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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO_____________
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COMMISSION FILE NUMBER 0-49762
TRIPLE-S MANAGEMENT CORPORATION
PUERTO RICO 66-0555678
(STATE OF INCORPORATION) (I.R.S. ID)
1441 F.D. ROOSEVELT AVENUE, SAN JUAN, PR 00926
(787) 749-4949
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $40.00 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of December 31, 2002 was $373,450.00.
The number of shares outstanding of the registrant's common stock as of
December 31, 2002 was 9,337.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Corporation's Annual Report to Shareholders
for the fiscal year ended December 31, 2002 are incorporated herein by
reference in response to Item 1 of Part I, and Item 6 of Part II and
Item 15 of Part VI.
(2) Portions of the definitive Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held
April 27, 2003 are incorporated by reference into Parts II and III.
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TRIPLE-S MANAGEMENT CORPORATION
FORM 10-K
For The Fiscal Year Ended December 31, 2002
INDEX
PART I
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Results of Operations and Financial
Condition 14
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 31
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures 36
PART III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 36
Item 13. Certain Relationships and Related Transactions 37
Item 14. Controls and Procedures 37
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 37
Signatures 39
Certifications 42
Page 2
PART I
ITEM 1. BUSINESS.
GENERAL DESCRIPTION OF BUSINESS AND RECENT DEVELOPMENTS
Triple-S Management Corporation (TSM) is incorporated under the laws of the
Commonwealth of Puerto Rico. It is the holding company of several entities,
through which it offers a wide range of insurance products and services. These
products and services are offered through the following TSM's subsidiaries:
- Triple-S, Inc. (TSI), a health insurance company serving two
major segments: the Commercial Program and the Commonwealth
of Puerto Rico Healthcare Reform Program (the Healthcare
Reform) of the Commonwealth of Puerto Rico;
- Seguros Triple-S, Inc. (STS), a property and casualty
insurance company; and
- Seguros de Vida Triple-S, Inc. (SVTS), a life and disability
insurance and annuity products company.
TSM's insurance subsidiaries, as well as other insurers doing business in
Puerto Rico, are subject to the regulations and supervision of the Office of
the Commissioner of Insurance of the Commonwealth of Puerto Rico (the
Commissioner of Insurance). The regulation and supervision of the Commissioner
of Insurance consist primarily of: the approval of policy forms and rates, when
applicable, the standards of solvency that must be met and maintained by
insurers and their agents, and the nature of and limitations on investments,
deposits of securities for the benefit of policyholders, methods of accounting,
periodic examinations and the form and content of reports of financial
condition required to be filed, among others. In general, such regulations are
for the protection of policyholders rather than security holders.
In addition to the insurance subsidiaries mentioned above, TSM has the
following other subsidiaries: Interactive Systems, Inc. (ISI) and Triple-C,
Inc. (TCI). ISI provides data processing services to Triple-S Management
Corporation and its subsidiaries (the Corporation). Effective October 1, 2001,
TCI was activated and commenced operations as part of a strategic positioning
in the health industry to take advantage of new market opportunities. It is
currently engaged as the third-party administrator in the administration of the
Healthcare Reform. The Healthcare Reform business was administered through a
division of TSI until September 30, 2001. It also provides healthcare advisory
services to TSI and other health-related services.
All of the premiums generated by the insurance subsidiaries are generated from
customers within Puerto Rico. In addition, long-lived assets, other than
financial instruments, including deferred policy acquisition costs and deferred
tax assets of the Corporation are located in Puerto Rico.
TSM started to do business as the holding company on January 4, 1999, the
effective date of the corporate reorganization described below. Before the
reorganization (as defined herein), Triple-S, Inc. (SSS), a health insurance
company, was the parent company of the existing subsidiaries previously
described.
Effective January 4, 1999, SSS and its subsidiaries completed a tax-exempt
corporate reorganization with the approval of the Department of Treasury and
the Commissioner of Insurance of the Commonwealth of Puerto Rico (the
Reorganization). According with the Reorganization, the following transactions
occurred:
- The stockholders of SSS exchanged in the same proportion
their common stocks held for common shares of TSM.
- SSS transferred to TSM its investment in former wholly-owned
subsidiaries, amounting to $50.2 million. Such balance was
comprised of SSS's capital contribution to its former wholly
owned subsidiaries of $9.8 million, as well as the
accumulated operating reserves and unrealized gains on
securities classified as available-for-sale of the former
wholly owned subsidiaries of $35.4 million and $4.9 million,
respectively.
- SSS sold to TSM its real estate at their carrying value of
$22.5 million at the date of the Reorganization. No gain or
loss was recognized by SSS in relation to this transaction.
- SSS merged into Triple-S Salud, Inc. (TSI) (a wholly-owned
subsidiary of TSM) and transferred to TSI its net assets of
$139.4 million (excluding its investment in former
subsidiaries), that include its accumulated
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operating reserves of $105 million and unrealized gains on
securities classified as available-for-sale of $33.8 million.
- SSS ceased to exist and TSI changed its legal name to
Triple-S, Inc.
The purpose of the reorganization was to allow the Corporation to participate
in activities that may better position it in the health services market without
the limitations inherent to an insurance company. Since the new corporation
(TSM) is not an insurance company, it is not subject to the limitations of the
Puerto Rico Insurance Code. Thus, providing the Corporation increased
flexibility to diversify into other lines of business. During the
reorganization there were no significant changes in the management of the
entities within the Corporation; the President and Chief Executive Officer of
TSI was named President and Chief Executive Officer of TSM while retaining the
position and responsibilities of the Presidency of TSI.
The Reorganization was structured as a tax-exempt reorganization under the
Puerto Rico Income Tax Code and the Puerto Rico Income Tax Act of 1954, as
amended. A favorable determination letter approving the tax-exempt status of
this reorganization was obtained from the Puerto Rico Treasury Department,
subject to the Corporation's compliance with certain conditions (see note 16 of
audited consolidated financial statements attached as Exhibit 1).
TSI, although legally incorporated as a for-profit organization, operates as if
it were a non-for-profit organization, whose principal purpose is to offer
affordable healthcare coverage in the Puerto Rico community. TSI is exempt from
Puerto Rico income taxes under a ruling issued by the Department of Treasury of
the Commonwealth of Puerto Rico before and after the corporate reorganization
described above. This exemption requires TSI to comply with the following
significant conditions:
- TSI, the Company, and the stockholders of the Company, should
make annual representations to the Department of Treasury of
the Commonwealth of Puerto Rico ratifying the status of TSI
operating as a non-profit organization and the conditions
provided by the ruling.
- TSI must annually ratify to the Department of Treasury that
it operated exclusively for the promotion of social welfare
in Puerto Rico.
- TSI's assets (as defined in the ruling) should be used
primarily for purposes related to its health insurance
business.
- Dividends cannot be paid on its common stock.
- In the event that TSI elects not to continue with this tax
exemption or it is revoked by the Secretary of Treasury of
the Commonwealth of Puerto Rico, there are two options
regarding the possible distribution of the operating reserve.
One of the options requires specific distribution to
non-profit organizations in the health field and the other
will require the payment of taxes. In the event of
liquidation of stocks, the Company is entitled to an amount
not in excess of the amount paid for the common stock when
they were originally issued. Any assets not distributed to
the Company will be distributed to non-profit organizations
in the health field.
- Any net income should be used exclusively for:
- Expanding and improving the health insurance
services
- Contributions to promote health insurance related
activities
- Increasing operating reserve until they reach a
balance equivalent to six months of claims expenses.
TSI's compliance with the requirements of the tax ruling is currently being
audited by representatives of the Department of the Treasury. Management is of
the opinion that TSI is in compliance with the aforementioned requirements
during the years ended December 31, 2002, 2001 and 2000.
TSM is a for-profit organization that operates as a not-for-profit organization
by virtue of the affirmative vote of its stockholders. As a result, TSM does
not distribute dividends. This resolution could be altered anytime by the
affirmative vote of stockholders and thus, dividends could be available for
distribution subject to the applicable obligations and responsibilities. The
decision to make dividends available for distribution does not require a
specific vote of the shareholders of the Corporation. Non-payment of dividends
is the result of the adoption of a not-for-profit operating philosophy affirmed
by the shareholders upon the approval of the 1998 corporate reorganization that
can be
Page 4
changed by a simple majority vote. The Board of Directors ("the Board")
presented a resolution to acknowledge that the Board may declare dividends,
subject to the determination of the Board that in their best judgment the
payment of such dividends is financially and legally feasible and that in
determining the amount of dividends to declare, the Board does not take into
consideration TSM's investment in TSI nor TSI's operating reserves. This
resolution was submitted in the definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on April 27, 2003.
In the event that stockholders decide to operate as a for-profit organization
and the Board decides to pay dividends, the amount of net income (loss) that
could be available for distribution would exclude TSI's net income due to TSI's
tax exempt status obtained through the above mentioned income tax ruling. For
purposes of computing the basic earnings per share presented in the
consolidated statements of operations and selected financial data, TSM
considers the operations of TSI as if TSI operated as a for-profit
organization, without the tax exemption. Under this scenario, in order to
determine the net income (loss) that could be available to stockholders, TSM
estimates the Puerto Rico income taxes that would have otherwise resulted and
deducts it from the results of operations of each year. TSI's estimate of
Puerto Rico income taxes, computed for such purposes, was determined as for an
other than life insurance entity, as defined in the Puerto Rico Income Tax
Code, as amended. The effective tax rate used was 39% for the three years ended
December 31, 2002, 2001, and 2000. No tax effect was considered for the
accumulated earnings since the tax grant does not provide any guideline for
this event.
The Corporation's filings with the Securities and Exchange Commission are not
available in its website address (ssspr.com) since the Corporation's stock has
no established public trading market. The Corporation will provide free of
charge copies of its filings to any shareholder that requests them at the
following address: Triple-S Management Corporation; Office of the Secretary of
the Board; PO Box 363628; San Juan, P.R. 00936-3628.
The consolidated net income (loss) per business segment presented in the
consolidated operating results of the Management's Discussion and Analysis of
Financial Condition and Results of Operations in this Form 10-K, for the Health
Insurance Commercial Program and Healthcare Reform are not available for
distribution to stockholders, as explained above.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This form and other publicly available documents may include statements that
may constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, including, among other things:
statements concerning financial condition, results of operations and business
of the Corporation. These statements are not historical, but instead represent
the Corporation's belief regarding future events, many of which, by their
nature, are inherently uncertain and outside of the Corporation's control.
These statements may address, among other things, financial results, strategy
for growth, and market position. It is possible that the Corporation's actual
results and financial condition may differ, possibly materially, from the
anticipated results and financial conditions indicated in these forward-looking
statements. The factors that could cause actual results to differ from those in
the forward-looking statements are discussed throughout this Form 10-K. The
Corporation is not under any obligation to update or alter any forward-looking
statement (and expressly disclaims any such obligations), whether as a result
of new information, future events or otherwise. Factors that may cause actual
results to differ materially from those contemplated by such forward looking
statements include, but are not limited to, rising healthcare costs, business
conditions and competition in the different insurance segments, government
action and other regulatory issues.
PUERTO RICO'S ECONOMY
Economic indicators showed a definite slowdown in the Puerto Rico economy,
which intensified during the year 2002, which ended with slow economic activity
and new threats of recessionary pressures. The economic recovery that was
expected by mid-2002 did not materialize as anticipated. The sluggish
performance of the Puerto Rico economy during the last year is due to several
factors. First, the slow growth of the United States has had a direct impact in
the Puerto Rican economy. On a local level, the fiscal crisis of the Government
of Puerto Rico has led to tax increases, which is not only a discouraging
factor for economic growth but also creates reservations that tend to slow
investments. In addition, the loss of tax incentives has led to a decline in
the competitiveness of the industrial sector, which has limited the ability of
the Island economy to retain and create new jobs.
The overall growth of the U.S. economy is the most important variable exerting
an impact on Puerto Rico's economy. The U. S. government reported that its
economy grew 2.4% during the year 2002, following a growth of 0.3% during 2001,
when its economy was experiencing its first formal recession in a decade.
Economists' forecasts show the U.S. economy growing at a 2.6% rate during the
year 2003. After the year 2003, the U.S. economy is expected to maintain a
growth path, but at lower rates than during the extraordinary expansion of the
second half of the nineties. Even when some economists argue that the economy
will rebound by the end of the year 2003, the uncertainties of the war with
Iraq need to be cleared before any economic rebound is seen in both the U.S.
and Puerto Rico economies.
Page 5
Despite the slow growth of the U.S. economy, the deterioration of the job
market, and continued recessionary pressures, the economy of Puerto Rico is
expected to start growing during the year 2003. Some sectors of the Puerto
Rican economy are beginning to show signs of a slow recovery. This is the case
of the construction, tourism, commercial and auto sales sectors. Island
economists believe that the deceleration of the Puerto Rican economy has hit
bottom and that its rebound will be noticeable during 2003. However, economic
indicators suggest that most of the impetus toward economic recovery will come
from public-sector investment and construction, since the 2003 agenda of the
Puerto Rico's government includes several large construction projects. This
investment should have a significant multiplying effect on the Island's
economic activity in general. The Puerto Rico Planning Board expects the Puerto
Rico economy to grow by 1.7% during the year 2003.
The realization of the expected recovery of the Puerto Rico economy is
particularly dependent upon the course of the U.S. economy. Several factors
have contributed to the restraint in the economic growth of the U. S. that also
cast doubts about the viability of short-term forecasts. Some of these factors
are the following: the uncertainty created by the stock-market volatility,
corporate scandals, and the rise in oil prices. In addition to these factors,
the short-run economic outlook is aggravated by the uncertainty created by the
war with Iraq. The war with Iraq may trigger greater terrorist activities and
will also exert an upward pressure upon oil prices. If a more pessimistic
scenario for the U.S. materializes, the real growth rate of the economy in
Puerto Rico will be negatively affected, at least reducing the growth prospects
for the years 2003 and 2004.
INSURANCE INDUSTRY
The insurance industry in Puerto Rico is highly competitive and is comprised of
both local and foreign entities. The approval of the Gramm-Leach-Bliley Act of
1999, which applies to Puerto Rico, has opened the insurance market to new
competition since financial institutions are permitted to enter into the
insurance business. At the moment, several banks in Puerto Rico have
established subsidiaries that operate as insurance agencies.
Natural disasters, which have affected Puerto Rico greatly over the past ten
years, have prompted local Government to create property and casualty insurance
reserves through legislation in order to provide coverage for catastrophic
events. The auto insurance market has also been affected by Government
regulation, with the Compulsory Auto Insurance Law. This law requires vehicle
owners to maintain a minimum of $3,000 in public liability insurance.
Additionally, the healthcare insurance sector has experienced significant
changes in the past ten years due to the implementation of the Healthcare
Reform Program. This Program provides healthcare coverage to Puerto Rico's
medically indigent population (as defined by the law), estimated at over 1.6
million lives as of December 31, 2002.
The Corporation is the leader in the insurance industry in Puerto Rico. The
Corporation's health insurance company, TSI, is the leader in the health
insurance industry. TSI's participation in the health insurance industry,
considering both the Commercial and Healthcare Reform segments, provide this
subsidiary with a market share of approximately 41.8% as of December 31, 2002.
The property and casualty and the life insurance subsidiaries also have
important positions in their respective markets. As of December 31, 2001, STS
has a market share of approximately 7.8% in the property and casualty insurance
industry in Puerto Rico. As of December 31, 2001 SVTS has a market share of
approximately 15.0% in the group life insurance market in Puerto Rico.
Almost all of the Corporation's business is done within Puerto Rico and as
such, it is subject to the risks associated with Puerto Rico's economy and its
geographic location.
HEALTH INSURANCE - COMMERCIAL SEGMENT
The Corporation participates in the commercial health insurance marketplace
through its wholly owned subsidiary, TSI. Total premiums in the Commercial
Program segment represent 54.6%, 54.9% and 53.8% of consolidated total premiums
for the years 2002, 2001 and 2000, respectively.
TSI is a Blue Cross and Blue Shield Association sub-licensee, which allows the
subsidiary to use the Blue Shield brand in Puerto Rico. TSI's participation in
the health insurance industry with the Commercial and Healthcare Reform
segments provide this subsidiary with a market share of approximately 41.8% as
of December 31, 2002. TSI offers a variety of health insurance products, and is
the leader in almost every market sector. Its market share is almost twice as
large as its nearest competitor (Medical Card Systems, which has a market share
of approximately 17.3%) and over three times larger than that of its second
nearest competitor (La Cruz Azul de Puerto Rico, which has a market share of
approximately 10.4%). TSI offers its products to six distinct market segments
in Puerto Rico. During 2002, TSI had the following market share within each
segment: Corporate Accounts (groups), 45.0%; Healthcare Reform, 37.6%; Federal
Employees, 99.6%; Local Government Employees, 19.8%; Individual Accounts,
56.7%; and about 68.6% in the Medicare supplemental segment. Within the
Corporate Accounts segment, employer groups may choose various
Page 6
funding options ranging from fully insured to self-funded financial
arrangements. While self-funded clients participate in TSI's networks, the
clients bear the claims risk. Through a contract with the United States Office
of Personnel Management (OPM), TSI provides health benefits to federal
employees in Puerto Rico under the Federal Employees Health Benefits Program.
This contract is subject to termination in the event of a noncompliance not
corrected to the satisfaction of OPM. TSI provides health insurance coverage to
certain employees of the government of Puerto Rico and its instrumentalities.
Earned premium revenue related to such health plans amounted to $64.6 million,
$59.0 million and $57.5 million for the three year-period ended December 31,
2002, 2001 and 2000, respectively. In addition, TSI processes and pays claims
as carrier for the Medicare - Part B Program in Puerto Rico and the United
States Virgin Islands. As a carrier for Medicare-Part B, TSI allocates
operating expenses to determine reimbursement due for services rendered in
accordance with the contract.
TSI's premiums are generated from customers within Puerto Rico. The premiums
for this segment are mainly originated through TSI's internal sales force and a
network of brokers and independent agents. For purposes of segment reporting,
the Healthcare Reform sector is considered a different segment and is
separately analyzed.
TSI's business is subject to changing federal and local legal, legislative and
regulatory environments. Some of the more significant current issues that may
affect TSI's business include:
- efforts to expand the tort liability of health plans
- initiatives to increase healthcare regulation
- local government initiatives for mandatory benefits.
Current initiatives to increase healthcare regulation at the federal level
include new legislative proposals for "patients' bill of rights". Such
legislation was passed by the United States Senate in June 2001 and would
expand tort liability for health plans and change the practices for deciding
medical necessity. In August 2001, the United States House of Representatives
passed similar legislation in an effort to resolve differences between the two
bills. Given the political process, it is not possible to determine what, if
any, federal and local legislation or regulation will ultimately be enacted or
what would be the effect on TSI.
In 2000, the United States Department of Health and Human Services issued two
significant regulations as required by the Health Insurance Portability and
Accountability Act of 1996 (HIPAA): one of them addresses the standardization
of electronic transactions while the other addresses the privacy of
individually identifiable health information.
The final regulation governing security standards for the maintenance and
transmission of health information is expected to be effective during 2003. TSI
has assessed the effect of the HIPAA regulation on standard transactions on its
operations. The original compliance date for this regulation was October 2002,
but the President of the United States signed legislation in late 2001 giving
covered entities the opportunity, as TSI, to apply for a one-year extension.
TSI filed for this extension and is already working on the implementation of
said regulation and expects to comply with the required dates.
Given that the HIPAA security regulation has not been finalized and that
further changes to the privacy regulation were recently issued, TSI continues
evaluating the effect of HIPAA regulations on its operations. Notwithstanding,
TSI is moving forward with implementation efforts to comply with current
regulations on the required dates.
The private health insurance market in Puerto Rico experienced a moderate
increase in premiums in 2002. Premiums in the private health insurance market
increased by 1.2% in the year 2002 and 2.5% in the year 2001. The moderate
premium growth was the result of the slowdown in Puerto Rico's economy, a
reduction in the employment of the manufacturing sector due to temporary and
permanent plant closings, and to reductions in the Government's Healthcare
Reform expenditures. In the coming years, TSI expects moderate premium growth
to take place mostly as the result of a mature health insurance market and
moderate increases in total employment. Total employment in Puerto Rico is
expected to rise from fiscal year 2002 to 2007 at an average annual rate of
0.84%.
In recent years, the health insurance market as a whole has been affected by
rising healthcare costs, particularly those related to pharmacy benefit costs,
new medical technology, the current weak economy and a growing sense of
consumerism in health benefits. Rising negative consumer perception about
managed care caused many consumers to transfer from Health Maintenance
Organization (HMO) type products to companies offering open access and greater
choice of healthcare providers. These trends have moved the health insurance
industry to adopt strategies that emphasize benefits management (such as
defined contribution) from a more restrictive medical management (as
pre-authorization of certain procedures).
Page 7
The constantly changing health care costs inflation trend generally rules the
profitability of health insurers. Thus, the greatest challenge for the health
insurance industry is to maintain affordable premiums in a sluggish economy
while providing for the yearly increases in healthcare costs. These costs are
constantly driven upwards by an aging population, new prescription drugs and
advances in medical technology. In the years 2002 and 2001, most of the
insurers did a good job of estimating increases in health care costs, as
indicated by solid profitability. The focus of the underwriting process has
shifted from top-line and market share growth to increased profitability.
Margins used in the underwriting of policies have widened, since pricing often
assumes inflation rates higher than estimated. This strong premium growth
across the health insurance industry has not been accompanied by enrollment
growth, as insurers have dropped coverage for unprofitable accounts and in some
cases refused to negotiate for premiums. Industry experts expect health
insurers to reflect solid profitability again during the year 2003 however,
beginning in the year 2004 health insurers are expected to experience
increasing difficulty in raising premiums. At this time, the profitability of
health insurers will depend on their ability to increase the efficiency of the
health care delivery model.
The underwriting results of the segment have been affected by the
ever-increasing healthcare costs. To cope with this situation, TSI has
established new strategies for pricing of contracts and is implementing several
healthcare management programs.
During the years 1998 and 1999, TSI was subject to higher than expected
increases in costs and a decrease in investment income due to interest rate
fluctuations. As a result, TSI began implementing premium rate increases. In
spite of the increases, TSI has achieved and exceeded projected retention
rates. Current retention rates were 94.4% in 2002 and 95.2% in 2001. In
addition, TSI has maintained its market share during the last three years.
TSI has established healthcare management program strategies that seek to
control claims costs while striving to fulfill the needs of highly informed and
demanding healthcare consumers. Among these strategies is the implementation of
disease and case management programs. These programs empower consumers by
providing them with education and engaging them in actively maintaining or
improving their own health. Early identification of patients and inter-program
referrals are the milestones of these programs, which provide for integrated
and optimal service. Other strategies include innovative partnerships and
business alliances with other entities to provide new products and services
such as: a 24-hour telephone based triage and health information service; an
employee assistance program (EAP); and, the promotion of evidence-based
protocols and patient safety programs among our providers. TSI has also
implemented a hospital concurrent review program, whose goal is to monitor the
adequacy of high admission rate diagnoses and high cost stays. To stem the
rising tide in pharmacy benefit costs, TSI has implemented a three-tier
formulary product, which has proved to be very effective, an exclusive provider
organization (EPO) and benefits design changes.
TSI expects to remain competitive in the market in which it operates,
particularly the Corporate Groups segment. TSI's quality of services is
considered strong enough to enable it to maintain a competitive position in the
marketplace.
HEALTH INSURANCE - HEALTHCARE REFORM SEGMENT
The Corporation participates in the medically indigent health insurance market
through its wholly owned subsidiary TSI. The Health Insurance - Healthcare
Reform segment comprises TSI's participation in the Healthcare Reform. The
Healthcare Reform segment premiums represent 39.3%, 39.2% and 40.3% of the
consolidated total premiums for the years 2002, 2001 and 2000, respectively.
In 1994, the Government of the Commonwealth of Puerto Rico (the Government)
privatized the delivery of services to the medically indigent population in
Puerto Rico, as defined by the Government, by contracting with private health
insurance companies instead of providing health services directly to such
population. The Government divided the Island into ten geographical areas.
Starting in 1994 the Government began to shift its role, instead of directly
providing healthcare services to Puerto Rico's medically indigent population
through its facilities and medical providers it contracted health insurance
companies who in turn contracted private health providers to treat the health
needs of this population. By December 31, 2001, the Healthcare Reform had been
fully implemented in each of the geographical areas. Each geographical area is
awarded to a health insurer doing business in Puerto Rico through a competitive
process requesting proposals from the industry.
The Government has been asking insurers to reduce or, at least, control the
increase of Healthcare Reform expenditures, which represent approximately 13.0%
of total Government expenditures. Several measures have been undertaken by the
Government to control Healthcare Reform costs. Some of these measures include
closer and continuous scrutiny of participant's (members) qualifications and
the carve-out of mental health benefits from the policy. Mental health benefits
are currently offered to the Healthcare Reform beneficiaries by behavioral
healthcare and mental healthcare companies. The Government is considering
carving-out additional benefits provided by the insurers. On March 2003 the
Government announced that, effective July 1, 2003, it will begin a pilot
project where it
Page 8
will be contracting directly with some of the medical groups, instead of
through the health insurance companies. This change is expected to decrease the
segment's enrollment by approximately 45 thousand members and the annualized
premiums by approximately $30.0 million.
All of the Government Healthcare Reform contracts expired on June 30, 2002.
After the expiration of these contracts, the Commonwealth redistributed the
geographical areas, merging two of the existing areas with the remaining ones,
thus reducing geographical areas to eight. As a result of the reorganization of
the geographical areas, the Northwest area (previously administered by TSI) was
merged into the West area. In addition, and as a result of the same
reorganization, six new municipalities were merged into areas administered by
TSI. TSI participated in the bidding process and submitted proposals to renew
each of the existing contracts and also to serve additional geographical areas.
Commencing on July 1, 2002, TSI was awarded three of the eight geographical
areas: North, Metro-North and Southwest. On this date, after the reorganization
of the geographical areas and the granting of the three areas, TSI experienced
a decrease in average enrollment of approximately 5.7% when compared to the
average enrollment as of June 30, 2002. This decrease in enrollment was not
significant and since premium rates were increased by approximately 6.3%, total
revenues are expected to be similar to the previous year. All Healthcare Reform
contracts were negotiated for a term of three years; the contracts expire on
June 30, 2005. The premium rates of each contract, however, will be negotiated
annually. The contracts include a clause where the net income for any given
contract year, as defined, cannot exceed 2.5% of earned premiums. If it is over
2.5%, the insurance companies have to return 75.0% of this excess to the
Government of Puerto Rico. In case the contract renewal process is not
completed by its expiration date, the contract may be extended by the
Government, upon acceptance by TSI, for any subsequent period of time if deemed
in the best interest of the beneficiaries and the Government. The terms of the
contract, including premiums, can be renegotiated if the term of the contracts
is extended. The contract for each area is subject to termination in the event
of any non-compliance not corrected or cured to the satisfaction of the
Government entity overseeing the Healthcare Reform, or in the event that the
Government determines there is an insufficiency of funds to finance the
Healthcare Reform. This last event will require prior written notice of at
least ninety days. As of filing date, management has not received any
Healthcare Reform contract cancellation notice from the Government of Puerto
Rico. The loss of any or all of the Healthcare Reform contracts would have a
material effect on the Corporation's operating results. This could include the
downsizing of certain personnel, the cancellation of lease agreements of
certain premises and of certain contracts, and severance payments, among
others. Also, this will result in a significant decrease in the volume of
premiums, claims, and operating expenses.
As of December 31, 2002, three local insurance companies were participating in
the Healthcare Reform. The three insurance companies participating in the
Healthcare Reform and their related market share during the year ended December
31, 2002 are the following: TSI (37.6%), Medical Card System (30.4%) and Humana
(27.6%). La Cruz Azul de Puerto Rico (4.4%) participated in the Healthcare
Reform sector until June 30, 2002. Once the Healthcare Reform was fully in
place, any participating insurance company's growth in this segment depends on
winning a geographical area serviced by another insurance company or through
the restructuring of the geographical areas. The health insurance companies
that decide to participate in this business compete against each other during
the adjudication processes. TSI's Healthcare Reform segment competing strengths
are its highly efficient administrative structure and superior quality of
services.
To provide services to its medically indigent membership, TSI established a
managed care program similar to a Health Maintenance Organization (HMO) that
integrates both the financing and delivery of services in order to manage the
accessibility, cost and quality of care. The established managed care model
includes disease and demand management as well as preventive healthcare
services. All of these programs and its effective administrative structure have
made TSI's product and pricing structure the most attractive and convenient.
TSI has established a network of Independent Practice Associations (IPA) to
provide service to its Healthcare Reform beneficiaries in the Healthcare Reform
areas serviced by TSI. TSI believes it has designed the economic model that
best suits the IPA's and the primary care physicians (PCP). The risks covered
by the Healthcare Reform policy are divided among those assumed by the IPA's
and those retained by TSI. The IPA receives an amount per capita, and it
assumes the costs of services provided and referred by its PCP's, including
procedures and in-patient services not related to risks assumed by TSI. As part
of its services, TSI retains a portion of the capitation payments to the IPA's
as a reserve to provide for incurred, but not reported claims (IBNR) for
services rendered by providers other than PCP's. TSI retains the risk
associated with services provided to the beneficiaries with special healthcare
needs, such as: neonatal, obstetrical, AIDS, cancer, cardiovascular, and dental
services, among others. Effective October 1, 2001, mental healthcare services
were carved-out by the Government and contracted with behavioral healthcare
companies. This represented a decrease in monthly premiums income of
approximately $3 million.
As of December 31, 2002, TSI's Healthcare Reform segment provided coverage to
beneficiaries in the following geographical areas: North, Metro-North and
Southwest (awarded to TSI effective October 1, 2001). TSI administered the
Northwest Area until June 30, 2001 and the West Area until June 30, 2000. As of
December 31, 2002, the three
Page 9
areas administered by TSI have a total enrollment of approximately 655 thousand
beneficiaries, which represented approximately 38.5% of the total eligible
beneficiaries of the population.
Healthcare Reform contracts have generally been for twelve-month periods.
Premiums need to be determined taking into consideration future costs of
services. Since premium levels are determined on a yearly basis and for a
significant block of business, TSI is exposed to a significant underwriting
risk.
Effective October 1, 2001, TSI entered into a service agreement with TCI, a
previously inactive affiliated organization that operated as a de facto
division of TSI, for the administration of the Healthcare Reform segment
operations in exchange for a service fee that will cover the operating expenses
plus a profit.
Since the year ended December 31, 2001, the Healthcare Reform segment had
experienced underwriting income. During the years 2000 and 1999, the segment
experienced underwriting losses as a result of over-utilization of certain
services by the enrolled beneficiaries. In 2001, and thereafter, this situation
was corrected by increasing premium rates and by controlling costs through the
utilization, demand and quality management programs.
PROPERTY AND CASUALTY INSURANCE SEGMENT
The Corporation participates in the property and casualty insurance market
through its wholly owned subsidiary STS. The property and casualty segment
premiums represent 4.9%, 4.7% and 4.9% of the consolidated total premiums for
the years 2002, 2001 and 2000, respectively.
STS is a multiple line insurer that substantially underwrites all lines of
property and casualty insurance. Its predominant lines of business are
commercial multiple peril, auto physical damage, auto liability and dwelling.
Business is exclusively subscribed in Puerto Rico through approximately twenty
general agencies and independent insurance agents and brokers. Signature
Insurance Agency, Inc., STS's wholly owned subsidiary, underwrote about 45% of
its total premium volume for the years ended December 31, 2002 and 2001.
STS is ranked sixth in the property and casualty insurance industry in Puerto
Rico, with a market share of approximately 7.8% as of December 31, 2001. Its
nearest competitors and their related market share are Royal and Sunalliance
Insurance PR, Inc. (9.3%) and Integrand Assurance Co. (7.7%). The market leader
in the property and casualty insurance industry in Puerto Rico is the Universal
Insurance Group, with a market share of 18.7% as of December 31, 2001.
The property and casualty insurance market has been affected by the increased
costs of reinsurance. The international reinsurance market has been
experiencing difficult times and has raised its reinsurance premium rates over
the last two years. Recent worldwide catastrophes have, in effect,
significantly altered the balance as to negotiating rates, terms and other
conditions. The Puerto Rico property and casualty insurance market must pass on
these additional costs to its customers, in spite of a recession and an
economic slowdown. On the positive side, the industry, for the most part, has
begun an effort to increase premium rates.
Due to its geographical location, the property and casualty insurance
operations in Puerto Rico are subject to natural catastrophic activity. Puerto
Rico is exposed to two major natural perils (hurricanes and earthquakes), which
lead local insurers to rely on the international reinsurance market in order to
provide enough capacity. Other issues that have plagued the industry over the
years, such as asbestos and pollution, have not affected the segment's
portfolio. STS maintains a comprehensive reinsurance program protecting its
surplus in the event of a catastrophe.
In addition to its catastrophic reinsurance coverage, STS is required by local
regulatory authorities to establish and maintain a trust fund (the Trust) to
protect STS from its dual exposure to hurricanes and earthquakes. The Trust is
intended to be used as the company's first layer of catastrophe protection. As
of December 31, 2002 and 2001, STS had $20.8 million and $19.7 million,
respectively, invested in securities deposited in the Trust (see note 18 of the
audited consolidated financial statements).
Considering the significance of reinsurance in protecting its capital base and
ensuring ongoing operations, STS is aware of the need to exercise its best
business judgment in the selection and approval of its reinsurers. A
comprehensive and sound reinsurance program has been established to provide the
level of protection that STS desires. These reinsurance arrangements do not
relieve STS from its direct obligations to its insureds. However, STS strongly
believes that the credit risk arising from recoverable balances of reinsurance,
if any, is immaterial. STS' policy is to only transact with reinsurers
considered to be financially sound.
The property and casualty insurance market in Puerto Rico is extremely
competitive. There are no new sources within the economy providing continued
growth; thus, property and casualty insurance companies tend to compete for the
Page 10
same accounts through price and/or more favorable conditions. STS competes by
reasonably pricing its products and providing efficient services to producers
and agents. The current level of expertise within the segment is also an
incentive for professional producers to conduct business with STS.
Effective January 2002, the Office of the Commissioner of Insurance of Puerto
Rico suspended filing requirements of rates for certain classes, subdivisions
or combinations of insurance in the interest to promote the economic activity
of the insurance industry in Puerto Rico. The classes, subdivisions or
combinations of insurance covered by this deregulation are related to
commercial property and liability insurance.
As of late 2001, pricing began to affect somewhat the local property and
casualty insurance market, but at a lower pace than for its United States of
America peers. However, the increase in reinsurance costs affected the property
and casualty insurance market in Puerto Rico in the same degree as affected in
the United States of America. STS' prompt reaction to these factors, as well as
the continued careful underwriting of property risks, should help preserve
strong results while accommodating the higher reinsurance costs.
The property and casualty insurance segment has experienced strong operating
results over the past years, and its profitability measures have outperformed
industry averages and larger size peers within the local insurance market. Such
results have been achieved in spite of unfavorable market conditions, including
soft demand, increased competition, a closed marketplace and rising reinsurance
costs affecting Puerto Rico over the last few years.
STS' commitment to sound underwriting practices, efficient claims reserve
monitoring, extensive catastrophe reinsurance programs, and underwriting
expense controls, have enabled it to maintain one of the best combined ratios
in the local industry. STS, as well as most of its property and casualty peers,
uses the loss ratio, the expense ratio and the combined ratio as measures of
performance. A controlled business expansion in the commercial market and
better underwriting performance of its auto business, evidenced by declining
loss ratios, have also contributed to such favorable results. In addition,
prudent reinsurance utilization through a sound strategy to control exposures
by means of a strict underwriting criteria and protection of retained exposures
have also enhanced underwriting results.
LIFE AND DISABILITY INSURANCE SEGMENT
The Corporation participates in the life and disability insurance marketplace
by means of its wholly owned subsidiary SVTS. The life and disability segment
premiums represent 1.2%, 1.2% and 1.1% of consolidated total premiums for the
years 2002, 2001 and 2000, respectively.
SVTS offers a wide variety of life, disability and investment products. Among
these are: group life insurance, group long and short-term disability, credit
life insurance, and the administration of individual retirement accounts and
flexible premium deferred annuities. Group life insurance represents the bulk
of the business. SVTS' insurance products are mainly offered to consumers in
Puerto Rico through its own network of brokers and independent agents.
SVTS insures more than 1,500 groups, which represent approximately 360 thousand
lives. This makes SVTS the second largest provider of group life insurance in
Puerto Rico, with a market share of approximately 15% in 2001. The segment's
nearest competitors in the group life insurance market in Puerto Rico and their
related market share as of December 31, 2001 are Cooperativa de Seguros de Vida
de Puerto Rico (39%) and National Life Insurance Co. (7%). Cooperativa de
Seguros de Vida de Puerto Rico is also the leader in the group life insurance
market.
To continue its growth in the life insurance market in Puerto Rico, SVTS plans
to introduce new products and services within the group and individual
insurance business in the coming years. During the year 2003, SVTS plans to
market and sell several individual insurance products, such as cancer, term
life, and accident insurance policies. To distribute its individual insurance
products, SVTS created a wholly owned subsidiary, Smart Solutions Insurance
Agency Corporation, which began operations during 2002.
FINANCIAL INFORMATION ABOUT SEGMENTS
Total revenue (with intersegment premiums/service revenues shown separately),
underwriting income or loss, net income or loss and total assets attributable
to reportable segments are set forth in note 3 to the consolidated financial
statements for the years ended December 31, 2002, 2001 and 2000, which are
attached hereto in Exhibit 1.
TRADEMARKS
The Corporation considers its trademark of "Triple-S" and the three "SSS" very
important and material to all segments in which it is engaged. In addition to
these, other trademarks used by the subsidiaries that are considered important
Page 11
have been duly registered with applicable authorities. It is the Corporation's
policy to register all its important and material trademarks in order to
protect its rights under applicable corporate and intellectual property laws.
HUMAN RESOURCES AND LABOR MATTERS
As of February 28, 2003, the Corporation had 1,363 full-time employees and 266
temporary employees. TSI has a collective bargaining agreement with the Union
General de Trabajadores, which represents 377 of TSI's 761 regular employees.
Said collective bargaining agreement expires on July 31, 2006. The Corporation
considers its relations with employees to be good.
ITEM 2. PROPERTIES
TSM owns a seven story (including the basement floor) building located at 1441
F.D. Roosevelt Avenue, in San Juan, Puerto Rico where the main offices of TSM,
TSI and ISI are located, and the adjacent two buildings, one that houses TCI
and certain offices of TSI, and the adjacent parking lot. In addition, TSM is
the owner of five floors of a fifteen-story building located at 1510 F.D.
Roosevelt Avenue, in Guaynabo, Puerto Rico. These floors house the Internal
Auditing Office of the Corporation, SVTS, STS and some divisions of TSI.
In addition to the properties described above, TSM or its subsidiaries are
parties to operating leases that are entered into in the ordinary course of
business.
The Corporation believes that its facilities are in good condition and that the
facilities, together with anticipated capital improvements and additions, are
adequate to meet its operating needs for the foreseeable future. The need for
expansion and upgrading and refurbishment of facilities is continually
evaluated in order to remain competitive and to take advantage of market
opportunities.
ITEM 3. LEGAL PROCEEDINGS.
(a) As of December 31, 2002, the Corporation was a defendant in
various lawsuits arising out of the ordinary course of
business. In the opinion of management and legal counsel, the
ultimate disposition of these matters will not have a
material adverse effect on the Corporation's consolidated
financial position and results of operations.
(b) On December 6, 1996, the Commissioner of Insurance issued an
order to annul the sale of 1,582 shares of common stock held
as treasury stock that TSI repurchased from the estate of
deceased stockholders. TSI contested such order through
administrative and judicial review processes. Consequently,
the sale of 1,582 stocks was cancelled and the amount paid
was returned to each former stockholder of the aforementioned
stocks. During the year 2000, the Commissioner of Insurance
issued a pronouncement providing further clarification of the
content and effect of the order. The order also required that
all corporate decisions undertaken by TSI through the vote of
its stockholders on record, be ratified in a stockholders'
meeting or in a subsequent referendum. In November 2000, TSM,
as the sole stockholder of TSI, ratified all such decisions.
Furthermore, on November 19, 2000, TSM held a special
stockholders' meeting, where a ratification of these
decisions was undertaken, except for the resolutions related
to the approval of the Reorganization of SSS and its
subsidiaries. This resolution did not reach the two-thirds
majority required by the order because the number of stocks
that were present and represented at the meeting were below
such amount (total stocks present and represented in the
stockholders' meeting were 64%). As stipulated in the order,
TSM began the process to conduct a referendum among its
stockholders to ratify such resolution. The process was later
suspended because upon further review of the scope of the
order, the Commissioner of Insurance issued an opinion in a
letter dated January 8, 2002 indicating that the ratification
of the corporate reorganization was not required.
In a letter to TSI, dated March 14, 2002, the Commissioner of
Insurance of Puerto Rico stated that the ratification of the
corporate reorganization was not required, and that TSI had
complied with the Commissioner's order of October 6, 1999
related to the corporate reorganization. Thereafter, two
stockholders of TSM filed a petition for review of the
Commissioner's determination before the Puerto Rico Circuit
Court of Appeals, which petition was opposed by TSI and by
the Commissioner of Insurance.
Pursuant to that review, on September 24, 2002, the Puerto
Rico Circuit Court of Appeals issued an order requiring the
Commissioner of Insurance to order that a meeting of
shareholders be held to ratify TSI's corporate reorganization
and the change of name of TSI from "Seguros de Servicios de
Salud de Puerto Rico,
Page 12
Inc." to "Triple-S, Inc.". The Circuit Court of Appeals based
its decision on administrative and procedural issues directed
at the Commissioner of Insurance. The Commissioner of
Insurance filed a motion of reconsideration with the Circuit
Court of Appeals on October 11, 2002. TSI and TSM also filed
a motion of reconsideration.
On October 25, 2002 the Circuit Court of Appeals dismissed
the Commissioner of Insurance's Motion for Reconsideration.
In addition, the Circuit Court of Appeals ordered the two
stockholders who filed the petition for review to reply
within twenty (20) days to TSI's and TSM's Motion of
Reconsideration. This situation is still pending resolution
from the Circuit Court of Appeals.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Corporation held a special meeting of shareholders on October 13, 2002 (the
"Special Meeting") to vote on a series of amendments to the Corporation's
Articles of Incorporation and By-Laws, relating to changes to its capital
structure in order to allow TSM to expand its base of shareholders. At the
Special Meeting, 57.3% of total shares outstanding were represented, but more
than 75.0% were required in order to take a vote to implement the proposals to
amend TSM's capital structure. Therefore, a resolution to recess the Special
Meeting and continue it at a later date was put to a vote. This Resolution
received 5,190 votes in favor, 165 votes against and 3 abstentions and,
therefore, it was approved.
On February 23, 2003, the Corporation held the continuation of the Special
Meeting commenced October 13, 2002. In the continuation of the Special Meeting
98.4% of the shares present and represented voted in favor of continuing the
meeting at a later date. This was necessary since 69% of total shares
outstanding were represented at the Special Meeting and 75% or more was
required in order to take a vote to implement the proposals to amend TSM's
capital structure. Therefore, a resolution to recess the Special Meeting and
continue it at a later date was approved with 6,302 votes in favor, 81 votes
against and 21 abstentions.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS.
MARKET INFORMATION
There is no established public trading market for TSM's Common Stock. Sporadic
sales of TSM's Common Stock are limited to redemption sales with TSM at the
shares' $40.00 par value or at the amount originally paid for the stock, since
the Common Stock of TSM is generally not transferable to the general public.
HOLDERS
The only outstanding voting securities of TSM are shares of its Common Stock,
par value $40.00 per share. As of March 20, 2003, there were 9,337 shares of
Common Stock outstanding. The number of holders of the Corporation's common
stock as of March 20, 2003 is 1,817.
DIVIDENDS
TSM has not declared nor paid any dividends since its incorporation. The Board
of Directors ("the Board") presented a resolution to acknowledge that the Board
may declare dividends, subject to the determination of the Board that in their
best judgment the payment of such dividends is financially and legally feasible
and that in determining the amount of dividends to declare, the Board does not
take into consideration TSM's investment in TSI nor TSI's operating reserves.
This resolution was submitted in the definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on April 27, 2003. For further details on
the Corporation's restrictions on the payment of dividends, see the section
"Restriction on Certain Payments by the Corporation" included in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Form 10-K.
RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
Page 13
ITEM 6. SELECTED FINANCIAL DATA.
(Dollar amounts in thousands,
except per share data) 2002 2001 2000 1999 1998 (1)
----------- ---------- ---------- ---------- --------
STATEMENT OF OPERATIONS DATA
Years ended December 31,
Premiums earned, net $ 1,230,671 1,151,173 1,088,163 967,510 807,067
Amounts attributable to claims under
self-funded arrangements 150,684 134,374 117,542 105,183 85,065
Less amounts attributable to claims under
self-funded arrangements (141,138) (126,295) (113,248) (96,441) (79,500)
----------- ---------- ---------- ---------- --------
Premiums earned, net and fee revenue 1,240,217 1,159,252 1,092,457 976,252 812,632
----------- ---------- ---------- ---------- --------
Net investment income 24,778 25,405 24,338 22,464 22,174
Net realized investments gains 185 4,655 6,377 6,690 2,495
Net unrealized investment gain (loss)
on trading securities (8,322) (3,625) (3,737) 1,807 4,116
Other income, net 8,051 4,709 7,552 276 4,765
----------- ---------- ---------- ---------- --------
Total revenue $ 1,264,909 1,190,396 1,126,987 1,007,489 846,182
=========== ========== ========== ========== ========
Net income (loss) $ 48,249 21,715 (1,512) (5,953) 20,064
=========== ========== ========== ========== ========
Basic earnings (loss) per share (2):
If the Corporation operated as a for-profit
organization $ 3,766 1,545 (70) (267) 1,637
----------- ---------- ---------- ---------- --------
If TSI operated as a not-for-profit
organization $ 1,085 1,052 929 639 738
----------- ---------- ---------- ---------- --------
BALANCE SHEET DATA
December 31,
Total assets $ 725,678 656,058 562,153 550,578 582,276
=========== ========== ========== ========== ========
Loans payable to bank $ 50,015 55,650 58,040 60,317 --
=========== ========== ========== ========== ========
Total stockholders' equity $ 231,664 186,028 159,693 159,247 189,587
=========== ========== ========== ========== ========
(1) Financial figures for this year are for TSM's predecessor company,
SSS.
(2) Further details of the calculation of basic earnings per share are set
forth in notes 2 and 22 of the consolidated financial statements for
the years ended December 31, 2002, 2001 and 2000. Consolidated
financial statements are attached hereto as Exhibit I.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This financial discussion contains an analysis of the consolidated financial
position and financial performance as of December 31, 2002 and 2001, and
consolidated results of operations for 2002, 2001 and 2000. This analysis
should be read in its entirety and in conjunction with the consolidated
financial statements, notes and tables included elsewhere in this Form 10-K.
This financial discussion has been prepared pursuant to the rules and
regulations adopted by the U.S. Securities and Exchange Commission.
GENERAL
The Corporation (on a consolidated basis and for each reportable segment),
along with most insurance entities, uses the loss ratio, the expense ratio and
the combined ratio as measures of performance. The loss ratio is the claims
incurred divided by the premiums earned, net and fee revenue. The expense ratio
is the operating expenses divided by the
Page 14
premiums earned, net and fee revenue. The combined ratio is the sum of the loss
ratio and the expense ratio. These ratios are relative measurements that
describe for every $100 of premiums earned, net and fee revenue, the costs of
claims and operating expenses, respectively. The combined ratio represents the
total cost per $100 of premium production. A combined ratio below 100
demonstrates underwriting profit; a combined ratio above 100 demonstrates
underwriting loss.
CONSOLIDATED OPERATING RESULTS
The analysis in this section is included to provide an overall view of certain
information, the consolidated statements of operations, and key financial
information. Further details of the results of operations of each reportable
segment are included in the respective segment's section.
(Dollar amounts in thousands) 2002 2001 2000
----------- ---------- ----------
Years ended December 31,
CONSOLIDATED PREMIUMS EARNED, NET AND FEE REVENUE:
Health insurance - Commercial Program $ 677,537 636,566 587,614
Health insurance - Healthcare Reform 487,000 454,923 439,774
Property and casualty 60,688 54,337 53,493
Life and disability 14,992 13,426 11,576
----------- ---------- ----------
$ 1,240,217 1,159,252 1,092,457
=========== ========== ==========
CONSOLIDATED CLAIMS INCURRED $ 1,061,980 1,021,024 990,133
CONSOLIDATED OPERATING COSTS 148,539 140,830 130,135
----------- ---------- ----------
CONSOLIDATED UNDERWRITING COSTS $ 1,210,519 1,161,854 1,120,268
=========== ========== ==========
CONSOLIDATED LOSS RATIO 85.6% 88.1% 90.6%
CONSOLIDATED EXPENSE RATIO 12.0% 12.1% 11.9%
----------- ---------- ----------
CONSOLIDATED COMBINED RATIO 97.6% 100.2% 102.5%
=========== ========== ==========
CONSOLIDATED NET INVESTMENT INCOME $ 24,778 25,405 24,338
CONSOLIDATED NET REALIZED GAIN ON SALE OF SECURITIES 185 4,655 6,377
CONSOLIDATED NET UNREALIZED LOSS ON TRADING SECURITIES (8,322) (3,625) (3,737)
----------- ---------- ----------
CONSOLIDATED NET INVESTMENT INCOME $ 16,641 26,435 26,978
=========== ========== ==========
CONSOLIDATED INCOME TAX EXPENSE $ 2,549 1,342 1,176
=========== ========== ==========
NET INCOME (LOSS) PER SEGMENT:
Health insurance - Commercial Program $ 28,133 6,776 (3,090)
Health insurance - Healthcare Reform 9,770 4,563 (7,614)
Property and casualty 6,223 6,529 6,282
Life and disability 3,585 3,366 3,334
Other 538 481 (424)
----------- ---------- ----------
CONSOLIDATED NET INCOME (LOSS) $ 48,249 21,715 (1,512)
=========== ========== ==========
Year ended December 31, 2002 compared with the year ended December 31, 2001
Consolidated premiums earned, net and fee revenue during 2002 increased by
$81.0 million, or 7.0%, when compared to the consolidated premiums earned, net
and fee revenue for 2001. This increase is mostly due to a combined increase of
$73.1 million in the premiums earned, net and fee revenue of the Health
Insurance - Commercial Program and the Health Insurance - Healthcare Reform
segments and to the increase in earned premiums of the property and casualty
insurance segment.
- The premiums earned, net and fee revenue corresponding to the
Health Insurance - Commercial Program reflect an increase of
$41.0 million, or 6.4%, during this period. Increases in
premium rates as well as a net increase in the average
enrollment account for the increase in the segment's earned
premiums net, and fee revenue.
- The premiums earned corresponding to the Health Insurance -
Healthcare Reform segment increased by $32.1 million, or
7.1%, during this period. This increase is basically the
result of increases in premium rates,
Page 15
a net increase in the average enrollment offset by the effect
of the exclusion of mental health and substance abuse
services.
- The premiums earned of the property and casualty insurance
segment increased by $6.4 million, or 11.7%, during the year
2002. This increase is mostly the result of increases in
premium rates due to the deregulation of the commercial
property and liability lines of business and to the segment's
increased volume of business.
During the year 2002 the consolidated claims incurred increased by $40.9
million, or 4.0%, due to an increase in the volume of business. However, the
loss ratio reflects a decrease of 2.5 percentage points when compared to the
prior year. This decrease is mostly attributed to fluctuations in the claims
incurred of the Health Insurance - Commercial Program segment and the Health
Insurance - Healthcare Reform segment. The decrease in loss ratio is the result
of better than expected utilization trends. In addition, management has
established several cost containment measures that have allowed cost and
utilization trends to maintain levels consistent with pricing and margin
objectives thus keeping the loss ratio under control. The consolidated expense
ratio has remained similar to that for the year 2001, reflecting an increase of
0.1 percentage points.
The consolidated realized gain on sale of securities of $185 thousand and $4.7
million for the years 2002 and 2001, respectively, is the result of the sound
and timely management of the investment portfolio in accordance with corporate
investment policies and from normal portfolio turnover of the trading and
available-for-sale securities. The consolidated realized gain during the year
2001 is mostly due to the sale of common stocks of Popular, Inc., which
generated a realized gain of approximately $2.3 million and also to normal
portfolio turnover of the trading and available for sale securities.
The unrealized loss on trading securities of $8.3 and $3.6 million for the
years 2002 and 2001, respectively, are related to investments held by the
Health Insurance - Commercial Program, Health Insurance - Healthcare Reform and
the Property and Casualty Insurance segments. This unrealized loss is mostly
attributed to losses in the portfolios held by such segments in equity holdings
that replicate the Standard & Poor's 500 Index (S&P 500 Index). This Index
experienced a negative return in 2002 and 2001. These segments plan to continue
their long-term strategy of passive management and diversification since
historically, performance of these types of investments has outperformed other
financial instruments.
The consolidated income tax expense for the year ended December 31, 2002
increased by $1.2 million when compared to the same amount for the prior year.
This increase is mostly noted in the income tax expense of the property and
casualty insurance segment, which reflect an increase of $685 thousand during
the year 2002 that is attributed to the segment's increased volume of business
and profitability.
Year ended December 31, 2001 compared with the year ended December 31, 2000
Consolidated premiums earned, net and fee revenue during 2001 increased by
$66.8 million, or 6.1%, when compared to the consolidated premiums earned, net
and fee revenue for 2000. This increase is mostly due to a combined increase of
$64.1 million in the premiums earned, net and fee revenue of the Health
Insurance - Commercial Program and the Health Insurance - Healthcare Reform
segments.
- The premiums earned, net and fee revenue corresponding to the
Health Insurance - Commercial Program reflect an increase of
$49.0 million, or 8.3%, during this period. Increased premium
rates as well as a net increase in the average enrollment
account for the increase in the segment's earned premiums
net, and fee revenue.
- The premiums earned corresponding to the Health Insurance -
Healthcare Reform segment increased by $15.1 million, or
3.4%, during this period. This increase is basically the net
result of increases in premium rates, a net decrease in the
average enrollment offset by the effect of the exclusion of
mental health and substance abuse services.
- The premiums earned of the remaining segments increased by
$2.7 million, or 4.1%, during this period.
During the year 2001 the consolidated claims incurred increased by $30.9
million, or 3.1%, due to an increase in the volume of business. However, the
loss ratio reflects a decrease of 2.5 percentage points when compared to the
prior year. This decrease is mostly attributed to fluctuations in the claims
incurred of the Health Insurance - Commercial Program segment and the Health
Insurance - Healthcare Reform segment. The decrease in loss ratio is the result
of management's ability to adjust its pricing strategy to cope with the
increase in claims costs and several measures for cost containment. This
process commenced during 1999 and the first half of 2000, and its effect
impacted the loss ratio during the second half of 2000 and 2001. The
consolidated expense ratio has remained similar to that for the year 2000,
reflecting an increase of 0.2 percentage points.
Page 16
The consolidated net investment income for 2001 increased by $1.1 million or
4.4% when compared to that for the year 2000. This increase is mostly due to a
higher average investment balance during the year 2001, partially offset by a
reduction on the average interest yield of the fixed income portfolio.
The consolidated realized gain on sale of securities of $4.7 million is the
result of the sound and timely management of the investment portfolio in
accordance with corporate investment policies and from normal portfolio
turnover of the trading and available-for-sale securities. This consolidated
realized gain during the year 2001 is mostly due to the sale of common stocks
of Popular, Inc., which generated a realized gain of approximately $2.3 million
and also to normal portfolio turnover of the trading and available for sale
securities.
The unrealized loss on trading securities of $3.6 million are related to
investments held by the Health Insurance - Commercial Program, Health Insurance
- - Healthcare Reform and the Property and Casualty Insurance segments. This
unrealized loss is attributed to losses in certain portfolios held by such
segments in equity holdings that replicate the Standard & Poor's 500 Index (S&P
500 Index). This Index experienced a negative return in 2001 and 2000. These
segments plan to continue their long-term strategy of passive management and
diversification since historically, performance of these types of investments
has outperformed other financial instruments.
HEALTH INSURANCE - COMMERCIAL PROGRAM OPERATING RESULTS
(Dollar amounts in thousands) 2002 2001 2000
--------- -------- --------
Years ended December 31,
AVERAGE ENROLLMENT:
Corporate accounts 313,557 322,369 328,029
Self-funded employers 123,680 118,866 119,069
Individual accounts 82,583 77,352 73,322
Federal employees 55,999 55,819 54,014
Local government employees 43,526 41,694 38,695
--------- -------- --------
TOTAL AVERAGE ENROLLMENT 619,345 616,100 613,129
========= ======== ========
Premiums earned, net $ 669,954 628,704 583,536
Amount attributable to self-funded arrangements 151,497 135,002 118,078
Less amounts attributable to claims under
self-funded arrangements (141,138) (126,295) (113,248)
--------- -------- --------
PREMIUMS EARNED, NET AND FEE REVENUE $ 680,313 637,411 588,366
========= ======== ========
CLAIMS INCURRED $ 574,874 560,809 531,187
OPERATING COSTS 86,321 83,771 77,990
--------- -------- --------
TOTAL UNDERWRITING COSTS $ 661,195 644,580 609,177
========= ======== ========
UNDERWRITING INCOME (LOSS) $ 19,118 (7,169) (20,811)
========= ======== ========
LOSS RATIO 84.5% 88.0% 90.3%
EXPENSE RATIO 12.7% 13.1% 13.3%
--------- -------- --------
COMBINED RATIO 97.2% 101.1% 103.5%
========= ======== ========
NET INVESTMENT INCOME $ 10,577 10,428 9,993
NET REALIZED (LOSS) GAIN ON SALE OF SECURITIES (312) 3,643 5,566
NET UNREALIZED LOSS ON TRADING SECURITIES (6,533) (2,908) (3,228)
--------- -------- --------
TOTAL NET INVESTMENT INCOME $ 3,732 11,163 12,331
========= ======== ========
NET INCOME (LOSS) $ 28,133 6,776 (3,090)
========= ======== ========
General
The Health Insurance - Commercial Program segment's total revenues are
primarily generated from premiums earned for risk-based healthcare services
provided to its members, revenues generated from self-funded arrangements, and
investment income. Claims incurred include healthcare services and other
benefit expenses consisting primarily of payments to physicians, hospital and
other service providers. A portion of the claims incurred for each period
consists of an actuarial estimate of claims incurred but not reported to the
segment during the period. Administrative expenses
Page 17
comprise general, selling, commissions, depreciation, payroll and other related
expenses. The segment's results of operations depend largely on its ability to
accurately predict and effectively manage healthcare costs.
This segment has a well-diversified investment portfolio with good asset
quality and a large portion invested in investment-grade, fixed income
securities. The segment's investment portfolio is predominantly held in U.S.
Treasury securities, obligations of the U.S. and P.R. government
instrumentalities and obligations of state and political subdivisions, which
comprise over 60% of the total portfolio value as of December 31, 2002. The
remaining investment portfolio consists of an equity securities portfolio that
replicates the S&P 500 Index, a corporate bonds portfolio, and investments in
strong local stocks of financial institutions. Due to market price
appreciation, the segment has a large single issuer equity concentration in
Popular, Inc., which is the holding company of Banco Popular de Puerto Rico,
the largest local commercial bank in Puerto Rico. As of December 31, 2002 and
2001, the carrying value of the Corporation's investment in Popular, Inc.
amounted to $25.8 million and $22.2 million, respectively. This investment
represents 11.6% for the year 2002 and 11.4% for the year 2001 of the segments'
total investments.
Year ended December 31, 2002 compared with the year ended December 31, 2001
Premiums earned, net and fee revenue for the year ended December 31, 2002,
reflect an increase of $42.9 million, or 6.7%, when compared to the premiums
earned, net and fee revenue for the year 2001. This increase is the result of
the following:
- This segment has been successful in monitoring premium rates,
particularly in the rated Corporate Accounts business,
assuring adequate premium rates that reflect actual claims
experience.
- The segment's enrollment increased by 3,245 members, or 0.5%,
when comparing the average enrollment as December 31, 2002
with the average enrollment as of December 31, 2001. This
increment is mostly reflected in the Individual Accounts,
Self-funded Employers and Local Government Employees
membership, where average enrollment increased by 5,231, or
6.8%, 4,814, or 4.1%, and 1,832, or 4.4%, during the year,
respectively. The average enrollment of the Corporate
Accounts groups decreased by 8,812 members, or 2.7%, during
the year 2002.
- In addition, management service fees increased by $1.7
million, or 19.0%, when compared to the same amount for the
year 2001. This increase was due to increases of claims
incurred under the self-funded agreements mostly as the
result of the increase in membership.
Approximately 89.7% of the total premiums increase is attributed to increases
in premium rates, while the remaining 10.3% is attributed to increases in
membership.
Claims incurred during the year 2002 increased by $14.1 million, or 2.5%, when
compared to the claims incurred during the year 2001. This increase is due to
the segment's increased volume of business, together with a decrease in the
loss ratio of 3.5 percentage points during the year. The improvement in the
loss ratio is the result of the following:
- Overall claims trends utilization development for the year
2002 was approximately 12.3% lower than expected.
- In addition, the segment continues with cost containment
measures that have allowed cost and utilization trends to
maintain levels consistent with pricing and margin
objectives. These cost containment initiatives have caused
some utilization indicators to exhibit a downward trend.
- Also, the segment experienced a favorable development of
$10.9 million of the 2001 claim liabilities estimate mostly
because of better than expected utilization trends.
Operating expenses increased by $2.6 million, or 3.0%, when comparing the
balances of the years 2002 and 2001. The operating expense ratio decreased by
0.4 percentage points during the year 2002. The lower operating expense ratio
for 2002 is mostly due to economies associated with premium revenue growth in
relation to fixed company operating expenses. In addition the segment has made
technology investments (increase in electronic claims submissions, virtual
storage technology, and interactive voice response, among others) that have
also resulted in increased efficiency. These economies were mitigated by the
increase in the acquisition cost of business, such as marketing and commission
expenses and the increase in payroll and payroll related expenses.
Year ended December 31, 2001 compared with the year ended December 31, 2000
Premiums earned, net and fee revenue for the year 2001 reflect an increase of
$49.0 million, or 8.3%, when compared to those for the year 2000. This increase
is the result of the combined effect of increases in premium rates and net
increases in enrollment.
Page 18
- Due to prior years' experience and to cope with increases in
health services cost, TSI was required to increase premium
rates to better reflect expected claims costs. This effort
was made gradually as contracts were renewed, and commenced
in the last semester of 1999. TSI was able to implement these
increases and retain the majority of its accounts because of
its products and services, and its position in the health
insurance market. The segment continues monitoring premium
rates increases, particularly in the rated Corporate Accounts
sector. This monitoring will make sure that premium rates
reflect the actual claims experience of the groups.
- Total enrollment increased by 8,675 members or 1.4% during
the year 2001. This increase is mostly attributed to the
increase in membership observed in the Individual Accounts of
7,303 members or 10.0%.
Approximately 81.5% of the total premiums increase is attributed to increases
in premium rates, while the remaining 18.5% is attributed to increases in
membership.
Claims incurred increased by $29.6 million or 5.6% when compared to 2000. This
increase is due to the net effect of the increase in membership net of a
decrease in loss ratio of 2.3 percentage points during the year 2001. The
improvement in the loss ratio is the result of better premium pricing and cost
containment measures for claims. As a result of the segment's cost containment
initiatives, cost and utilization trends have been maintained at levels
consistent with pricing and margin objectives. Due to the various initiatives,
average length of hospital stays and emergency room visits continue to exhibit
a downward trend. In addition, the implementation of certain pharmacy programs
maintained the pharmacy cost trends at single digit numbers during 2001. For
additional details of claims costs containment measures see Item 1 in the
section "Health Insurance Commercial Program Segment".
The expense ratio for 2001 remained at the same level as the year 2000 levels.
The amount of operating expenses increased by $5.8 million, or 7.4%, during the
year 2001. This increase is mostly attributed to increases in normal costs
incurred in the acquisition of new business, such as marketing and commission
expenses, expenses related to compliance with the federal HIPAA, and in payroll
and payroll related expenses. The expense ratio for the year 2001 decreased by
0.2 percentage points when compared to the expense ratio of the year 2000.
HEALTH INSURANCE - HEALTHCARE REFORM OPERATING RESULTS
(Dollar amounts in thousands) 2002 2001 2000
--------- ------- -------
Years ended December 31,
AVERAGE ENROLLMENT:
North Area 251,002 272,564 277,121
Northwest Area 78,168 165,123 163,609
Metro-North Area 202,028 177,065 169,288
Southwest Area 162,088 37,866 --
West Area -- -- 63,209
--------- ------- -------
TOTAL AVERAGE ENROLLMENT 693,286 652,618 673,227
========= ======= =======
PREMIUMS EARNED, NET $ 487,000 454,923 439,774
========= ======= =======
CLAIMS INCURRED $ 445,039 420,953 420,476
OPERATING COSTS 36,109 32,646 30,350
--------- ------- -------
TOTAL UNDERWRITING COSTS $ 481,148 453,599 450,826
========= ======= =======
UNDERWRITING INCOME (LOSS) $ 5,852 1,324 (11,052)
========= ======= =======
LOSS RATIO 91.4% 92.5% 95.6%
EXPENSE RATIO 7.4% 7.2% 6.9%
--------- ------- -------
COMBINED RATIO 98.8% 99.7% 102.5%
========= ======= =======
NET INVESTMENT INCOME $ 5,106 4,547 4,633
NET REALIZED GAIN ON SALE OF SECURITIES 76 6 252
NET UNREALIZED (LOSS) GAIN ON TRADING SECURITIES (495) (132) 76
--------- ------- -------
TOTAL NET INVESTMENT INCOME $ 4,687 4,421 4,961
========= ======= =======
NET INCOME (LOSS) $ 9,770 4,563 (7,614)
========= ======= =======
Page 19
General
The Health Insurance - Healthcare Reform segment's total revenues are primarily
generated from premiums earned according to the provisions of the Government's
Healthcare Reform contracts and investment income. Claims incurred include
health services and other benefit expenses consisting primarily of payments to
physicians, hospitals and other service providers. A portion of the claims
incurred for each period consists of an actuarial estimate of claims incurred
but not reported to the segment during the period. Administrative expenses
consist of general, depreciation, payroll and other related expenses. The
segment's results of operations depend largely on its ability to accurately
predict and effectively manage healthcare costs.
This segment has a well-diversified investment portfolio with good asset
quality and a large portion invested in investment-grade, fixed income
securities. The segment's investment portfolio is predominantly held in United
States Treasury securities, obligations of United States government
instrumentalities and obligations of state and political subdivisions, which
comprise over 45% of the total portfolio value as of December 31, 2001. The
remaining balance of the investment portfolio consists of an equity securities
portfolio that replicates the S&P 500 Index, a corporate bonds portfolio, as
well as investments in strong local stocks of sound financial institutions.
Year ended December 31, 2002 compared with the year ended December 31, 2001
Premiums earned, net of the Healthcare Reform segment for the year 2002
increased by $32.1 million, or 7.1%, when compared to the year 2001. This
increase is the result of the following:
- The average enrollment for this segment reflects an increase
of 40,668 members when comparing to the average enrollment
for the year 2001. This increase is due to the net effect of
the following: the acquisition of the Southwest Area
effective October 1, 2001, the merger of six (6) new
municipalities into existing areas effective July 1, 2002 and
the loss of the Northwest Area, which municipalities were
merged into the West Area (served by another carrier)
effective July 1, 2002.
- Premium rates were increased by approximately 13.2% during
the Healthcare Reform contract renegotiation process. New
premium rates were negotiated effective October 1, 2001 for a
nine-month period and effective July 1, 2002 for a
twelve-month period ending on June 30, 2003.
- Effective October 1, 2001, the Government of Puerto Rico
excluded mental health and substance abuse benefits from the
risks managed by the health insurance carrier. The exclusion
of these benefits represented a decrease of approximately $36
million in premiums earned during the year ended December 31,
2002. These services will continue to be directly contracted
by the Government with specialized mental health service
providers.
Approximately 89.0% of the total premiums increase is attributed to increases
in membership, while the remaining 11.0% is attributed to increases in premium
rates.
Claims incurred during the year 2002 increased by $24.1 million, or 5.7%, when
compared to the claims incurred during the year 2001. The increase is
attributed to the increase in volume of business, net of the exclusion of
mental health services and substance abuse benefits from the coverage of the
policy. During the year ended 2002, the loss ratio decreased when compared with
the year 2001, as a result of the increase in premiums rates, as well as to a
reduction in the coverage of the Healthcare Reform policy.
Operating expenses for the year 2002, increased by $3.5 million, or 10.6%, when
compared to the year 2001. This increase is due to the segment's increase in
membership. The expense ratio for the year 2002 increased by 0.2 percentage
points when compared to the expense ratio for the year 2001.
Year ended December 31, 2001 compared with the year ended December 31, 2000
Premiums earned, net for the year 2001 increased by $15.1 million or 3.4% when
compared to the same amount for the year 2000. This increase is basically the
net result of increases in premium rates offset by a decrease in members and
the exclusion of mental health and substance abuse services from the Health
Reform insurance policy.
- New premium rates were negotiated effective October 1, 2001
for a nine-month period ending on June 30, 2002.
- The average enrollment for this segment reflects a decrease
of 20,609 members when compared to the average enrollment for
the year 2000. This decrease is attributed to the net effect
of the loss of the West Area effective July 1, 2000 and the
acquisition of the Southwest Area effective October 1, 2001.
The decrease in membership represented about $14.0 million in
premiums earned.
Page 20
- Effective October 1, 2001, the Government of Puerto Rico
excluded mental health and substance abuse benefits from the
coverage offered in the policy. The exclusion of the mental
health and substance abuse benefits from the coverage of the
Healthcare Reform insurance policy represented a decrease of
approximately $9.0 million in premiums earned during 2001.
These services will continue to be directly contracted by the
Government with specialized mental health service providers.
The total increase experienced in earned premiums is attributed to increased
premium rates.
Claims incurred increased by $477 thousand or 0.1% when compared to the year
2000. This increase is attributed to the growth in capitation payments to IPA's
and in the cost of risks assumed by the segment, net of the exclusion of mental
health services and substance abuse benefits and the decrease in membership.
During 2001, the loss ratio for the Health Insurance - Healthcare Reform
segment decreased by 3.1 percentage points when compared to the loss ratio for
2000. This decrease is mainly due to increases in premium rates, particularly
in the Metro-North Area, as well as to a reduction in the coverage of the
Healthcare Reform policy. Effective September 30, 2001, the Healthcare Reform
policy did not cover mental health and substance abuse benefits. The Government
now directly assumes the risk for these benefits.
Operating expenses for the year 2001 increased by $2.3 million, or 7.6%, when
compared to the operating expenses for the year 2000. This increase is
attributed to the increased volume of business of the segment. The expense
ratio increased by 0.3 percentage points when compared to the expense ratio for
the year 2000.
PROPERTY AND CASUALTY INSURANCE OPERATING RESULTS
(Dollar amounts in thousands) 2002 2001 2000
--------- ------- -------
Years ended December 31,
PREMIUMS WRITTEN:
Commercial multiperil $ 48,640 41,013 31,082
Dwelling 17,165 18,051 17,046
Auto physical damage 16,918 13,961 14,173
Commercial auto liability 10,823 8,274 9,348
Medical malpractice 5,857 5,456 4,067
All other 12,878 10,061 11,508
--------- ------- -------
Total premiums written 112,281 96,816 87,224
--------- ------- -------
Premiums ceded (39,806) (39,608) (31,208)
Change in unearned premiums (11,787) (2,871) (2,523)
========= ======= =======
NET PREMIUMS EARNED $ 60,688 54,337 53,493
========= ======= =======
CLAIMS INCURRED $ 34,334 32,348 32,692
OPERATING COSTS 25,549 22,548 20,569
--------- ------- -------
TOTAL UNDERWRITING COSTS $ 59,883 54,896 53,261
========= ======= =======
UNDERWRITING INCOME (LOSS) $ 805 (559) 232
========= ======= =======
LOSS RATIO 56.6% 59.5% 61.1%
EXPENSE RATIO 42.1% 41.5% 38.5%
--------- ------- -------
COMBINED RATIO 98.7% 101.0% 99.6%
========= ======= =======
NET INVESTMENT INCOME $ 6,579 7,564 6,996
NET REALIZED GAIN ON SALE OF SECURITIES 243 967 539
NET UNREALIZED LOSS ON TRADING SECURITIES (1,294) (585) (585)
--------- ------- -------
TOTAL NET INVESTMENT INCOME $ 5,528 7,946 6,950
========= ======= =======
NET INCOME $ 6,223 6,529 6,282
========= ======= =======
General
The property and casualty insurance segment's total revenues are primarily
generated from net premiums earned and investment income. Claims incurred are
composed of losses and loss-adjustment expenses. A portion of the claims
Page 21
incurred for each period consists of an estimate of unreported losses to the
segment during the period. Administrative expenses consist of general,
commissions, depreciation, payroll and other related expenses.
STS has a well-diversified investment portfolio with good asset quality and a
large portion invested in investment-grade, fixed income securities. The
segment's investment portfolio is predominantly held in U.S. Treasury
securities, obligations of U.S. government instrumentalities and obligations of
state and political subdivisions, which comprise over 80% of the total
portfolio value as of December 31, 2002. The remaining balance of the
investment portfolio consists of an equity securities portfolio that replicates
the S&P 500 Index, a corporate bonds portfolio, and investments in strong local
stocks of financially sound financial institutions. Due to market value
increase, the segment has a large single issuer equity concentration in
Popular, Inc. As of December 31, 2002 and 2001, the carrying value of the
Corporation's investment in Popular, Inc. amounted to $2.3 million and $4.2
million, respectively. This investment represents 2.2% for the year 2002, and
4.2% for the year 2001 of the segments total investments.
Year ended December 31, 2002 compared with the year ended December 31, 2001
Total premiums written for the year ended December 31, 2002 increased by $15.5
million, or 16.0%, when compared to the year 2001. This increase is reflected
in the premiums written for the following lines of business:
- The commercial multiple peril line accounted for the
principal increase in premiums volume, increasing by $7.6
million, or 18.6%, during the year 2002. This increase is due
to increases in premium rates as a result of the commercial
lines deregulation. Also, during the year 2002 the segment
subscribed new business with higher average premium rates
that substituted other accounts with average premium rates
below desired levels. As in the previous years, the increase
in average premium rates of the commercial business is the
primary contributor to the fluctuation experienced in total
premiums written.
- The auto business also contributed to this year's increase,
where the auto physical damage lines and the commercial auto
liability line increased by $3.0 million, or 21.2%, and $2.5
million, or 30.8%, respectively. These increases are also
attributed to the deregulation of premium rates, mostly as a
result of the elimination of credits or discounts in the
commercial accounts.
- The amount of premiums written in the general liability
business (included within the "All Other" caption in the
above summary) reflect an increase of $2.0 million during the
year 2002. This increase is due to the acquisition of one
significant account within this line of business, with
premiums written of approximately $1.6 million.
- On the contrary, dwelling premiums reflect a decrease of $886
thousands, or 4.9%, during the year 2002. This decrease is
basically the result of a decrease in new business from
financial institutions. This segment's management has been
devoting additional efforts to increase its client base in
this financial sector to mitigate the effect of such
fluctuation.
Approximately 60.0% of the increase in total premiums written is due to
increases in premium rates. The remaining 40.0% is attributed to an increase in
the volume of business.
Premiums ceded to reinsurers for the year ended December 31, 2002 remained
similar to the same amount for the year 2001, reflecting an increase of $198
thousand, or 0.5%. The ratio of premiums ceded to total premiums written,
however, reflects a decrease of 5.4 percentage points. This fluctuation is the
net result of several factors:
- STS has increased its retention of the commercial property
portfolio. The increased retention, which decreases the
amounts or premiums ceded to reinsurers, allows the segment
to keep more premiums on profitable business.
- During the reinsurance contract renewal process, the segment
cancelled a commercial quota share reinsurance treaty. This
cancellation propitiated a reinsurance portfolio transfer
that resulted in the reacquisition of business previously
ceded, and, accordingly, a reduction in premiums ceded.
- An increase of over 30% in catastrophe reinsurance costs due
to recent worldwide catastrophes.
- Acquisition of additional catastrophe protection as a result
of a shortfall on the property first surplus treaty.
During the year ended December 31, 2002 the property and casualty segment loss
ratio decreased by 2.9 percentage points as compared to the loss ratio for the
year 2001. This decrease is mostly the result of favorable underwriting results
in the commercial multiperil line of business (resulting from increases in
premium rates as a consequence of deregulation) and an increased retention of
the segment's profitable lines of business, which has increased the premiums
earned base. Also, the professional liability line experienced an improvement
in its loss ratio as a result of premium rate increases of approximately 60%
(which were effective April 2001) and strict adherence to underwriting
practices and reinsurance constraints. In addition, the loss ratio of the auto
physical damage line of business shows a decrease of 7.8 percentage points,
mostly due to the net effect of increased premium rates and reserve releases.
Page 22
The operating expenses for the year ended December 31, 2002 increased by $3.0
million, or 13.3%, when compared to the operating expenses for the year ended
December 31, 2001. This increase is directly related to the segment's increase
in its volume of business. The expense ratio experienced an increase of 0.6
percentage points during the year 2002. The increase in the expense ratio is
the result of a reduction in the reinsurance commission income, which is
presented netting the commission expense of the segment. The decrease in the
reinsurance commission income is due to the restructuring of the reinsurance
program during the contract renewal process.
Year ended December 31, 2001 compared with the year ended December 31, 2000
Gross premiums written in the property and casualty insurance segment for the
year 2001 increased by $9.6 million, or 11.0%, when compared to the year 2000.
This increase is reflected in the premiums written for the following lines of
business:
- Premiums written in the commercial multiple peril line
increased by $9.9 million, or 32.0%, during the year 2001.
This increase in volume is due to STS' efforts to establish
itself as the island's leader in the commercial package
business.
- Premiums written in the professional liability line increased
by $1.4 million, or 34.2%, during the year 2001. This is the
result of rate increases of 59.9% for physicians and surgeons
and 85.6% for hospitals. These increases were effective April
1, 2001.
Over 80% of the increase experienced in premiums written is attributed to
increased volume of business and the remaining 20% is attributed to increased
premium rates.
Premiums ceded to reinsurers during 2001 increased by $8.4 million or 26.9%
when compared to 2000. This increase is due to the effect of the following:
- Most of the increase in premiums ceded is concentrated in
catastrophe reinsurance premiums and attributed to recent
worldwide catastrophes, which influence the global condition
on the cost and availability of catastrophe coverage. In STS
this situation resulted in an increase in catastrophe
coverage costs of 44% in the 2002 treaty renewal, which is
expected to be recovered through an average increase in
property risks rates of approximately 35% and a reduction in
acquisition costs.
- In addition, STS' growth in the commercial property sector
caused a proportional increase in aggregate levels needed to
be covered by catastrophic and proportional treaties.
During 2001, property and casualty loss ratio decreased by 1.6 percentage
points, primarily as a result of favorable underwriting results in the auto
business and premium rate increases of approximately 60% that were effective
April 2001. Operating expenses increased by $2.0 million, or 9.6%, during the
year 2001. The increase in the expense ratio of 3.0 percentage points is the
result of a reduction in the reinsurance commission income, which is presented
netting the commission expense of the segment. The decrease in the reinsurance
commission income is due to the restructuring of the reinsurance program during
the contract renewal process.
Page 23
LIFE AND DISABILITY INSURANCE OPERATING RESULTS
(Dollar amounts in thousands) 2002 2001 2000
-------- ------ ------
Years ended December 31,
NET EARNED PREMIUMS AND COMMISSION INCOME:
Earned premiums $ 20,929 17,996 15,590
Earned premiums ceded (6,447) (5,165) (4,558)
-------- ------ ------
Net earned premiums 14,482 12,831 11,032
-------- ------ ------
Commission income on reinsurance 510 595 544
-------- ------ ------
NET PREMIUMS EARNED $ 14,992 13,426 11,576
======== ====== ======
CLAIMS INCURRED $ 7,733 6,914 5,778
OPERATING COSTS 5,133 4,553 3,788
-------- ------ ------
TOTAL UNDERWRITING COSTS $ 12,866 11,467 9,566
======== ====== ======
UNDERWRITING INCOME $ 2,126 1,959 2,010
======== ====== ======
LOSS RATIO 51.6% 51.5% 49.9%
EXPENSE RATIO 34.2% 33.9% 32.7%
-------- ------ ------
COMBINED RATIO 85.8% 85.4% 82.6%
======== ====== ======
NET INVESTMENT INCOME $ 2,253 2,496 2,502
NET REALIZED GAIN ON SALE OF SECURITIES 67 34 20
-------- ------ ------
TOTAL NET INVESTMENT INCOME $ 2,320 2,530 2,522
======== ====== ======
NET INCOME $ 3,585 3,366 3,334
======== ====== ======
General
The life and disability insurance segment's total revenues are primarily
generated from net premiums earned and investment income. Claims incurred are
composed of benefits and claims. A portion of the claims incurred for each
period consists of an estimate of unreported claims to the segment during the
period. Administrative expenses consist of general, commissions, depreciation,
payroll and other related expenses.
SVTS segment has a well-diversified investment portfolio with good asset
quality and a large portion invested in investment-grade, fixed income
securities. The segment's investment portfolio is predominantly held in U.S.
Treasury securities, obligations of U.S. government instrumentalities and
obligations of state and political subdivisions, which comprise over 91% of the
total portfolio value as of December 31, 2002. The remaining investment
portfolio consists of investments in strong local stocks from financially sound
financial institutions. The segment has a large single issuer equity
concentration in Popular, Inc. As of December 31, 2002 and 2001, the carrying
value of the Corporation's investment in Popular, Inc. amounted to $1.7 million
and $2.2 million, respectively. This investment represents 4.6% for the year
2002 and 5.3% for the year 2001 of the segment's total investments.
Year ended December 31, 2002 compared with the year ended December 31, 2001
Earned premiums for the year 2002 increased by $2.9 million or 16.3% when
compared to 2001. This increase in earned premiums is mostly due to an increase
in the number of certificates in force in the group life and group disability
business totaling 38,386 certificates or 12.9% during the year 2002.
Approximately 99% of the increase experienced in the earned premiums is
attributed to increased volume of business. The remaining 1% of the increase in
earned premiums is attributed to increased premium rates.
Premiums ceded to reinsurers during the year 2002 increased by $1.3 million or
24.8%. This increase is directly related to the increase in volume of business
of the segment. The ratio of premiums ceded to earned premiums during 2002
increased from 28.7% in 2001 to 30.8% in 2002. This is mainly due to the
product mix of subscribed business in the year. In 2002, more new business was
subscribed in disability lines where the company retains 25% of the risk as
compare to group life where the company retains 70% of the risk.
Page 24
Claims incurred increased by $819 thousand or 11.8% when compared to 2001
mainly due to the increase in volume. The segment's loss ratio and
administrative expense ratio remains constant when compared to 2001, due to
favorable experience in all lines of business and cost control measures in
place.
Year ended December 31, 2001 compared with the year ended December 31, 2000
Total earned premiums in the year 2001 increased by $2.4 million, or 15.4%,
when compared to the year 2000. This increase in earned premiums is mostly due
to an increase in the number of certificates in force in the group life and
group disability business totaling 12,702 certificates, or 13.1%, during the
year 2001. Approximately 99% of the increase experienced in the earned premiums
is attributed to the increased volume of business. The remaining 1% of the
increase in earned premiums is attributed to increased premium rates.
Premiums ceded to reinsurers during the year 2001 increased by $607 thousand,
or 13.3%. This increase is directly related to the increase in volume of
business of the segment. The ratio of premiums ceded to earned premiums during
2001 was consistent with the ratio for 2000. The premiums ceded to earned
premiums' ratio were 28.7% for 2001 and 29.2% for 2000.
Claims incurred increased by $1.1 million or 19.7% when compared to the year
2000. The segment's loss ratio reflects an increase of 1.6 percentage points
during the year 2001. This increase is mostly attributed to the net effect of a
decrease in claims costs during 2001 and to non-recurring release of incurred
but not reported claims reserve of approximately $1 million during the year
2000. This adjustment is the result of a better than expected actual
development of the incurred but not reported claims reserve determined in 1999
for a significant new group that commenced coverage during the last quarter of
1999. Management assumed a conservative approach in determining the incurred
but not reported claims reserve for this group in 1999, assuming a worst-case
scenario in the absence of historical claim trends. Also, during the year 2001
the segment subscribed more disability business than during the year 2000, fact
that also contributes to greater control in the loss ratio for the segment.
The expense ratio for the year 2001 reflects an increase of 1.2 percentage
points when compared to the year 2000. This increase is the result of increased
commission expense attributed to the increase in volume of business observed
during the year and to the overall increase in payroll and payroll related
expenses.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The Corporation maintains good liquidity measures due to the quality of its
assets, the predictability of its liabilities, and the duration of its
contracts. The liquidity of the Corporation is primarily derived from the
operating cash flows of its insurance subsidiaries.
As of December 31, 2002 and 2001, the Corporation's cash and cash equivalents
amounted to $82.8 million and $81.0 million, respectively. Sources of funds
considered in meeting the objectives of the Corporation's operations include
cash provided from operations, maturities and sales of securities classified
within the trading and available-for-sale portfolios, securities sold under
repurchase agreements, and issuance of long and short-term debt.
Net cash flows from operations are expected to sustain operations for the next
year and thereafter, as long as the operations continue showing positive
results. In addition, the Corporation monitors its premium rates and its claims
incurred to ascertain proper cash flows and has the ability to increase premium
rates throughout the year in the monthly renewal process.
Cash Flows from Operations
Most of the cash flows from operating activities are generated from the
insurance subsidiaries. The basic components of the cash flows from operations
are premium collections, claims payments less reinsurance premiums, and payment
of operating expenses.
Net cash flows provided by operating activities amounted to $56.8 million,
$69.4 million and $7.4 million as of December 31, 2002, 2001 and 2000,
respectively, a decrease of $12.6 million in 2002 and an increase $62.0 in
2001. The fluctuation in cash flows provided by operating activities is mainly
attributed to the net effect of the following:
- Increase in collections of premiums of $74.0 million in 2002
and $65.9 million in 2001. The increase in premium
collections is the result of the increased volume of business
and increased premium rates of the operating segments.
Page 25
- Increase of $72.0 million in 2002 and a decrease of $12.3 in
2001 in the amount of claims losses and benefits paid. In the
year 2002 the increase in the amount of claims losses and
benefits paid is mostly the result of the segment's increased
volume of business. The decrease in the amount of claims
losses and benefits paid during the year 2001 is the result
of the establishment of several costs containment measures by
operating segments.
- Increase of $6.3 million in 2002 and $15.9 million in 2001 in
the amount of cash paid to suppliers and employees. The
amount of cash paid to suppliers and employees increased
mainly as a result of additional expenses generated from the
acquisition of new business.
- In addition during the year 2002, the amount of net
acquisitions of investments in the trading portfolio
increased by $9.5 million.
This excess liquidity is available, among other things, to invest in high
quality and diversified fixed income securities and, to a lesser degree, to
invest in marketable equity securities.
Cash Flows from Investing Activities
The basic components of the cash flows from investing activities is derived
from acquisitions and proceeds from investments in the available-for-sale and
held-to-maturity portfolios, and capital expenditures. The Corporation monitors
the duration of its investment portfolio and executes purchases and sales of
these investments with the objective of having adequate funds available to
satisfy its maturing liabilities.
Net cash flows used in investing activities amounted to $43.5 million, $24.8
million and $7.4 million as of December 31, 2002, 2001 and 2000, respectively.
The cash flows used in investing activities during 2002 and 2001 is mainly due
to the investment of the excess cash generated from the operations and
reinvestment of securities called or matured during the years 2002 and 2001.
Total acquisition of investments exceeded the proceeds from investments sold or
matured by $38.3 million and $18.8 million during the years 2002 and 2001,
respectively.
Cash Flows from Financing Activities
Net cash flows (used in) provided by financing activities amounted to $(11.5)
million, $2.8 million and $5.2 million for the years ended December 31, 2002,
2001 and 2000, respectively. The decrease of $14.3 million during the year 2002
and $2.4 million during the year 2001 in the cash flows from financing
activities is due to the effect of the following fluctuations:
- The change in outstanding checks in excess of bank balances
decreased by $10.2 and $2.8 million during the years 2002 and
2001, respectively. This represents a timing difference
between the issuance of checks and the cash balance in the
bank account at one point in time.
- The payments of long-term debt increased by $3.2 million and
$113 thousand during the years 2002 and 2001, respectively.
This increase during the year 2002 is due to additional
payments made during the year over the scheduled principal
payments of the credit agreements. Scheduled principal
repayments for 2003 amount to $1.6 million. Principal
repayments are expected to be paid out of the Corporation's
cash flows from operations.
- During the year 2002, the amount of net surrenders of
individual retirement accounts experienced an increase of
$829 thousand. This fluctuation in the net surrenders of
individual retirement accounts is attributed to the
aggressive competition in the market for this product in
Puerto Rico.
FINANCING AND FINANCING CAPACITY
The Corporation has significant short-term liquidity supporting its businesses.
It also has available short-term borrowings from time to time to address timing
differences between cash receipts and disbursements. These short-term
borrowings are mostly in the form of securities sold under repurchase
agreements. As of December 31, 2002, the Corporation had $81 million in
available credit on these agreements, although there is no balance due as of
that date.
In addition, during 1999 the Corporation entered into two credit agreements
with a commercial bank, FirstBank Puerto Rico. These credit agreements bear
interest rates determined by the London Interbank Offered Rate (LIBOR) plus a
margin specified by the commercial bank at the time of the agreement. As of
December 31, 2002, the two credit agreements have an outstanding balance of
$34.0 million and $16.0 million and an average annual interest rate of 4.47%
and 3.26%, respectively. During 2001, the Corporation amended the $19.0 million
credit agreement to extend its maturity date and to restructure its repayment
schedule, which was originally due in August 31, 2001. The amended agreement
stipulates repayments of principal amounts of not less than $250 thousand and
in integral multiples of $50 thousand. The aggregate principal amounts of this
credit agreement, as amended, shall be reduced annually to the amounts on or
before the dates described below:
Page 26
Required Principal
Outstanding
Date Balance
- -------------- ----------------------
(amounts in thousands)
August 1, 2003 $ 16,500
August 1, 2004 15,000
August 1, 2005 13,500
August 1, 2006 12,000
August 1, 2007 --
These credit agreements contain several restrictive covenants, including, but
not limited to, restrictions to incur in additional indebtedness and the
granting of certain liens, limitations on acquisitions and limitations on
changes in control. As of December 31, 2002, management believes the
Corporation is in compliance with these covenants. Failure to meet these
covenants may trigger the accelerated payment of the credit agreements'
outstanding balance. Principal repayments on these loans are expected to be
paid out of the operating and investment cash flows of the Corporation.
The Corporation continually monitors existing and alternative financing sources
to support its capital and liquidity needs.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Corporation's contractual obligations include loans payable to a bank
(refer to the previous section) and operating leases. The Corporation has
operating non-cancelable leases for several offices and certain equipment. The
maturity schedule of the Corporation's contractual obligations at December 31,
2002 is as follows:
(Dollar amounts
in thousands) TOTAL 2003 2004 2005 2006 2007 THEREAFTER
----- ---- ---- ---- ---- ---- ----------
Loans payable $50,015 1,640 2,645 3,140 3,140 13,640 25,810
Operating leases 2,838 1,445 600 426 301 66 --
------- ----- ----- ----- ----- ------ ------
$52,853 3,085 3,245 3,566 3,441 13,706 25,810
======= ===== ===== ===== ===== ====== ======
The maturity schedule of the Corporation's other commercial commitments as of
December 31, 2002 is as follows:
(Dollar amounts
in thousands) TOTAL 2003 2004 2005 2006 2007 THEREAFTER
----- ---- ---- ---- ---- ---- ----------
Standby Repurchase
Obligations $81,000 81,000 -- -- -- -- --
======= ===== ===== ===== ===== ====== ======
As of December 31, 2002, the repurchase obligations credit facilities remained
unused. Such facilities are due on various dates in 2003. Management
understands that the Corporation has the ability to extend or renew them at its
convenience.
The Corporation has an interest-rate related derivative instrument to manage
the variability caused by interest rate changes in the cash flows of its loan
agreements. The Corporation does not enter into derivative instruments for any
purpose other than cash flow hedging purposes. That is, the Corporation does
not speculate using derivative instruments. To meet this objective, on December
6, 2002 management entered into an interest rate swap agreement to manage
fluctuations in cash flows resulting from interest rate risk. This five-year
interest swap changes the variable-rate cash flow (LIBOR plus 100 basis points)
exposure on the debt obligation to fixed-rate cash flow (4.72%). The interest
rate swap agreement is effective April 1, 2003.
As of December 31, 2002, $682 thousand of deferred loss on the derivative
instrument was included within the accounts payable and accrued liabilities in
the consolidated balance through a charge to accumulated other comprehensive
income. No derivative instrument was held by the Corporation as of December 31,
2001.
Page 27
Other than as noted above, the Corporation does not have any material
off-balance sheet arrangements, trading activities involving non-exchange
related contracts accounted for at fair value or relationships with persons or
entities that derive benefits from a non-independent relationship with the
Corporation or the Corporation's related parties.
RESTRICTION ON CERTAIN PAYMENTS BY THE CORPORATION
The Corporation is a for-profit organization that operates as a not-for-profit
organization by virtue of the affirmative vote of its stockholders. As a
result, the Corporation does not distribute dividends. This resolution could be
altered anytime by the affirmative vote of stockholders and thus, dividends
could be available for distribution subject to the applicable obligations and
responsibilities.
In the event that the stockholders decide to operate as a for-profit
organization and the Board of Directors decides to pay dividends, the amount
that could be available for distribution would exclude TSI's operating reserve
and the capital contributions made by TSI to its former subsidiaries before the
corporate reorganization, due to TSI's tax exemption. This fact was reaffirmed
by a letter issued by the Department of Treasury on July 3, 2001.
TSI is not allowed to distribute dividends on its common stock. This is due to
an income tax administrative ruling issued by the Department of the Treasury of
the Commonwealth of Puerto Rico, which grants the subsidiary a total tax
exemption from Puerto Rico taxes if it complies with several conditions, one of
which prohibits the payment of dividends.
TSM's insurance subsidiaries are subject to the regulations of the Commissioner
of Insurance of the Commonwealth of Puerto Rico. These regulations, among other
things, require insurance companies to maintain certain levels of capital;
therefore, restricting the amount of earnings that can be distributed. As of
December 31, 2002, the insurance subsidiaries were in compliance with such
minimum capital requirements. These regulations are not directly applicable to
TSM, as a holding company, since it is not an insurance company. Except for
TSI, which has the dividend restriction imposed by the Department of the
Treasury's income tax administrative ruling, the regulations applicable to
insurance subsidiaries are not expected to affect their ability to distribute
dividends to TSM.
The credit agreements with a commercial bank restrict the amount of dividends
that TSM and its subsidiaries can declare or pay to stockholders. According to
the credit agreements, the dividend payment cannot exceed the accumulated
retained earnings of the paying entity.
None of the previously described dividend restrictions are expected to have a
significant effect on TSM's ability to meet its cash obligations.
SOLVENCY REGULATION
To monitor the solvency of the operations, the Blue Cross and Blue Shield
Association (BCBSA) requires TSM and TSI to comply with certain specified
levels of Risk Based Capital (RBC). RBC is designed to identify weakly
capitalized companies by comparing each company's adjusted surplus to its
required surplus (RBC ratio). The RBC ratio reflects the risk profile of
insurance companies. At December 31, 2002, both entities had a RBC ratio above
the level required by BCBSA.
OTHER CONTINGENCIES
(1) Legal Proceedings - Various litigation claims and assessments
against the Corporation have arisen in the course of the
Corporation's business, including but not limited to, its
activities as an insurer and employer. Further, the
Commissioner of Insurance of the Commonwealth of Puerto Rico,
as well as other Federal and Puerto Rico government
authorities regularly make inquiries and conduct audits
concerning the Corporation's compliance with applicable
insurance and other laws and regulations.
TSI's compliance with the requirements of its income tax
ruling is currently being audited by representatives of the
Puerto Rico Department of the Treasury. Management is of the
opinion that TSI is in compliance with such ruling at
December 31, 2002 and 2001.
Based on the information currently known by the Corporation's
management, in its opinion, the outcomes of such pending
investigations and legal proceedings are not likely to have a
material adverse effect on the Corporation's financial
position, results of operations and cash flows. However, given
the inherent unpredictability of these matters, it is possible
that an adverse outcome in certain matters could, from time to
time, have an adverse effect on the Corporation's operating
results and/or cash flows (see "Item 3. Legal Proceedings").
Page 28
(2) Guarantee Association - To operate in Puerto Rico, insurance
companies, such as TSM's insurance subsidiaries, are required
to participate in guarantee associations, which are organized
to pay policyholders contractual benefits on behalf of
insurers declared to be insolvent. These associations levy
assessments, up to prescribed limits, on a proportional
basis, to all member insurers in the line of business in
which the insolvent insurer was engaged. During the year
2002, the Corporation paid an assessment in connection with
insurance companies declared insolvent in the amount of $654.
No assessments were levied against the Corporation during the
years 2001 and 2000. It is the opinion of management that any
possible future guarantee association assessments will not
have a material effect on the Corporation's operating results
and/or cash flows.
Pursuant to the Puerto Rico Insurance Code, the property and
casualty insurance segment is a member of Sindicato de
Aseguradores para la Suscripcion Conjunta de Seguros de
Responsabilidad Profesional Medico-Hospitalaria (SIMED) and
of the Sindicato de Aseguradores de Responsabilidad
Profesional para Medicos. Both syndicates were organized for
the purpose of underwriting medical-hospital professional
liability insurance. As a member, the segment shares risks
with other member companies and, accordingly, is contingently
liable in the event the previously mentioned syndicates
cannot meet their obligations. In recent years, SIMED has
encountered financial difficulties, mainly attributed to
premium deficiencies. As of December 31, 2001 (date of latest
financial statements available), SIMED presented a deficit of
approximately $22.3 million. During 2002, 2001 and 2000, no
assessment or payment has been made for this contingency.
(3) Examination from Regulator - The Puerto Rico House of
Representatives Banking and Insurance Committee (the
Committee) is conducting an investigation of TSI's tax
treatment under rulings issued by the Puerto Rico Department
of the Treasury that grant TSI's tax exempt status. A similar
resolution was approved by the Puerto Rico Senate. TSI has
provided to the Committee and Puerto Rico Senate information
and documents as requested.
CRITICAL ACCOUNTING ESTIMATES
The Corporation's consolidated financial statements and accompanying notes have
been prepared in accordance with generally accepted accounting principles
applied on consistent basis. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
The Corporation continually evaluates the accounting policies and estimates it
uses to prepare the consolidated financial statements. In general, management's
estimates are based on historical experience and on various other assumptions
that are believed to be reasonable under the facts and circumstances. Actual
results could differ from those estimates made by management.
The policies discussed below are considered by management to be critical to an
understanding of the Corporation's financial statements because their
application places the most significant demands on management's judgment, with
financial reporting results relying on estimation about the effect of matters
that are inherently uncertain. For all these policies, management cautions that
future events may not necessarily develop as forecast, and the best estimates
routinely require adjustment. Management believes that the amounts provided for
these critical accounting estimates are adequate.
CLAIM LIABILITIES
The Corporation recognizes claim liabilities for all its insurance subsidiaries
as follows:
- Claims processed and incomplete for the health insurance
segments represent the estimated amounts to be paid to
providers based on experience and accumulated statistical
data. Loss-adjustment expenses related to such claims are
accrued based on estimated future expenses necessary to
process such claims.
- Claims processed and incomplete and loss-adjustment expenses
of the property and casualty insurance segment represents the
individual case estimate for reported claims and estimates
for unreported losses, net of any salvage and subrogation as
well as an estimate of expenses for investigating and
settling claims. These estimates are based on analysis of
prior loss experience modified for current trends.
Page 29
- Claims processed and incomplete of the life and disability
insurance segment are based on the amount of benefits
contractually determined for reported claims and on estimates
for unreported claims. These estimates are based on analysis
of prior loss experience modified for current trends.
Claim liabilities amounted to $244.6 million as of December 31, 2002; of that
total, $103.1 million are related to unreported losses and $13.6 million are
related to unpaid loss-adjustment expenses. The remaining balance corresponds
to claims processed and incomplete.
Management continually evaluates the potential for changes in its claim
liabilities estimates, both positive and negative, and uses the results of
these evaluations both to adjust recorded claim liabilities and to adjust
underwriting criteria. The Corporation's profitability depends in large part on
accurately predicting and effectively managing the amount of claims incurred,
particularly those of the health insurance segments and the losses arising from
the property and casualty insurance segment. Management regularly reviews its
premiums and benefits structure to reflect the Corporation's underlying claims
experience and revised actuarial data; however, several factors could adversely
affect the Corporation's underwriting. Some of these factors are beyond
management control and could adversely affect its ability to accurately predict
and effectively control claims incurred. Examples of such factors include
changes in health practices, economic conditions, the advent of natural
disasters, and malpractice litigation. Costs in excess of those anticipated
could have a material adverse effect on the Corporation's results of
operations.
IMPAIRMENT OF INVESTMENTS
A decline in the estimated fair value of any available for sale or held to
maturity security below cost, which is deemed to be other than temporary,
results in a reduction of the carrying amount to its fair value. The impairment
is charged to operations and a new cost basis for the security is established.
Management regularly reviews each investment security for impairment based on
criteria that include the extent to which cost exceeds estimated fair value,
the duration of the estimated fair value decline and the financial health and
specific prospects for the issuer. Management regularly performs market
research and monitors market conditions in order to minimize impairment risk.
Investment in securities amounted to $469.6 million as of December 31, 2002.
Gross unrealized gains and losses included in that carrying amount related to
fixed maturity securities amounted to $8.8 million and $177 thousand,
respectively. Gross unrealized gains and losses on equity securities,
classified as securities held for trading and securities held as available for
sale, amounted to $25.0 million and $10.1 million, respectively. Management
believes that none of the securities whose carrying amount exceeds its
estimated fair value at December 31, 2002 is at risk of being charged to
operations during the year 2003. During the year 2002, the Corporation
recognized an other than temporary impairment on one of its available for sale
securities amounting to $311 thousand. No other than temporary impairment was
recognized in the years 2001 and 2000.
ALLOWANCE FOR DOUBTFUL RECEIVABLES
The Corporation estimates the amount of uncollectible receivables in each
period and establishes an allowance for doubtful receivables. The amount
provided is based on management's continuous evaluation of the aging of
accounts receivable and such other factors that deserve current recognition. A
change in the level of uncollectible accounts could have a significant effect
on the Corporation's results of operations. The allowance for doubtful
receivables amounted to $13.8 million and $11.7 million as of December 31, 2002
and 2001, respectively.
OTHER SIGNIFICANT ACCOUNTING POLICIES
The Corporation has other significant accounting policies that do not involve
the same degree of measurement uncertainty as those discussed above, that are
nevertheless important to an understanding of the financial statements. These
significant accounting policies are disclosed in note 2 of the notes to the
audited consolidated financial statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development, and/or normal use
of the assets. The Company also records a corresponding asset which is
depreciated over the life of the asset. Subsequent to the initial measurement
of the asset retirement obligation, the obligation will be adjusted at the end
of each period to reflect the passage of time and changes in the estimated
future cash flows underlying the obligation. The Company is required to adopt
SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected
to have a material effect on the Company's financial statements.
Page 30
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 amends existing guidance on reporting gains and losses on the
extinguishment of debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to
require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
statement related to the rescission of SFAS No. 4 are applied in fiscal years
beginning after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of the statement related to SFAS No. 13 were
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 is not expected to have a material
effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity.
The provisions of this statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS No. 146 is not expected to have a material effect on the
Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107
and a rescission of FASB Interpretation No. 34. This interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. The
interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
financial statements. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002. The adoption of SFAS No. 148 is
not expected to apply on the Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This
interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the interpretation. The interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For public enterprises with a variable
interest in a variable interest entity created before February 1, 2003, the
interpretation applies to that enterprise no later than the beginning of the
first interim or annual reporting period beginning after June 15, 2003. The
application of this interpretation is not expected to have a material effect on
the Company's financial statements. The interpretation requires certain
disclosures in financial statements issued after January 31, 2003 if it is
reasonably possible that the Company will consolidate or disclose information
about variable interest entities when the interpretation becomes effective.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Corporation is exposed to certain market risks that are inherent in the
Corporation's financial instruments, which arise from transactions entered into
in the normal course of business. The Corporation does not enter into
derivative financial instrument transactions to manage or reduce market risk or
for speculative purposes, but is subject to market risk on certain of its
financial instruments. The Corporation must effectively manage, measure, and
monitor the market risk associated with its invested assets and interest rate
sensitive liabilities. It has established and implemented comprehensive
policies and procedures to minimize the effects of potential market volatility.
MARKET RISK EXPOSURE
The Corporation has exposure to market risk mostly in its investment
activities. For purposes of this disclosure, "market risk" is defined as the
risk of loss resulting from changes in interest rates and equity prices.
Analytical tools and monitoring systems are in place to assess each one of the
elements of market risks.
Page 31
As in other insurance companies, investment activities are an integral part of
the Corporation's business. Insurance statutes regulate the type of investments
that the insurance segments are permitted to make and limit the amount of funds
that may be invested in some types of securities. Due to these statutes and
regulations as well as due to business and investment strategies, the
Corporation has a well-diversified investment portfolio with good asset quality
and a large portion invested in investment-grade, fixed income securities.
The Corporation's investment philosophy is to maintain a largely
investment-grade fixed income portfolio, provide adequate liquidity for
expected liability durations and other requirements, and maximize total return
through active investment management.
The Corporation evaluates the interest rates risk of its assets and liabilities
regularly, as well as the appropriateness of investments relative to its
internal investment guidelines. The Corporation operates within these
guidelines by maintaining a well-diversified portfolio, both across and within
asset classes. Investment decisions are centrally managed by investment
professionals based on the guidelines established by management. The
Corporation has a Finance Committee, composed of members of the Board of
Directors, which monitors and approves investment policies and procedures. The
investment portfolio is managed following those policies and procedures.
The Corporation's investment portfolio is predominantly held in U.S. treasury
securities, obligations of U.S. government instrumentalities, obligations of
state and political subdivisions, and obligations of the Commonwealth of Puerto
Rico and its instrumentalities, which comprise approximately 70% of the total
portfolio value in the year 2002. Of this 70% of total portfolio value,
approximately 23% is composed of U. S. agency-backed mortgage backed securities
and collateralized mortgage obligations. The remaining balance of the
investment portfolio consists of an equity securities portfolio that replicates
the S&P 500 Index, a corporate bonds portfolio and investments in strong local
stocks from well-known financial institutions. The Corporation has a large
single issuer equity concentration in Popular, Inc., which is the holding
company of the largest local commercial bank in Puerto Rico. As of December 31,
2002, the carrying value of the Corporation's investment in Popular, Inc.
amounted to $31.6 million, which represents 6.7% of total investments and 13.7%
of stockholders' equity.
The Corporation measures market risk related to its holdings of invested assets
and other financial instruments utilizing a sensitivity analysis. This analysis
estimates the potential changes in fair value of the instruments subject to
market risk. The sensitivity analysis was performed separately for each of the
Corporation's market risk exposures related to its trading and other than
trading portfolios. This sensitivity analysis is an estimate and should not be
viewed as predictive of the Corporation's future financial performance. The
Corporation cannot assure that its actual losses in any particular year will
not exceed the amounts indicated in the following paragraphs. Limitations
related to this sensitivity analysis include:
- The market risk information is limited by the assumptions and
parameters established in creating the related sensitivity
analysis, including the impact of prepayment rates on
mortgages;
- The model assumes that the composition of assets and
liabilities remains unchanged throughout the year.
Accordingly, the Corporation uses such models as tools and not as a substitute
for the experience and judgment of its management and Board of Directors.
INTEREST RATE RISK
The Corporation's exposure to interest rate changes results from its
significant holdings of fixed maturities. Fixed maturities include U.S. and
Puerto Rico government bonds, securities issued by government agencies,
corporate bonds and mortgage-backed securities. Investments subject to interest
rates risk are located within the Corporation's trading and other than trading
portfolios. The Corporation is also exposed to interest rate risk from its two
variable interest credit agreements and from its individual retirement
accounts.
EQUITY PRICE RISK
The Corporation's investments in equity securities expose it to equity price
risks, for which potential losses could arise from adverse changes in the value
of equity securities. Financial instruments subject to equity prices risk are
located within the Corporation's trading and other than trading portfolios.
Page 32
RISK MEASUREMENT
TRADING PORTFOLIO
The Corporation's trading securities are a source of market risk. As of
December 31, 2002, the Corporation's trading portfolio is composed of
investments in publicly traded common stock (approximately 47% of total
portfolio value) and investments in corporate bonds (approximately 51% of total
portfolio value). The remaining balance of the trading portfolio is comprised
of U.S. Treasury securities and obligations of U.S. government
instrumentalities. The securities in the trading portfolio are high quality,
diversified across industries and readily marketable. Trading securities are
recorded at fair value; changes in the fair value of these securities are
included in operations. The fair value of the investments in trading securities
is exposed to both interest rate risk and equity price risk.
(1) Interest Rate Risk - The Corporation has evaluated the net
impact to the fair value of its fixed income investments
using a combination of both statistical and fundamental
methodologies. From these shocked values, a resultant market
price appreciation/depreciation can be determined after
portfolio cash flows are modeled and evaluated over an
instantaneous 100, 200 and 300 basis points (bp) rate shifts.
Techniques used in the evaluation of cash flows include Monte
Carlo simulation through a series of probability
distributions over 200 interest rate paths. Necessary
prepayment speeds are compiled using Salomon Brothers Yield
Book, which sources numerous factors in deriving speeds,
including but not limited to: historical speeds, economic
indicators, street consensus speeds, etc. Securities
evaluated under the aforementioned scenarios include mostly
private label structures, provided that cash flows
information is available. The following table sets forth the
result of this analysis for the years ended December 31, 2002
and 2001.
(Dollar amounts in thousands)
EXPECTED AMOUNT OF %
CHANGE IN INTEREST RATES FAIR VALUE DECREASE CHANGE
- ------------------------ ---------- -------- ------
DECEMBER 31, 2002:
Base Scenario $49,693
+100 bp $46,941 (2,752) (5.54)%
+200 bp $44,428 (5,265) (10.60)%
+300 bp $42,122 (7,571) (15.24)%
DECEMBER 31, 2001:
Base Scenario $38,431
+100 bp $36,478 (1,953) (5.08)%
+200 bp $34,701 (3,730) (9.71)%
+300 bp $33,078 (5,353) (13.93)%
The Corporation believes that an interest rate shift in a
12-month period of 100 bp represents a moderately adverse
outcome, while a 200 bp shift is significantly adverse and a
300 bp shift is unlikely given historical precedents.
(2) Equity Price Risk - The Corporation's equity securities in
the trading portfolio are comprised primarily of publicly
traded common stock. Assuming an immediate decrease of 10% in
the market value of these securities as of December 31, 2002
and 2001, the hypothetical loss in the fair value of these
investments is estimated to be approximately $4.5 million and
$5.1 million, respectively.
OTHER THAN TRADING PORTFOLIO
The Corporation's available-for-sale and held-to-maturity securities are also a
source of market risk. As of December 31, 2002 approximately 87% and 100% of
the Corporation's investments in available-for-sale and held-to-maturity
securities, respectively, consisted of fixed income securities. The remaining
balance of the available-for-sale portfolio is comprised of equity securities.
Available-for-sale securities are recorded at fair value, changes in the market
value of these securities, net of the related tax effect, are excluded from
operations and are reported as a separate component of other comprehensive
income (loss) until realized. Held-to-maturity securities are recorded at
amortized cost, adjusted for the amortization, or accretion of premiums or
discounts. The fair value of the investments in the other than trading
portfolio is exposed to both interest rate risk and equity price risk.
Page 33
(1) Interest Rate Risk - The Corporation has evaluated the net
impact to the fair value of its fixed income investments
using a combination of both statistical and fundamental
methodologies. From these shocked values a resultant market
price appreciation/depreciation can be determined after
portfolio cash flows are modeled and evaluated over an
instantaneous 100, 200 and 300 bp rate shifts. Techniques
used in the evaluation of cash flows include Monte Carlo
simulation through a series of probability distributions over
200 interest rate paths. Necessary prepayment speeds are
compiled using Salomon Brothers Yield Book, which sources
numerous factors in deriving speeds, including but not
limited to: historical speeds, economic indicators, street
consensus speeds, etc. Securities evaluated under the
aforementioned scenarios include, as it relates to the
Corporation, mortgage pass-through certificates and
collateralized mortgage obligations of U.S. agencies, and
private label structures, provided that cash flows
information is available. The following table sets forth the
result of this analysis for the years ended December 31, 2002
and 2001.
(Dollar amounts in thousands)
EXPECTED AMOUNT OF %
CHANGE IN INTEREST RATES FAIR VALUE DECREASE CHANGE
- ------------------------ ---------- -------- ------
DECEMBER 31, 2002:
Base Scenario $348,467
+100 bp $336,628 (11,839) (3.40)%
+200 bp $325,671 (22,796) (6.54)%
+300 bp $313,400 (35,067) (10.06)%
DECEMBER 31, 2001:
Base Scenario $290,043
+100 bp $278,413 (11,630) (4.01)%
+200 bp $267,725 (22,318) (7.69)%
+300 bp $257,182 (32,861) (11.33)%
The Corporation believes that an interest rate shift in a
12-month period of 100 bp represents a moderately adverse
outcome, while a 200 bp shift is significantly adverse and a
300 bp shift is unlikely given historical precedents.
Although the Corporation classifies 88% of its fixed income
securities as available-for-sale, the Corporation's cash
flows and the intermediate duration of its investment
portfolio should allow it to hold securities until their
maturity, thereby avoiding the recognition of losses, should
interest rates rise significantly.
The Corporation is subject to interest rate risk on its two
credit agreements with a commercial bank and on its
individual retirement accounts (IRA). Shifting interest rates
do not have a material effect on the fair value of these
instruments. The two credit agreements have a variable
interest rate structure, which reduces the potential exposure
to interest rate risk. The IRA accounts have short-term
interest rate guarantee which also reduces the accounts'
exposure to interest rate risk.
The Corporation a has interest-rate related derivative
instrument to manage the variability caused by interest rate
changes in the cash flows of its credit agreements. The
Corporation does not enter into derivative instruments for
any purpose other than cash flow hedging purposes. That is,
the Corporation does not speculate using derivative
instruments. To meet this objective, on December 6, 2002
management entered into an interest rate swap agreement to
manage fluctuations in cash flows resulting from interest
rate risk. This swap changes the variable-rate cash flow
exposure on the debt obligations to fixed-rate cash flows.
The Corporation assesses interest rate cash flow risk by
continually identifying and monitoring changes in interest
rate exposures that may adversely impact expected future cash
flows and by evaluating hedging opportunities. The
Corporation maintains risk management control systems to
monitor interest rate cash flow risk attributable to both the
Corporation's outstanding or forecasted debt obligations as
well as the Corporation's offsetting hedge positions. The
risk management control systems involve the use of analytical
techniques, to estimate the expected impact of changes in
interest rates on the Corporation's future cash flows.
Page 34
As of December 31, 2002, $682 thousand of deferred loss on the
derivative instrument was included within the accounts payable
and accrued liabilities in the consolidated balance sheets.
Assuming an immediate decrease of 10% period end rates, the
hypothetical loss in the fair value of the derivative
instrument is estimated to be approximately $68 thousand. No
derivative instrument was held by the Corporation as of
December 31, 2001.
(2) Equity Price Risk - The Corporation's equity securities in
the available-for-sale portfolio are comprised primarily of
stock of several Puerto Rico financial institutions. Assuming
an immediate decrease of 10% in the market value of these
securities as of December 31, 2002 and 2001, the hypothetical
loss in the fair value of these investments is estimated to
be approximately $4.7 million and $3.8 million, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
FINANCIAL STATEMENTS
For the consolidated financial statements as of December 31, 2002, 2001 and
2000, see Index to financial statements in "Item 15. Exhibits, Financial
Statement Schedules, and Reports on Form 8-K" to this Form 10-K.
SELECTED QUARTERLY FINANCIAL DATA
(Dollar amounts in thousands,
except per share data MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
--------- ------- ------------ ----------- ---------
2002
STATEMENT OF OPERATIONS DATA
Premiums earned, net $ 309,842 308,478 304,586 307,765 1,230,671
Amounts attributable to claims under
self-funded arrangements 34,838 37,427 38,524 39,895 150,684
Less amounts attributable to claims under
self-funded arrangements (32,458) (36,379) (35,210) (37,091) (141,138)
--------- ------- ------- ------- ---------
Premiums earned, net and fee revenue 312,222 309,526 307,900 310,569 1,240,217
--------- ------- ------- ------- ---------
Net investment income 5,990 6,359 6,186 6,243 24,778
Net realized investment gains (losses) (156) 6 683 (348) 185
Net unrealized investment gain (loss)
on trading securities 285 (5,662) (6,695) 3,750 (8,322)
Other income, net 213 211 6,174 1,453 8,051
--------- ------- ------- ------- ---------
Total revenue $ 318,554 310,440 314,248 321,667 1,264,909
========= ======= ======= ======= =========
Net income $ 6,451 9,267 13,949 18,582 48,249
========= ======= ======= ======= =========
Basic earnings per share (1):
If the Corporation operated as a for-profit
organization $ 575 795 890 1,506 3,766
--------- ------- ------- ------- ---------
If TSI operated as a not-for-profit
organization $ 287 304 187 307 1,085
========= ======= ======= ======= =========
Page 35
(Dollar amounts in thousands,
except per share data MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
--------- ------- ------------ ----------- ---------
2001
STATEMENT OF OPERATIONS DATA
Premiums earned, net $ 278,464 275,902 288,760 308,047 1,151,173
Amounts attributable to claims under
self-funded arrangements 33,303 33,034 30,862 37,175 134,374
Less amounts attributable to claims under
self-funded arrangements (32,187) (30,821) (30,404) (32,883) (126,295)
--------- ------- ------- ------- ---------
Premiums earned, net and fee revenue 279,580 278,115 289,218 312,339 1,159,252
--------- ------- ------- ------- ---------
Net investment income 6,198 6,362 6,345 6,500 25,405
Net realized investment gains (losses) 809 1,571 2,995 (720) 4,655
Net unrealized investment gain (loss)
on trading securities (2,286) (838) (6,152) 5,651 (3,625)
Other income, net 48 4,484 26 151 4,709
--------- ------- ------- ------- ---------
Total revenue $ 284,349 289,694 292,432 323,921 1,190,396
========= ======= ======= ======= =========
Net income $ 4,166 5,555 2,557 9,437 21,715
========= ======= ======= ======= =========
Basic earnings per share (1):
If the Corporation operated as a for-profit
organization $ 334 398 255 558 1,545
--------- ------- ------- ------- ---------
If TSI operated as a not-for-profit
organization $ 268 274 252 258 1,052
========= ======= ======= ======= =========
(1) Further details on the calculation of basic earnings per share are set
forth in notes 2 and 22 to the audited consolidated financial
statements for the years ended December 31, 2002, 2001 and 2000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This information is incorporated by reference to the section "Proposals of the
Board of Directors" included in the Corporation's definitive Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
This information is incorporated by reference to the section "Executive
Compensation" included in the Corporation's definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
This information is incorporated by reference to the section "Principal Holders
of the Shares" included in the Corporation's definitive Proxy Statement.
Page 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information is incorporated by reference to the section "Certain
Relationships and Related Transactions" included in the Corporation's
definitive Proxy Statement.
ITEM 14. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this annual report, the
Corporation's Chief Executive Officer and Chief Financial Officer, with the
participation of management, have conducted an evaluation of the effectiveness
of disclosure controls and procedures pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be disclosed by the Corporation in reports filed under
the Exchange Act have been made known to them in a timely fashion.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Corporation's disclosure controls and
procedures, or in factors that could significantly affect internal controls,
subsequent to the date the Chief Executive Officer and Chief Financial Officer
completed the evaluation referred to above.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS AND SCHEDULES
FINANCIAL STATEMENTS DESCRIPTION
-------------------- -----------
F-1 Independent Auditors' Report
F-2 Consolidated Balance Sheets as of December 31, 2002 and 2001
F-3 Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000
F-4 Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the years ended December 31, 2002, 2001 and 2000
F-5 Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
F-7 Notes to Consolidated Financial Statements - December 31, 2002, 2001
and 2000
FINANCIAL STATEMENTS
SCHEDULES DESCRIPTION
-------------------- -----------
S-1 Schedule II - Condensed Financial Information of the Registrant
S-2 Schedule III - Supplementary Insurance Information
S-3 Schedule IV - Reinsurance
S-4 Schedule V - Valuation and Qualifying Accounts
Schedule I - Summary of Investments was omitted because the information is
disclosed in the notes to the consolidated financial statements. Schedule VI -
Supplemental Information Concerning Property Casualty Insurance Operations was
omitted because the schedule is not applicable to the Corporation.
REPORTS ON FORM 8-K
The Corporation filed with the Securities and Exchange Commission the following
Current Reports on Form 8-K:
- Form 8-K dated January 9, 2003, to reschedule the date to
reconvene and continue the Special Meeting commenced on
October 13, 2002 from February 9, 2003 to February 23, 2003.
- Form 8-K dated February 23, 2003, to report the issuance of a
press release announcing that 98.4% of the shares present and
represented at the continuation of the Special Meeting
commenced October 13, 2002, held on February 23, 2003 (the
"Special Meeting"), voted in favor of continuing the meeting
at a later date. This was necessary since only 69% of total
shares outstanding were represented at the Special Meeting
and 75% or more was required in order to take a vote to
implement the proposals to amend TSM's capital structure.
These proposals were approved by shareholders in the Annual
Shareholders Meeting held in April 2001.
Page 37
Exhibits
Exhibits Description
3(i) Articles of Incorporation of Triple-S Management Corporation
as amended (English Translation) (incorporated hereto by
reference to Exhibit 3(i) to TSM's Form 10-Q for the Quarter
Ended June 30, 2002 (File No. 0-49762).
3(ii) By-Laws of Triple-S Management Corporation as amended (English
Translation) (incorporated hereto by reference to Exhibit
3(ii) to TSM's Form 10-Q for the Quarter Ended June 30, 2002
(File No. 0-49762).
10.1 Puerto Rico Health Insurance Contract for the Metro-North
Region (incorporated hereto by reference to Exhibit 10.1 to
TSM's Form 10-Q for the Quarter Ended June 30, 2002 (File No.
0-49762).
10.2 Puerto Rico Health Insurance Contract for the North Region
(incorporated hereto by reference to Exhibit 10.2 to TSM's
Form 10-Q for the Quarter Ended June 30, 2002 (File No.
0-49762).
10.3 Puerto Rico Health Insurance Contract for the South-West
Region (incorporated hereto by reference to Exhibit
10.3 to TSM's Form 10-Q for the Quarter Ended June 30, 2002
(File No. 0-49762).
10.4 Employment Contract with Mr. Ramon Ruiz Comas, CPA
(incorporated hereto by reference to Exhibit 10.4 to TSM's
Form 10-Q for the Quarter Ended June 30, 2002 (File No.
0-49762).
10.5 Employment Contract with Ms. Socorro Rivas, CPA (incorporated
hereto by reference to Exhibit 10.5 to TSM's Form 10-Q for the
Quarter Ended June 30, 2002 (File No. 0-49762).
10.6 Employment Contract with Dr. Alejandro Franco CPA
(incorporated hereto by reference to Exhibit 10.9 to TSM'
General Form of Registration of Securities on Form 10 (File
No. 0-49762).
10.7 Federal Employees Health Benefits Contract (incorporated
hereto by reference to Exhibit 10.5 to TSM' General Form of
Registration of Securities on Form 10 (File No. 0-49762).
10.8 Credit Agreement with FirstBank Puerto Rico in the amount of
$41,000,000 (incorporated hereto by reference to Exhibit 10.6
to TSM' General Form of Registration of Securities on Form 10
(File No. 0-49762).
10.9 Credit Agreement with FirstBank Puerto Rico in the amount of
$20,000,000 (incorporated hereto by reference to Exhibit 10.7
to TSM' General Form of Registration of Securities on Form 10
(File No. 0-49762).
10.10 Non-Contributory Retirement Program (incorporated hereto by
reference to Exhibit 10.8 to TSM' General Form of Registration
of Securities on Form 10 (File No. 0-49762).
10.11 License and other Agreements with Blue Shield (incorporated
hereto by reference to Exhibit 10.10 to TSM' General Form of
Registration of Securities on Form 10 (File No. 0-49762).
11.1 Statement re computation of per share earnings; an exhibit
describing the computation of the earnings per share for the
years ended December 31, 2002, 2001 and 2000 has been omitted
as the detail necessary to determine the computation of
earnings per share can be clearly determined from the notes to
the consolidated financial statements.
12.1 Statement re computation of ratios; an exhibit describing the
computation of the loss ratio, expense ratio and combined
ratio for the years ended December 31, 2002, 2001 and 2000 has
been omitted as the detail necessary to determine the
computation of earnings per share can be clearly determined
from the material contained in Part II of this Form 10-K.
13.1 Triple-S Management Corporation Annual Report to Shareholders
for the year ended December 31, 2002.
13.2 List of Exhibits to Annual Report to Shareholders for the year
ended December 31, 2002.
23.1 List of Subsidiaries of the Corporation (incorporated hereto
by reference to Exhibit 21 to TSM' General Form of
Registration of Securities on Form 10 (File No. 0-49762).
99.1 Triple-S Management Corporation's Proxy Statement for the
April 27, 2003 Annual Meeting of Shareholders (incorporated
hereto by reference to the Definitive Proxy Statement on
Schedule 14A filed March 28, 2003).
38
All other exhibits for which provision is made in the applicable accounting
regulation of the United States Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRIPLE-S MANAGEMENT CORPORATION
Registrant
By: /s/ Ramon M. Ruiz-Comas Date: March 31, 2003
-------------------------------------
Ramon M. Ruiz-Comas
President and Chief Executive Officer
By: /s/ Juan J. Roman Date: March 31, 2003
-------------------------------------
Juan J. Roman
Vice President of Finance
(Principal Financial Officer)
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Fernando Ysern-Borras Date: March 31, 2003
----------------------------------
Dr. Fernando Ysern-Borras
Director and Chairman of the Board
39
By: /s/ Dr. Wilmer Rodriguez-Silva Date: March 31, 2003
---------------------------------------------
Dr. Wilmer Rodriguez-Silva
Director and Vice-Chairman of the Board
By: /s/ Jesus R. Sanchez-Colon Date: March 31, 2003
---------------------------------------------
Dr. Jesus R. Sanchez-Colon
Director and Secretary of the Board
By: /s/ Arturo Cordova-Lopez Date: March 31, 2003
---------------------------------------------
Dr. Arturo Cordova-Lopez
Director and Assistant Secretary of the Board
By: /s/ Vicente J. Leon-Irizarry Date: March 31, 2003
---------------------------------------------
Mr. Vicente J. Leon-Irizarry, CPA
Director and Treasurer of the Board
By: /s/ Sonia Gomez de Torres Date: March 31, 2003
---------------------------------------------
Ms. Sonia Gomez de Torres, CPA
Director and Assistant Treasurer of the Board
By: /s/ Valeriano Alicea-Cruz Date: March 31, 2003
---------------------------------------------
Dr. Valeriano Alicea-Cruz
Director
By: /s/ Porfirio E. Diaz-Torres Date: March 31, 2003
---------------------------------------------
Dr. Porfirio E. Diaz-Torres
Director
By: /s/ Mario S. Belaval Date: March 31, 2003
---------------------------------------------
Mr. Mario S. Belaval
Director
By: /s/ Jose Davison-Lampon Date: March 31, 2003
---------------------------------------------
Mr. Jose Davison-Lampon, Esq.
Director
By: /s/ Jose Arturo Alvarez-Gallardo Date: March 31, 2003
---------------------------------------------
Mr. Jose Arturo Alvarez-Gallardo
Director
By: /s/ Juan Jose Leon-Soto Date: March 31, 2003
---------------------------------------------
Mr. Juan Jose Leon-Soto, Esq.
Director
By: /s/ Hector Ledesma Date: March 31, 2003
---------------------------------------------
Mr. Hector Ledesma
Director
40
By: /s/ Fernando L. Longo Date: March 31, 2003
---------------------------------------------
Dr. Fernando L. Longo
Director
By: /s/ Manuel A. Marcial-Seoane Date: March 31, 2003
---------------------------------------------
Dr. Wilfredo Lopez-Hernandez
Director
By: /s/ Manuel A. Marcial-Seoane Date: March 31, 2003
---------------------------------------------
Dr. Manuel A. Marcial-Seoane
Director
By: /s/ Adamina Soto-Martinez Date: March 31, 2003
---------------------------------------------
Ms. Adamina Soto-Martinez, CPA
Director
By: /s/ Manuel Suarez-Mendez, Date: March 31, 2003
---------------------------------------------
Mr. Manuel Suarez-Mendez, P.E.
Director
41
CERTIFICATION
I, Ramon M. Ruiz-Comas, certify that:
1. I have reviewed this annual report on Form 10-K of Triple-S Management
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and c) Presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 31, 2003 By: /s/ Ramon M. Ruiz-Comas
-------------- --------------------------
Ramon M. Ruiz-Comas
President and
Chief Executive Officer
42
CERTIFICATION
I, Juan J. Roman, certify that:
1. I have reviewed this annual report on Form 10-K of Triple-S Management
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003 By: /s/ Juan J. Roman
-------------- --------------------------
Juan J. Roman
Vice President of Finance
and Chief Financial Officer
43
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(With Independent Auditors' Report Thereon)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity and Comprehensive Income F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Triple-S Management Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Triple-S
Management Corporation and Subsidiaries (the Company) as of December 31, 2002
and 2001, and the related consolidated statements of operations, stockholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Triple-S Management
Corporation and Subsidiaries at December 31, 2002 and 2001, and the results of
its operations and its cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
San Juan, Puerto Rico
February 14, 2003, except for note 24
as to which date is March 1, 2003
Stamp No. 1828159 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
F-1
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
(Dollar amounts in thousands)
2002 2001
-------- -------
ASSETS
Investments and cash:
Securities held for trading, at fair value:
Fixed maturities (amortized cost of $47,487 in 2002 and
$37,313 in 2001) $ 50,317 38,107
Equity securities (amortized cost of $51,859 in 2002 and
$47,623 in 2001) 44,621 50,743
Securities available for sale, at fair value:
Fixed maturities (amortized cost of $315,478 in 2002 and
$281,833 in 2001) 321,244 286,505
Equity securities (amortized cost of $25,239 in 2002 and
$20,857 in 2001) 47,406 37,829
Securities held to maturity, at amortized cost:
Fixed maturities (fair value of $5,976 in 2002 and $3,723 in 2001) 5,982 3,779
Cash and cash equivalents 82,776 80,970
-------- -------
Total investments and cash 552,346 497,933
Premiums and other receivables, net 88,027 74,872
Deferred policy acquisition costs 13,770 9,550
Property and equipment, net 36,721 39,090
Other assets 34,814 34,360
-------- -------
Total assets $725,678 655,805
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Claim liabilities:
Claims processed and incomplete $127,628 114,599
Unreported losses 103,310 103,240
Unpaid loss-adjustment expenses 13,644 11,601
-------- -------
Total claim liabilities 244,582 229,440
Unearned premiums 70,961 58,306
Individual retirement annuities 15,143 17,426
Liability to Federal Employees Health Benefits Program 7,066 12,130
Accounts payable 11,682 9,120
Accrued liabilities 77,068 80,340
Additional minimum pension liability 9,449 --
Net deferred tax liability 8,048 7,365
Loans payable to bank 50,015 55,650
-------- -------
Total liabilities 494,014 469,777
-------- -------
Stockholders' equity:
Common stock, $40 par value. Authorized 12,500 shares;
issued and outstanding 9,337 and 9,714 at December 31, 2002 and
2001, respectively 373 389
Additional paid-in capital 150,406 150,405
Operating reserve 62,499 14,250
Accumulated other comprehensive income 18,386 20,984
-------- -------
231,664 186,028
Commitments and contingencies
-------- -------
Total liabilities and stockholders' equity $725,678 655,805
======== =======
See accompanying notes to consolidated financial statements.
F-2
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
2002 2001 2000
----------- --------- ---------
Revenue:
Premiums earned, net $ 1,230,671 1,151,173 1,088,163
Amounts attributable to self-funded
arrangements 150,684 134,374 117,542
Less amounts attributable to claims under
self-funded arrangements (141,138) (126,295) (113,248)
----------- --------- ---------
1,240,217 1,159,252 1,092,457
Net investment income 24,778 25,405 24,338
Net realized investment gains 185 4,655 6,377
Net unrealized investment loss on trading securities (8,322) (3,625) (3,737)
Other income, net 8,051 4,709 7,552
----------- --------- ---------
Total revenue 1,264,909 1,190,396 1,126,987
----------- --------- ---------
Benefits and expenses:
Claims incurred 1,061,980 1,021,024 990,133
Operating expenses, net of reimbursement
for services 148,539 140,830 130,135
Interest expense 3,592 5,485 7,055
----------- --------- ---------
Total benefits and expenses 1,214,111 1,167,339 1,127,323
----------- --------- ---------
Income (loss) before taxes 50,798 23,057 (336)
----------- --------- ---------
Income tax expense:
Current 1,316 518 463
Deferred 1,233 824 713
----------- --------- ---------
Total income taxes 2,549 1,342 1,176
----------- --------- ---------
Net income (loss) $ 48,249 21,715 (1,512)
=========== ========= =========
Net income (loss) available to stockholders and basic net
income (loss) per share as if the Company operated
as a for-profit organization (note 22):
Net income (loss) available to stockholders $ 35,898 15,242 (695)
=========== ========= =========
Basic net income (loss) per share $ 3,766 1,545 (70)
=========== ========= =========
Net income available to stockholders and basic
net income per share as if Triple-S, Inc. operated
as a not-for-profit organization (note 22):
Net income available to stockholders
after excluding the net result of
operations of Triple-S, Inc. $ 10,346 10,376 9,192
=========== ========= =========
Basic net income per share after excluding
the net results of operations of
Triple-S, Inc. $ 1,085 1,052 929
=========== ========= =========
See accompanying notes to consolidated financial statements.
F-3
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
and Comprehensive Income
Years ended December 31, 2002, 2001, and 2000
(Dollar amounts in thousands)
ACCUMULATED
ADDITIONAL OPERATING OTHER TOTAL
COMMON PAID-IN RESERVE COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) INCOME EQUITY
------ ---------- --------- ------------- -------------
Balance, December 31, 1999 $ 459 150,403 (5,953) 14,338 159,247
Stock redemption (64) -- -- -- (64)
Comprehensive income:
Net loss -- -- (1,512) -- (1,512)
Net unrealized change in investment securities -- -- -- 2,022 2,022
-------
Total comprehensive income -- -- -- -- 510
----- ------- ------ ------ -------
Balance, December 31, 2000 395 150,403 (7,465) 16,360 159,693
Stock redemption (6) 2 -- -- (4)
Comprehensive income:
Net income -- -- 21,715 -- 21,715
Net unrealized change in investment securities -- -- -- 4,624 4,624
-------
Total comprehensive income -- -- -- -- 26,339
----- ------- ------ ------ -------
Balance, December 31, 2001 389 150,405 14,250 20,984 186,028
Stock redemption (16) 1 -- -- (15)
Comprehensive income:
Net income -- -- 48,249 -- 48,249
Net unrealized change in investment securities -- -- -- 5,986 5,986
Net change in minimum pension liability -- -- -- (8,114) (8,114)
Net change in fair value of cash flow hedges -- -- -- (470) (470)
-------
Total comprehensive income -- -- -- -- 45,651
----- ------- ------ ------ -------
Balance, December 31, 2002 $ 373 150,406 62,499 18,386 231,664
===== ======= ====== ====== =======
See accompanying notes to consolidated financial statements.
F-4
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001, and 2000
(Dollar amounts in thousands)
2002 2001 2000
----------- --------- ---------
Cash flows from operating activities:
Premiums collected $ 1,232,209 1,157,527 1,091,630
Cash paid to suppliers and employees (151,598) (144,399) (128,546)
Claim losses and benefits paid (1,046,838) (974,815) (987,073)
Interest received 23,069 23,109 22,003
Proceeds from trading securities sold or
matured:
Fixed maturities sold 103,012 22,620 22,077
Equity securities 11,804 15,982 16,960
Acquisition of investments in trading portfolio:
Fixed maturities (112,879) (25,420) (23,847)
Equity securities (16,471) (18,196) (17,347)
Interest paid (4,220) (4,773) (7,153)
Expense reimbursement from Medicare 12,743 13,575 10,778
Contingency reserve funds from FEHBP 5,976 4,226 7,962
----------- --------- ---------
Net cash provided by
operating activities 56,807 69,436 7,444
----------- --------- ---------
Cash flows from investing activities:
Proceeds from investments sold or matured:
Securities available for sale:
Fixed maturities sold 64,465 21,997 29,307
Fixed maturities matured 173,853 128,495 11,000
Equity securities 3,681 7,657 3,290
Securities held to maturity:
Fixed maturities matured 1,458 25 --
Acquisition of investments:
Securities available for sale:
Fixed maturities (270,104) (174,709) (47,468)
Equity securities (7,991) (571) (969)
Securities held to maturity:
Fixed maturities (3,621) (1,676) --
Capital expenditures (6,601) (6,054) (2,689)
Proceeds from sale of property and equipment 1,376 -- 111
----------- --------- ---------
Net cash used in investing activities $ (43,484) (24,836) (7,418)
----------- --------- ---------
(Continued)
F-5
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Years ended December 31, 2002, 2001, and 2000
(Dollar amounts in thousands)
2002 2001 2000
-------- ------ ------
Cash flows from financing activities:
Change in outstanding checks in excess of
bank balances $ (4,416) 5,820 8,578
Payments of long-term debt (5,635) (2,390) (2,277)
Redemption of common stock (15) (4) (64)
Proceeds from individual retirement annuities 2,809 1,638 2,241
Surrenders of individual retirement annuities (4,260) (2,260) (3,235)
-------- ------ ------
Net cash (used in) provided by
financing activities (11,517) 2,804 5,243
-------- ------ ------
Net increase in cash
and cash equivalents 1,806 47,404 5,269
Cash and cash equivalents, beginning of year 80,970 33,566 28,297
-------- ------ ------
Cash and cash equivalents, end of year $ 82,776 80,970 33,566
======== ====== ======
See accompanying notes to consolidated financial statements.
F-6
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
(1) NATURE OF BUSINESS
Triple-S Management Corporation (the Company or TSM) was incorporated
under the laws of the Commonwealth of Puerto Rico on January 17, 1997 to
engage principally, among other things, as the holding company of
entities primarily involved in the insurance industry. The Company was a
wholly owned subsidiary of Triple-S, Inc. (TSI) until January 4, 1999,
date in which it commenced operations, which is the effective date and
completion of a corporate reorganization.
On December 6, 1996 the Commissioner of Insurance of the Commonwealth of
Puerto Rico (the Commissioner of Insurance) issued an order to annul the
sale of 1,582 shares of common stock held as treasury stock that TSI
repurchased from the estate of deceased stockholders. TSI contested such
order through administrative and judicial review processes. Consequently,
the sale of 1,582 shares was cancelled and the amount paid was returned
to each former stockholder of the aforementioned shares. During the year
2000, the Commissioner of Insurance issued a pronouncement providing
further clarification to the content and effect of the order. The order
also required that all corporate decisions undertaken by TSI through the
vote of its stockholders in record, be ratified in a stockholders'
meeting or in a subsequent referendum. In November 2000, the Company, as
the sole stockholder of TSI, ratified all such decisions. Furthermore, on
November 19, 2000 the Company held a special meeting of its stockholders
where a ratification of the same decisions was undertaken, except for the
resolutions related to the approval of the corporate reorganization of
TSI and its subsidiaries. This resolution did not reach the two-thirds
majority required by the order because the number of shares that were
present and represented in the meeting were below such amount (total
shares present and represented in the stockholders' meeting were 64%). As
stipulated in the order, the Company began the process to conduct a
referendum among its stockholders to ratify such resolution. The process
was later suspended because upon a further review of the scope of the
order, the Commissioner of Insurance upon a letter dated January 8, 2002,
maintained that the ratification of the corporate reorganization may not
be required.
The Commissioner of Insurance confirmed this position in a letter dated
March 14, 2002 to TSI, which states that there are no further corporate
decisions requiring ratification and that the Commissioner's order of
December 6, 1996 has been complied with. Thereafter, two stockholders of
TSM filed a petition for review of the Commissioner's determination
before the Puerto Rico Circuit Court of Appeals, which petition was
opposed by TSI and by the Commissioner of Insurance. Pursuant to that
review, on September 24, 2002, the Puerto Rico Circuit Court of Appeals
issued an order requiring the Commissioner of Insurance to order that a
meeting of shareholders be held to ratify TSI's corporate reorganization
and the change of TSI's name from "Seguros de Servicios de Salud de
Puerto Rico, Inc." to "Triple-S, Inc." The Circuit Court of Appeals based
its decision on administrative and procedural issues directed at the
Commissioner of Insurance. The Commissioner of Insurance filed a motion
of reconsideration with the Circuit Court of Appeals on October 11, 2002.
TSI and TSM also filed a motion of reconsideration. On October 25, 2002
the Circuit Court of Appeals dismissed the Commissioner of Insurance's
motion for reconsideration. This matter is still pending resolution from
the Circuit Court of Appeals. It is the opinion of the management and its
legal counsels that the corporate reorganization as approved is in full
force and effect.
The Company has the following wholly owned subsidiaries that are subject
to the regulations of the Commissioner of Insurance: (1) TSI, which
provides hospitalization and health benefits to subscribers
F-12 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
through contracts with hospitals, physicians, dentists, laboratories, and
other organizations located mainly in Puerto Rico. The Company and TSI
are members of the Blue Cross and Blue Shield Association (BCBSA); (2)
Seguros de Vida Triple-S, Inc. (SVTS), which is engaged in the
underwriting of life insurance policies and the administration of
individual retirement annuities; and (3) Seguros Triple-S, Inc. (STS),
which is engaged in the underwriting of property and casualty insurance
policies.
The Company also has two other wholly owned subsidiaries, Interactive
Systems, Inc. (ISI) and Triple-C, Inc. (TC). ISI is mainly engaged in
providing data processing services to the Company and its subsidiaries.
The Commonwealth of Puerto Rico Health Care Reform's (the Reform)
business was administered through a division of TSI up to September 30,
2001. Effective October 1, 2001 TC commenced operations as part of a
strategic positioning in the health industry to take advantage of new
market opportunities. It will be mainly engaged as a third-party
administrator for TSI in the administration of the Reform. It will also
provide health care advisory services to TSI and other health
insurance-related services to the health insurance industry.
TSI is engaged in three principal underwriting activities which are its
Regular Commercial Plan, the Commonwealth of Puerto Rico Health Reform
Program, and the Federal Employees Health Benefits Program (FEHBP). The
operations of the FEHBP do not result in any excess or deficiency of
revenue or expenses as this program has a special account available to
compensate any excess or deficiency in the operations of this program
(see note 9). TSI also processes and pays claims as fiscal intermediary
for the Medicare - Part B Program in Puerto Rico and is reimbursed for
operating expenses (see note 14). The Medicare claims and expenses are
not reflected in the accompanying consolidated financial statements.
A substantial majority of the Company's business activity is with
insureds located throughout Puerto Rico, and as such, the Company is
subject to the risks associated with the Puerto Rico economy.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following are the significant accounting policies followed by the
Company and its subsidiaries:
(A) BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America (GAAP). These principles
are established primarily by the Financial Accounting Standards
Board (FASB) and the American Institute of Certified Public
Accountants. The preparation of financial statements in conformity
with GAAP requires the Company to make estimates when recording
transactions resulting from business operations, based on
information currently available.
The consolidated financial statements include the financial
statements of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(B) CASH EQUIVALENTS
Cash equivalents of $13,265 and $52,094 at December 31, 2002 and
2001, respectively, consist principally of certificates of
deposit, money market accounts, and U.S. Treasury obligations with
an
F-13 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
initial term of less than three months. For purposes of the
consolidated statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
(C) INVESTMENTS
Investment in securities at December 31, 2002 and 2001 consists
mainly of U.S. Treasury securities and obligations of U.S.
government instrumentalities, obligations of the Commonwealth of
Puerto Rico and its instrumentalities, obligations of state and
political subdivisions, mortgage-backed securities, collateralized
mortgage obligations, corporate debt, and equity securities. The
Company classifies its debt and equity securities in one of three
categories: trading, available for sale, or held to maturity.
Trading securities are bought and held principally for the purpose
of selling them in the near term. Securities classified as held to
maturity are those securities in which the Company has the ability
and intent to hold the security until maturity. All other
securities not included in trading or held to maturity are
classified as available for sale.
Trading and available for sale securities are recorded at fair
value. Held to maturity debt securities are recorded at amortized
cost, adjusted for the amortization or accretion of premiums or
discounts. Unrealized holding gains and losses on trading
securities are included in operations. Unrealized holding gains
and losses, net of the related tax effect, on available for sale
securities are excluded from operations and are reported as a
separate component of other comprehensive income until realized.
Transfers of securities between categories are recorded at fair
value at the date of transfer. Unrealized holding gains and losses
are recognized in operations for transfers into trading
securities. Unrealized holding gains or losses associated with
transfers of securities from held to maturity to available for
sale are recorded as a separate component of other comprehensive
income. The unrealized holding gains or losses included in the
separate component of other comprehensive income for securities
transferred from available for sale to held to maturity, are
maintained and amortized into operations over the remaining life
of the security as an adjustment to yield in a manner consistent
with the amortization or accretion of premium or discount on the
associated security.
Net unrealized gain on investments classified as available for
sale by the Company and its subsidiaries amounted to $27,933 and
$21,644 in 2002 and 2001, respectively, net of deferred tax
liability of $963 and $660 in 2002 and 2001, respectively. No
deferred income tax was recognized for unrealized gains of $21,837
and $17,311 for 2002 and 2001, respectively, on investments
classified as available for sale by TSI due to its tax-exempt
status.
The Company regularly monitors the difference between the costs
and estimated fair value of their investments. A decline in the
estimated fair value of any available for sale or held to maturity
security below cost, which is deemed to be other than temporary,
results in a reduction of the carrying amount to its fair value.
The impairment is charged to operations and a new cost basis for
the security is established. During the year ended December 31,
2002, the Company recognized an other than temporary impairment on
one of its available for sale equity securities amounting to $311.
No impairments were identified nor recognized by the Company
during the years 2001 and 2000.
F-14 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
Premiums and discounts are amortized or accreted over the life of
the related held to maturity or available for sale security as an
adjustment to yield using the effective interest method. Dividend
and interest income are recognized when earned.
Realized gains and losses from the sale of available for sale
securities are included in operations and are determined on a
specific-identification basis.
(D) REVENUE RECOGNITION
Subscriber premiums on health insurance policies are billed in
advance of their respective coverage period and the related
revenue is recorded as earned during the coverage period. The
premiums of TSI and SVTS are billed in the month prior to the
effective date of the policy with a grace period of one month. If
the insured fails to pay, the policy can be canceled at the end of
the grace period at the option of the companies. Certain groups
have health insurance contracts that provide for the group to be
at risk for all or a portion of their claims experience. Most of
these self-funded groups purchase aggregate and/or specific
stop-loss coverage. In exchange for a premium, the group's
aggregate liability or the group's liability on any one episode of
care is capped for the year. Premiums for the stop-loss coverage
are actuarially determined based on experience and other factors
and are recorded as earned over the period of the contract in
proportion to the coverage provided. Under the Company's
self-funded arrangements, revenue and amounts due are recognized
based on incurred claims plus administrative and other fees and
any stop-loss premiums. In addition, accounts for certain
self-insured groups are charged or credited with interest expense
or income as provided by the group's contracts.
Premiums on property and casualty contracts are recognized as
earned on a pro rata basis over the policy term. The portion of
premiums related to the period prior to the end of coverage is
recorded in the consolidated balance sheets as unearned premiums
and is transferred to premium revenue as earned.
Life insurance premiums are reported as earned when due.
(E) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities to
prepare these financial statements in conformity with accounting
principles generally accepted in the United States of America.
Actual results could differ from those estimates. The most
significant items on the consolidated balance sheets that involve
a greater degree of accounting estimates and actuarial
determinations subject to changes in the future are liabilities
for claims processed and incomplete, future policy benefits,
unreported losses, and unpaid claims. In addition, the Company
establishes an allowance for doubtful receivables based on
management's evaluation of the aging of accounts and such other
factors, which deserve current recognition. As additional
information becomes available (or actual amounts are
determinable), the recorded estimates will be revised and
reflected in operating results. Although some variability is
inherent in these estimates, the Company believes the amounts
provided are adequate.
F-15 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
(F) DEFERRED POLICY ACQUISITION COSTS
Certain costs for acquiring property and casualty insurance
businesses are deferred by the Company. These costs mainly relate
to commissions incurred during the production of property and
casualty business and are deferred and amortized ratably over the
terms of the policies.
The method used in calculating deferred policy acquisition costs
limits the amount of such deferred costs to actual costs or their
estimated realizable value, whichever is lower. In determining
estimated realizable value, the method considers the premiums to
be earned, losses and loss-adjustment expenses, and certain other
costs expected to be incurred as the premiums are earned.
Amortization of deferred policy acquisition costs in 2002, 2001,
and 2000 was $13,728, $12,700, and $11,500, respectively.
Acquisition costs related to health, group life, and disability
insurance policies are expensed as incurred.
(G) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs
are expensed as incurred. Depreciation is calculated on the
straight-line method over the estimated useful lives of the
assets. Costs of computer equipment, programs, systems,
installations, and enhancements are capitalized. Costs of systems
in operation are amortized over their estimated useful lives.
(H) CLAIM LIABILITIES
Claims processed, incomplete and unreported losses for subscriber
benefits for health insurance policies represent the estimated
amounts to be paid to providers based on experience and
accumulated statistical data. Loss-adjustment expenses related to
such claims are accrued currently based on estimated future
expenses necessary to process such claims.
TSI's Reform business division contracts with various Independence
Practice Associations (IPA) for certain medical care services
provided to the Reform's subscribers. The IPAs are compensated
based on a capitation basis. TSI retains a portion of the
capitation payments to provide for incurred but not reported
losses. At December 31, 2002 and 2001, total withholdings and
capitation payable amounted to $30,862 and $32,816, respectively,
which are recorded as part of the liability for claims processed
and incomplete in the accompanying consolidated balance sheets.
The liability for losses and loss-adjustment expenses for STS
represents individual case estimates for reporting claims and
estimates for unreported losses, net of any salvage and
subrogation based on past experience modified for current trends
and estimates of expenses for investigating and settling claims.
The liability for policy and contract claims of SVTS is based on
the amount of benefits contractually determined for reported
claims, and on estimates, based on past experience modified for
current trends, for unreported claims.
F-16 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
The above liabilities are necessarily based on estimates and,
while management believes that the amounts are adequate, the
ultimate liability may be in excess of or less than the amounts
provided. The methods for making such estimates and for
establishing the resulting liability are continually reviewed, and
any adjustments are reflected in the consolidated statements of
operations of the current year.
(I) INDIVIDUAL RETIREMENT ANNUITIES
Amounts received for individual retirement annuities are
considered deposits and recorded as a liability. Interest accrued
on such individual retirement accounts, which amounted to $711,
$943, and $950 during the three-year period ended December 31,
2002, 2001, and 2000, respectively, is recorded as interest
expense in the accompanying consolidated statements of operations.
(J) REINSURANCE
In the normal course of business, the insurance-related
subsidiaries seek to limit their exposure that may arise from
catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of
exposure with other insurance enterprises or reinsurers.
Reinsurance premiums, commissions, and expense reimbursements,
related to reinsured businesses are accounted for on bases
consistent with those used in accounting for the original policies
issued and the terms of the reinsurance contracts. Accordingly,
reinsurance premiums are reported as prepaid reinsurance premiums
and amortized over the remaining contract period in proportion to
the amount of insurance protection provided.
Premiums ceded and recoveries of losses and loss-adjustment
expenses have been reported as a reduction of premiums earned and
losses and loss-adjustment expenses incurred, respectively.
Commission and expense allowances received by STS in connection
with reinsurance ceded have been accounted for as a reduction of
the related policy acquisition costs and are deferred and
amortized accordingly.
Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsured
policy.
(K) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company accounts for derivative instruments and hedging
activities in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Certain Hedging Activities, and SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an Amendment to SFAS No. 133. SFAS No. 133 and
SFAS No. 138 require that all derivative instruments be recorded
on the balance sheet at their respective fair values.
On the date the derivative contract is entered into, the Company
designates the derivative as either a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm
commitment ("fair value" hedge), a hedge of a forecasted
transaction or the variability of cash flows to be received or
paid related to a recognized asset or liability ("cash flow"
hedge), a foreign currency fair
F-17 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
value or cash flow hedge ("foreign currency" hedge), or a hedge of
a net investment in a foreign operation. For all hedging
relationships the Company formally documents the hedging
relationship and its risk-management objective and strategy for
undertaking the hedge, the hedging instrument, the item, the
nature of the risk being hedged, how the hedging instrument's
effectiveness in offsetting the hedged risk will be assessed, and
a description of the method of measuring ineffectiveness. This
process includes linking all derivatives that are designated as
fair value, cash flow, or foreign currency hedges to specific
assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions. The Company also formally
assesses, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash
flows of hedged items. When it is determined that a derivative is
not highly effective as a hedge or that it has ceased to be a
highly effective hedge, the Company discontinues the hedge
accounting prospectively.
Changes in the fair value of a derivative that is highly effective
and that is designated and qualifies as a fair value hedge, along
with the loss or gain on the hedged asset or liability or
unrecognized firm commitment of the hedged item that is
attributable to the hedged risk, are recorded in earnings. Changes
in the fair value of a derivative that is highly effective and
that is designated and qualifies as a cash flow hedge are recorded
in other comprehensive income to the extent that the derivative is
effective as hedge, until earnings are affected by the variability
in cash flows of the designated hedged item. Changes in the fair
value of derivatives that are highly effective as hedges and that
are designated and qualify as foreign currency hedges are recorded
in either earnings or other comprehensive income, depending on
whether the hedge transaction is a fair value hedge or a cash flow
hedge. However, if a derivative is used as a hedge of a net
investment in a foreign operation, its changes in fair value, to
the extent effective as a hedge, are recorded in the cumulative
translation adjustments account within other comprehensive income.
The ineffective portion of the change in fair value of a
derivative instrument that qualifies as either a fair value hedge
or a cash flow hedge is reported in earnings. Changes in the fair
value of derivative trading instruments are reported in current
period earnings.
The Company discontinues hedge accounting prospectively when it is
determined that the derivative is no longer effective in
offsetting changes in the fair value or cash flows of the hedged
item, the derivative expires or is sold, terminated, or exercised,
the derivative is dedesignated as a hedging instrument, because it
is unlikely that a forecasted transaction will occur, a hedged
firm commitment no longer meets the definition of a firm
commitment, or management determines that designation of the
derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined
that the derivative no longer qualifies as an effective fair value
hedge, the Company continues to carry the derivative on the
balance sheet at its fair value, and no longer adjusts the hedged
asset or liability for changes in fair value. The adjustment of
the carrying amount of the hedged asset or liability is accounted
for in the same manner as other components of the carrying amount
of that asset or liability. When hedge accounting is discontinued
because the hedged item no longer meets the definition of a firm
commitment, the Company continues to carry the derivative on the
balance sheet at its fair value, removes any asset or liability
that was recorded pursuant to recognition of the firm commitment
from the balance sheet and recognizes any gain or loss in
earnings. When hedge accounting is
F-18 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
discontinued because it is probable that a forecasted transaction
will not occur, the Company continues to carry the derivative on
the balance sheet at its fair value with subsequent changes in
fair value included in earnings, and gains and losses that were
accumulated in other comprehensive income are recognized
immediately in earnings. In all other situations in which hedge
accounting is discontinued, the Company continues to carry the
derivative at its fair value on the balance sheet, and recognizes
any changes in its fair value in earnings.
(L) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the consolidated statements of operations in the period that
includes the enactment date.
(M) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instrument that potentially subject the Company to
concentrations of credit risk consist principally of premium
receivable, accrued interest receivable, and other receivable.
The fair value information of financial instruments in the
accompanying consolidated financial statements was determined as
follows:
(I) CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the
short-term nature of those instruments.
(II) INVESTMENT IN SECURITIES
The fair value of investment in securities is estimated
based on quoted market prices for those or similar
investments. Additional information pertinent to the
estimated fair value of investment in securities is
included in note 4.
(III) RECEIVABLES, ACCOUNTS PAYABLE, AND ACCRUED LIABILITIES
The carrying amount of receivables, accounts payable, and
accrued liabilities approximates fair value because they
mature and should be collected or paid within 12 months
after December 31.
(IV) INDIVIDUAL RETIREMENT ANNUITIES
The fair value of individual retirement annuities is the
amount payable on demand at the reporting date, and
accordingly, the carrying value amount approximates fair
value.
F-19 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
(V) LOANS PAYABLE TO BANK
The carrying amount of the loans payable to bank
approximates fair value due to its floating interest rate
structure.
(VI) INTEREST RATE SWAPS
Current market pricing models were used to estimate fair
values of interest rate swap agreement.
(N) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
SFAS No. 144 provides a single accounting model for long-lived
assets to be disposed of. SFAS No. 144 also changes the criteria
for classifying an asset as held for sale; and broadens the scope
of businesses to be disposed of that qualify for reporting as
discontinued operations and changes the timing of recognizing
losses on such operations. The Company adopted SFAS No. 144 on
January 1, 2002.
In accordance with SFAS No. 144, long-lived assets, such as
property, plant, and equipment, and purchased intangibles subject
to amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an
asset to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of
would be separately presented in the balance sheet and reported at
the lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. The assets and liabilities of a
disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the
balance sheet.
Goodwill and intangible assets not subject to amortization are
tested annually for impairment, and are tested for impairment more
frequently if events and circumstances indicate that the asset
might be impaired. An impairment loss is recognized to the extent
that the carrying amount exceeds the asset's fair value.
Prior to the adoption of SFAS No. 144, the Company accounted for
long-lived assets in accordance with SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of.
(O) INSURANCE-RELATED ASSESSMENTS
The Company accounts for insurance-related assessments in
accordance with the provisions of the Statement of Position (SOP)
No. 97-3, Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments. This SOP prescribes liability
recognition when the following three conditions are met: (1) the
assessment has been imposed or the information available prior to
the issuance of the financial statements indicates it is probable
that an assessment will be imposed; (2) the event obligating an
entity to pay (underlying cause of) an imposed or probable
assessment has
F-20 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
occurred on or before the date of the financial statements; and
(3) the amount of the assessment can be reasonably estimated.
Also, this SOP provides for the recognition of an asset when the
paid or accrued assessment is recoverable through either premium
taxes or policy surcharges.
(P) EARNINGS PER SHARE
The Company calculates and presents earnings per share in
accordance with SFAS No. 128, Earnings per Share. Basic earnings
per share excludes dilution and is computed by dividing the net
income (loss) that could be available to common stockholders by
the weighted average number of common shares outstanding for the
period (see note 22). There is no potential dilution that could
affect the basic earnings per share.
(Q) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires the Company to
record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation
associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development, and/or
normal use of the assets. The Company also records a corresponding
asset which is depreciated over the life of the asset. Subsequent
to the initial measurement of the asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect
the passage of time and changes in the estimated future cash flows
underlying the obligation. The Company is required to adopt SFAS
No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not
expected to have a material effect on the Company's financial
statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. SFAS No. 145 amends existing guidance
on reporting gains and losses on the extinguishment of debt to
prohibit the classification of the gain or loss as extraordinary,
as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends
SFAS No. 13 to require sale-leaseback accounting for certain lease
modifications that have economic effects similar to sale-leaseback
transactions. The provisions of the statement related to the
rescission of SFAS No. 4 is applied in fiscal years beginning
after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of the statement related to SFAS No. 13
were effective for transactions occurring after May 15, 2002, with
early application encouraged. The adoption of SFAS No. 145 is not
expected to have a material effect on the Company's financial
statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, SFAS No. 146
addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity.
The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002,
with early application encouraged. The adoption of SFAS No. 146 is
not expected to have a material effect on the Company's financial
statements.
F-21 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
In November 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57, and 107 and a
rescission of FASB Interpretation No. 34. This interpretation
elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under guarantees issued. The interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the
interpretation are applicable to guarantees issued or modified
after December 31, 2002 and are not expected to have a material
effect on the Company's financial statements. The disclosure
requirements are effective for financial statements of interim and
annual periods ending after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment
of FASB Statement No. 123. This statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending
after December 15, 2002. The adoption of SFAS No. 148 is not
expected to apply to the Company.
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51. This interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in
the interpretation. The interpretation applies immediately to
variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest
entities obtained after January 31, 2003. For public enterprises
with a variable interest in a variable interest entity created
before February 1, 2003, the interpretation applies to that
enterprise no later than the beginning of the first interim or
annual reporting period beginning after June 15, 2003. The
application of this interpretation is not expected to have a
material effect on the Company's financial statements. The
interpretation requires certain disclosures in financial
statements issued after January 31, 2003 if it is reasonably
possible that the Company will consolidate or disclose information
about variable interest entities when the interpretation becomes
effective.
(R) RECLASSIFICATIONS
Certain amounts in the 2001 financial statements were reclassified
to conform with the 2002 presentation.
F-22 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
(3) SEGMENT INFORMATION
The operations of the Company are conducted principally through four
business segments. Business segments were identified according to the
type of insurance products offered. These segments and a description of
their respective operations are as follows:
- HEALTH INSURANCE - COMMERCIAL PROGRAM - This type of insurance is
provided by TSI and comprises the health insurance coverage
subscribed to all commercial groups and some government entities.
The Commercial Program offers a fee-for-service type plan through
five distinct markets: corporate sector; individual sector; local
government sector, covering the employees of the Commonwealth of
Puerto Rico; federal government program, covering federal
government employees within Puerto Rico; and the Medicare
supplement plan (Medigap). TSI is a qualified contractor to
provide health insurance coverage to federal government employees
within Puerto Rico. The contract with the U.S. Office of Personnel
Management (OPM) is subject to termination in the event of a
noncompliance not corrected to the satisfaction of OPM. The
premiums for this segment are mainly originated through TSI's
internal sales force and a network of brokers and independent
agents. Under its regular plan, TSI provides health insurance
coverage to certain employees of the Commonwealth of Puerto Rico
and its instrumentalities. Earned premium revenue related to such
health plans amounted to $64,578, $58,961, and $57,528 for the
three-year period ended December 31, 2002, 2001, and 2000,
respectively.
- HEALTH INSURANCE - REFORM PROGRAM - This type of insurance is also
provided by TSI and the business subscribed within this segment is
awarded periodically by the Commonwealth of Puerto Rico's central
government. The Reform program provides health coverage to
medically indigent citizens in Puerto Rico, as defined by the laws
of the Commonwealth of Puerto Rico. The Reform consists of a
single policy with the same benefits for each qualified medically
indigent citizen. The government segregates Puerto Rico by areas
or regions. Each area is awarded to an insurance company through a
bidding process. On June 30, 2002 the government redistributed the
geographical areas, merging two of the existing areas with the
remaining ones, thus reducing geographical areas to eight. TSI
participated in the bidding process and submitted proposals to
renew its existing contracts and to serve additional geographical
areas. Commencing on July 1, 2002, TSI was awarded three of the
eight geographical areas: North, Metro-North, and Southwest. All
Reform contracts are subject to termination, with a prior written
notice of 90 days in the event of a noncompliance not corrected or
cured to the satisfaction of the Commonwealth of Puerto Rico or in
the event the government determines that there are not enough
funds for the payment of premiums.
- PROPERTY AND CASUALTY INSURANCE - This type of insurance is
provided by STS. The predominant insurance lines of business of
this segment are commercial multiple peril, auto physical damage,
auto liability, and dwelling. The premiums for this segment are
originated through a network of independent insurance agents and
brokers. Agents or general agencies collect the premiums from the
insureds, which are subsequently remitted to STS, net of
commissions. Remittances are due 60 days after the closing date of
the general agent's account current.
- LIFE AND DISABILITY INSURANCE - This type of insurance is provided
by SVTS, which offers primarily group life, group short- and
long-term disability insurance coverage, and the administration of
F-23 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
individual retirement accounts and annuities. The premiums for
this segment are mainly subscribed through a network of brokers
and independent agents.
The accounting policies for the segments are the same as those described
in the summary of significant accounting policies included in the notes
to consolidated financial statements. The Company evaluates performance
based on the underwriting income and net income of each segment. Services
provided between reportable segments are done at transfer prices which
approximate fair value. The financial data of each segment is accounted
for separately, therefore no segment allocation is necessary. In the case
of the commercial and Reform program segments, they are accounted for
separately, even though they are both part of TSI business. However,
certain operating expenses are centrally managed, therefore requiring an
allocation to each segment. Most of these expenses are distributed to
each segment based on different parameters, such as payroll hours,
processed claims, square footage, and others. In addition, some
depreciable assets are kept by one segment, while allocating the
depreciation expense to other segments. The allocation of the
depreciation expense is based on the same proportion as the asset was
used by each segment. Certain expenses are not allocated to the segments
and are kept within TSM's operations.
The following table summarizes the operations by operating segment for
the three-year period ended December 31, 2002, 2001, and 2000:
F-24 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
2002
-----------------------------------------------------------------------------------
OPERATING SEGMENT
-----------------------------------------------------------------------------------
HEALTH HEALTH PROPERTY LIFE
INSURANCE INSURANCE AND AND
COMMERCIAL REFORM CASUALTY DISABILITY
PROGRAM PROGRAM INSURANCE INSURANCE OTHER(*) TOTAL
--------- --------- --------- ---------- -------- ---------
Premiums earned, net $ 667,991 487,000 60,688 14,992 -- 1,230,671
Amounts attributable to
self-funded arrangements 150,684 -- -- -- -- 150,684
Less amounts attributable to claims
under self-funded arrangements (141,138) -- -- -- -- (141,138)
Intersegment premiums/service revenue 2,776 -- -- -- 46,308 49,084
--------- ------- ------ ------ ------ ---------
680,313 487,000 60,688 14,992 46,308 1,289,301
Net investment income 10,577 5,106 6,579 2,253 -- 24,515
Realized gain (loss) on sale
of securities (313) 77 243 67 -- 74
Unrealized loss on trading securities (6,533) (495) (1,294) -- -- (8,322)
Other 6,112 (38) 1,475 114 -- 7,663
--------- ------- ------ ------ ------ ---------
Total revenue $ 690,156 491,650 67,691 17,426 46,308 1,313,231
========= ======= ====== ====== ====== =========
Net income $ 28,133 9,770 6,223 3,585 694 48,405
Claims incurred 574,874 445,039 34,334 7,733 -- 1,061,980
Operating expenses 86,321 36,109 25,549 5,133 45,165 198,277
Depreciation expense, included in
operating expenses 3,376 1,385 397 78 -- 5,236
Interest expense 829 731 -- 711 -- 2,271
Income taxes -- -- 1,585 264 449 2,298
Segment assets 324,628 115,499 205,753 51,354 1,633 698,867
Significant noncash item:
Net change in unrealized gain on
securities available for sale 3,928 598 652 613 -- 5,791
(*) Includes segments which are not required to be reported separately.
These segments include the data processing services organization as
well as the third-party administrator of the health insurance services.
(Continued)
F-25
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
2001
-----------------------------------------------------------------------------------
OPERATING SEGMENT
-----------------------------------------------------------------------------------
HEALTH HEALTH PROPERTY LIFE
INSURANCE INSURANCE AND AND
COMMERCIAL REFORM CASUALTY DISABILITY
PROGRAM PROGRAM INSURANCE INSURANCE OTHER(*) TOTAL
--------- --------- --------- ---------- -------- ---------
Premiums earned, net $ 628,487 454,923 54,337 13,426 -- 1,151,173
Amounts attributable to self-funded
arrangements 134,374 -- -- -- -- 134,374
Less amounts attributable to claims
under self-funded arrangements (126,295) -- -- -- -- (126,295)
Intersegment premiums/service revenue 845 -- -- -- 18,953 19,798
--------- ------- ------ ------ ------ ---------
637,411 454,923 54,337 13,426 18,953 1,179,050
Net investment income 10,428 4,547 7,564 2,496 -- 25,035
Realized gain on sale of securities 3,643 6 967 34 -- 4,650
Unrealized loss on trading securities (2,908) (132) (585) -- -- (3,625)
Other 4,218 -- 42 60 -- 4,320
--------- ------- ------ ------ ------ ---------
Total revenue $ 652,792 459,344 62,325 16,016 18,953 1,209,430
========= ======= ====== ====== ====== =========
Net income $ 6,776 4,563 6,529 3,366 449 21,683
Claims incurred 560,809 420,953 32,348 6,914 -- 1,021,024
Operating expenses 83,771 32,646 22,548 4,553 18,258 161,776
Depreciation expense, included in
operating expenses 3,053 1,049 503 111 5 4,721
Interest expense 1,436 1,182 -- 938 -- 3,556
Income taxes -- -- 900 245 246 1,391
Segment assets 287,893 105,319 179,184 50,410 515 623,321
Significant noncash item:
Net change in unrealized gain on
securities available for sale 1,036 1,368 1,091 990 -- 4,485
(*) Includes segments which are not required to be reported separately.
These segments include the data processing services organization as
well as the third-party administrator of the health insurance services.
(Continued)
F-26
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
2000
-----------------------------------------------------------------------------------
OPERATING SEGMENT
-----------------------------------------------------------------------------------
HEALTH HEALTH PROPERTY LIFE
INSURANCE INSURANCE AND AND
COMMERCIAL REFORM CASUALTY DISABILITY
PROGRAM PROGRAM INSURANCE INSURANCE OTHER(*) TOTAL
--------- --------- --------- ---------- -------- ---------
Premiums earned, net $ 583,320 439,774 53,493 11,576 -- 1,088,163
Amounts attributable to self-funded
arrangements 117,542 -- -- -- -- 117,542
Less amounts attributable to claims
under self-funded arrangements (113,248) -- -- -- -- (113,248)
Intersegment premiums/service revenue 752 -- -- -- 9,050 9,802
--------- ------- ------ ------ ------ ---------
588,366 439,774 53,493 11,576 9,050 1,102,259
Net investment income 9,993 4,633 6,996 2,502 -- 24,124
Realized gain on sale of securities 5,566 252 539 20 -- 6,377
Unrealized gain (loss) on trading
securities (3,228) 76 (585) -- -- (3,737)
Other 7,426 (62) -- -- -- 7,364
--------- ------- ------ ------ ------ ---------
Total revenue $ 608,123 444,673 60,443 14,098 9,050 1,136,387
========= ======= ====== ====== ===== =========
Net income (loss) $ (3,090) (7,614) 6,282 3,334 163 (925)
Claims incurred 531,187 420,476 32,692 5,778 -- 990,133
Operating expenses 77,990 30,350 20,569 3,788 8,732 141,429
Depreciation expense, included in
operating expenses 3,122 1,119 614 54 -- 4,909
Interest expense 2,036 1,461 -- 950 -- 4,447
Income taxes -- -- 900 248 155 1,303
Segment assets 246,865 74,146 161,811 43,913 225 526,960
Significant noncash item:
Net change in unrealized gain on
securities available for sale (1,674) 1,653 2,193 (185) -- 1,987
(*) Includes segments which are not required to be reported separately.
These segments include the data processing services organization.
(Continued)
F-27
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS
TOTAL REVENUE 2002 2001 2000
----------- --------- ---------
Revenue for reportable segments $ 1,266,923 1,190,477 1,127,337
Revenue for other segments 46,308 18,953 9,050
----------- --------- ---------
1,313,231 1,209,430 1,136,387
----------- --------- ---------
Elimination of intersegment earned premiums (2,776) (845) (752)
Elimination of intersegment service revenue (46,308) (18,953) (9,050)
Unallocated amount:
Revenue from external sources 762 764 402
----------- --------- ---------
(48,322) (19,034) (9,400)
----------- --------- ---------
Total consolidated revenue $ 1,264,909 1,190,396 1,126,987
=========== ========= =========
NET INCOME (LOSS) 2002 2001 2000
----------- --------- ---------
Net income (loss) for reportable segments $ 47,711 21,234 (1,088)
Net income for other segments 694 449 163
----------- --------- ---------
48,405 21,683 (925)
----------- --------- ---------
Elimination of TSM charges:
Rent expense 6,203 6,185 6,185
Interest expense 829 1,436 2,036
----------- --------- ---------
7,032 7,621 8,221
----------- --------- ---------
Unallocated amounts related to TSM:
General and administrative expenses (5,549) (5,037) (4,693)
Interest expense (2,150) (3,365) (4,644)
Other revenue from external sources 511 813 529
----------- --------- ---------
(7,188) (7,589) (8,808)
----------- --------- ---------
Consolidated net income (loss) $ 48,249 21,715 (1,512)
=========== ====== ======
(Continued)
F-28
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
ASSETS 2002 2001
--------- -------
Total assets for reportable segments $ 697,234 622,806
Total assets for other segments 1,633 515
--------- -------
698,867 623,321
--------- -------
Elimination entries - intersegment receivables (7,690) (5,677)
--------- -------
Unallocated amounts related to TSM:
Cash, cash equivalents, and investments 6,424 7,909
Property and equipment, net 27,755 30,018
Other assets 322 487
--------- -------
34,501 38,414
--------- -------
Consolidated assets $ 725,678 656,058
========= =======
OTHER SIGNIFICANT ITEMS
2002
--------------------------------------------
SEGMENT CONSOLIDATED
TOTALS ADJUSTMENTS(*) TOTALS
---------- -------------- ------------
Claims incurred $1,061,980 -- 1,061,980
Operating expenses 198,277 (49,738) 148,539
Depreciation expense 5,236 2,359 7,595
Interest expense 2,271 1,321 3,592
Income taxes 2,298 251 2,549
Significant noncash item - net change in
unrealized gain on securities available for sale 5,791 195 5,986
2001
--------------------------------------------
SEGMENT CONSOLIDATED
TOTALS ADJUSTMENTS(*) TOTALS
---------- -------------- ------------
Claims incurred $1,021,024 -- 1,021,024
Operating expenses 161,776 (20,946) 140,830
Depreciation expense 4,721 1,332 6,053
Interest expense 3,556 1,929 5,485
Income taxes 1,391 (49) 1,342
Significant noncash item - net change in
unrealized gain on securities available for sale 4,485 139 4,624
2000
--------------------------------------------
SEGMENT CONSOLIDATED
TOTALS ADJUSTMENTS(*) TOTALS
---------- -------------- ------------
Claims incurred $ 990,133 -- 990,133
Operating expenses 141,429 (11,294) 130,135
Depreciation expense 4,909 1,428 6,337
Interest expense 4,447 2,608 7,055
Income taxes 1,303 (127) 1,176
Significant noncash item - net change in
unrealized gain on securities available for sale 1,987 35 2,022
(*) Adjustments represent principally TSM operations and eliminations of
intersegment charges. None of the amounts included as adjustments are
considered significant.
F-29
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
(4) INVESTMENT IN SECURITIES
The Company's investments at December 31, 2002 and 2001, consist of the
following:
2002 2001
-------- --------
Trading securities, at fair value $ 94,938 88,850
Available for sale, at fair value 368,650 324,334
Held to maturity, at amortized cost 5,982 3,779
-------- --------
$469,570 416,963
======== ========
The amortized cost for debt and equity securities, gross unrealized
gains, gross unrealized losses, and estimated fair value for trading,
available for sale, and held to maturity securities by major security
type and class of security at December 31, 2002 and 2001, were as
follows:
2002
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
Trading securities:
U.S. Treasury securities and
obligations of U.S. government
instrumentalities $ 1,865 9 (2) 1,872
Corporate debt securities 45,622 2,839 (16) 48,445
---------- ---------- ---------- ----------
Total fixed maturities 47,487 2,848 (18) 50,317
Equity securities 51,859 2,793 (10,031) 44,621
---------- ---------- ---------- ----------
Totals $ 99,346 5,641 (10,049) 94,938
========== ========== ========== ==========
2001
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
Trading securities:
U.S. Treasury securities and
obligations of U.S. government
instrumentalities $ 1,173 4 (7) 1,170
Corporate debt securities 36,140 1,114 (317) 36,937
---------- ---------- ---------- ----------
Total fixed maturities 37,313 1,118 (324) 38,107
Equity securities 47,623 7,299 (4,179) 50,743
---------- ---------- ---------- ----------
Totals $ 84,936 8,417 (4,503) 88,850
========== ========== ========== ==========
F-30 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
2002
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
Securities available for sale:
U.S. Treasury securities and
obligations of U.S. government
instrumentalities $ 204,312 3,275 (43) 207,544
Obligations of the Commonwealth
of Puerto Rico and its
instrumentalities 31,082 996 (61) 32,017
Obligations of state and political
subdivisions 9,242 128 -- 9,370
Mortgage-backed securities 16,139 244 (6) 16,377
Collateralized mortgage obligations 54,703 1,282 (49) 55,936
---------- ---------- ---------- ----------
Total fixed maturities 315,478 5,925 (159) 321,244
Equity securities 25,239 22,218 (51) 47,406
---------- ---------- ---------- ----------
Totals $ 340,717 28,143 (210) 368,650
========== ========== ========== ==========
2001
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
Securities available for sale:
U.S. Treasury securities and
obligations of U.S. government
instrumentalities $ 203,166 3,157 (402) 205,921
Obligations of the Commonwealth
of Puerto Rico and its
instrumentalities 28,776 628 (50) 29,354
Obligations of state and political
subdivisions 3,526 50 -- 3,576
Mortgage-backed securities 4,500 116 (15) 4,601
Collateralized mortgage obligations 41,865 1,344 (156) 43,053
---------- ---------- ---------- ----------
Total fixed maturities 281,833 5,295 (623) 286,505
Equity securities 20,857 17,423 (451) 37,829
---------- ---------- ---------- ----------
Totals $ 302,690 22,718 (1,074) 324,334
========== ========== ========== ==========
F-31 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
2002
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
Securities held to maturity:
Mortgage-backed securities $ 4,432 -- (9) 4,423
Collateralized mortgage obligations 550 3 -- 553
Certificates of deposit 1,000 -- -- 1,000
---------- ---------- ---------- ----------
Totals $ 5,982 3 (9) 5,976
========== ========== ========== ==========
2001
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
Securities held to maturity:
U.S. Treasury securities and
obligations of U.S. government
instrumentalities $ 1,390 32 -- 1,422
Mortgage-backed securities 1,839 -- (84) 1,755
Collateralized mortgage obligations 550 -- (4) 546
---------- ---------- ---------- ----------
Totals $ 3,779 32 (88) 3,723
========== ========== ========== ==========
Fair values for debt securities were determined using market quotations
provided by outside securities consultants or prices provided by market
makers. The fair values for equity securities were determined using
market quotations on the principal public exchange markets.
F-32 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
Maturities of investment securities classified as available for sale and
held to maturity were as follows at December 31, 2002:
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
Securities available for sale:
Due in one year or less $ 8,980 9,138
Due after one year through five years 111,846 114,136
Due after five years through ten years 116,044 117,870
Due after ten years 7,766 7,787
Collateralized mortgage obligations 54,703 55,936
Mortgage-backed securities 16,139 16,377
Equity securities 25,239 47,406
---------- ----------
$ 340,717 368,650
========== ==========
Securities held to maturity:
Due after five years through ten years $ 1,000 1,000
Collateralized mortgage obligations 550 553
Mortgage-backed securities 4,432 4,423
---------- ----------
$ 5,982 5,976
========== ==========
Expected maturities may differ from contractual maturities because some
issuers have the right to call or prepay obligations with or without call
or prepayment penalties.
Investments with an amortized cost of $2,440 and $2,369 (fair value of
$2,626 and $2,506) at December 31, 2002 and 2001, respectively, were
deposited with the Commissioner of Insurance to comply with the deposit
requirements of the Insurance Code.
F-33 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
Information regarding realized and unrealized gains and losses from
investments for the years ended December 31 is as follows:
2002 2001 2000
-------- -------- --------
Realized gains (loss):
Fixed maturities securities:
Trading securities:
Gross gains from sales $ 1,492 488 134
Gross losses from sales (1,058) (195) (668)
-------- -------- --------
434 293 (534)
-------- -------- --------
Available for sale:
Gross gains from sales 110 555 1,533
Gross losses from sales -- (5) (2)
-------- -------- --------
110 550 1,531
-------- -------- --------
Total debt securities 544 843 997
-------- -------- --------
Equity securities:
Trading securities:
Gross gains from sales 1,594 2,095 5,139
Gross losses from sales (2,026) (2,999) (1,258)
-------- -------- --------
(432) (904) 3,881
-------- -------- --------
Available for sale:
Gross gains from sales 391 4,716 1,499
Gross losses from sales (318) -- --
-------- -------- --------
73 4,716 1,499
-------- -------- --------
Total equity securities (359) 3,812 5,380
-------- -------- --------
Net realized gain on
securities $ 185 4,655 6,377
======== ======== ========
F-34 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
2002 2001 2000
-------- -------- --------
Changes in unrealized gains (losses):
Fixed maturities securities:
Trading securities $ 2,036 1,162 1,677
Available for sale 1,094 4,749 5,711
Held to maturity 50 (69) (1)
-------- -------- --------
3,180 5,842 7,387
-------- -------- --------
Equity securities:
Trading securities (10,358) (4,787) (5,414)
Available for sale 5,195 51 (3,471)
-------- -------- --------
(5,163) (4,736) (8,885)
-------- -------- --------
Net change in unrealized
gains (losses) $ (1,983) 1,106 (1,498)
======== ======== ========
The following equity securities individually exceeded 10% of
stockholders' equity at December 31:
2002 2001
------------------------ -------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
Popular, Inc. $ 10,405 31,585 13,703 37,679
========== ========== ========== ==========
As of December 31, 2002 and 2001, the investments in obligations that are
payable from and secured by the same source of revenue or taxing
authority, other than the U.S. government, did not exceed 10% of
stockholders' equity.
F-35 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
(5) NET INVESTMENT INCOME
Components of net investment income were as follows:
Years ended December 31
------------------------------------------
2002 2001 2000
-------- -------- --------
Mortgage-backed securities $ 937 816 5,390
Zero coupons 1,451 268 1,023
Bonds 16,679 16,252 11,627
Securities purchased under agreement
to resell 814 763 847
Collateralized mortgage obligations 2,519 2,359 1,996
Common and preferred stocks 1,895 2,046 1,909
Others 716 3,123 1,727
-------- -------- --------
Subtotal 25,011 25,627 24,519
Less investment expenses 233 222 181
-------- -------- --------
Total $ 24,778 25,405 24,338
======== ======== ========
(6) PREMIUMS AND OTHER RECEIVABLES
Premiums and other receivables as of December 31 were as follows:
2002 2001
---------- ----------
Premiums $ 46,531 40,373
Self-funded group receivables 14,244 11,241
FEHBP 7,636 5,379
Accrued interest 4,880 4,833
Reinsurance recoverable on paid losses 17,552 13,371
Other 10,978 11,353
---------- ----------
101,821 86,550
---------- ----------
Less allowance for doubtful receivables:
Premiums 8,081 6,854
Other 5,713 4,824
---------- ----------
13,794 11,678
---------- ----------
Premiums and other receivables, net $ 88,027 74,872
========== ==========
F-36 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
(7) PROPERTY AND EQUIPMENT, NET
Property and equipment are composed of the following:
December 31
----------------------------
2002 2001
---------- ----------
Land $ 6,531 6,531
Buildings and leasehold improvements 31,578 30,445
Office furniture and equipment 16,471 15,664
Computer equipment 28,173 26,143
Automobiles 238 237
---------- ----------
82,991 79,020
Less accumulated depreciation and amortization 46,270 39,930
---------- ----------
Property and equipment, net $ 36,721 39,090
========== ==========
(8) CLAIM LIABILITIES
The activity in the total claim liabilities during 2002, 2001, and 2000
is as follows:
2002 2001 2000
------------ ------------ ------------
Claim liabilities at beginning of year $ 229,440 183,231 177,427
Reinsurance recoverable on claim liabilities (10,062) (7,636) (14,609)
------------ ------------ ------------
Net claim liabilities at beginning of year 219,378 175,595 162,818
------------ ------------ ------------
Incurred claims and loss-adjustment expenses:
Current period insured events 1,079,237 1,022,242 989,435
Prior period insured events (17,257) (1,218) 698
------------ ------------ ------------
Total 1,061,980 1,021,024 990,133
------------ ------------ ------------
Payments of losses and loss-adjustment expenses:
Current period insured events 894,945 831,006 845,994
Prior period insured events 155,420 146,235 131,362
------------ ------------ ------------
Total 1,050,365 977,241 977,356
------------ ------------ ------------
Net claim liabilities at end of year 230,993 219,378 175,595
Reinsurance recoverable on claim liabilities 13,589 10,062 7,636
------------ ------------ ------------
Claim liabilities at end of year $ 244,582 229,440 183,231
============ ============ ============
As a result of changes in estimates of insured events in prior years, the
amounts included as incurred claims for prior periods insured events
different from anticipated claims incurred.
F-37 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
The credit in the incurred claims and loss-adjustment expenses for prior
period insured events during the year 2002 is due to a favorable
development of the claim liabilities that is attributed to better than
expected utilization trends.
Reinsurance recoverable on unpaid claims is reported as other assets in
the accompanying consolidated financial statements.
(9) FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM (FEHBP)
TSI entered into a contract, renewable annually, with the U.S. Office of
Personnel Management (OPM) as authorized by the Federal Employees' Health
Benefits Act of 1959, as amended, to provide a comprehensive medical plan
(FEHBP). The FEHBP covers postal and federal employees resident in the
Commonwealth of Puerto Rico as well as retirees and eligible dependents.
The Program is financed through a negotiated contribution made by the
federal government and employees' payroll deductions.
Pursuant to the Defense Authorization Act for 1999, Public Law 105-261,
the DoD/FEHBP demonstration project was established. Effective January 1,
2000, a DoD/FEHBP demonstration project allows some active and retired
uniformed service members and their dependents to enroll in the FEHBP.
The demonstration project will last for three years and is financed
through the same standards negotiated by the federal government for the
FEHBP. Upon letter dated September 23, 2002, OPM informed the Company
that the DOD/FEHBP demonstration project was scheduled to end on December
31, 2002. As a result, the Company was instructed to disenroll
demonstration beneficiaries automatically on December 31, 2002.
The accounting policies for this program are the same as those described
in the summary of significant accounting policies included in the notes
to consolidated financial statements. Premium rates are determined
annually by TSI and approved by the federal government. Claims are paid
to providers based on the guidelines determined by the federal
government. Operating expenses are allocated from TSI's operations to the
federal program based on several allocation guidelines (such as by the
number of claims processed for each program).
The operations of the FEHBP do not result in any excess or deficiency of
revenue or expense as this program has a special account available to
compensate any excess or deficiency in the operations of this program.
The contract with OPM allows for the payment of service fees as
negotiated between TSI and OPM. Service fees, which are included with the
other income, net in the accompanying consolidated statements of
operations, amounted to $625, $650, and $591 for the three-year period
ended December 31, 2002, 2001, and 2000, respectively.
F-38 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
The following summarizes the operations of the FEHBP for the three-year
period ended December 31, 2002, 2001, and 2000, which are included in the
accompanying statements of operations:
2002 2001 2000
-------- -------- --------
Premiums earned:
Billed $ 92,616 91,241 81,113
Transfer (to) from special account 5,064 (2,165) (2,383)
-------- -------- --------
97,680 89,076 78,730
-------- -------- --------
Underwriting costs:
Claims incurred 97,911 87,782 81,567
Operating expenses 5,505 5,616 5,308
-------- -------- --------
Total underwriting costs 103,416 93,398 86,875
-------- -------- --------
Underwriting loss $ (5,736) (4,322) (8,145)
======== ======== ========
Interest income $ 385 744 860
Other income 5,351 3,578 7,285
-------- -------- --------
Total interest income and other
income, net $ 5,736 4,322 8,145
======== ======== ========
The changes in the special account during 2002 and 2001 are as follows:
2002 2001
-------- --------
Funds payable at beginning of year $ 12,130 9,965
Transfer from (to) premiums earned by the FEHBP (5,064) 2,165
-------- --------
Funds payable at end of year $ 7,066 12,130
======== ========
The account for the FEHBP is related to the following accounts in the
balance sheet as of December 31:
2002 2001
-------- --------
Cash, cash equivalents, and investments $ 19,117 20,549
Premiums, accrued interest, and other receivables 7,664 7,752
Claims liabilities, including related unpaid
loss-adjustment expenses (10,439) (9,090)
Due to TSI (9,276) (7,081)
-------- --------
$ 7,066 12,130
======== ========
A contingency reserve is maintained by the OPM at the U.S. Treasury, and
is available to the Company under certain conditions as specified in
government regulations. Accordingly, such reserve is not reflected in the
accompanying balance sheets. The balance of such reserve as of December
31, 2002 and 2001 was
F-39 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
approximately $23,597 and $23,984, respectively. The Company received
$5,976, $4,226, and $7,962 of payments made from the contingency reserve
fund of OPM during 2002, 2001, and 2000, respectively, which are recorded
as other income in the accompanying consolidated financial statements.
The claim payments and operating expenses charged to the FEHBP are
subject to audit by the U.S. government. Management is of the opinion
that an adjustment, if any, resulting from such audits will not have a
significant effect on the accompanying financial statements. The claim
payments and operating expenses reimbursed in connection with the FEHBP
have been audited through 1998 by OPM.
(10) LOANS PAYABLE TO BANK
A summary of the credit agreements entered by the Company with a
commercial bank at December 31, is as follows:
2002 2001
-------- --------
Secured loan payable of $41,000, payable in monthly
installments of $137 up to July 1, 2024, plus interest at a
rate reset periodically of 100 basis points over
LIBOR selected (which was 4.00% and 5.66%
at December 31, 2002 and 2001, respectively) $ 34,010 36,650
Secured note payable of $20,000, payable in various different
installments up to August 31, 2007, with interest payable
on a monthly basis at a rate reset periodically of
130 basis points over LIBOR selected (which was
3.09% and 3.38% at December 31, 2002 and
2001, respectively) 16,005 19,000
-------- --------
Total loans payable to bank $ 50,015 55,650
======== ========
Aggregate maturities of the Company's credit agreements as of December
31, 2002 are summarized as follows:
2003 $ 1,640
2004 2,645
2005 3,140
2006 3,140
2007 13,640
Thereafter 25,810
--------
$ 50,015
========
Substantially all of the proceeds from the loan payable of $41,000 were
used by the Company to finance the acquisition of real estate properties
from subsidiaries during 1999. A portion of the proceeds of the $41,000
loan and all of the proceeds of the $20,000 note payable were used by the
Company for working capital needs and for the corporate reorganization.
F-40 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
During 2001, the Company amended its credit agreement related to the
$20,000 secured note payable to extend the maturity date of the facility
and restructure its repayment schedule, which was originally due in
August 31, 2001. The amended agreement calls for repayments of principal
amount of not less than $250 and in integral multiples of $50. The
aggregate principal amounts shall be reduced annually to the amounts on
or before the dates described below:
REQUIRED
PRINCIPAL
OUTSTANDING
Date BALANCE
-------------- -----------
August 1, 2003 $ 16,500
August 1, 2004 15,000
August 1, 2005 13,500
August 1, 2006 12,000
August 1, 2007 --
The loan and note payable previously described are guaranteed by a first
position held by the bank on the Company's land, building, and
substantially all leasehold improvements, as collateral for the term of
the loans under a continuing general security agreement. These credit
facilities contain certain covenants, which are normal in this type of
credit facility, which the Company has complied with at December 31, 2002
and 2001.
Interest expense on the above debts amounted to $2,150, $3,365, and
$4,644 for the years ended December 31, 2002, 2001, and 2000,
respectively.
(11) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has interest-rate related derivative instruments to manage
its exposure on its debt instruments. The Company does not enter into
derivative instruments for any purpose other than cash flow hedging
purposes. That is, the Company does not speculate using derivative
instruments.
By using derivative financial instruments to hedge exposures to changes
in interest rates, the Company exposes itself to credit risk and market
risk. Credit risk is the failure of the counterparty to perform under the
terms of the derivative contract. When the fair value of a derivative
contract is positive, the counterparty owes the Company, which creates
credit risk for the Company. When the fair value of a derivative contract
is negative, the Company owes the counterparty and, therefore, it does
not possess credit risk. The Company minimizes the credit risk in
derivative instruments by entering into transactions with high-quality
counterparties.
Market risk is the adverse effect on the value of a financial instrument
that results from a change in interest rates, currency exchange rates, or
commodity prices. The market risk associated with interest-rate contracts
is managed by establishing and monitoring parameters that limit the types
and degree of market risk that may be undertaken.
F-41 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
The Company assesses interest rate cash flow risk by continually
identifying and monitoring changes in interest rate exposures that may
adversely impact expected future cash flows and by evaluating hedging
opportunities. The Company maintains risk management control systems to
monitor interest rate cash flow risk attributable to both the Company's
outstanding or forecasted debt obligations as well as the Company's
offsetting hedge positions. The risk management control systems involve
the use of analytical techniques to estimate the expected impact of
changes in interest rates on the Company's future cash flows.
The Company has a variable-rate debt that was used to finance the
acquisition of real estate from subsidiaries during 1999 (see note 10).
The debt obligations expose the Company to variability in interest
payments due to changes in interest rates. Management believes it is
prudent to limit the variability of a portion of its interest payments.
To meet this objective, on December 6, 2002 management entered into an
interest rate swap agreement to manage fluctuations in cash flows
resulting from interest rate risk. This swap changes the variable-rate
cash flow exposure on the debt obligations to fixed cash flows. Under the
terms of the interest rate swap, the Company receives variable interest
rate payments and makes fixed interest rate payments, thereby creating
the equivalent of fixed-rate debt. This interest rate swap is effective
on April 1, 2003.
Changes in the fair value of the interest rate swap, designated as a
hedging instrument that effectively offsets the variability of cash flows
associated with the variable-rate of the long-term debt obligation, are
reported in accumulated other comprehensive income. This amount is
subsequently reclassified into interest expense as a yield adjustment of
the hedged debt obligation in the same period in which the related
interest affects earnings.
Interest expense for the year ended December 31, 2002 does not include
any amount representing cash flow hedge ineffectiveness since the terms
of the swap agreement allow the Company to assume no ineffectiveness in
the agreement.
As of December 31, 2002, $682 of deferred loss on the derivative
instrument was included within the accounts payable and accrued
liabilities in the accompanying consolidated balance sheets and is
expected to be reclassified to earnings during the next 12 to 18 months.
Transactions and events expected to occur over the next twelve months
that will necessitate reclassifying the derivatives loss to earnings is
the repricing of variable-rate debt. There were no cash flow hedges
discontinued during 2002.
(12) OPERATING RESERVE AND STOCKHOLDERS' EQUITY
As members of the BCBSA, the Company and TSI are required by membership
standards of the association to maintain liquidity as defined by BCBSA.
That is, to maintain net worth exceeding the Company Action Level as
defined in the NAIC's Risk-Based Capital for Insurers Model Act.
Also, under the exemption from Puerto Rico income taxes (see note 16),
TSI is required to use any net income, among other things, to increase
its operating reserve until they reach a balance equivalent to six months
of claims expenses. The companies are in compliance with the above
requirements.
F-42 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
(13) COMPREHENSIVE INCOME
The accumulated balances for each classification of comprehensive income
are as follows:
ACCUMULATED
UNREALIZED MINIMUM OTHER
GAINS ON PENSION CASH FLOW COMPREHENSIVE
SECURITIES LIABILITY HEDGES INCOME
---------- ---------- ---------- -------------
Beginning balance $ 20,984 -- -- 20,984
Net current period change 6,107 (8,114) (470) (2,477)
Reclassification adjustments for
gains and losses reclassified
in income (121) -- -- (121)
---------- ---------- ---------- -------------
Ending balance $ 26,970 (8,114) (470) 18,386
========== ========== ========== =============
The related deferred tax effects allocated to each component of other
comprehensive income in the accompanying consolidated statements of
stockholders' equity and comprehensive income in 2002 and 2001 are as
follows:
2002
------------------------------------------------
DEFERRED TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
---------- ------------ ----------
Unrealized holding gains on securities
arising during the period $ 6,472 (365) 6,107
Less reclassification adjustment for
gains and losses realized in income (183) 62 (121)
---------- ------------ ----------
Net change in unrealized gain 6,289 (303) 5,986
Minimum pension liability adjustment (8,755) 641 (8,114)
Cash flow hedges (682) 212 (470)
---------- ------------ ----------
Net current period change $ (3,148) 550 (2,598)
========== ============ ==========
F-43 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
2001
------------------------------------------------
DEFERRED TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
---------- ------------ ----------
Unrealized holding gains on securities
arising during the period $ 10,066 (337) 9,729
Less reclassification adjustment for
gains and losses realized in income (5,266) 161 (5,105)
---------- ------------ ----------
Net change in unrealized gain $ 4,800 (176) 4,624
========== ============ ==========
Deferred tax expenses or benefits are related to the unrealized holding
gains (losses) on investments classified as available for sale held by
the Company and its wholly owned subsidiaries, except for those related
to TSI, for which no deferred income tax effect was recognized due to its
tax-exempt status (see notes 4 and 16). A deferred tax benefit was also
recognized for the deferred loss related to the Company's cash flow
hedges (see note 11) and the minimum pension liability adjustment.
(14) AGENCY CONTRACT AND EXPENSE REIMBURSEMENT
TSI processes and pays claims as fiscal intermediary for the Medicare -
Part B Program. Claims from this program, which are excluded from the
accompanying consolidated statements of operations, amounted to $574,720,
$539,218, and $497,771 for the three-year period ended December 31, 2002,
2001, and 2000, respectively.
TSI is reimbursed for administrative expenses incurred in performing this
service. For the years ended December 31, 2002, 2001, and 2000, the
Company was reimbursed by $12,743, $13,575, and $10,778, respectively,
for such services which are deducted from operating expenses in the
accompanying consolidated statements of operations.
The operating expense reimbursements in connection with processing
Medicare claims have been audited through 1997 by federal government
representatives. Management is of the opinion that no significant
adjustments will be made affecting cost reimbursements through December
31, 2002.
(15) REINSURANCE ACTIVITY
STS and SVTS, in accordance with general industry practices, annually
purchase reinsurance to protect them from the impact of large unforeseen
losses and prevent sudden and unpredictable changes in net income and
stockholders' equity of the Company. Reinsurance contracts do not relieve
any of the subsidiaries from their obligations to policyholders. In the
event that all or any of the reinsuring companies might be unable to meet
their obligations under existing reinsurance agreements, the subsidiaries
would be liable for such defaulted amounts.
STS has a number of pro rata and excess of loss reinsurance treaties
whereby the subsidiary retains for its own account all loss payments for
each occurrence that does not exceed the stated amount in the agreements
and a catastrophe cover, whereby it protects itself from a loss or
disaster of a catastrophic nature. During 2002 and 2001, STS placed 15%
of its reinsurance business with one reinsurance company.
F-44 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
Under these treaties, STS ceded premiums of $39,806, $39,608, and $31,208
in 2002, 2001, and 2000, respectively.
Reinsurance cessions are made on excess of loss treaties and on a
proportional basis. Principal reinsurance agreements are as follows:
- Property surplus treaty covering fire, allied lines, and inland
marine lines of business for a maximum of $10,000 subject to a
retention of $500 by STS. Only 70% of this treaty was placed with
reinsurer. The remaining exposure was covered by a property excess
of loss treaty which provides reinsurance in excess of $500 up to a
maximum of $2,500 and an additional property catastrophe excess of
loss which provides protection for losses in excess of $5,000
resulting from any catastrophe, subject to a maximum loss of
$43,500.
- Casualty excess of loss treaty. This treaty provides reinsurance for
losses in excess of $150 up to a maximum of $6,850.
- Property catastrophe excess of loss. This treaty provides protection
for losses in excess of $5,000 resulting from any catastrophe,
subject to a maximum loss of $210,000.
- Personal lines quota share. This treaty provides protection of 30%
on all ground-up losses, subject to a limit of $1,000 for any one
risk.
- Reinstatement Premium Protection. This treaty provides a maximum
limit of $8,000 to cover the necessity of reinstating the
catastrophe program in the event it is activated.
- Medical malpractice excess of loss. This treaty provides reinsurance
in excess of $150 up to a maximum of $1,500 per incident.
- Builders' risk quota share and first surplus covering contractors'
risk. This treaty provides protection on a 20/80 quota share basis
for the initial $2,500 and a first surplus of $5,000 for a maximum
of $7,500 any one risk. STS cancelled this treaty on September 30,
2002.
- Surety quota share treaty covering contract and miscellaneous surety
bond business. This treaty provides reinsurance up to $3,000 for
contract surety bonds, subject to an aggregate of $7,000 per
contractor and $2,000 per miscellaneous surety bond.
Facultative reinsurance is obtained when coverage per risk is required,
on a proportional basis. All reinsurance contracts are for a period of
one year on a calendar basis and are subject to modifications and
negotiations in each renewal.
SVTS cedes insurance with six reinsurers. Insurance is ceded on a pro
rata, facultative excess of loss and catastrophic bases. Under the pro
rata agreement, SVTS reinsures 50% of the risk up to $250 on the life of
any participating individual of certain groups insured. Under this
treaty, SVTS ceded premiums of $2,085 in 2002, $2,379 in 2001, and $2,183
in 2000.
F-45 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
The life insurance facultative excess of loss agreements provide for SVTS
to retain a portion of the losses on the life of any participating
individual of certain groups insured. Any excess will be recovered from
the reinsurer. A summary of the principal life insurance facultative
excess of loss agreements is as follows:
- A life insurance facultative excess of loss agreement that provides
for a retention of the first $50 of losses. Under this facultative
treaty SVTS ceded premiums of approximately $550 in 2002, $349 in
2001, and $640 in 2000.
- A life insurance facultative excess of loss agreement that provides
for a retention of the first $75 of losses. Under this facultative
treaty SVTS ceded premiums of approximately $111 in 2002. No
premiums were ceded under this agreement during the years 2001 and
2000.
- A life insurance facultative excess of loss agreement that provides
for a retention of the first $25 of losses. Under this facultative
treaty SVTS ceded premiums of approximately $11 in 2002. No premiums
were ceded under this agreement during the years 2001 and 2000.
SVTS also has facultative pro rata agreements with three reinsurers for
the long-term disability insurance risk. Under this treaty, SVTS
reinsures 75% of the risk. Premiums ceded under this treaty amounted to
$3,594 in 2002, $2,433 in 2001, and $1,740 in 2000.
The accidental death catastrophic reinsurance covers each and every
accident arising out of one event or occurrence resulting in the death or
dismemberment of five or more persons. SVTS's retention for each event is
$250 with a maximum of $1,000 for each event and $2,000 per year. Under
this treaty, the Company ceded premiums of $68 in 2002 and $5 in 2001 and
2000, respectively.
The ceded unearned reinsurance premiums on STS arising from these
reinsurance transactions amounted to $10,672 and $12,668 at December 31,
2002 and 2001, respectively and are reported as other assets in the
accompanying consolidated balance sheets.
The effect of reinsurance on premiums earned and claims incurred is as
follows:
PREMIUMS EARNED CLAIMS INCURRED
-------------------------------------------- --------------------------------------------
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Gross $ 1,279,483 1,192,678 1,122,079 1,071,751 1,029,992 998,085
Ceded (48,812) (41,505) (33,916) (9,771) (8,968) (7,952)
------------ ------------ ------------ ------------ ------------ ------------
Net $ 1,230,671 1,151,173 1,088,163 1,061,980 1,021,024 990,133
============ ============ ============ ============ ============ ============
(16) INCOME TAXES
Under Puerto Rico income tax law, the Company is not allowed to file
consolidated tax returns with its subsidiaries.
The tax status of its subsidiaries is as follows: TSI is exempt from
Puerto Rico income taxes under a ruling issued by the Department of the
Treasury of the Commonwealth of Puerto Rico (the Department of
F-46 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
Treasury) before and after the corporate reorganization. This exemption
requires TSI to comply with the following significant conditions:
- TSI, the Company, and the stockholders of the Company should make
annual representations to the Department of Treasury ratifying the
status of TSI operating as a not-for-profit corporation and the
conditions provided by the ruling.
- TSI must annually ratify to the Department of Treasury that it
operated exclusively for the promotion of social welfare in Puerto
Rico.
- TSI's assets (as defined in the ruling) should be used primarily for
purposes related to its health insurance business.
- Dividends cannot be paid on its common stock.
- In the event of liquidation of stocks, the Company is entitled to an
amount not in excess of the amount paid for the common stock when
they were originally issued. Any assets not distributed to the
Company will be distributed to not-for-profit organizations in the
health field.
- Any net income should be used exclusively for one or more of the
following:
- Expanding and improving the health insurance services.
- Contributions to promote health insurance-related activities.
- Increasing operating reserve until they reach a balance
equivalent to six months of claims expenses.
- In the event that TSI elects not to continue with this tax exemption
or it is revoked by the Secretary of Treasury of the Commonwealth of
Puerto Rico, there are two options regarding the possible
distribution of the operating reserve. One of the options requires
specific distribution to not-for-profit organizations in the health
field and the other must require the payment of taxes.
TSI's compliance with the requirements of the tax ruling for the year
ended December 31, 1999 is currently being audited by representatives of
the Department of Treasury (see note 20). In the opinion of management,
with the advice of its legal counsel, TSI was in compliance at December
31, 1999 with the aforementioned requirements. Also, in the opinion of
management, with the advice of its legal counsel, TSI was in compliance
with the aforementioned requirements at December 31, 2002, 2001, and
2000.
In the event that TSI elects not to continue with this tax exemption or
it is revoked by the Department of Treasury, the ruling provides that if
TSI is liquidated then an amount equal to TSI's operating reserve (as
determined for tax purposes) accumulated as of the date of termination of
the exemption (the freezed operating reserve) must be distributed in the
liquidation to nonprofit health organizations or to the Government of
Puerto Rico for the designated purposes. TSI may elect not being subject
to this distribution in liquidation requirement and if such election is
exercised, TSM will be required to recognize as gross income an amount
equal to the freezed operating reserve in the year of the election.
Management is of the opinion that if the election is exercised, the
amount of Puerto Rico income tax to be paid by TSM on the freezed
operating reserve is dependant on various factors and, therefore, an
administrative process with the Department of Treasury would likely be
required to determine such amount.
F-47 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
Among the other factors to be agreed upon between the Department of
Treasury and TSI, in connection with such possible taxes, are the
following: (a) accounting basis to be used for tax computation (that is,
accounting practices prescribed or permitted by the Commissioner of
Insurance or accounting principles generally accepted in the United
States of America); (b) exempt income generated by TSI over such years;
and (c) deductible and nondeductible expenses that will arise depending
upon the accounting basis selected for such computation. The Company
cannot presently determine the amount of accumulated earnings and profits
that TSI would be required to calculate taxes due to the uncertainty of
the different factors and elements that interplay in such determination.
In the opinion of management, the ultimate disposition of this matter
could have a significant effect on the consolidated financial position
and result of operations of the Company.
STS is taxed essentially the same as other corporations, with taxable
income determined on the basis of the statutory annual statements filed
with the insurance regulatory authorities. Also, operations are subject
to an alternative minimum income tax, which is calculated based on the
formula established by existing tax laws. Any alternative minimum income
tax paid may be used as a credit against the excess, if any, of regular
income tax over the alternative minimum income tax in future years.
No regular Puerto Rico income tax was payable by STS for 2002 and 2001
since STS incurred a net operating loss for tax purposes mainly caused by
exempt interest income of approximately $5,900 and $6,800, respectively.
The resulting net operating loss for tax purposes will not represent a
future deductible amount because the exempt income for 2002 and 2001
exceeded the net operating loss.
STS is also subject to federal income taxes for foreign source dividend
income. No federal income taxes were recognized for 2002, 2001, and 2000.
SVTS operates as a qualified domestic life insurance company and is
subject to the alternative minimum tax and taxes on its capital gains.
TSM, TCI, and ISI are subject to Puerto Rico income taxes as a regular
corporation, as defined in the Puerto Rico Income Tax Code, as amended.
F-48 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
The income tax benefit (expense) differs from the amount computed by
applying the Puerto Rico statutory income tax rate to the income (loss)
before income taxes as a result of the following:
2002 2001 2000
-------- -------- --------
Income (loss) before taxes $ 50,798 23,057 (336)
Less: net income (loss) corresponding to TSI
operations, which are exempt from
Puerto Rico income taxes 37,903 11,339 (10,704)
-------- -------- --------
12,895 11,718 10,368
Statutory tax rate 39% 39% 39%
-------- -------- --------
Income tax expense at statutory rate of 39% (5,029) (4,570) (4,044)
Increase (decrease) in taxes resulting from:
Exempt interest income 3,771 3,239 2,946
Alternative minimum tax (264) (245) (248)
Excess of regular tax over alternative
minimum tax on SVTS 45 853 808
Effect of using earnings under statutory
accounting principles instead of GAAP
earnings for STS tax computation (900) (690) (440)
Dividends received deduction 68 128 102
Disallowances, net (149) (144) (213)
Other (91) -- --
Change in valuation allowance -- 87 (87)
-------- -------- --------
Total income tax expense $ (2,549) (1,342) (1,176)
======== ======== ========
F-49 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
Deferred income taxes reflect the tax effects of temporary differences
between carrying amounts of assets and liabilities for financial
reporting purposes and income tax purposes. The net deferred tax
liability at December 31, 2002 and 2001 of the Company and of the life
and property and casualty insurance subsidiaries is composed of the
following:
2002 2001
---------- ----------
Deferred tax asset:
Puerto Rico Guaranty Fund reserve $ -- 235
Alternative minimum tax credit carryforward -- 78
Allowance for doubtful receivables 133 150
Reserve for obsolete inventory 74 153
Cash flow hedges 212 --
Nondeductible depreciation 468 --
Additional minimum pension liability 641 --
Other -- 75
---------- ----------
Gross deferred tax asset 1,528 691
---------- ----------
Deferred tax liability:
Deferred policy acquisition costs (4,125) (2,865)
Unrealized gain on securities available for sale (963) (660)
Catastrophe loss reserve trust fund (4,488) (4,531)
---------- ----------
Gross deferred tax liability (9,576) (8,056)
---------- ----------
Net deferred tax liability $ (8,048) (7,365)
========== ==========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management believes it is more likely than not that the
Company will realize the benefits of these deductible differences.
(17) PENSION PLAN
The Company sponsors a noncontributory defined-benefit pension plan for
all of its employees and for the employees of its subsidiaries who are
age 21 or older and have completed one year of service. Pension benefits
begin to vest after five years of vesting service, as defined, and are
based on years of service and final average salary, as defined. The
funding policy is to contribute to the plan as necessary to meet the
minimum funding requirements set forth in the Employee Retirement Income
Security Act of 1974, as amended, plus such additional amounts as the
Company may determine to be appropriate from time to time.
F-50 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
The following table sets forth the plan's benefit obligations, fair value
of plan assets, and funded status as of December 31, 2002 and 2001,
accordingly:
2002 2001
---------- ----------
Change in benefit obligation:
Projected benefit obligation at beginning of year $ 42,634 42,205
Service cost 3,115 2,681
Interest cost 3,369 3,168
Benefit payments (6,081) (180)
Actuarial losses 10,192 3,654
Plan amendments 764 --
Settlements -- (8,894)
---------- ----------
Projected benefit obligation at end of year $ 53,993 42,634
========== ==========
Accumulated benefit obligation at end of year $ 38,412 28,934
========== ==========
Vested benefit obligation at end of year $ 31,294 23,564
========== ==========
At December 31, 2002, the Company recognized an additional minimum
pension liability of $9,449 in order to bring the accrued pension
liability up to the level of the plan's unfunded accumulated benefit
obligation. This amount is offset by an intangible asset amounting to
$694 as of December 31, 2002 that is based on the outstanding
unrecognized prior service cost. The net amount of the additional minimum
pension liability and the intangible asset was recorded through a charge
to other comprehensive income, net of a deferred tax asset of $641 at
December 31, 2002.
2002 2001
---------- ----------
Change in plan assets:
Fair value of plan assets at beginning of year $ 26,769 36,178
Actual return on assets (net of expenses) (2,513) (1,947)
Employer contributions 7,100 1,613
Benefit payments (6,081) (180)
Settlements -- (8,894)
---------- ----------
Fair value of plan assets at end of year $ 25,275 26,770
========== ==========
Reconciliation of funded status:
Funded status $ (28,717) (15,864)
Unrecognized prior service cost 693 (14)
Unrecognized actuarial loss 24,336 9,269
---------- ----------
Accrued benefit cost $ (3,688) (6,609)
========== ==========
F-51 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
The components of net periodic benefit cost for 2002, 2001, and 2000 were
as follows:
2002 2001 2000
-------- -------- --------
Components of net periodic benefit cost:
Service cost $ 3,115 2,681 2,390
Interest cost 3,369 3,168 2,903
Expected return on assets (2,754) (3,214) (3,107)
Amortization of transition obligation -- 75 75
Amortization of prior service cost 57 5 5
Amortization of actuarial loss 392 -- --
Settlement loss -- 1,934 --
-------- -------- --------
Net periodic benefit cost $ 4,179 4,649 2,266
======== ======== ========
Net periodic pension expense may include settlement charges as a result
of retirees selecting lump-sum distributions. Settlement charges may
increase in the future if the number of eligible participants deciding to
receive distributions and the amount of their benefits increases.
The following assumptions were used on a weighted average basis in the
accounting of the plan as of December 31, 2002, 2001, and 2000:
2002 2001 2000
---------------- ---------------- ----------------
Discount rate 6.75% 7.25% 7.50%
Expected return on plan assets 8.50% 9.00% 9.00%
Rate of compensation increase Graded; 3.00% to Graded; 3.00% to Graded; 3.00% to
6.50% 6.50% 6.50%
The assumptions used in computing net periodic benefit cost for 2002,
2001, and 2000 were as follows:
2002 2001 2000
----------------- ----------------- -----------------
Assumptions used in computing net
periodic benefit cost:
Discount rate 7.25% 7.50% 7.75%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase Graded; 3.00% to Graded; 3.00% to Graded; 3.00% to
6.50% 6.50% 6.50%
(18) CATASTROPHE LOSS RESERVE TRUST FUND
In accordance with the Act No. 73 of August 12, 1994, and Chapter 25 of
the Insurance Code, STS is required to establish and maintain a trust
fund for the payments of catastrophe losses. The establishment of this
trust fund will increase the financial capacity in order to offer
protection for those insurers exposed to catastrophe losses. This trust
may invest its funds in securities authorized by the Insurance Code, but
not in
F-52 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
investments whose value may be affected by hazards covered by the
catastrophic insurance losses. The interest earned on these investments
and any realized gain (loss) on investment transactions becomes part of
the reserve for catastrophic insurance losses and income (expense) of the
Company. The assets in this fund, which are reported as other assets in
the accompanying consolidated balance sheets, will be used solely and
exclusively to pay catastrophe losses covered under policies written in
Puerto Rico.
The operating reserve of STS is restricted in the accompanying
consolidated balance sheets by the total catastrophe loss reserve
balance.
In addition, pursuant to Article 8 of Rule LXXII of October 15, 1999, of
the Insurance Code of the Commonwealth of Puerto Rico, STS is required to
make the current year deposit to the fund, if any, on or before January
30 of the following year. Contributions are determined by a rate (2.5%
for 2002 and 10% for 2001), imposed by the Commissioner of Insurance for
the catastrophe policies written in that year.
No deposits were made during 2002 and 2001 as the deposit formula
resulted in no additional contribution for the year. The amount deposited
in the trust fund may be reimbursed in the case that STS ceases to
underwrite risks subject to catastrophe losses.
As of December 31, 2002 and 2001, the movement of the catastrophe loss
reserve is as follows:
2002 2001
-------- --------
Catastrophe loss reserve at beginning of year $ 19,732 18,232
Investment income 1,092 1,500
-------- --------
Balance of the catastrophe loss reserve trust
fund at end of year $ 20,824 19,732
======== ========
The trust fund assets are composed of the following:
2002 2001
-------- --------
U.S. Treasury securities, at amortized cost (fair value of
$390 and $386 in 2002 and 2001, respectively) $ 370 370
Federal Home Loan Bank note, at amortized cost (fair value
of $18,865 and $17,784 in 2002 and 2001, respectively) 18,565 17,595
Obligations of the Commonwealth of Puerto Rico and
its instrumentalities, at amortized cost (fair value
of $1,514 and $1,426 in 2002 and 2001, respectively) 1,500 1,500
Accrued interest receivable 318 261
Cash and cash equivalents 71 6
-------- --------
$ 20,824 19,732
======== ========
F-53 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
Maturities of investments held in the catastrophe loss reserve trust
fund were as follows at December 31, 2002:
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
Due after one year through five years $ 8,470 8,605
Due after five years through ten years 10,465 10,613
Due after ten years 1,500 1,551
------- ------
$20,435 20,769
======= ======
(19) COMMITMENTS
The Company leases its regional offices, certain equipment, and
warehouse facilities under operating noncancelable leases. Minimum
annual rental commitments at December 31, 2002 under existing
agreements are summarized as follows:
Year ending December 31:
2003 $ 2,148
2004 959
2005 712
2006 572
2007 342
Thereafter 440
------------------
Total $ 5,173
==================
Rental expense for 2002, 2001, and 2000 was $1,459, $1,274, and $1,141,
respectively, after deducting the amount of $441, $419, and $260,
respectively, reimbursed by Medicare (see note 13).
(20) CONTINGENCIES
(A) LEGAL PROCEEDINGS
At December 31, 2002, the Company is defendant in various
lawsuits arising in the ordinary course of business. In the
opinion of management, with the advice of its legal counsel,
the ultimate disposition of these matters will not have a
material adverse effect on the consolidated financial position
and results of operations of the Company.
(B) GUARANTEE ASSOCIATIONS
Pursuant to the Puerto Rico Insurance Code, STS is a member of
Sindicato de Aseguradores para la Suscripcion Conjunta de
Seguros de Responsabilidad Profesional Medico-Hospitalaria
(SIMED) and of the Sindicato de Aseguradores de
Responsabilidad Profesional para Medicos. Both syndicates were
organized for the purpose of underwriting medical-hospital
professional liability insurance. As
F-54 (Continued)
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
a member, the subsidiary shares risks with other member
companies and, accordingly, is contingently liable in the
event that the above-mentioned syndicates cannot meet their
obligations.
In the recent years SIMED has encountered financial
difficulties, mainly attributed to premium deficiencies. As of
December 31, 2001 (date of latest financial statements
available), SIMED presented a deficit of approximately
$22,300. During 2002, 2001, and 2000, no assessment or payment
has been made for this contingency.
Additionally, pursuant to Article 12 of Rule LXIX of the
Insurance Code of the Commonwealth of Puerto Rico, STS is a
member of the Compulsory Vehicle Liability Insurance Joint
Underwriting Association (the Association). This Association
was organized during 1997 to underwrite insurance coverage of
motor vehicles property damage liability risks effective on
January 1, 1998. As a participant, STS shares the risk,
proportionately with other members, based on a formula
established by the Insurance Code. During the three-year
period ended December 31, 2002, 2001, and 2000, the
Association distributed to the insurance companies
underwriting auto property damages liability insurance in
Puerto Rico, an experience refund. STS received $565, $602,
and $538 in 2002, 2001, and 2000, respectively, out of total
refund distributed.
STS is a member of the Asociacion de Garantia de Seguros de
Todas Clases, excepto Vida, Incapacidad y Salud and TSI and
SVTS are members of the Asociacion de Garantia de Seguros de
Vida, Incapacidad y Salud. As members, they are required to
provide funds for the payment of claims and unearned premiums
reimbursements for policies issued by insurance companies
declared insolvent. At December 31, 2001, STS had accrued $785
for possible future assessments. During 2002, STS paid an
assessment in connection with insurance companies declared
insolvent in the amount of $654. No accrual was made at
December 31, 2002, since STS has not been informed of any
further assessments. During 2001, no assessments or payments
were made to these associations.
(C) EXAMINATION FROM REGULATOR
The Puerto Rico House of Representatives Banking and Insurance
Committee (the Committee) is conducting an investigation of
TSI's tax treatment under rulings issued by the Puerto Rico
Department of the Treasury that grant TSI's tax exempt status.
A similar resolution was approved by the Puerto Rico Senate.
TSI has provided to the Committee and the Puerto Rico Senate
the information and documents as requested and will cooperate
with all aspects of the investigation (note 16).
(21) STATUTORY ACCOUNTING (UNAUDITED)
TSI, SVTS, and STS (collectively known as the regulated
subsidiaries) are regulated by the Commissioner of Insurance.
The regulated subsidiaries are required to prepare financial
statements using accounting practices prescribed or permitted
by the Commissioner of Insurance, which differ from GAAP.
F-55
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
The principal differences resulting on the financial statements of the
regulated subsidiaries under statutory accounting practices with GAAP
are as follows:
- - The accounting basis of investments in debt and equity securities are
based upon the rules promulgated by National Association of Insurance
Commissioners (NAIC) Statutory Accounting Principles (SAP).
- - Certain assets (primarily prepaid expenses, furniture and equipment,
and premiums' balances not collected within 90 days) are classified as
nonadmitted and are excluded from the balance sheets by a charge to
unassigned capital and surplus.
- - Certain notes payable are classified as surplus notes under statutory
accounting practices.
- - Policy acquisitions costs (mainly commissions) are not deferred over
the periods in which the premiums are earned but charged to operations
as incurred.
The NAIC has recodified SAP to promote standardization throughout the industry.
On January 1, 2001 the Company adopted these new statutory accounting
principles. During 1999, the Commissioner of Insurance adopted the NAIC SAP as
long as it does not contradict the provisions of the Insurance Code of the
Commonwealth of Puerto Rico. This results on the situation that various
accounting practices prescribed or permitted by the Commissioner of Insurance
depart from NAIC SAP.
In terms of permitted accounting practices, the Commissioner of Insurance
through a circular letter dated September 14, 2001 permitted the property and
casualty insurance companies in Puerto Rico not recording the deferred tax
liability that otherwise would have resulted from the contributions made to the
catastrophe reserve fund (see note 18). The use of this permitted statutory
accounting practice relieves STS in 2002 and 2001 of recording a charge to
operations of approximately $43 and $62, respectively, and a charge to the
statutory surplus of approximately $4,500, in 2002 and 2001, which otherwise
would have been recorded under the prescribed statutory accounting practices.
The accumulated earnings of SVTS and STS are restricted as to the payment
companies. Such limitations restrict the payment of dividends by insurance
companies generally to unrestricted unassigned surplus funds reported for
statutory purposes which amounted to approximately $20,777 and $19,500 as of
December 31, 2002 and 2001, respectively, for STS and approximately $16,466 and
$13,000 for SVTS, respectively. As more fully described in note 17, the
accumulated earnings of STS are also restricted by the catastrophe loss reserve
balance as required by the Insurance Code of the Commonwealth of Puerto Rico.
The net admitted assets and capital and surplus of the insurance subsidiaries at
December 31, 2002 and 2001 are as follows:
2002
-------------------------------------
TSI STS SVTS
------------ ------- ------
Net admitted assets $ 416,108 163,775 43,509
============ ======= ======
Capital and surplus $ 162,880 50,101 17,665
============ ======= ======
F-56
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
2001
-------------------------------------
TSI STS SVTS
------------ ------- ------
Net admitted assets $ 371,553 146,385 43,713
============ ======= ======
Capital and surplus $ 131,091 47,546 14,194
============ ======= ======
The net income (loss) of the insurance subsidiaries for the three-year
period ended December 31, 2002, 2001, and 2000 is as follows:
TSI STS SVTS
2002 $ 39,098 3,774 3,429
========== ===== =====
2001 $ 15,515 6,469 3,366
========== ===== =====
2000 $ (5,517) 6,567 3,342
========== ===== =====
(22) NET INCOME (LOSS) AVAILABLE TO STOCKHOLDERS AND NET INCOME (LOSS) PER
SHARE
The Company presents only basic earnings per share, which is comprised
of the net income (loss) that could be available to common stockholders
divided by the weighted average number of common shares outstanding for
the period.
The Company is a for-profit organization that operates as a
not-for-profit organization by virtue of the affirmative vote of its
stockholders. As a result, the Company does not distribute dividends.
This resolution could be altered anytime by the affirmative vote of
stockholders and thus, dividends could be available for distribution
subject to the applicable obligations and responsibilities.
In the event that stockholders decide to operate as a for-profit
organization and the board decides to pay dividends, the amount that
could be available for distribution would exclude TSI's operating
reserve at December 31, 2002 and capital contributions made by TSI to
its former subsidiaries before the corporate reorganization (see note
1) due to TSI's tax exemption (see note 16). This fact was reaffirmed
by a letter issued by the Department of Treasury on July 3, 2001. For
purposes of computing the basic earnings per share presented in the
consolidated statements of operations, the Company considers the
operations of TSI as if TSI operated as a for-profit organization.
Under this scenario, in order to determine the net income (loss) that
could be available to stockholders, the Company estimates the Puerto
Rico income taxes that would have otherwise resulted and deducts it
from the results of operations of each year. TSI's estimate of Puerto
Rico income taxes, computed for such purposes, was determined as for an
other than life insurance entity, as defined in the Puerto Rico Income
Tax Code, as amended. The effective tax rate used was 39% for the three
years ended December 31, 2002, 2001, and 2000.
F-57
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
The following table sets forth the resulting net income (loss) that
could be available to stockholders if TSI operated as a for-profit
organization for the three years ended December 31, 2002, 2001, and
2000.
2002 2001 2000
------------------ ------------------ -------------------
Net income (loss) $ 48,249 21,715 (1,512)
Less tax effect on TSI operations 12,351 6,473 (817)
------------------ ------------------ -------------------
Net income (loss) available
to stockholders $ 35,898 15,242 (695)
================== ================== ===================
The following table sets forth the computation of basic earnings per
share for the three-year period ended December 31, 2002, 2001, and 2000
(in thousands, except shares outstanding and per share data):
2002 2001 2000
------------------ ------------------ -------------------
Numerator for basic earnings per share:
Net income (loss) available to
stockholders $ 35,898 15,242 (695)
================== ================== ===================
Denominator for basic earnings per share:
Weighted average of common
shares outstanding 9,531 9,864 9,894
================== ================== ===================
Basic net income (loss) per share $ 3,766 1,545 (70)
================== ================== ===================
Should the Company decide to continue to preserve the tax exemptions
granted to TSI by the previously mentioned income tax ruling, then
dividends cannot be distributed out of the results of operations of TSI.
The following table sets forth the resulting net income (loss) that would
otherwise be available for distribution after excluding the net result of
operations of TSI for the three-year period ended December 31, 2002,
2001, and 2000.
2002 2001 2000
------------------ ------------------ ------------------
Net income (loss) $ 48,249 21,715 (1,512)
Less TSI result of operations 37,903 11,339 (10,704)
------------------ ------------------ ------------------
Net income after excluding
the operations of TSI $ 10,346 10,376 9,192
================== ================== ==================
F-58
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
The following table sets forth the computation of basic earnings per
share for the three-year period ended December 31, 2002, 2001, and 2000
if the Company excludes TSI's results of operations (in thousands,
except shares outstanding and per share data):
2002 2001 2000
------------------ ------------------ ------------------
Numerator for basic earnings per share:
Net income available to stockholders
after excluding the net result of
operations of TSI $ 10,346 10,376 9,192
================== ================== ==================
Denominator for basic earnings per share:
Weighted average of common shares
outstanding 9,531 9,864 9,894
================== ================== ==================
Basic net income per share after
excluding the net results of operations
of TSI $ 1,085 1,052 929
================== ================== ==================
(23) RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
A reconciliation of net income (loss) to net cash provided by operating
activities follows:
2002 2001 2000
------------------ ------------------- -------------------
Net income (loss) $ 48,249 21,715 (1,512)
------------------ ------------------- -------------------
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 7,595 6,053 6,337
Net amortization of investments
(discounts) premiums 2 (789) 28
Accretion in value of securities (1,664) (1,324) (2,113)
Increase in provision for
doubtful receivables 2,116 2,887 381
Increase in net deferred tax liability 1,233 825 659
Gain on sale of securities (185) (4,655) (6,357)
Unrealized (gain) loss of trading
securities 8,322 3,625 3,737
Proceeds from trading securities sold
or matured:
Fixed maturities sold 103,012 22,620 22,077
Equity securities 11,804 15,982 16,960
------------------ ------------------ ------------------
Balance carried forward $ 180,484 66,939 40,197
------------------ ------------------ ------------------
F-59
2002 2001 2000
------------------ ------------------ ------------------
Balance brought forward $ 180,474 66,939 40,197
------------------ ------------------ ------------------
Acquisition of securities in trading portfolio:
Fixed maturities (112,878) (25,420) (23,847)
Equity securities (16,472) (18,196) (17,347)
Gain on sale of property and equipment (1) (35) (43)
Increase in premiums receivable (6,158) (10,056) (7,458)
Increase in accrued interest receivable (47) (183) (270)
(Increase) decrease in other receivables (9,066) (991) 12,507
Increase in deferred policy acquisition costs (4,220) (1,550) (1,200)
(Increase) decrease in other assets 240 (4,580) (6,295)
Increase (decrease) in claims processed
and incomplete and future policy
benefits liability 13,029 30,199 (6,098)
Increase in unreported losses 70 15,094 9,354
Increase (decrease) in loss-adjustment
expenses 2,043 916 (196)
Increase (decrease) on individual
retirement annuities (832) 178 (212)
Increase in unearned premiums 12,655 6,166 4,248
Increase (decrease) in liability to FEHBP (5,064) 2,165 2,383
Increase in accounts payable
and accrued liabilities 3,024 8,790 1,721
------------------ ------------------- -------------------
Net cash provided by
operating activities $ 56,807 69,436 7,444
================== =================== ===================
Supplementary information on noncash
transactions affecting cash flows
activities:
Change in net unrealized gain on
securities available for sale,
including deferred income tax liability
of $963 in 2002 and deferred tax asset
of $660 in 2001 $ 5,986 4,624 2,022
================== =================== ===================
Retirement of fully depreciated items $ 1,258 838 1,323
================== =================== ===================
Income taxes paid $ 499 877 353
================== =================== ===================
Change in cash flow hedges,
including deferred income tax
asset of $212 in 2002 $ 470 -- --
================== =================== ===================
Change in minimum pension liability,
including related intangible asset
of $694 and deferred income tax
of $641 in 2002 $ 8,114 -- --
================== ====-============== ===================
F-60
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Dollar amounts in thousands, except per share data)
(24) SUBSEQUENT EVENT
The Puerto Rico Health Insurance Administration of the Commonwealth of
Puerto Rico (the Administration) is considering carving-out additional
benefits provided by the insurers of the Reform segment. On March 1,
2003, the Administration announced that, effective July 1, 2003, it
will begin a pilot project where it will be contracting directly with
some of the medical groups, instead of through the health insurance
companies. This change is expected to decrease the Reform's segment
enrollment by approximately 46,000 members and the related annualized
premiums by approximately $30 million.
F-61
SCHEDULE II
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Financial Statements
December 31, 2002 and 2001
(With Independent Auditors' Report Thereon)
S-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Triple-S Management Corporation:
Under date of February 14, 2003 we reported on the consolidated balance sheets
of Triple-S Management Corporation and Subsidiaries (the Company) as of December
31, 2002 and 2001, and the related consolidated statements of operations,
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2002 as contained in the 2002
annual report to stockholders. These consolidated financial statements and our
report thereon are incorporated by reference in the annual report on Form 10-K
for the year 2002. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedules as listed in the Item 15. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG LLP
February 14, 2003
Stamp No. 1828179 of the Puerto Rico Society
of Certified Public Accountants was affixed
to the record copy of this report.
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Balance Sheets
December 31, 2002 and 2001
(Dollar amounts in thousands)
ASSETS 2002 2001
--------- ---------
Current assets:
Cash and cash equivalents $ 675 2,794
--------- ---------
Receivables:
Premiums financing contracts 138 196
Due from subsidiaries 228 210
Other 10 8
--------- ---------
Total receivables 376 414
Less allowance for doubtful receivables (138) (193)
--------- ---------
Receivables, net 238 221
Investment in securities 5,749 5,115
Deferred income taxes 857 253
Other assets 24 84
--------- ---------
Total current assets 7,543 8,467
Notes receivable from subsidiary 26,000 26,000
Accrued interest 4,914 4,088
Investments in wholly owned subsidiaries 225,021 178,979
Property and equipment, net 27,755 30,018
--------- ---------
Total assets $ 291,233 247,552
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,640 2,640
Due to subsidiaries 4,206 4,693
Accounts payable and accrued expenses 867 1,181
Accrued pension cost 3,688 --
Income tax payable 463 --
--------- ---------
Total current liabilities 10,864 8,514
Additional minimum pension liability 330 --
Long-term debt 48,375 53,010
--------- ---------
Total liabilities 59,569 61,524
--------- ---------
Stockholders' equity:
Common stock at $40 par value. Authorized 12,500 shares; issued
and outstanding 9,337 and 9,714 shares at December 31, 2002
and 2001, respectively 373 389
Additional paid-in capital 150,406 150,405
Retained earnings 62,499 14,250
Accumulated other comprehensive income 18,386 20,984
--------- ---------
231,664 186,028
Commitments and contingencies
--------- ---------
Total liabilities and stockholders' equity $ 291,233 247,552
========= =========
See accompanying notes to financial statements
2
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Statements of Operations
Years ended December 31, 2002 and 2001
(Dollar amounts in thousands)
2002 2001
-------- --------
Rental income $ 6,591 6,574
General and administrative expenses (5,549) (5,037)
-------- --------
Operating income 1,042 1,537
-------- --------
Other revenue (expenses):
Equity in net income of subsidiaries 48,405 21,683
Interest expense, net of interest income of $1,092 and $1,806
in 2002 and 2001, respectively (1,058) (1,559)
Other, net 111 5
-------- --------
Total other revenue, net 47,458 20,129
-------- --------
Income before income taxes 48,500 21,666
-------- --------
Income tax expense (benefit):
Current 547 --
Deferred (296) (49)
-------- --------
Total income tax expense (benefit), net 251 (49)
-------- --------
Net income $ 48,249 21,715
======== ========
See accompanying notes to financial statements.
3
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 2002 and 2001
(Dollar amounts in thousands)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
-------- -------- -------- -------- --------
Balance, December 31, 2000 $ 395 150,403 (7,465) 16,360 159,693
Stock redemption (6) 2 -- -- (4)
Comprehensive income:
Net income -- -- 21,715 -- 21,715
Net unrealized change in
investment securities -- -- -- 4,624 4,624
--------
Total comprehensive income -- -- -- -- 26,339
-------- -------- -------- -------- --------
Balance, December 31, 2001 389 150,405 14,250 20,984 186,028
Stock redemption (16) 1 -- -- (15)
Comprehensive income:
Net income -- -- 48,249 -- 48,249
Net unrealized change in
investment securities -- -- -- 5,986 5,986
Net change in minimum pension liability -- -- -- (8,114) (8,114)
Net change in fair value of cash
flow hedges -- -- -- (470) (470)
--------
Total comprehensive income -- -- -- -- 45,651
-------- -------- -------- -------- --------
Balance, December 31, 2002 $ 373 150,406 62,499 18,386 231,664
======== ======== ======== ======== ========
See accompanying notes to financial statements.
4
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Statements of Cash Flows
Years ended December 31, 2002 and 2001
(Dollar amounts in thousands)
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 48,249 21,715
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in net income of subsidiaries (48,405) (21,683)
Depreciation and amortization 2,359 1,273
Gain on sale of securities (111) (5)
Provision for obsolescence -- 221
Provision for doubtful receivables (55) (23)
Deferred income tax benefit (296) (49)
Income tax payable 463 --
Changes in assets and liabilities:
Receivables 38 154
Accrued interest (826) (1,499)
Other assets 84 167
Accounts payable, accrued expenses, and due to subsidiary 2,204 2,274
-------- --------
Net cash provided by operating activities 3,704 2,545
-------- --------
Cash flows from investing activities:
Dividend received from wholly owned subsidiaries 227 240
Acquisition of investment in securities classified as available for sale (5,920) (5,685)
Proceeds from sale and maturities of investment in securities
classified as available for sale 5,616 3,722
Acquisition of property and equipment, net (96) (51)
-------- --------
Net cash used in investing activities (173) (1,774)
-------- --------
Cash flows from financing activities:
Capital investment in subsidiary -- (1)
Payment of long-term debts (5,635) (2,390)
Redemption of common stocks (15) (4)
-------- --------
Net cash used in financing activities (5,650) (2,395)
-------- --------
Net decrease in cash and cash equivalents (2,119) (1,624)
Cash and cash equivalents, beginning of year 2,794 4,418
-------- --------
Cash and cash equivalents, end of year $ 675 2,794
======== ========
Noncash activities:
Change in net unrealized gain on securities available
for sale of the subsidiaries $ 5,766 4,474
Change in net unrealized gain on securities available for sale 220 150
Change in cash flow hedges including deferred tax asset of
$212 in 2002 470 --
Change in minimum pension liability including related
intangible asset of $694 in 2002 8,114 --
See accompanying notes to financial statements.
5
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
(1) NATURE OF BUSINESS AND CORPORATE REORGANIZATION
Triple-S Management Corporation (the Company or TSM) was incorporated
under the laws of the Commonwealth of Puerto Rico to engage principally,
among other things, as the holding company of entities previously
involved in the insurance industry. The Company was a wholly owned
subsidiary of Triple-S, Inc. (TSI) until January 4, 1999, and did not
start operations until such day, which is the effective date and
completion of the corporate reorganization described below.
On December 6, 1996 the Commissioner of Insurance of the Commonwealth of
Puerto Rico (the Commissioner of Insurance) issued an order to annul the
sale of 1,582 shares of common stock held as treasury stock that TSI
repurchased from the estate of deceased stockholders. TSI contested such
order through administrative and judicial review processes. Consequently,
the sale of 1,582 shares was cancelled and the amount paid was returned
to each former stockholder of the aforementioned shares. During the year
2000, the Commissioner of Insurance issued a pronouncement providing
further clarification to the content and effect of the order. The order
also required that all corporate decisions undertaken by TSI through the
vote of its stockholders in record, be ratified in a stockholders'
meeting or in a subsequent referendum. In November 2000, the Company, as
the sole stockholder of TSI, ratified all such decisions. Furthermore, on
November 19, 2000 the Company held a special meeting of its stockholders
where a ratification of the same decisions was undertaken, except for the
resolutions related to the approval of the corporate reorganization of
TSI and its subsidiaries. This resolution did not reach the two-thirds
majority required by the order because the number of shares that were
present and represented in the meeting were below such amount (total
shares present and represented in the stockholders' meeting were
approximately 64%). As stipulated in the order, the Company began the
process to conduct a referendum among its stockholders to ratify such
resolution. The process was later suspended because upon a further review
of the scope of the order, the Commissioner of Insurance upon a letter
dated January 8, 2002, maintained that the ratification of the corporate
reorganization may not be required.
The Commissioner of Insurance confirmed this position in a letter dated
March 14, 2002 to TSI, which states that there are no further corporate
decisions requiring ratification and that the Commissioner of Insurance's
order of December 6, 1996 has been complied with. Thereafter, two
stockholders of TSM filed a petition for review of the Commissioner of
Insurance's determination before the Puerto Rico Circuit Court of
Appeals, which petition was opposed by TSI and by the Commissioner of
Insurance. Pursuant to that review, on September 24, 2002, the Puerto
Rico Circuit Court of Appeals issued an order requiring the Commissioner
of Insurance to order that a meeting of shareholders be held to ratify
TSI's corporate reorganization and the change of TSI's name from "Seguros
de Servicios de Salud de Puerto Rico, Inc." to "Triple-S, Inc." The
Circuit Court of Appeals based its decision on administrative and
procedural issues directed at the Commissioner of Insurance. The
Commissioner of Insurance filed a motion of reconsideration with the
Circuit Court of Appeals on October 11, 2002. TSI and TSM also filed a
motion of reconsideration. On October 25, 2002 the Circuit Court of
Appeals dismissed the Commissioner of Insurance's motion for
reconsideration. This matter is still pending resolution from the Circuit
Court of Appeals. It is the opinion of the management and its legal
counsels that the corporate reorganization as approved is in full force
and effect.
(Continued)
6
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
The Company has the following wholly owned subsidiaries that are subject
to the regulations of the Commissioner of Insurance: (1) TSI, which
provides hospitalization and health benefits to subscribers through
contracts with hospitals, physicians, dentists, laboratories, and other
organizations located mainly in Puerto Rico; the Company and TSI are
members of the Blue Cross and Blue Shield Association (BCBSA); (2)
Seguros de Vida Triple-S, Inc. (SVTS), which is engaged in the
underwriting of life insurance policies and the administration of
individual retirement annuities; and (3) Seguros Triple-S, Inc. (STS),
which is engaged in the underwriting of property and casualty insurance
policies.
The Company also has two other wholly owned subsidiaries, Interactive
Systems, Inc. (ISI) and Triple-C, Inc. (TC). ISI is mainly engaged in
providing data processing services to the Company and its subsidiaries.
The Commonwealth of Puerto Rico Health Care Reform's business was
administered through a division of TSI up to September 30, 2001.
Effective October 1, 2001 TC commenced operations as part of a strategic
positioning in the health industry to take advantage of new market
opportunities. It will be mainly engaged as a third-party administrator
for TSI in the administration of the Reform. It will also provide health
care advisory services to TSI and other health insurance-related services
in the health insurance industry.
A substantial majority of the Company's business activity is with
insureds located throughout Puerto Rico, and as such, the Company is
subject to the risks associated with the Puerto Rico economy.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following are the significant accounting policies followed by the
Company:
(a) BASIS OF PRESENTATION
The accompanying financial statements have been prepared for
statutory tax purposes and separate consolidated financial
statements have been issued. These financial statements are in
conformity with accounting principles generally accepted in the
United States of America.
(b) CASH EQUIVALENTS
Cash equivalents of $500 and $2,739 at December 31, 2002 and 2001
consist principally of time deposits, and U.S. Treasury securities
and obligations of the U.S. government instrumentalities with an
initial term of less than three months. For purposes of the
statements of cash flows, the Company considers all time deposits
and highly liquid debt instruments with original maturities of
three months or less to be cash equivalents.
(c) INVESTMENT IN SECURITIES
Investment in securities at December 31, 2002 and 2001 consists of
obligations of the U.S. government instrumentalities, marketable
equity securities, and a certificate of deposit. The Company
classifies its debt and marketable equity securities as available
for sale, and accordingly, are recorded at fair value.
Trading and available for sale securities are recorded at fair
value. Held to maturity debt securities are recorded at amortized
cost, adjusted for the amortization or accretion of premiums or
discounts.
(Continued)
7
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
Unrealized holding gains and losses on trading securities are
included in operations. Unrealized holding gains and losses, net
of the related tax effect, on available for sale securities are
excluded from operations and are reported as a separate component
of other comprehensive income until realized. Transfers of
securities between categories are recorded at fair value at the
date of transfer. Unrealized holding gains and losses are
recognized in operations for transfers into trading securities.
Unrealized holding gains or losses associated with transfers of
securities from held to maturity to available for sale are
recorded as a separate component of other comprehensive income.
The unrealized holding gains or losses included in the separate
component of other comprehensive income for securities transferred
from available for sale to held to maturity, are maintained and
amortized into operations over the remaining life of the security
as an adjustment to yield in a manner consistent with the
amortization or accretion of premium or discount on the associated
security.
Net unrealized gain on investments classified as available for
sale by the Company and its subsidiaries amounted to $27,933 and
$21,644 in 2002 and 2001, respectively, net of deferred tax
liability of $963 and $660 in 2002 and 2001, respectively. No
deferred income tax was recognized for unrealized gains of $21,837
and $17,311 for 2002 and 2001, respectively, on investments
classified as available for sale by TSI due to its tax-exempt
status.
A decline in the fair value of any available-for-sale security
below cost that is deemed to be other than temporary results in a
reduction in the carrying amount to fair value. The impairment is
charged to operations and a new cost basis for the security is
established.
Premiums and discounts are amortized or accreted over the life of
the related available-for-sale security as an adjustment to yield
using the effective interest method. Dividend and interest income
are recognized when earned. Realized gains and losses from the
sale of available-for-sale securities are included in operations
and are determined on a specific-identification basis.
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs
are expensed as incurred. Depreciation is calculated on the
straight-line method over the estimated useful lives of the
assets. Costs of computer equipment, programs, systems,
installations, and enhancements are capitalized. Costs of systems
in operations are amortized over their estimated useful lives.
(e) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company accounts for derivative instruments and hedging
activities in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Certain Hedging Activities, and SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an Amendment to SFAS No. 133. SFAS No. 133 and
SFAS No. 138 require that all derivative instruments be recorded
on the balance sheet at their respective fair values.
On the date the derivative contract is entered into, the Company
designates the derivative as either a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm
commitment (fair
(Continued)
8
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
value hedge), a hedge of a forecasted transaction or the
variability of cash flows to be received or paid related to a
recognized asset or liability (cash flow hedge), a foreign
currency fair value or cash flow hedge (foreign currency hedge),
or a hedge of a net investment in a foreign operation. For all
hedging relationships the Company formally documents the hedging
relationship and its risk-management objective and strategy for
undertaking the hedge, the hedging instrument, the item, the
nature of the risk being hedged, how the hedging instrument's
effectiveness in offsetting the hedged risk will be assessed, and
a description of the method of measuring ineffectiveness. This
process includes linking all derivatives that are designated as
fair value, cash flow, or foreign currency hedges to specific
assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions. The Company also formally
assesses, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash
flows of hedged items. When it is determined that a derivative is
not highly effective as a hedge or that it has ceased to be a
highly effective hedge, the Company discontinues the hedge
accounting prospectively.
Changes in the fair value of a derivative that is highly effective
and that is designated and qualifies as a fair value hedge, along
with the loss or gain on the hedged asset or liability or
unrecognized firm commitment of the hedged item that is
attributable to the hedged risk, are recorded in earnings. Changes
in the fair value of a derivative that is highly effective and
that is designated and qualifies as a cash flow hedge are recorded
in other comprehensive income to the extent that the derivative is
effective as hedge, until earnings are affected by the variability
in cash flows of the designated hedged item. Changes in the fair
value of derivatives that are highly effective as hedges and that
are designated and qualify as foreign currency hedges are recorded
in either earnings or other comprehensive income, depending on
whether the hedge transaction is a fair value hedge or a cash flow
hedge. However, if a derivative is used as a hedge of a net
investment in a foreign operation, its changes in fair value, to
the extent effective as a hedge, are recorded in the cumulative
translation adjustments account within other comprehensive income.
The ineffective portion of the change in fair value of a
derivative instrument that qualifies as either a fair value hedge
or a cash flow hedge is reported in earnings. Changes in the fair
value of derivative trading instruments are reported in current
period earnings.
The Company discontinues hedge accounting prospectively when it is
determined that the derivative is no longer effective in
offsetting changes in the fair value or cash flows of the hedged
item, the derivative expires or is sold, terminated, or exercised,
the derivative is designated as a hedging instrument, because it
is unlikely that a forecasted transaction will occur, a hedged
firm commitment no longer meets the definition of a firm
commitment, or management determines that designation of the
derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined
that the derivative no longer qualifies as an effective fair value
hedge, the Company continues to carry the derivative on the
balance sheet at its fair value, and no longer adjusts the hedged
asset or liability for changes in fair value. The adjustment of
the carrying amount of the hedged asset or liability is accounted
for in the same manner as other components of the carrying amount
of that asset or liability. When hedge accounting is discontinued
because the hedged item no longer meets the definition of a firm
(Continued)
9
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
commitment, the Company continues to carry the derivative on the
balance sheet at its fair value, removes any asset or liability
that was recorded pursuant to recognition of the firm commitment
from the balance sheet and recognizes any gain or loss in
earnings. When hedge accounting is discontinued because it is
probable that a forecasted transaction will not occur, the Company
continues to carry the derivative on the balance sheet at its fair
value with subsequent changes in fair value included in earnings,
and gains and losses that were accumulated in other comprehensive
income are recognized immediately in earnings. In all other
situations in which hedge accounting is discontinued, the Company
continues to carry the derivative at its fair value on the balance
sheet, and recognizes any changes in its fair value in earnings.
(f) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the statements of operations in the period that includes the
enactment date.
(g) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts and
notes receivable. The fair value information of financial
instruments in the accompanying financial statements was
determined as follows:
(i) CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the
short-term nature of those instruments.
(ii) INVESTMENT IN SECURITIES
The fair value of investment in securities is estimated
based on quoted market prices for those or similar
investments. Additional information pertinent to the
estimated fair value of investment in securities is included
in note 3.
(iii) RECEIVABLES, OTHER ASSETS, DUE TO SUBSIDIARY, ACCOUNTS
PAYABLE AND ACCRUED EXPENSES, INCOME TAXES PAYABLE, AND
ACCRUED PENSION COST
The carrying amount of receivables, other assets, due to
subsidiary, accounts payable and accrued expenses, income
taxes payable, and accrued pension cost approximates fair
value because they mature and should be collected or paid
within 12 months after December 31.
(Continued)
10
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
(iv) LONG-TERM DEBT
The carrying amount of long-term debt approximates fair
value due to its floating interest rate structure.
(v) INTEREST RATE SWAPS
Current market pricing models were used to estimate fair
values of interest rate swap agreement (see note 7).
(h) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
SFAS No. 144 provides a single accounting model for long-lived
assets to be disposed of. SFAS No. 144 also changes the criteria
for classifying an asset as held for sale and broadens the scope
of businesses to be disposed of that qualify for reporting as
discontinued operations and changes the timing of recognizing
losses on such operations. The Company adopted SFAS No. 144 on
January 1, 2002.
In accordance with SFAS No. 144, long-lived assets, such as
property, plant, and equipment, and purchased intangibles subject
to amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an
asset to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of
would be separately presented in the balance sheet and reported at
the lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. The assets and liabilities of a
disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the
balance sheet.
Goodwill and intangible assets not subject to amortization are
tested annually for impairment, and are tested for impairment more
frequently if events and circumstances indicate that the asset
might be impaired. An impairment loss is recognized to the extent
that the carrying amount exceeds the asset's fair value.
Prior to the adoption of SFAS No. 144, the Company accounted for
long-lived assets in accordance with SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of.
(i) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with accounting
principles generally accepted in the United States of America. The
Company establishes an allowance for doubtful receivables based on
(Continued)
11
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
management's evaluation of the aging of accounts and such other
factors, which deserve current recognition. Actual results could
differ from those estimates.
(3) INVESTMENT IN SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair value for available-for-sale and held-to-maturity
securities at December 31, 2002 and 2001 were as follows:
2002
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------------- ---------------- ---------------- ----------------
Securities available for sale:
Obligations of state and
political subdivisions $ 2,249 9 -- 2,258
Equity securities 2,039 452 -- 2,491
---------------- ---------------- ---------------- ----------------
$ 4,288 461 -- 4,749
================ ================ ================ ================
2001
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------------- ---------------- ---------------- ----------------
Securities available for sale:
Obligations of state and
political subdivisions $ 3,015 41 (6) 3,050
Equity securities 1,859 206 -- 2,065
---------------- ---------------- ---------------- ----------------
$ 4,874 247 (6) 5,115
================ ================ ================ ================
2002
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------------- ---------------- ---------------- ----------------
Securities held to maturity:
Certificate of deposit $ 1,000 -- -- 1,000
================ ================ ================ ================
Fair values for debt securities were determined using market quotations
provided by outside securities consultants or prices provided by market
makers. The fair values for equity securities were determined using
market quotations on the principal public exchange markets.
(Continued)
12
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
Maturities of investment securities classified as available for sale and
held to maturity were as follows at December 31, 2002:
AMORTIZED ESTIMATED
COST FAIR VALUE
------ ------
Securities available for sale:
Due after one year through five years $1,499 1,506
Due after five years through ten years 750 752
Equity securities 2,039 2,491
------ ------
$4,288 4,749
====== ======
Securities held to maturity:
Due after one year through five years $1,000 1,000
====== ======
Expected maturities may differ from contractual maturities because some
issuers have the right to call or prepay obligations with or without call
or prepayment penalties.
Proceeds from the sales and maturities of investment securities available
for sale were $5,616 and $3,722 in 2002 and 2001, respectively. Gross
gains of $111 and $5 in 2002 and 2001, respectively, were realized on
those sales; no gross losses were realized during 2002 and 2001,
respectively.
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment are composed of the following at December 31:
2002 2001
-------- --------
Land $ 6,531 6,531
Buildings and leasehold improvements 27,437 27,341
-------- --------
33,968 33,872
Less accumulated depreciation and amortization (6,213) (3,854)
-------- --------
Property and equipment, net $ 27,755 30,018
======== ========
(Continued)
13
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
(5) INVESTMENT IN WHOLLY OWNED SUBSIDIARIES
Summarized combined financial information for the Company's wholly owned
subsidiaries as of and for the years ended December 31, 2002 and 2001 is
as follows:
ASSETS 2002 2001
-------- --------
Cash, cash equivalents, and investments $545,922 490,024
Receivables, net 95,003 80,399
Reinsurance recoverable and other assets 57,942 52,898
-------- --------
Total assets $698,867 623,321
======== ========
LIABILITIES
Reserve for losses, loss-adjustment expenses,
and future policy benefits $244,582 229,440
Unearned premiums 70,961 58,306
Individual retirement annuities 15,143 17,426
Accounts payable and other liabilities 143,160 139,170
-------- --------
Total liabilities $473,846 444,342
======== ========
Stockholders' equity $225,021 178,979
======== ========
Net income for the year $ 48,405 21,683
======== ========
The Company allocates to its subsidiaries certain expenses incurred in
the administration of their operations. Total charges including other
expenses paid on behalf of the subsidiaries amounted to $4,062 and $3,602
in 2002 and 2001, respectively, and are reduced from the general and
administrative expenses in the accompanying statements of operations.
(Continued)
14
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
(6) LOANS PAYABLE TO BANK
A summary of the credit agreements entered by the Company with a
commercial bank at December 31, is as follows:
2002 2001
-------- --------
Secured loan payable of $41,000, payable in monthly installments of $137 up to
July 1, 2024, plus interest at a rate reset periodically of 100 basis
points over LIBOR selected (which was 4.00% and 5.66%
at December 31, 2002 and 2001, respectively) $ 34,010 36,650
Secured note payable of $20,000, payable in various different
installments up to August 31, 2007, with interest payable on a monthly
basis at a rate reset periodically of 130 basis points over LIBOR selected
(which was 3.09% and 3.38% at December 31, 2002 and
2001, respectively) 16,005 19,000
Less current maturities (1,640) (2,640)
-------- --------
Total loans payable to bank $ 48,375 53,010
======== ========
Aggregate maturities of the Company's credit agreements as of December
31, 2002 are summarized as follows:
2003 $ 1,640
2004 2,645
2005 3,140
2006 3,140
2007 13,640
Thereafter 25,810
-------------------
$ 50,015
===================
Substantially all of the proceeds from the loan payable of $41,000 were
used by the Company to finance the acquisition of real estate properties
from subsidiaries during 1999. A portion of the proceeds of the $41,000
loan and all of the proceeds of the $20,000 note payable were used by the
Company for working capital needs and for the corporate reorganization.
Also, these loans provide the Company the option to change the LIBOR to
be used on the monthly payments within a short-term period.
(Continued)
15
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
During 2001, the Company amended its credit agreement related to the
$20,000 secured note payable to extend the maturity date of the facility
and restructure its repayment schedule, which was originally due in
August 31, 2001. The amended agreement calls for repayments of principal
amount of not less than $250 and in integral multiples of $50. The
aggregate principal amounts shall be reduced annually to the amounts on
or before the dates described below:
REQUIRED
PRINCIPAL
OUTSTANDING
Date BALANCE
- --------------------------------------------------- -------------------
August 1, 2003 $ 16,500
August 1, 2004 15,000
August 1, 2005 13,500
August 1, 2006 12,000
August 1, 2007 --
The loan and note payable previously described are guaranteed by a first
position held by the bank on the Company's land, building, and
substantially all leasehold improvements, as collateral for the term of
the loans under a continuing general security agreement. These credit
facilities contain certain covenants, which are normal in this type of
credit facility, which the Company has complied with at December 31, 2002
and 2001.
Interest expense on the above debts amounted to $2,150 and $3,365 for the
years ended December 31, 2002 and 2001, respectively.
(7) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has interest-rate related derivative instruments to manage
its exposure on its debt instruments. The Company does not enter into
derivative instruments for any purpose other than cash flow hedging
purposes. That is, the Company does not speculate using derivative
instruments.
By using derivative financial instruments to hedge exposures to changes
in interest rates, the Company exposes itself to credit risk and market
risk. Credit risk is the failure of the counterparty to perform under the
terms of the derivative contract. When the fair value of a derivative
contract is positive, the counterparty owes the Company, which creates
credit risk for the Company. When the fair value of a derivative contract
is negative, the Company owes the counterparty and, therefore, it does
not possess credit risk. The Company minimizes the credit risk in
derivative instruments by entering into transactions with high-quality
counterparties.
Market risk is the adverse effect on the value of a financial instrument
that results from a change in interest rates, currency exchange rates, or
commodity prices. The market risk associated with interest-rate contracts
is managed by establishing and monitoring parameters that limit the types
and degree of market risk that may be undertaken.
(Continued)
16
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
The Company assesses interest rate cash flow risk by continually
identifying and monitoring changes in interest rate exposures that may
adversely impact expected future cash flows and by evaluating hedging
opportunities. The Company maintains risk management control systems to
monitor interest rate cash flow risk attributable to both the Company's
outstanding or forecasted debt obligations as well as the Company's
offsetting hedge positions. The risk management control systems involve
the use of analytical techniques to estimate the expected impact of
changes in interest rates on the Company's future cash flows.
The Company has a variable-rate debt that was used to finance the
acquisition of real estate from subsidiaries during 1999 (see note 6).
The debt obligations expose the Company to variability in interest
payments due to changes in interest rates. Management believes it is
prudent to limit the variability of a portion of its interest payments.
To meet this objective, on December 6, 2002 management entered into an
interest rate swap agreement to manage fluctuations in cash flows
resulting from interest rate risk. This swap changes the variable-rate
cash flow exposure on the debt obligations to fixed cash flows. Under the
terms of the interest rate swap, the Company receives variable interest
rate payments and makes fixed interest rate payments, thereby creating
the equivalent of fixed-rate debt. This interest rate swap is effective
on April 1, 2003.
Changes in the fair value of the interest rate swap, designated as a
hedging instrument that effectively offsets the variability of cash flows
associated with the variable-rate of the long-term debt obligation, are
reported in accumulated other comprehensive income. This amount is
subsequently reclassified into interest expense as a yield adjustment of
the hedged debt obligation in the same period in which the related
interest affects earnings.
Interest expense for the year ended December 31, 2002 does not include
any amount representing cash flow hedge ineffectiveness since the terms
of the swap agreement allow the Company to assume no ineffectiveness in
the agreement.
As of December 31, 2002, $682 of deferred loss on the derivative
instrument was included within the accounts payable and accrued
liabilities in the accompanying consolidated balance sheets and is
expected to be reclassified to earnings during the next 12 to 18 months.
Transactions and events expected to occur over the next twelve months
that will necessitate reclassifying the derivatives loss to earnings is
the repricing of variable-rate debt. There were no cash flow hedges
discontinued during 2002.
(8) OPERATING RESERVE AND STOCKHOLDERS' EQUITY
As members of BCBSA, the Company is required by membership standards of
the association to maintain liquidity as defined by BCBSA. That is, to
maintain net worth exceeding the Company Action Level as defined in the
NAIC's Risk-Based Capital for Insurers Model Act. The Company is in
compliance with the above requirements.
(Continued)
17
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
(9) COMPREHENSIVE INCOME
The related deferred tax effects allocated to the accumulated balances of
the unrealized gains on securities substantially held by certain
subsidiaries classified as available for sale that are included as
comprehensive income in the accompanying statements of stockholders'
equity and comprehensive income in 2002 and 2001, are as follows:
ACCUMULATED
UNREALIZED MINIMUM OTHER
GAINS ON PENSION CASH FLOW COMPREHENSIVE
SECURITIES LIABILITY HEDGES INCOME
-------- -------- -------- --------
Beginning balance $ 20,984 -- -- 20,984
Net current period change 6,107 (8,114) (470) (2,477)
Reclassification adjustments for
gains and losses reclassified
in income (121) -- -- (121)
-------- -------- -------- --------
Ending balance $ 26,970 (8,114) (470) 18,386
======== ======== ======== ========
The related deferred tax effects allocated to each component of other
comprehensive income in the accompanying statements of stockholders'
equity and comprehensive income in 2002 and 2001 are as follows:
2002
-------------------------------------------
DEFERRED TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
------- ------- -------
Unrealized holding gains on securities
arising during the period $ 6,472 (365) 6,107
Less reclassification adjustment for
gains and losses realized in income (183) 62 (121)
------- ------- -------
Net change in unrealized gain 6,289 (303) 5,986
Minimum pension liability adjustment (8,755) 641 (8,114)
Cash flow hedges (682) 212 (470)
------- ------- -------
Net current period change $(3,148) 550 (2,598)
======= ======= =======
(Continued)
18
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
2001
---------------------------------------------
DEFERRED TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
-------- -------- --------
Unrealized holding gains on securities $ 10,066 367 10,433
arising during the period
Less reclassification adjustment for
gains and losses realized in income (5,266) 161 (5,105)
-------- -------- --------
Net change in unrealized
gains $ 4,800 528 5,328
======== ======== ========
Deferred tax expenses or benefits are related to the unrealized holding
gains (losses) on investments classified as available for sale held by
the Company and its wholly owned subsidiaries, except for those related
to TSI, for which no deferred income tax effect was recognized due to its
tax exempt status (see notes 3 and 13). A deferred tax benefit was also
recognized for the deferred loss related to the Company's cash flow
hedges (see note 7) and the minimum pension liability adjustment (see
note 12).
(10) INCOME TAXES
The Company is subject to Puerto Rico income taxes. Under Puerto Rico
income tax law, the Company is not allowed to file consolidated tax
returns with its subsidiaries.
The income tax benefit (expense) differs from the amount computed by
applying the Puerto Rico statutory income tax rate to losses before
income taxes as a result of the following:
2002 2001
-------- --------
Income tax (expense) benefit at statutory rate of 39% $(18,915) (8,450)
(Increase) decrease in taxes resulting from:
Equity in net income of wholly owned subsidiaries 18,878 8,456
Disallowances (105) (44)
Change in valuation allowance -- 87
Other, net (109) --
-------- --------
Total income tax benefit (expense) $ (251) 49
======== ========
(Continued)
19
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
Deferred income taxes reflect the tax effects of temporary differences
between carrying amounts of assets and liabilities for financial
reporting purposes and income tax purposes. The net deferred tax asset at
December 31, 2002 and 2001 is composed of the following:
2002 2001
----- -----
Deferred tax assets:
Allowance for doubtful receivables $ 43 60
Reserve for obsolete supplies inventory 74 153
Interest rate swap 212 --
Nondeductible depreciation 468 --
Additional minimum pension liability 119 --
Other -- 75
----- -----
Gross deferred tax assets 916 288
Deferred tax liability:
Unrealized holding gains on investments classified as
available for sale by the Company (59) (35)
----- -----
Net deferred tax assets $ 857 253
===== =====
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management believes it is more likely than not that the
Company will realize the benefits of these deductible differences.
(11) TRANSACTION WITH RELATED PARTIES
The following are the significant related-party transactions made during
the year ended December 31, 2002 and 2001:
2002 2001
------ ------
Rent charges to subsidiaries $6,203 6,185
====== ======
Interest charged to subsidiary on notes receivable $ 829 1,436
====== ======
(12) PENSION PLAN
The Company sponsors a noncontributory defined-benefit pension plan for
all of its employees and for the employees of its subsidiaries who are
age 21 or older and have completed one year of service. Pension benefits
begin to vest after five years of vesting service, as defined, and are
based on years of service and final average salary, as defined. The
funding policy is to contribute to the plan as necessary to meet the
minimum funding requirements set forth in the Employee Retirement Income
Security Act of 1974, as
(Continued)
20
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
amended, plus such additional amounts as the Company may determine to be
appropriate from time to time.
The following table sets forth the plan's benefit obligations, fair value
of plan assets, and funded status as of December 31:
2002 2001
-------- --------
Fair value of plan assets $ 25,275 26,770
Benefit obligations 53,993 42,634
-------- --------
Funded status $(28,718) (15,864)
======== ========
Accrued benefit cost recognized in the balance sheets $ 3,688 6,609
======== ========
During 2002, management centralized the administration of the pension
plan of the Company and its subsidiaries in TSM. In prior years, this
function was administered by TSI. Monthly charge of the corresponding
pension cost is allocated to the different subsidiaries through the
intercompany accounts while the accrued pension cost and the
corresponding contributions are made by TSM.
At December 31, 2002, the Company's allocation of the recognized
additional minimum pension liability amounted to $330 in order to bring
the accrued pension liability up to the level of the plan's unfunded
accumulated benefit obligation. This amount is offset by an intangible
asset amounting to $24 as of December 31, 2002 that is based on their
proportionate share of the outstanding unrecognized prior service cost.
The net amount of the additional minimum pension liability and the
intangible asset was recorded through a charge to other comprehensive
income, net of a deferred tax asset of $119 at December 31, 2002.
The following assumptions were used on a weighted average basis in the
accounting of the plan as of December 31, 2002 and 2001:
2002 2001
-------------- --------------
Discount rate 7.25% 7.50%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase Graded 3.00% Graded 3.00%
to 6.50% to 6.50%
The benefit cost, employer contribution, and benefits paid for 2002 and
2001 were as follows:
2002 2001
------ ------
Benefit cost $4,179 4,649
====== ======
Employer contribution $7,100 1,613
====== ======
Benefits paid $6,081 180
====== ======
(Continued)
21
TRIPLE-S MANAGEMENT CORPORATION
(Parent Company Only)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollar amounts in thousands)
Pension expense is reported by the Company and allocated to its
affiliates. Pension expense allocated to the Company amounted to $118 and
$79 in 2002 and 2001, respectively. It is not practicable to determine
the amounts of plan assets and accumulated plan benefits related to the
Company as required by accounting principles generally accepted in the
United States of America.
(13) CONTINGENCIES
(a) LEGAL PROCEEDINGS
The Company is defendant in various lawsuits arising in the
ordinary course of business. In the opinion of management, with
the advise of its legal counsel, the ultimate disposition of these
matters will not have a material adverse effect on the financial
position and results of operations of the Company.
(b) EXAMINATION FROM REGULATOR
TSI's compliance with the requirements of the tax ruling for the
year ended December 31, 1999 is currently being audited by
representatives of the Department of Treasury. In the opinion of
management, with the advice of its legal counsel, TSI was in
compliance at December 31, 1999 with the aforementioned
requirements. Also, in the opinion of management, with the advice
of its legal counsel, TSI was in compliance with the
aforementioned requirements at December 31, 2002, 2001, and 2000.
In the event that TSI elects not to continue with this tax
exemption or it is revoked by the Department of Treasury, the
ruling provides that if TSI is liquidated then an amount equal to
TSI's operating reserve (as determined for tax purposes)
accumulated as of the date of termination of the exemption (the
freezed operating reserve) must be distributed in the liquidation
to nonprofit health organizations or to the Government of Puerto
Rico for the designated purposes. TSI may elect not being subject
to this distribution in liquidation requirement and if such
election is exercised, the Company will be required to recognize
as gross income an amount equal to the freezed operating reserve
in the year of the election. Management is of the opinion that if
the election is exercised, the amount of Puerto Rico income tax to
be paid by the Company on the freezed operating reserve is
dependent on various factors and, therefore, an administrative
process with the Department of Treasury would likely be required
to determine such amount.
Among the other factors to be agreed upon between the Department
of Treasury and the Company, in connection with such possible
taxes, are the following: (a) accounting basis to be used for tax
computation (that is, accounting practices prescribed or permitted
by the Commissioner of Insurance or accounting principles
generally accepted in the United States of America); (b) exempt
income generated by TSI over such years; and (c) deductible and
nondeductible expenses that will arise depending upon the
accounting basis selected for such computation. The Company cannot
presently determine the amount of accumulated earnings and profits
that TSI will be subject to taxation due to the uncertainty of the
different factors and elements that interplay in such
determination. In the opinion of management, the ultimate
disposition of this matter could have a significant effect on the
consolidated financial position and result of operations of the
Company.
22
SCHEDULE III
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(DOLLAR AMOUNTS IN THOUSANDS)
DEFERRED OTHER
POLICY POLICY CLAIMS
ACQUISITION CLAIM UNEARNED AND BENEFITS PREMIUM
SEGMENT COSTS LIABILITIES PREMIUMS PAYABLE REVENUE
------- ----------- ----------- --------- ------------- -----------
2002
Health insurance - Commercial Program $ -- $ 102,120 $ 6,119 $ -- $ 680,313
Health insurance - Reform Program -- 73,900 -- -- 487,000
Property and casualty insurance 13,747 55,757 64,757 -- 60,688
Life insurance 23 12,805 85 -- 14,992
Other non-reportable segments, parent
company operations and net
consolidating entries -- -- -- -- (2,776)
------- ---------- ------- --------- ----------
Total $13,770 $ 244,582 $70,961 $ -- $1,240,217
======= ========== ======= ========= ==========
2001
Health insurance - Commercial Program $ -- $ 103,313 $ 2,777 $ -- $ 637,411
Health insurance - Reform Program -- 66,150 -- -- 454,923
Property and casualty insurance 9,550 47,073 55,529 -- 54,337
Life insurance -- 12,904 -- -- 13,426
Other non-reportable segments, parent
company operations and net
consolidating entries -- -- -- -- (845)
------- ---------- ------- --------- ----------
Total $ 9,550 $ 229,440 $58,306 $ -- $1,159,252
======= ========== ======= ========= ==========
2002
Health insurance - Commercial Program $ -- $ 77,414 $ 2,751 $ -- $ 588,366
Health insurance - Reform Program -- 51,041 -- -- 439,774
Property and casualty insurance 8,000 44,385 49,389 -- 53,493
Life insurance -- 10,391 -- -- 11,576
Other non-reportable segments, parent
company operations and net
consolidating entries -- -- -- -- (752)
------- ---------- ------- --------- ----------
Total $ 8,000 $ 183,231 $52,140 $ -- $1,092,457
======= ========== ======= ========= ==========
AMORTIZATION OF
NET DEFERRED POLICY OTHER
INVESTMENT CLAIMS ACQUISITION OPERATING PREMIUMS
SEGMENT INCOME INCURRED COSTS EXPENSES WRITTEN
- ------- ---------- ----------- --------------- --------- ----------
2002
Health insurance - Commercial Program $10,577 $ 574,874 $ -- $ 86,321 $ 680,313
Health insurance - Reform Program 5,106 445,039 -- 36,109 487,000
Property and casualty insurance 6,579 34,334 13,728 11,820 112,281
Life insurance 2,253 7,733 -- 5,133 20,929
Other non-reportable segments, parent
company operations and net
consolidating entries 263 -- -- (4,572) --
------- ---------- ------- --------- ----------
Total $24,778 $1,061,980 $13,728 $ 134,811 $1,300,523
======= ========== ======= ========= ==========
2001
Health insurance - Commercial Program $10,428 $ 560,809 $ -- $ 83,771 $ 637,411
Health insurance - Reform Program 4,547 420,953 -- 32,646 454,923
Property and casualty insurance 7,564 32,348 12,700 9,848 96,831
Life insurance 2,496 6,914 -- 4,553 17,997
Other non-reportable segments, parent
company operations and net
consolidating entries 370 -- -- (2,688) --
------- ---------- ------- --------- ----------
Total $25,405 $1,021,024 $12,700 $ 128,130 $1,207,162
======= ========== ======= ========= ==========
2000
Health insurance - Commercial Program $ 9,993 $ 531,187 $ -- $ 77,990 $ 588,366
Health insurance - Reform Program 4,633 420,476 -- 30,350 439,774
Property and casualty insurance 6,996 32,692 11,500 9,069 87,128
Life insurance 2,502 5,778 -- 3,788 15,590
Other non-reportable segments, parent
company operations and net
consolidating entries 214 -- -- (2,562) --
------- ---------- ------- --------- ----------
Total $24,338 $ 990,133 $11,500 $ 118,635 $1,130,858
======= ========== ======= ========= ==========
S-2
SCHEDULE IV
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(DOLLAR AMOUNTS IN THOUSANDS)
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES(1) COMPANIES AMOUNT TO NET
---------- --------- ---------- --------- ----------
2002
Life insurance in force $5,039,598 1,888,567 -- 3,151,031 0.0%
========== ========= ========== ========= =======
Premiums:
Life insurance $ 20,929 6,447 -- 14,482 0.0%
Accident and health insurance 1,167,313 -- -- 1,167,313 0.0%
Property and casualty insurance 112,281 39,806 -- 72,475 0.0%
---------- --------- ---------- --------- -------
Total premiums $1,300,523 46,253 -- 1,254,270 0.0%
========== ========= ========== ========= =======
2001
Life insurance in force $3,984,033 1,777,518 -- 2,206,515 0.0%
========== ========= ========== ========= =======
Premiums:
Life insurance $ 17,997 4,571 -- 13,426 0.0%
Accident and health insurance 1,092,334 -- -- 1,092,334 0.0%
Property and casualty insurance 96,831 39,607 -- 57,224 0.0%
---------- --------- ---------- --------- -------
Total premiums $1,207,162 44,178 -- 1,162,984 0.0%
========== ========= ========== ========= =======
2000
Life insurance in force $3,507,903 1,716,399 -- 1,791,504 0.0%
========== ========= ========== ========= =======
Premiums:
Life insurance $ 15,590 4,014 11,576 0.0%
Accident and health insurance 1,028,140 -- -- 1,028,140 0.0%
Property and casualty insurance 87,128 31,208 -- 55,920 0.0%
---------- --------- ---------- --------- -------
Total premiums $1,130,858 35,222 -- 1,095,636 0.0%
========== ========= ========== ========= =======
(1) Premiums ceded on the life insurance business are net of commission income
on reinsurance amounting to $509, $595 and $544 for the years ended
December 31, 2002, 2001 and 2000.
S-3
SCHEDULE V
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLAR AMOUNTS IN THOUSANDS)
ADDITIONS
--------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER ACCOUNTS DEDUCTIONS - END OF
PERIOD EXPENSES - DESCRIBE (1) DESCRIBE (2) PERIOD
------------ ---------- --------------- ------------ ----------
2002
ALLOWANCE FOR DOUBTFUL RECEIVABLES $ 11,678 5,402 (55) (3,231) 13,794
======== ====== ==== ======= ======
2001
Allowance for doubtful receivables $ 8,791 4,592 -- (1,705) 11,678
======== ====== ==== ======= ======
2000
Allowance for doubtful receivables $ 8,410 3,853 72 (3,544) 8,791
======== ====== ==== ======= ======
(1) Represents the recovery of accounts previously written-off.
(2) Deductions represent the write-off of accounts deemed uncollectible.
S-4