note matures on
December 15, 2012, is annually renewable and requires us to make monthly
interest payments at a variable rate of 30-day LIBOR plus 1.75%, or 1.98% at
September 30, 2012. Under this revolving note, we are required to have a minimum
tangible net worth equal to or greater than $2.5 million at the end of each
fiscal year, and we are in compliance with this covenant. As of September 30,
2012, we expect to renew the revolving note in December 2012.

We believe our premium revenues, cash, investments and working capital lines of
credit are sufficient to meet our short-term and long-term liquidity needs. In
the short-term, we are obligated to make payments related to our contractual
obligations such as our healthcare services expense, building mortgage, and our
capital and operating leases and other commitments, including future payment of
key employee and director deferred compensation obligations. In the long-term,
we will continue to be obligated to make payments related to our other
contractual obligations. We will also be obligated in certain circumstances to
repurchase the Redeemable Common Shares of our provider shareholders who die,
become permanently disabled or retire. We will also be obligated in certain
circumstances to repurchase the Redeemable Institutional Preferred Shares upon
redemption request. Our Board of Directors establishes limitations on the amount
of share redemptions each year. While we are not able to estimate future
redemptions of our Redeemable Common Shares and Redeemable Institutional
Preferred Shares, we believe our cash balances, investment securities, operating
cash flows, and borrowing capacity, taken together, provide adequate resources
to fund ongoing operating and regulatory requirements and fund future expansion
opportunities and capital expenditures in the next twelve months.

Our largest subsidiary, Dental Care Plus Inc, ("DCP"), operates in states that
regulate its payment of dividends and debt service on inter-company loans, as
well as other inter-company cash transfers and require minimum levels of equity
as well as limit investments to approved securities. The amount of dividends
that may be paid by DCP, without prior approval by state regulatory authorities,
is limited based on statutory income and statutory capital and surplus. Even if
prior approval is not required, prior notification must be provided to state
agencies in Ohio, Kentucky and Indiana before paying a dividend. There were no
dividends declared or paid by DCP in the 2012 or 2011 periods.

A.M. Best Company assigns a rating to companies that have, in their opinion, an
ability to meet their ongoing obligations to policyholders, but are financially
vulnerable to adverse changes in underwriting and economic conditions. In June
2012, A.M. Best Company upgraded our financial strength rating to B (Fair) from
B- (Fair) with a positive outlook based on DCP's positive operating performance
and improved capitalization. Our A.M. Best rating is a measure of our financial
strength relative to other insurance companies and is not a recommendation to
buy, sell or hold securities. The rating assigned by A.M. Best Company is based,
in part, on the ratio of our fully-insured premium revenue to our statutory
capital and surplus.

We attempt to reduce overall risk by maintaining a well-diversified
fixed-maturity portfolio. We invest in certificates of deposits, investment
grade corporate bonds and money market funds, targeting what we believe to be
optimal risk-adjusted after-tax yields. Risk, in this context, includes interest
rate, call, reinvestment rate, credit and liquidity risk. We do not make a
concerted effort to alter duration on a portfolio basis in response to
anticipated movements in interest



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rates. By continually investing in certificates of deposits, money market funds
and investment grade corporate bonds, we believe the portfolio mitigates the
impact of adverse economic factors. As of September 30, 2012, we had
approximately $2,110,000 or 74% of the total fair value of investment grade
corporate bonds with a Standard & Poor's rating of A- or better. The remaining
investment grade corporate bonds had a fair value of approximately $726,000 with
a Standard & Poor's rating between BB+ and BBB+. The weighted average
yield-to-book value of our investment grade corporate bonds was approximately
4.24% at September 30, 2012. The weighted average maturity of our investment
grade corporate bonds was 8.19 years at September 30, 2012.

Our regulated subsidiary's state of domicile has statutory risk-based capital,
or RBC, requirements for health and other insurance companies largely based on
the NAIC's RBC Model Act. These RBC requirements are intended to measure capital
adequacy, taking into account the risk characteristics of an insurer's
investments and products. The NAIC sets forth the formula for calculating the
RBC requirements, which are designed to take into account asset risks, insurance
risks, interest rate risks and other relevant risks with respect to an
individual insurance company's business. In general, an insurance company must
submit a report of its RBC level to the state insurance department or insurance
commissioner, as appropriate, at the end of each calendar year. Our subsidiary's
risk-based capital as of December 31, 2011, which was the most recent date for
which reporting was required, was in excess of all mandatory RBC thresholds.

Critical Accounting Policies

Deferred Acquisition Costs


Deferred acquisition costs are those incremental direct costs related to the
successful acquisition of new and renewal business. These incremental direct
costs and other costs are those that are essential to the contract transaction
and would not have been incurred had the contract transaction not occurred. Such
incremental direct costs include commissions, costs of contract issuance and
underwriting, premium taxes and other costs the Company incurs to acquire
successful new business or renew existing business. The Company defers policy
acquisition costs and amortizes them over the estimated life of the contracts,
which are short-duration in nature, in proportion to premiums earned.

Effective January 1, 2012, the Financial Accounting Standards Board ("FASB")
amended the guidance for deferred acquisition costs and requires that only
incremental direct costs of successful contract acquisition be capitalized.
These incremental direct costs and other costs are those that are essential to
the contract transaction and would not have been incurred had the contract
transaction not occurred. On January 1, 2012, the impact of adoption on
redeemable shares totaled approximately $125,000, net of tax. The Company has
applied the retrospective method for financial statement presentation and note
disclosures for the prior periods reported.

Claims Payable Liability


We estimate liabilities for both incurred but not reported ("IBNR") and reported
claims in process by employing actuarial methods that are commonly used by
health insurance actuaries and meet actuarial standards of practice. These
actuarial standards of practice require that claim liability estimates be
adequate under moderately adverse circumstances. The Company's consulting
actuary assists us in making these estimates. Since our liability for claims
payable is based on actuarial estimates, the amount of claims eventually paid
for services provided prior to the balance sheet date could differ from the
estimated liability. Any such differences are recognized in the condensed
consolidated statements of comprehensive income for the period in which the
differences are identified. Historically, such differences have not been
material.

We develop our estimate for claims payable liability using actuarial
methodologies and assumptions, primarily based on historical claim payments and
claim receipt patterns, as well as historical dental cost trends. Depending on
the period for which incurred claims are estimated, we apply a different method
in determining our estimate. For periods prior to the most recent month, we
calculate a "completion factor" which indicates the percentage of claims payable
estimated for a prior period that have been paid as of the end of the current
reporting period. We use the completion factor to determine historical patterns
over a rolling 12-month period, made consistent by making adjustments for known
changes in claims in process levels and known changes in claim payment
processes. For the most recent month, we calculate a "claims trend factor" that
estimates incurred claims primarily from a trend analysis based upon PMPM claims
trends developed from our historical experience in the preceding months,
adjusted for known provider contracting changes, changes in benefit levels,
seasonality and consideration of any subsequent actual claims data available.
When developing our estimate for claims payable liability as of December 31,
2011, we considered actual paid claim data from January 2012. As a result, we
were able to use the completion factors approach for all historical months at
December 31, 2011.



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We have not changed the key actuarial methodologies used by management to
estimate the IBNR and reported claims in process components of our claims
payable liability during the periods presented, and management has not adjusted
any of the key methodologies used in calculating the most recent estimate of the
IBNR and reported claims in process components of our claims payable liability.
Our assumptions in the 2012 quarter for the claims trend factor used to estimate
incurred claims for September 30, 2012 are consistent with the dental services
utilization levels we experienced in the prior year and our expectation that
this level of utilization will continue in the future.

The table set forth below illustrates how our operating results are affected
when there is a variance between estimated claims expense and actual claims
expense. The table shows the sensitivity of the estimated fully-insured incurred
claims payable liability to fluctuations in the expected completion factors and
claims trend factors that were used to estimate the claims payable liability as
of September 30, 2012 within variance ranges historically experienced.



              Completion Factor (a)                                Claims Trend Factor (b)
                                Estimated claims                                      Estimated claims
(Decrease)                     payable liability      (Decrease)                     payable liability
 Increase                            as of             Increase                            as of
In Factor                          9/30/2012          In Factor                          9/30/2012
  (0.5)%                                3,072,970        (5)%                                 2,686,361
    0%       (estimate used)            2,842,710         0%      
(estimate used)            2,842,710
   0.5%                                 2,711,945         5%                                  3,007,587



(a) Reflects estimated potential changes in incurred claims payable liability

caused by changes in completion factors for months prior to the most recent

month.

(b) Reflects estimated potential changes in incurred claims payable liability

caused by annualized claims trend used for the estimation of the PMPM

incurred claims for the most recent month.



Based on historical experience, we believe the completion factors we use to
estimate outstanding IBNR and reported claims in process are reliable for
predicting actual claims paid at future times, with a variance range of
approximately one-half of one percent, plus or minus. The claims trend factors
we use to estimate outstanding IBNR and reported claims in process for the most
recent month are somewhat less reliable based on historical experience, with a
variance range of approximately five percent, plus or minus. We have found that
the estimated claims trend factor can be higher or lower than what the paid
claims data indicates with the passage of time primarily because of factors
beyond our control, such as the level of utilization of services by dental
members and the expected and actual mix of the types of services received by
dental members.

In 2012, our first quarter healthcare services expense was lower than the first
quarter of 2011. This decrease was primarily due to a lower level of
fully-insured dental HMO/IND and fully-insured dental PPO healthcare services
expense on a PMPM basis. This decrease is primarily the result of the 10%
withhold on the in-network portion of the fully-insured dental PPO that was in
effect in the first quarter of 2012 but not in the first quarter of 2011. In the
second quarter of 2012, our healthcare services expense on a PMPM basis was
higher than the second quarter of 2011. Given the 10% withhold on the in-network
portion of the fully-insured dental PPO was in effect during the second quarter
of both 2012 and 2011, the increase in healthcare services expense on a PMPM
basis was the result of higher dental services utilization in the 2012 quarter.
In the third quarter of 2012, our healthcare services expense on a PMPM basis
was lower than that in the third quarter of 2011 as a result of lower dental
services utilization in the third quarter of 2012.



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Based on our healthcare services expense on a PMPM basis that adjusts the
quarterly healthcare services expense for membership volume changes, our dental
plan members have historically used their dental plan benefits according to a
seasonal pattern. In general, claims on a PMPM basis are generally lower in the
second and fourth quarter than in the first quarter and the third quarter. The
higher third quarter claim level on a PMPM basis is primarily due to the high
level of dental services used in July and August by student members prior to
returning to school. Use of dental services is lowest in the fourth quarter due
to the holiday season and the fact that a portion of our members have already
reached their maximum annual benefit level for the year. The following shows
these trends in tabular form:



                                          Healthcare Service Expense
                                         2012                     2011
                                  $000's       $PMPM       $000's       $PMPM
                First Quarter    $ 16,240     $ 19.83     $ 16,190     $ 20.31
                Second Quarter     15,920       19.43       15,184       19.11
                Third Quarter      16,092       19.61       15,999       19.98
                Fourth Quarter                              14,978       18.65
Wordcount: 7555



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