REPORT ON EXAMINATION OF DELTA DENTAL OF ...Delta Dental of Delaware, Inc. 2 January 1, 2012 through December 31, 2015, and encompassed a general review of transactions during the

REPORT ON EXAMINATION

OF

DELTA DENTAL OF DELAWARE, INC.

AS OF

DECEMBER 31, 2015

NAIC CODE 11132

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TABLE OF CONTENTS

SCOPE OF EXAMINATION......................................................................................................... 1

SUMMARY OF SIGNIFICANT FINDINGS OF FACT ............................................................... 3

COMPANY HISTORY .................................................................................................................. 4

MANAGEMENT AND CONTROL .............................................................................................. 4

Directors ...........................................................................................................................................4 Board Committees ...........................................................................................................................5 Officers ............................................................................................................................................6 Holding Company System ...............................................................................................................7 Affiliated Management and Service Agreements ............................................................................9

TERRITORY AND PLAN OF OPERATION ............................................................................. 10

Territory .........................................................................................................................................10 Plan of Operation ...........................................................................................................................10

REINSURANCE........................................................................................................................... 11

Assumed Reinsurance ....................................................................................................................11 Ceded Reinsurance .........................................................................................................................11

FINANCIAL STATEMENTS ...................................................................................................... 11

Assets .............................................................................................................................................13 Liabilities, Capital and Surplus ......................................................................................................14 Statement of Revenue and Expenses .............................................................................................15 Reconciliation of Capital and Surplus ...........................................................................................16

ANALYSIS OF CHANGES IN FINANCIAL STATEMENTS FROM EXAMINATION ........ 16

COMMENTS ON FINANCIAL STATEMENTS ........................................................................ 16

SUBSEQUENT EVENTS ............................................................................................................ 17

COMPLIANCE WITH PRIOR REPORT OF EXAMINATION ................................................ 17

SUMMARY OF RECOMMENDATIONS .................................................................................. 17

CONCLUSION ............................................................................................................................. 18

May 4, 2017 Honorable Trinidad Navarro Commissioner Delaware Department of Insurance Rodney Building 841 Silver Lake Blvd. Dover, Delaware 19904 Dear Commissioner: In accordance with instructions and pursuant to statutory provisions contained in

Certification Number 16.007, dated December 29, 2015, an examination has been made of the

affairs, financial condition and management of

DELTA DENTAL OF DELAWARE, INC.

hereinafter referred to as (Company) or (DDD), incorporated under the laws of the State of

Delaware as a non-stock corporation, with its home office located at 203 NE Front Street, Suite

101, Milford, Delaware. The examination was conducted at the main administrative office of the

Company, located at One Delta Drive, Mechanicsburg, Pennsylvania.

The examination report thereon is respectfully submitted.

SCOPE OF EXAMINATION

The Delaware Department of Insurance (Department) has performed a multi-state

coordinated risk-focused financial examination of the Company. The last examination of the

Company was conducted as of December 31, 2011. This examination covered the period of

Delta Dental of Delaware, Inc.

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January 1, 2012 through December 31, 2015, and encompassed a general review of transactions

during the period, the Company’s business policies and practices, as well as management and

relevant corporate matters, with a determination of the financial condition of the Company at

December 31, 2015. Transactions after the examination date were reviewed where deemed

necessary.

The examination of the Company was performed as part of the examination of the

Dentegra Group, Inc. (Dentegra Group) insurance group of companies as of December 31, 2015.

The examination was conducted concurrently with that of its Delaware domiciled affiliate

companies, Delta Dental Insurance Company (DDIC) and Dentegra Insurance Company (DIC),

along with the following affiliated companies: Delta Dental of Pennsylvania (DDP), Delta

Dental of New York (DDNY), Delta Dental of West Virginia (DDWV), Alpha Dental of

Arizona, Inc. (ADAZ), Alpha Dental of Nevada, Inc. (ADNV), Alpha Dental of Utah, Inc.

(ADUT), Alpha Dental of New Mexico, Inc. (ADNM) and Alpha Dental Programs, Inc. (ADP),

a Texas domiciled affiliate. To the fullest extent, the efforts, resources, project material and

findings were coordinated and made available to all examination participants.

We conducted the examination in accordance with the National Association of Insurance

Commissioners (NAIC) Financial Condition Examiners Handbook (Handbook) and generally

accepted statutory insurance examination standards consistent with the Insurance Code and

Regulations of the State of Delaware. The NAIC Handbook requires that the Department plan

and perform the examination to evaluate the financial condition, assess corporate governance,

identify current and prospective risks of the Company and evaluate system controls and

procedures used to mitigate those risks. An examination also includes identifying and evaluating

significant risks that could cause an insurer’s surplus to be materially misstated both currently


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and prospectively. All accounts and activities of the Company were considered in accordance

with the risk-focused examination process. This may include assessing significant estimates

made by management and evaluating management’s compliance with Statutory Accounting

Principles. The examination does not attest to the fair presentation of the financial statements

included herein. If, during the course of the examination an adjustment is identified, the impact

of such adjustment will be documented separately following the Company’s financial statements.

This examination report includes significant findings of fact, along with general

information about the insurer and its financial condition. There may be other items identified

during the examination that, due to their nature, are not included within the examination report

but are separately communicated to other regulators and/or the Company.

During the examination, consideration was given to work performed by the Company’s

external independent accounting firm, Armanino LLC. Certain auditor work papers were

incorporated into the work papers of the examiners and were utilized in determining the

examination scope, areas of emphasis in conducting the examination, and in areas of risk

mitigation and substantive testing.

SUMMARY OF SIGNIFICANT FINDINGS OF FACT

This examination had no material adverse findings, significant non-compliance findings,

material changes in financial statements, or updates on other significant regulatory information

disclosed in the previous examination.


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COMPANY HISTORY

The Company is a non-profit dental service corporation subject to Chapter 38 (Dental

Plan Organization Act) of the Delaware Insurance Code and is a tax-exempt corporation under

Section 501(c)(4) of the Internal Revenue Code. The Company was originally organized as a

non-stock corporation under the laws of the State of Delaware on December 21, 1987.

Representatives from DDP merged the Company with an existing wholly-owned corporation of

the same name domiciled in Pennsylvania, Delta Dental of Delaware, (DDD Pennsylvania). The

Company received its Certificate of Authority (COA) as a domestic dental plan organization

from the Delaware Department of Insurance on October 24, 2004. Effective November 15,

2004, DDD Pennsylvania, was merged into the Company, which became the surviving

corporation. As the surviving corporation in the merger, the Company assumed all the assets,

liabilities and other obligations of DDD Pennsylvania, which subsequently dissolved.

MANAGEMENT AND CONTROL

Directors

Pursuant to the General Corporation Laws of the State of Delaware, as implemented by

the Company's Articles of Incorporation and Restated Bylaws, all corporate powers are exercised

by or under the direction of the Board of Directors (Board). The bylaws, as amended and

restated November 1, 2015, provide that the Board shall have general charge of the direction of

the Company and shall perform such duties and exercise such other rights and powers as are

provided by law.

The Board shall consist of not less than three (3) and no more than thirteen (13) directors,

all of whom shall be citizens of the United States. Any person elected as a director, except to fill

an unexpired term of a predecessor, shall serve for a period of three (3) years and shall be


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eligible to succeed himself for an additional period of three (3) years, but after serving six (6)

consecutive years shall not be eligible to be a director for a period of one (1) year. Further, the

number of Directors who are not dentists must exceed the number of Directors who are dentists

by at least one.

At December 31, 2015, the members of the Board together with their principal business

affiliations were as follows:

Director’s Name Principal Occupation

Anthony S. Barth President and Chief Executive Officer Delta Dental of California

Michael J. Castro Executive Vice President and Chief Financial Officer

Delta Dental of California Kevin L. Jackson Senior Vice President, Underwriting and Actuarial

Delta Dental of California Marty A. Sheetz Vice President, Sales Shared Services

Delta Dental of California Peter H. Drake Managing Dental Consultant

Delta Dental of Pennsylvania

The minutes of the meetings of the Shareholders and Board, which were held during the

period of examination, were obtained and reviewed. Attendance at meetings, election of

directors and officers, and approval of investment transactions were also noted.

Board Committees

The Company’s amended and restated bylaws provide that the Board shall have two (2)

Standing Committees, an Executive Committee and a Nominating Committee. The Executive

Committee shall consist of the Chairman, the Secretary and the Treasurer of the Company, and

such other members of the Board as the Chairman may, from time to time, designate. The

Nominating Committee shall consist of at least one (1) member of the Board. The Executive


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Committee shall have and may exercise the powers of the Board when the Board is not in

session. The Nominating Committee shall be responsible for the nomination of persons to be

elected directors and officers of the Company.

Additionally, the Chairman shall appoint such Ad Hoc Committees as may be approved

by the Board. Such Ad Hoc Committees shall be charged by the Chairman to perform their

specific committee assignments. As of December 31, 2015, the Board had designated the

following committees:

Executive Committee Investment Committee

Anthony S. Barth, Chairman Michael J. Castro, Chairman Michael J. Castro Anthony S. Barth Kevin L. Jackson Alicia F. Weber

Jeanne M. Foster Kevin L. Jackson

Finance Committee1 Audit Committee2

Joseph P. Beck, Jr., Chairman James A. Smeltzer, Chairman Eugene F. Carter Eugene F. Carter Glen F. Bergert Glen F. Bergert James A. Smeltzer Joseph P. Beck, Jr.

Nominating Committee

Kevin L. Jackson

1 The Board appointed the Finance Committee of Delta Dental of Pennsylvania (DDP) to serve as the Finance Committee of DDD. 2 The Board appointed the Audit Committee of Delta Dental of Pennsylvania (DDP) to serve as the Audit Committee of DDD.

Officers

The Company’s amended and restated bylaws provide that the Company’s officers shall

consist of a Chairman, a Secretary, and a Treasurer, all of whom shall be elected annually by the

Board of Directors at the annual meeting of the Board of Directors and shall hold office for a

period of one year or until their successors are elected. The President and other officers


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appointed by the Board of Directors shall hold their offices subject to the pleasure of the Board

of Directors.

At December 31, 2015, the Company’s principal officers and their respective titles were

as follows:

Officer’s Name Principal Occupation

Anthony S. Barth Chairman of the Board Delta Dental of Delaware, Inc.

Michael J. Castro Treasurer Delta Dental of Delaware, Inc.

Kevin L. Jackson Secretary Delta Dental of Delaware, Inc.

The Company maintains a formal written Code of Conduct, which sets out the standards

of ethical conduct that apply to all employees, officers and directors. Incorporated into the Code

of Conduct is a Conflict of Interest Policy. On an annual basis all officers and directors of the

Company are required to complete a Conflict of Interest Disclosure Statement. A review of the

Company’s annual Conflict of Interest Disclosure Statement for officers, directors and key

employees was performed, with no concerns or issues identified. Finally, review of the

Company’s Board meeting minutes over the examination period reflected accordance with the

Company’s bylaws. From review of such minutes, the attendance at Board meetings, the

elections of directors and officers and the approvals of investment transactions were noted.

Holding Company System

The Company is a member of an insurance holding company system as defined under 18

Del. C. §5001(6) “Insurance Holding Company System”. The Company’s Annual Insurance

Holding Company System Registration Statement (Form B) was filed timely for each year under

examination with the Department.


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The Company is part of the Dentegra Group holding company system, whereby Delta

Dental of California (DDC) operates as the ultimate controlling entity. The Dentegra Group is

bifurcated into two (2) parent companies, DDC and DDP. DDC and DDP, operating as non-

profit companies, combine their resources in an effort to eliminate duplication in the areas of

market development and technology, to share best practices, develop economies of scale,

increase competitiveness on a national scale and to bring new services to its subscribers, clients

and partner dentists.

Certain companies within the holding company system are members of the Delta Dental

Plans Association (DDPA). DDPA is a nationwide association of independently-operated dental

health service plans which have a key feature of offering subscribers access to the national

provider networks under the Delta USA program and access to the local provider networks

maintained by the Dentegra Group.

The following organizational chart reflects the identities and interrelationships between

the Company, affiliated insurers and other members within the holding company system as of

December 31, 2015:


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Affiliated Management and Service Agreements

As of December 31, 2015, the Company was party to the following affiliated agreements,

which were disclosed in the annual Form B filings with the Department:

Amended and Restated General Agency Agreement

Effective January 1, 2006, the Company entered into an Amended and Restated General

Agency Agreement with DDP and DDIC, whereby the Company will act as a general agent for

DDIC in Delaware and DDP provides management services to the Company and DDIC.

Guarantee Agreement

Effective December 3, 1999, the Company executed a Guarantee Agreement with DDP,

whereby DDP unconditionally guarantees the punctual payment of all contractual Policyholder’s


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obligations of the Company. In addition, DDP unconditionally guarantees that it will, by means

of surplus or subordinated loans, infuse capital into the Company in an amount necessary to

bring the Company’s unencumbered surplus up to the amount needed to exceed 125% of the

“Company Action Level” under the Risk-Based Capital (RBC) calculation for health insurers.

TERRITORY AND PLAN OF OPERATION

Territory

As of December 31, 2015, the Company was licensed to transact business solely in the

State of Delaware. In 2015, the Company had direct premiums written of $32,911,014. The

Company is authorized as a non-profit corporation to transact business as a Dental Plan

Organization as defined in 18 Del. C. § 3802 (3)"Dental plan organization." The principal office

facilities of the Company are located in Mechanicsburg, Pennsylvania.

Plan of Operation

The Company, a non-profit dental service corporation, administers dental care programs

under agreements with various subscriber groups and/or clients in the State of Delaware. These

dental care programs are offered through their affiliation with the DDPA, a national association

that governs all Delta branded plans. The Company provides cost-effective dental benefits from

local programs, such as managed fee-for-service and Preferred-Provider Programs (PPO), as well

as customized programs, such as Delta Dental Premier® and Dental Dental PPO.

Distribution System

The Company’s sales distribution system involves three (3) key channels: direct sales to

purchasers; coordination of sales to purchasers through independent brokers, consultants and

general agents; and sales to purchasers through co-marketing arrangements with other carriers.


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REINSURANCE

For the year ended December 31, 2015, the Company reported the following distribution

of net premiums written:

Direct 32,911,014$ Reinsurance assumed -

Total direct and assumed 32,911,014$

Reinsurance ceded (to affiliates) 25,544,481 Reinsurance ceded (to non-affiliates) -

Net premiums written 7,366,533$

Assumed Reinsurance

The Company did not assume any business during the examination period.

Ceded Reinsurance

During the examination period, the Company maintained a 90% quota share reinsurance

agreement with affiliate Delta Reinsurance Corporation (DRC), a Barbados reinsurance

corporation. Under this agreement, effective July 1, 2007, DRC reinsures ninety percent (90%)

of the dental contract risks under the Delta Dental Premier® and Delta Dental PPO dental service

contracts sold or renewed by the Company. In 2015, the Company ceded approximately $25.5

million of premium to DRC, with recoverables from DRC totaling approximately $2.2 million.

As of December 31, 2015 under this agreement, funds withheld from DRC totaled approximately

$2.6 million, increasing approximately $1.1 million during the examination period.

FINANCIAL STATEMENTS

The following financial statements are based on the statutory financial statements filed by

the Company with the Department and present the financial condition of the Company for the


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period ending December 31, 2015. The accompanying comments on financial statements reflect

any examination adjustments to the amounts reported in the annual statements and should be

considered an integral part of the financial statements.

Assets Liabilities, Capital and Surplus Statement of Revenue and Expenses Reconciliation of Capital and Surplus The narrative on the reserve related balances is presented in the “Comments on Financial

Statements” section of this report.


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Assets December 31, 2015

NetNonadmitted Admitted

Assets Assets Assets Notes

Bonds 3,242,422$ 3,242,422$ 1

Cash, cash equivalents and short-term investments 742,331 742,331

Investment income due and accrued 24,100 24,100

Premiums and considerations: Uncollected premiums and agents' balances in course of collection 257,292 177 257,115 Reinsurance: Amounts recoverable from reinsurers 2,156,978 2,156,978 Other amounts receivable under reinsurance contracts 949,943 949,943 Amounts receivable related uninsured plans 608,501 608,501 Receivable from parent, subsidiaries and affiliates 14,290 14,290

Aggregate write-ins for other than invested assets 9,026 9,026

Total Assets 8,004,884$ 9,203$ 7,995,681$


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Liabilities, Capital and Surplus December 31, 2015

Notes

Claims unpaid 117,000$ 2

Unpaid claims adjustment expenses 25,000 2

Premiums received in advance 44,101

General expenses due and accrued 386,170

Ceded reinsurance premiums payable 2,250,279

Amounts withheld or retained for the account of others 5,394

Remittances and items not allocated 704

Amounts due to parent, subsidiaries and affiliates 37,691

Funds held under reinsurance treaties 2,623,300

Liability for amounts held under uninsured plans 601,768

Total Liabilities 6,091,407$

Aggregate write-ins for special surplus funds 37,904

Unassigned funds 1,866,370

Total Capital and Surplus 1,904,274$

Total Liabilities, Capital and Surplus 7,995,681$


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Statement of Revenue and Expenses December 31, 2015

Net premium income 7,366,533$

Change in unearned premium reserves and reserve for rate credits (20,036)

Total Revenues 7,346,497$

Hospital/medical benefits 27,472,934$

Net reinsurance recoveries 24,494,577$

Total Hospital and Medical 2,978,357$

Claims adjustment expenses 1,526,800$ General administrative expenses 2,557,784

Total Underwriting Deductions 7,062,941$

Net Underwriting Gain or (Loss) 283,556$

Net investment income earned 51,852$

Net realized capital gains (losses) -0-

Net Investment Gains (Losses) 51,852$

Net gain or (loss) from agents' or premium balances charged off -0- Aggregate write-ins for other income or expenses (850)$

Net Income or (Loss); after capital gains and before all other federal income taxes 334,558$

Federal and foreign income taxes incurred -0-

Net Income (Loss) 334,558$


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Reconciliation of Capital and Surplus December 31, 2011 to December 31, 2015

Aggregate Write-Ins for Special Surplus Funds Surplus Notes

Unassigned Surplus Total

December 31, 2011 $ - $ 1,000,000 $ 632,885 1,632,885$

Operations 2012 (1) 479,651 479,651

Operations 2013 (1) 467,546 467,546

Change in Surplus Notes (2) (1,000,000) (1,000,000)

Operations 2014 (1) (5,621) (5,621)

ACA Tax (3) 24,457 (24,457)

Operations 2015 (1) 329,813 329,813

ACA Tax (3) 13,447 (13,447)

December 31, 2015 37,904$ -$ 1,866,370$ 1,904,274$

(1) Operations defined as: Net income (loss) and change in non-admitted assets

(2) Change in Surplus Notes: Payment of surplus note principle

(3) ACA Tax: ACA tax provision

ANALYSIS OF CHANGES IN FINANCIAL STATEMENTS FROM EXAMINATION

There were no financial adjustments to the Company's financial statements as a result of

this examination.

COMMENTS ON FINANCIAL STATEMENTS

(1) Bonds $ 3,242,422

Long-term bonds constitute the largest category of invested assets at December 31, 2015,

representing approximately 40.6% of the Company’s reported total admitted assets, with 100.0%

of the bonds rated as Class 1 (97.5%) or Class 2 (2.5%) by the NAIC, or investment grade.


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(2) Claims unpaid $ 117,000 Unpaid claims adjustments expenses $ 25,000

The Department contracted INS Consultants, Inc. (INS), to conduct an independent

review of the Company’s claims unpaid reserve and unpaid claims adjustment expenses reserve

amounts reported by the Company as of December 31, 2015. The INS Actuary’s analysis was

performed using a risk-focused approach according to the guidelines contained in the NAIC

Handbook. The INS Actuary determined that the Company’s aforementioned reserve amounts

were reasonably stated, as reported by the Company as of December 31, 2015. The Company’s

Statement of Actuarial Opinion and Actuarial Memorandum as of December 31, 2015 were

signed by David S. Rubadue, FSA, MAAA, Actuary from CBIZ, Inc.

SUBSEQUENT EVENTS

There were no significant subsequent events that warranted disclosure in this examination

report.

COMPLIANCE WITH PRIOR REPORT OF EXAMINATION

There were no recommendations in the prior report of examination.

SUMMARY OF RECOMMENDATIONS

No examination report recommendations were noted as a result of this examination.


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CONCLUSION

The assistance and cooperation of examiners representing the states on the coordinated

examination is acknowledged. In addition, the assistance of the consulting actuarial firm, INS

Consultants, Inc., the information systems specialist firm, INS Services, Inc., the Company’s

outside audit firm, Armanino LLC, and the Company’s management and staff was appreciated

and is acknowledged.

Respectfully submitted,

James M. Perkins, CFE Examiner-In-Charge State of Delaware Department of Insurance

Tony Cardone, CFE Supervising Examiner State of Delaware Department of Insurance

REPORT ON EXAMINATION OF DELTA DENTAL OF ...Delta Dental of Delaware, Inc. 2 January 1, 2012 through December 31, 2015, and encompassed a general review of transactions during the

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