UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON,United States Securities and Exchange Commission
Washington, D.C. 20549FORM
10-Q (Mark One) [X]10-Q/A
AMENDMENT NO. 1
(Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROMTO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________to _______________
COMMISSION FILE NUMBER: 0-49762
TRIPLE-S MANAGEMENT CORPORATION
(Exact(Exact name of registrant as specified in its charter)
PUERTO RICO 66-0555678 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1441 F.D. ROOSEVELT AVENUE SAN JUAN, PUERTO RICO 00920 (Address of principal executive offices) (Zip code)
Puerto Rico 66-0555678 (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization) 1441 F.D. Roosevelt Avenue San Juan, Puerto Rico 00920 (Address of principal executive offices) (Zip code) (787) 749-4949
(Registrant's
(Registrant’s telephone number, including area code)NOT APPLICABLE (FormerNot applicable
(Former name, former address and former fiscal year, if changed since last report)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.
|X|[ X ] Yes|_|[ ] NoIndicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [ X ] No
Indicate the number of shares outstanding of each of the
issuer'sissuer’s classes of common stock, as of the latest practicable date.TITLE OF EACH CLASS OUTSTANDING AT MARCH 31, 2003 ------------------- ----------------------------- Common Stock, $40.00 par value 9,337
Title of each class Outstanding at June 30, 2003 Common Stock, $40.00 par value 9,210 TRIPLE-S MANAGEMENT CORPORATION
FORM 10-Q
For the Quarter EndedMarch 31,June 30, 2003EXPLANATORY NOTE
This Amendment No. 1 to Form 10-Q for the quarter ended on June 30, 2003 (the “Form 10-Q”) is being filed for the purpose of correcting the following: (i) make the presentation on the Corporation’s comprehensive income on pages 5 and 19 from January 1, 2003 to June 30, 2003; and (ii) amend the narrative presentation and tables of Note 8 to the Corporation’s Consolidated Financial Statements as of June 30, 2003. No other changes are being made by means of this filing.
Table of Contents
PAGE PART I -– FINANCIAL INFORMATIONItem 1. Financial Statements Consolidated Balance Sheets as of March 31,June 30, 2003 and December 31, 20023 Consolidated Statements of Operations for the three months and six months periods ended March 31,June 30, 2003 and 20024 Consolidated Statements of Stockholders'Stockholders’ Equity and Comprehensive Income for the three months and six months periods endedMarch 31,June 30, 2003 and 20025 Consolidated Statements of Cash Flows for the threesix months periods endedMarch 31, 6June 30, 2003 and 20026 Notes to Consolidated Financial Statements 7 Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations 2024 Item 3. Quantitative and Qualitative Disclosures About Market Risk 3140 Item 4. Controls and Procedures 3140 PART II -– OTHER INFORMATIONItem 1. Legal Proceedings 3140 Item 2. Changes in Securities and Use of Proceeds 3241 Item 3. Defaults Upon Senior Securities 3241 Item 4. Submissions of Matters to a Vote of Security Holders 3241 Item 5. Other Information 3244 Item 6. Exhibits and Reports on Form 8-K 3245 SIGNATURES 34 CERTIFICATIONS 3546 2
PARTPart I
-– FINANCIAL INFORMATIONITEMItem 1.
FINANCIAL STATEMENTSFinancial StatementsTRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets(Dollar
(Dollar amounts in thousands)
(UNAUDITED) MARCH 31, DECEMBER 31, 2003 2002 ----------- ------------ASSETS Investments and cash: Securities held for trading, at fair value: Fixed maturities $ 53,400 50,317 Equity securities 43,553 44,621 Securities available for sale, at fair value: Fixed maturities 351,992 321,244 Equity securities 49,905 47,406 Securities held to maturity, at amortized cost: Fixed maturities 5,981 5,982 Cash and cash equivalents 64,477 82,776 -------- ------- Total investments and cash 569,308 552,346 -------- ------- Premiums and other receivables, net 104,178 88,027 Deferred policy acquisition costs 15,002 13,770 Property and equipment, net 36,553 36,721 Other assets 32,792 34,814 -------- ------- Total assets $757,833 725,678 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Claim liabilities: Claims processed and incomplete $117,439 127,628 Unreported losses 126,850 103,310 Unpaid loss-adjustment expenses 14,362 13,644 -------- ------- Total claim liabilities 258,651 244,582 -------- ------- Unearned premiums 70,319 70,961 Individual retirement annuities 15,524 15,143 Liability to Federal Employees Health Benefits Program 4,636 7,066 Accounts payable and accrued liabilities 96,120 88,750 Additional minimum pension liability 9,449 9,449 Net deferred tax liability 8,317 8,048 Loans payable to bank 49,605 50,015 -------- ------- Total liabilities 512,621 494,014 -------- ------- Stockholders' equity: Common stock, $40 par value. Authorized 12,500 shares; issued and outstanding 9,337 at March 31, 2003 and December 31, 2002 373 373 Additional paid-in capital 150,406 150,406 Operating reserve 75,976 62,499 Accumulated other comprehensive income 18,457 18,386 -------- ------- Total stockholders' equity 245,212 231,664 -------- ------- Total liabilities and stockholders' equity $757,833 725,678 ======== =======
(Unaudited) June 30, December 31, 2003 2002 Investments and cash: Securities held for trading, at fair value: Fixed maturities $ 70,471 50,317 Equity securities 49,804 44,621 Securities available for sale, at fair value: Fixed maturities 348,090 321,244 Equity securities 46,507 47,406 Securities held to maturity, at amortized cost: Fixed maturities 5,823 5,982 Cash and cash equivalents 80,436 82,776 Total investments and cash 601,131 552,346 Premiums and other receivables, net 110,754 88,027 Deferred policy acquisition costs 15,385 13,770 Property and equipment, net 36,394 36,721 Other assets 36,166 34,814 Total assets $ 799,830 725,678 Claim liabilities: Claims processed and incomplete $ 122,076 127,628 Unreported losses 111,441 103,310 Unpaid loss-adjustment expenses 14,580 13,644 Total claim liabilities 248,097 244,582 Unearned premiums 74,528 70,961 Individual retirement annuities 20,454 15,143 Liability to Federal Employees Health Benefits Program 16,829 7,066 Accounts payable and accrued liabilities 91,900 88,034 Income tax payable 63,669 716 Net deferred tax liability 6,124 8,048 Additional minimum pension liability 9,449 9,449 Loans payable to bank 49,332 50,015 Total liabilities 580,382 494,014 Stockholders’ equity: Common stock, $40 par value. Authorized 12,500 shares; issued and outstanding 9,210 and 9,337 at June 30, 2003 and December 31, 2002, respectively 368 373 Additional paid-in capital 150,407 150,406 Retained earnings 52,690 62,499 Accumulated other comprehensive income 15,983 18,386 Total stockholders’ equity 219,448 231,664 Total liabilities and stockholders’ equity $ 799,830 725,678 See accompanying notes to unaudited consolidated financial statements.
3
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
For the three months and six months periods endedMarch 31,June 30, 2003 and 2002(Dollar
(Dollar amounts in thousands, except net income per share)
THREE MONTHS ENDED MARCH 31, 2003 2002 --------- --------REVENUES: Premiums earned, net $ 315,556 309,842 Amounts attributable to self-funded arrangements 40,003 34,838 Less amounts attributable to claims under self-funded arrangements (37,359) (32,458) --------- -------- 318,200 312,222 Net investment income 6,098 5,990 Net realized investment losses (3,023) (156) Net unrealized investment gain on trading securities 2,092 285 Other income, net 850 213 --------- -------- Total revenue 324,217 318,554 --------- -------- BENEFITS AND EXPENSES: Claims incurred 270,831 271,773 Operating expenses, net of reimbursement for services 38,490 38,711 Interest expense 703 1,119 --------- -------- Total benefits and expenses 310,024 311,603 --------- -------- Income before taxes 14,193 6,951 --------- -------- INCOME TAX EXPENSE: Current 377 199 Deferred 339 301 --------- -------- Total income taxes 716 500 --------- -------- Net income $ 13,477 6,451 ========= ======== Basic net income per share if Triple-S, Inc. operated without its tax exemption $ 1,068 576 --------- -------- Basic net income per share excluding Triple-S, Inc.'s net income $ 451 287 ========= ========
Three months ended Six months ended June 30, June 30, 2003 2002 2003 2002 Premiums earned, net $ 313,789 308,478 629,345 618,320 Amounts attributable to self-funded arrangements 40,181 37,427 80,184 72,265 Less amounts attributable to claims under self-funded arrangements (37,191 ) (36,379 ) (74,550 ) (68,837 ) 316,779 309,526 634,979 621,748 Net investment income 6,286 6,359 12,384 12,349 Net realized investment gains (losses) 6,644 6 3,621 (150 ) Net unrealized investment gain (losses) on trading securities 7,276 (5,662 ) 9,368 (5,377 ) Other income, net 1,524 211 2,374 424 Total revenue 338,509 310,440 662,726 628,994 Claims incurred 259,172 260,878 530,003 532,651 Operating expenses, net of reimbursement for services 39,917 38,642 78,407 77,353 Interest expense 765 872 1,468 1,991 Total benefits and expenses 299,854 300,392 609,878 611,995 Income before taxes 38,655 10,048 52,848 16,999 Current 63,909 318 64,286 517 Deferred (1,968 ) 463 (1,629 ) 764 Total income taxes 61,941 781 62,657 1,281 Net income (loss) $ (23,286 ) 9,267 (9,809 ) 15,718 Basic net income (loss) per share (see note 7) $ (2,514 ) 527 (1,055 ) 1,030 See accompanying notes to unaudited consolidated financial statements.
4
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements ofStockholders'Stockholders’ Equity and
Comprehensive Income (Unaudited)
For the three months and six months periods
endedMarch 31,June 30, 2003 and 2002(Dollar
(Dollar amounts in thousands)
2003 2002 --------- ---------BALANCE AT JANUARY 1 $ 231,664 186,028 Stock redemption -- (3) Comprehensive income: Net income 13,477 6,451 Net unrealized change in investment securities 231 (2,929) Net change in fair value of cash flow hedges (160) -- --------- --------- Total comprehensive income 13,548 3,522 --------- --------- BALANCE AT MARCH 31 $ 245,212 189,547 ========= =========
2003 2002 $ 231,664 186,028 Stock redemption (4 ) (4 ) Comprehensive income: Net income (loss) (9,809 ) 15,718 Net unrealized change in investment securities (4,581 ) 5,249 Net change in minimum pension liability 2,715 — Net change in fair value of cash flow hedges (537 ) — Total comprehensive income (loss) (12,212 ) 20,967 $ 219,448 206,991 See accompanying notes to unaudited consolidated financial statements.
5
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For thethreesix months periods endedMarch 31,June 30, 2003 and 2002(Dollar
(Dollar amounts in thousands)
THREE MONTHS ENDED MARCH 31, 2003 2002 --------- --------CASH FLOWS FROM OPERATING ACTIVITIES: Premiums collected $ 298,169 290,271 Cash paid to suppliers and employees (38,460) (33,269) Claims, losses and benefits paid (256,762) (249,212) Interest received 6,778 6,410 Proceeds from trading securities sold or matured: Fixed maturities sold 10,908 6,000 Equity securities 6,363 64 Acquisitions of investments in trading portfolio: Fixed maturities (13,501) (5,966) Equity securities (6,795) -- Interest paid (177) (454) Expense reimbursement from Medicare 3,562 3,450 --------- -------- Net cash provided by operating activities 10,085 17,294 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from investments sold or matured: Securities available for sale: Fixed maturities sold 27,511 2,424 Fixed maturities matured 70,334 42,781 Equity securities -- 2,643 Acquisitions of investments: Securities available for sale: Fixed maturities (128,563) (61,537) Equity securities (2,010) -- Capital expenditures (1,543) (1,393) Proceeds from sale of property and equipment 289 337 --------- -------- Net cash used in investing activities (33,982) (14,745) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in outstanding checks in excess of bank balances 6,153 (5,505) Payments of long term debt (410) (1,273) Redemption of common stock -- (4) Proceeds from individual retirement annuities 148 277 Surrenders of individual retirement annuities (293) (305) --------- -------- Net cash provided by (used in) financing activities 5,598 (6,810) --------- -------- Net decrease in cash and cash equivalents (18,299) (4,261) Cash and cash equivalents at beginning of the period 82,776 80,970 --------- -------- Cash and cash equivalents at end of the period $ 64,477 76,709 ========= ========
Six months ended June 30, 2003 2002 Premiums collected $ 614,467 600,770 Cash paid to suppliers and employees (83,675 ) (72,893 ) Claims, losses and benefits paid (526,488 ) (518,601 ) Interest received 12,561 11,331 Proceeds from trading securities sold or matured: Fixed maturities sold 31,148 76,122 Equity securities 10,512 9,609 Acquisitions of investments in trading portfolio: Fixed maturities (49,452 ) (74,557 ) Equity securities (11,217 ) (10,137 ) Interest paid (785 ) (1,320 ) Expense reimbursement from Medicare 6,270 5,982 Contingency reserve funds from FEHBP 13,023 — Net cash provided by operating activities 16,364 26,306 Proceeds from investments sold or matured: Securities available for sale: Fixed maturities sold 42,555 15,597 Fixed maturities matured 124,619 57,392 Equity securities 9,675 2,642 Securities held to maturity: Fixed maturities matured 150 1,433 Acquisitions of investments: Securities available for sale: Fixed maturities (193,820 ) (96,264 ) Equity securities (4,010 ) — Capital expenditures (2,525 ) (3,250 ) Proceeds from sale of property and equipment 45 922 Net cash used in investing activities (23,311 ) (21,528 ) Change in outstanding checks in excess of bank balances 666 (151 ) Payments of long term debt (683 ) (1,933 ) Redemption of common stock (4 ) (4 ) Proceeds from individual retirement annuities 5,716 791 Surrenders of individual retirement annuities (1,088 ) (4,425 ) Net cash provided by (used in) financing activities 4,607 (5,722 ) Net decrease in cash and cash equivalents (2,340 ) (944 ) Cash and cash equivalents at beginning of the period 82,776 80,970 Cash and cash equivalents at end of the period $ 80,436 80,026 See accompanying notes to unaudited consolidated financial statements.
6
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31,June 30, 2003
(Dollar(Dollar amounts in thousands)
(Unaudited)
(1)
BASIS OF PRESENTATIONBasis of PresentationThe accompanying consolidated interim financial statements prepared by Triple-S Management Corporation (TSM) and its subsidiaries (the Corporation) are unaudited, except for the balance sheet information as of December 31, 2002, which is derived from the
Corporation'sCorporation’s audited consolidated financial statements, pursuant to the rules and regulations of the United States Securities and Exchange Commission. Accordingly, the consolidated interim financial statements do not include all of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in theCorporation'sCorporation’s Form 10-K for the year ended December 31, 2002.Certain amounts in prior period financial statements were reclassified to conform to the 2003 presentation.
In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such consolidated interim financial statements have been included. The results of operations for the three months and six months period ended
March 31,June 30, 2003 are not necessarily indicative of the results for the full year.(2)
SEGMENT INFORMATIONSegment InformationThe following tables summarize the operations by major operating segment for the three months and six months period ended
March 31,June 30, 2003 and 2002:7
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial StatementsMarch 31,
June 30, 2003(Dollar
(Dollar amounts in thousands)
(Unaudited)
Operating Segments Health Health Insurance Insurance Property Life and Commercial Reform and Casualty Disability Program Program Insurance Insurance Other * Total Premiums earned, net $ 168,478 122,852 18,254 4,205 — 313,789 Amounts attributable to self-funded arrangements 40,181 — — — — 40,181 Less: Amounts attributable to claims under self-funded arrangements (37,191 ) — — — — (37,191 ) Intersegment premiums earned/service revenues 551 — — — 11,027 11,578 172,019 122,852 18,254 4,205 11,027 328,357 Net investment income 2,654 1,279 1,700 557 — 6,190 Realized gain on sale of securities 4,737 189 620 448 — 5,994 Unrealized gain (loss) on trading securities 5,028 1,385 956 (93 ) — 7,276 Other 77 (8 ) 1,391 (98 ) — 1,362 Total revenues $ 184,515 125,697 22,921 5,019 11,027 349,179 Net income $ 19,435 3,505 2,899 1,498 420 27,757 Claims incurred $ 138,164 108,786 10,645 1,577 — 259,172 Operating expenses $ 21,861 8,428 8,966 1,608 10,693 51,556 Depreciation expense, included in operating expenses $ 1,054 — 66 31 — 1,151 Interest expense $ 168 104 — 158 — 430 Income taxes $ 4,887 4,874 411 178 (86 ) 10,264
OPERATING SEGMENTS --------------------------------------------------------------------------- HEALTH HEALTH INSURANCE INSURANCE PROPERTY LIFE AND COMMERCIAL REFORM AND CASUALTY DISABILITY PROGRAM PROGRAM INSURANCE INSURANCE OTHER* TOTAL ---------------------------------------------------------------------------THREE MONTHS ENDED MARCH 31, 2003 Premiums earned, net $ 175,505 115,795 19,053 5,203 - 315,556 Amounts attributableIncludes segments which are not required to self-funded arrangements 40,003 - - - - 40,003 Less: Amounts attributable to claims under self-funded arrangements (37,359) - - - - (37,359) Intersegment premiums earned/service revenues 695 - - - 11,116 11,811 -------------- ------------ --------- ------- ------- --------- 178,844 115,795 19,053 5,203 11,116 330,011 Net investment income 2,619 1,274 1,644 523 - 6,060 Realized gain (loss) on salebe reported separately. These segments include the data processing services organization as well as the third party administrator ofsecurities (2,303) (298) (425) 3 - (3,023) Unrealized gain on trading securities 1,550 237 305 - - 2,092 Other 32 (7) 706 43 - 774 -------------- ----------- --------- ------- ------- --------- Total revenues $ 180,742 117,001 21,283 5,772 11,116 335,914 ============== =========== ========= ======= ======= ========= Net income $ 4,854 4,415 2,567 1,605 296 13,737 ============== =========== ========= ======= ======= ========= Claims incurred $ 154,557 104,167 9,810 2,297 - 270,831 ============== =========== ========= ======= ======= ========= Operating expenses $ 21,159 8,318 8,519 1,558 10,658 50,212 ============== =========== ========= ======= ======= ========= Depreciation expense, included in operating expenses 980 - 136 29 - 1,145 ============== =========== ========= ======= ======= ========= Interest expense $ 172 101 - 156 - 429 ============== =========== ========= ======= ======= ========= Income taxes $ - - 387 156 162 705 ============== =========== ========= ======= ======= =========the health insurance services.* 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.8
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31,
Notes to Consolidated Financial Statements
June 30, 2003(Dollar
(Dollar amounts in thousands)
(Unaudited)
Operating Segments Health Health Insurance Insurance Property Life and Commercial Reform and Casualty Disability Program Program Insurance Insurance Other * Total Premiums earned, net $ 167,190 123,079 14,364 3,845 — 308,478 Amounts attributable to self-funded arrangements 37,427 — — — — 37,427 Less: Amounts attributable to claims under self-funded arrangements (36,379 ) — — — — (36,379 ) Intersegment premiums earned/service revenues 684 — — — 12,691 13,375 168,922 123,079 14,364 3,845 12,691 322,901 Net investment income 2,759 1,297 1,656 571 — 6,283 Realized gain (loss) on sale of securities 113 (170 ) 71 (8 ) — 6 Unrealized loss on trading securities (4,442 ) (387 ) (833 ) — — (5,662 ) Other 62 (8 ) 30 29 — 113 Total revenues $ 167,414 123,811 15,288 4,437 12,691 323,641 Net income (loss) $ 6,898 (555 ) 1,411 1,523 207 9,484 Claims incurred $ 137,558 113,711 8,287 1,322 — 260,878 Operating expenses $ 22,752 10,465 5,141 1,274 12,337 51,969 Depreciation expense, included in operating expenses $ 1,739 — 117 14 — 1,870 Interest expense $ 206 190 — 173 — 569 Income taxes $ — — 449 145 147 741
OPERATING SEGMENTS ----------------------------------------------------------------------------------- HEALTH HEALTH INSURANCE INSURANCE PROPERTY LIFE AND COMMERCIAL REFORM AND CASUALTY DISABILITY PROGRAM PROGRAM INSURANCE INSURANCE OTHER* TOTAL -------------- ---------- ------------ ---------- ------- -------THREE MONTHS ENDED MARCH 31, 2002 Premiums earned, net $ 164,998 124,447 16,088 3,813 -- 309,346 Amounts attributableIncludes segments which are not required to self-funded arrangements 35,334 -- -- -- -- 35,334 Less: Amounts attributable to claims under self-funded arrangements (32,458) -- -- -- -- (32,458) Intersegment premiums earned/service revenues 668 -- -- -- 11,474 12,142 --------- -------- ------- ------ ------ -------- 168,542 124,447 16,088 3,813 11,474 324,364 Net investment income 2,558 1,188 1,578 590 -- 5,914 Realized gain (loss) on salebe reported separately. These segments include the data processing services organization as well as the third party administrator ofsecurities (174) 3 (55) 70 -- (156) Unrealized gain (loss) on trading securities 386 (266) 165 -- -- 285 Other 35 (14) 70 24 -- 115 --------- -------- ------- ------ ------ -------- Total revenues $ 171,347 125,358 17,846 4,497 11,474 330,522 ========= ======== ======= ====== ====== ======== Net income $ 3,527 148 1,732 764 268 6,439 ========= ======== ======= ====== ====== ======== Claims incurred $ 145,804 115,984 7,801 2,184 -- 271,773 ========= ======== ======= ====== ====== ======== Operating expenses $ 21,803 8,999 8,126 1,276 11,058 51,262 ========= ======== ======= ====== ====== ======== Depreciation expense, included in operating expenses 1,091 -- 119 13 -- 1,223 ========= ======== ======= ====== ====== ======== Interest expense $ 213 227 -- 222 -- 662 ========= ======== ======= ====== ====== ======== Income taxes $ -- -- 187 51 148 386 ========= ======== ======= ====== ====== ========the health insurance services.* 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.9
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial StatementsMarch 31,
June 30, 2003(Dollar
(Dollar amounts in thousands)
(Unaudited)
Operating Segments Health Health Insurance Insurance Property Life and Commercial Reform and Casualty Disability Program Program Insurance Insurance Other * Total Premiums earned, net $ 343,983 238,647 37,307 9,408 — 629,345 Amounts attributable to self-funded arrangements 80,184 — — — — 80,184 Less: Amounts attributable to claims under self-funded arrangements (74,550 ) — — — — (74,550 ) Intersegment premiums earned/service revenues 1,246 — — — 22,143 23,389 350,863 238,647 37,307 9,408 22,143 658,368 Net investment income 5,273 2,553 3,344 1,080 — 12,250 Realized gain (loss) on sale of securities 2,434 (109 ) 195 451 — 2,971 Unrealized gain (loss) on trading securities 6,578 1,622 1,261 (93 ) — 9,368 Other 109 (15 ) 2,097 (55 ) — 2,136 Total revenues $ 365,257 242,698 44,204 10,791 22,143 685,093 Net income $ 24,289 7,920 5,466 3,103 716 41,494 Claims incurred $ 292,721 212,953 20,455 3,874 — 530,003 Operating expenses $ 43,020 16,746 17,485 3,166 21,351 101,768 Depreciation expense, included in operating expenses $ 2,034 — 202 60 — 2,296 Interest expense $ 340 205 — 314 — 859 Income taxes $ 4,887 4,874 798 334 76 10,969
BALANCE SHEET ITEMS OPERATING SEGMENTS - --------------------------------------------------------------------------------------------------------------------------- HEALTH HEALTH INSURANCE INSURANCE PROPERTY LIFE AND COMMERCIAL REFORM AND CASUALTY DISABILITY PROGRAM PROGRAM INSURANCE INSURANCE OTHER* TOTAL - ---------------------------------------------------------------------------------------------------------------------------AS OF MARCH 31, 2003 Segment assets $ 345,646 120,685 211,605 54,856 2,109 734,901 - --------------------------------------------------------------------------------------------------------------------------- Significant noncash item - net change in unrealized gain on securities available for sale $ (16) (182) 168 247 - 217 - --------------------------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 2002 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 Net change in minimum pension liability (6,961) - (231) (102) (633) (7,927) - ---------------------------------------------------------------------------------------------------------------------------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. * 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.10
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial StatementsMarch 31,
June 30, 2003(Dollar
(Dollar amounts in thousands)
(Unaudited)
Operating Segments Health Health Insurance Insurance Property Life and Commercial Reform and Casualty Disability Program Program Insurance Insurance Other * Total Premiums earned, net $ 332,684 247,526 30,452 7,658 — 618,320 Amounts attributable to self-funded arrangements 72,265 — — — — 72,265 Less: Amounts attributable to claims under self-funded arrangements (68,837 ) — — — — (68,837 ) Intersegment premiums earned/service revenues 1,352 — — — 24,165 25,517 337,464 247,526 30,452 7,658 24,165 647,265 Net investment income 5,317 2,485 3,234 1,161 — 12,197 Realized gain (loss) on sale of securities (61 ) (167 ) 16 62 — (150 ) Unrealized loss on trading securities (4,056 ) (653 ) (668 ) — — (5,377 ) Other 97 (22 ) 100 53 — 228 Total revenues $ 338,761 249,169 33,134 8,934 24,165 654,163 Net income (loss) $ 10,425 (407 ) 3,143 2,287 475 15,923 Claims incurred $ 283,362 229,695 16,088 3,506 — 532,651 Operating expenses $ 44,555 19,464 13,267 2,550 23,395 103,231 Depreciation expense, included in operating expenses $ 2,830 — 240 27 — 3,097 Interest expense $ 419 417 — 395 — 1,231 Income taxes $ — — 636 196 295 1,127
* 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. 11
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Dollar amounts in thousands)
(Unaudited)Balance Sheet Items
Operating Segments Health Health �� Insurance Insurance Property Life and Commercial Reform and Casualty Disability Program Program Insurance Insurance Other * Total Segment assets $ 366,715 119,059 229,947 61,425 2,348 779,494 Significant noncash items: Net change in unrealized gain on securities available for sale $ (3,987 ) (409 ) (105 ) 289 — (4,212 ) Net change in minimum pension liability 2,715 — — — — 2,715 Segment assets $ 324,628 115,499 205,753 51,354 1,633 698,867 Significant noncash items: Net change in unrealized gain on securities available for sale $ 3,928 598 652 613 — 5,791 Net change in minimum pension liability (6,961 ) — (231 ) (102 ) (633 ) (7,927 ) 12
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Dollar amounts in thousands)
(Unaudited)RECONCILIATION OF REPORTABLE SEGMENT TOTALS
WITH FINANCIAL STATEMENTS
Three months ended Six months ended June 30, June 30, 2003 2002 2003 2002 Total revenues for reportable segments $ 338,152 310,950 662,950 629,998 Total revenues for other segments 11,027 12,691 22,143 24,165 349,179 323,641 685,093 654,163 Elimination of intersegment earned premiums (551 ) (684 ) (1,246 ) (1,352 ) Elimination of intersegment service revenues (11,027 ) (12,691 ) (22,143 ) (24,165 ) Unallocated amount — revenues from external sources 908 174 1,022 348 (10,670 ) (13,201 ) (22,367 ) (25,169 ) Consolidated total revenues $ 338,509 310,440 662,726 628,994 Net income for reportable segments $ 27,337 9,277 40,778 15,448 Net income for other segments 420 207 716 475 27,757 9,484 41,494 15,923 Elimination of TSM charges: Rent expense 1,487 1,546 3,051 3,092 Interest expense 168 206 340 419 1,655 1,752 3,391 3,511 Unallocated amounts related to TSM: Income tax expense (51,677 ) — (51,688 ) — General and administrative expenses (1,426 ) (1,594 ) (3,079 ) (2,731 ) Interest expense (503 ) (509 ) (949 ) (1,179 ) Other revenues from external sources 908 134 1,022 194 (52,698 ) (1,969 ) (54,694 ) (3,716 ) Consolidated net income (loss) $ (23,286 ) 9,267 (9,809 ) 15,718 13
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Dollar amounts in thousands)
(Unaudited)RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS
Three months period ended June 30, 2003 Segment Consolidated Totals Adjustments * Totals Claims incurred $ 259,172 — 259,172 Operating expenses 51,556 (11,639 ) 39,917 Depreciation expense 1,151 278 1,429 Interest expense 430 335 765 Income taxes 10,264 51,677 61,941
Three months period ended June 30, 2002 Segment Consolidated Totals Adjustments * Totals Claims incurred $ 260,878 — 260,878 Operating expenses 51,969 (13,327 ) 38,642 Depreciation expense 1,870 291 2,161 Interest expense 569 303 872 Income taxes 741 40 781
Six months period ended June 30, 2003 Segment Consolidated Totals Adjustments * Totals Claims incurred $ 530,003 — 530,003 Operating expenses 101,768 (23,361 ) 78,407 Depreciation expense 2,296 556 2,852 Interest expense 859 609 1,468 Income taxes 10,969 51,688 62,657
Six months period ended June 30, 2002 Segment Consolidated Totals Adjustments * Totals Claims incurred $ 532,651 — 532,651 Operating expenses 103,231 (25,878 ) 77,353 Depreciation expense 3,097 576 3,673 Interest expense 1,231 760 1,991 Income taxes 1,127 154 1,281
THREE MONTHS ENDED MARCH 31, 2003 2002 --------- ---------TOTAL REVENUES Total revenues for reportable segments $ 324,798 319,048 Total revenues for other segments 11,116 11,474 --------- --------- 335,914 330,522 Elimination* Adjustments represent TSM operations and the elimination of intersegment earned premiums (695) (668) Elimination of intersegment service revenues (11,116) (11,474) Unallocated amount - revenues from external sources 114 174 --------- --------- (11,697) (11,968) --------- --------- Consolidated total revenues $ 324,217 318,554 ========= ========= NET INCOME (LOSS) Net income for reportable segments $ 13,441 6,171 Net income for other segments 296 268 --------- --------- 13,737 6,439 --------- --------- Elimination of TSM charges: Rent expense 1,564 1,546 Interest expense 172 213 --------- --------- 1,736 1,759 --------- --------- Unallocated amounts related to TSM: General and administrative expenses (1,653) (1,137) Interest expense (446) (670) Other revenues from external sources 103 60 --------- --------- (1,996) (1,747) --------- --------- Consolidated net income $ 13,477 6,451 ========= =========charges.1114
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial StatementsMarch 31,
June 30, 2003(Dollar
(Dollar amounts in thousands)
(Unaudited)RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS
June 30, December 31, 2003 2002 Total assets for reportable segments $ 777,146 697,234 Total assets for other segments 2,348 1,633 779,494 698,867 Elimination entries - intersegment receivables (15,565 ) (7,690 ) Unallocated amounts: TSM cash, cash equivalents and investments 8,428 6,424 TSM net property and equipment 27,211 27,755 TSM other assets 262 322 35,901 34,501 Consolidated assets $ 799,830 725,678 OTHER SIGNIFICANT ITEMS
As of June 30, 2003 Segment Consolidated Totals Adjustments * Totals Significant noncash item: Net change in unrealized gain on securities available for sale $ (4,212 ) (369 ) (4,581 ) Net change in minimum pension liability 2,715 — 2,715
As of December 31, 2002 Segment Consolidated Totals Adjustments * Totals Significant noncash items: Net change in unrealized gain on securities available for sale $ 5,791 195 5,986 Net change in minimum pension liability (7,927 ) (187 ) (8,114 )
THREE MONTHS ENDED MARCH 31, 2003 ------------------------------------------- SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS* TOTALS ---------- ------------- ------------Claims incurred $ 270,831 -- 270,831 Operating expenses 50,212 (11,722) 38,490 Depreciation expense 1,145 278 1,423 Interest expense 429 274 703 Income taxes 705 11 716Adjustments represent TSM operations and the elimination of intersegment charges.
THREE MONTHS ENDED MARCH 31, 2002 ------------------------------------------- SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS * TOTALS ---------- ------------- ------------Claims incurred $ 271,773 -- 271,773 Operating expenses 51,262 (12,551) 38,711 Depreciation expense 1,223 285 1,508 Interest expense 662 457 1,119 Income taxes 386 114 500* Adjustments represent TSM operations and the elimination of intersegment charges. 1215
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September
June 30,2002 (Dollar2003
(Dollar amounts in thousands)
(Unaudited)RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS
MARCH 31, DECEMBER 31, 2003 2002 ---------- ------------ASSETS Total assets for reportable segments $ 732,792 697,234 Total assets for other segments 2,109 1,633 ---------- ---------- 734,901 698,867 ---------- ---------- Elimination entries - intersegment receivables (12,322) (7,690) ---------- ---------- Unallocated amounts: Parent cash, cash equivalents and investments 7,287 6,424 Parent net property and equipment 27,479 27,755 Parent other assets 488 322 ---------- ---------- 35,254 34,501 ---------- ---------- Consolidated assets $ 757,833 725,678 ========== ==========OTHER SIGNIFICANT ITEMS
AS OF MARCH 31, 2003 ------------------------------------------- SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS * TOTALS ------- ------------- ------------Significant noncash item - net change in unrealized gain on securities available for sale $ 217 14 231
AS OF DECEMBER 31, 2002 ------------------------------------------- SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS * TOTALS ------- ------------- ------------Significant noncash items: Net change in unrealized gain on securities available for sale $ 5,791 195 5,986 Net change in minimum pension liability (7,927) (187) (8,114)* Adjustments represent TSM operations and the elimination of intersegment charges. 13TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 2003 (Dollar amounts(3) Investment in
thousands) (Unaudited) (3) INVESTMENT IN SECURITIESSecuritiesThe
Corporation'sCorporation’s investment atMarch 31,June 30, 2003 and December 31, 2002, consist of the following:
(UNAUDITED) MARCH 31, DECEMBER 31, 2003 2002 ---------- ------------Trading securities, at fair value $ 96,953 94,938 Available for sale, at fair value 401,897 368,650 Held to maturity, at amortized cost 5,981 5,982 ---------- ------- Total investments $ 504,831 469,570 ========== =======
(Unaudited) June 30, December 31, 2003 2002 Trading securities, at fair value $ 120,275 94,938 Available for sale, at fair value 394,597 368,650 Held to maturity, at amortized cost 5,823 5,982 Total investments $ 520,695 469,570 The amortized cost for debt securities and equity securities, gross unrealized gain, 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
March 31,June 30, 2003 and December 31, 2002, were as follows:
MARCH 31, 2003 (UNAUDITED) --------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ---------Trading securities: Fixed maturities $ 50,354 3,099 (53) 53,400 Equity securities 48,956 2,521 (7,924) 43,553 -------- ------ ------- ------- $ 99,310 5,620 (7,977) 96,953 ======== ====== ======= =======
MARCH 31, 2003 (UNAUDITED) --------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ---------Securities available for sale: Fixed maturities $346,383 5,990 (381) 351,992 Equity securities 27,250 22,758 (103) 49,905 -------- ------ ------- ------- $373,633 28,748 (484) 401,897 ======== ====== ======= =======
MARCH 31, 2003 (UNAUDITED) --------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ---------Securities held to maturity: Fixed maturities $ 5,981 9 (6) 5,984 ======== === === ======14
June 30, 2003 (Unaudited) Gross Gross Amortized unrealized unrealized Estimated fair cost gains losses value Trading securities: Fixed maturities $ 66,456 4,229 (214 ) 70,471 Equity securities 48,881 4,833 (3,910 ) 49,804 $ 115,337 9,062 (4,124 ) 120,275
June 30, 2003 (Unaudited) Gross Gross Amortized unrealized unrealized Estimated fair cost gains losses value Securities available for sale: Fixed maturities $ 342,429 6,454 (793 ) 348,090 Equity securities 25,988 20,540 (21 ) 46,507 $ 368,417 26,994 (814 ) 394,597
June 30, 2003 (Unaudited) Gross Gross Amortized unrealized unrealized Estimated fair cost gains losses value Securities held to maturity: Fixed maturities $ 5,823 61 (4 ) 5,880 16
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31,Notes to Consolidated Financial Statements
June 30, 2003(Dollar
(Dollar amounts in thousands, except per share data)
(Unaudited)
DECEMBER 31, 2002 --------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ---------Trading securities: Fixed maturities $ 47,487 2,848 (18) 50,317 Equity securities 51,859 2,793 (10,031) 44,621 -------- ------ ------- ------- $ 99,346 5,641 (10,049) 94,938 ======== ====== ======= =======
DECEMBER 31, 2002 --------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ---------Securities available for sale: Fixed maturities $ 315,478 5,925 (159) 321,244 Equity securities 25,239 22,218 (51) 47,406 --------- ------- ----- -------- $ 340,717 28,143 (210) 368,650 ========= ======= ===== ========
DECEMBER 31, 2002 --------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ---------Securities held to maturity: Fixed maturities $ 5,982 3 (9) 5,976 ======= === === ======
December 31, 2002 Gross Gross Amortized unrealized unrealized Estimated fair cost gains losses value Trading securities: Fixed maturities $ 47,487 2,848 (18 ) 50,317 Equity securities 51,859 2,793 (10,031 ) 44,621 $ 99,346 5,641 (10,049 ) 94,938
December 31, 2002 Gross Gross Amortized unrealized unrealized Estimated fair cost gains losses value Securities available for sale: Fixed maturities $ 315,478 5,925 (159 ) 321,244 Equity securities 25,239 22,218 (51 ) 47,406 $ 340,717 28,143 (210 ) 368,650
December 31, 2002 Gross Gross Amortized unrealized unrealized Estimated fair cost gains losses value Securities held to maturity: Fixed maturities $ 5,982 3 (9 ) 5,976 Investment in securities at
March 31,June 30, 2003 are mostly comprised of U.S. Treasury securities and obligations of U.S. government instrumentalities(40.9%(40.6%), mortgage backed and collateralized mortgage obligations that are U.S. agency-backed(22.2%(20.7%), obligations of the government of Puerto Rico and its instrumentalities(5.1%(5.2%) and obligations of states and political subdivisions (1.2%). The remaining30.6%32.3% of the investment portfolio is comprised of corporate debt and equity securities.The Corporation regularly monitors the difference between the
costscost and estimated fair value of their investments. If a decline in themarketfair value of any available for sale or held to maturity security below cost is deemed to be other than temporary, the carrying amount will be reduced to fair value. If investments experience a decline in fair value that is deemed to be other than temporary, the security is written down to fair value with a charge to operations and new cost basis for the security is established. No impairment has been noted nor recognized by the Corporation during the three months and six months periods endedMarch 31,June 30, 2003.1517
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31,Notes to Consolidated Financial Statements
June 30, 2003(Dollar
(Dollar amounts in thousands, except per share data)
(Unaudited)(4)
PREMIUMS AND OTHER RECEIVABLESPremiums and Other ReceivablesPremiums and other receivables as of
March 31,June 30, 2003 and December 31, 2002 were as follows:
(UNAUDITED) MARCH 31, DECEMBER 31, 2003 2002 ----------- ------------Premiums $ 56,602 46,531 Self-funded group receivables 15,051 14,244 FEHBP 13,868 7,636 Accrued interest 4,064 4,880 Reinsurance recoverable on paid losses 17,401 17,552 Other 12,938 10,978 ---------- -------- 119,924 101,821 ---------- -------- Less allowance for doubtful receivables: Premiums 9,661 8,081 Other 6,085 5,713 ---------- -------- 15,746 13,794 ---------- -------- Total premiums and other receivables $ 104,178 88,027 ========== ========
(Unaudited) June 30, December 31, 2003 2002 Premiums $ 51,187 42,054 Self-funded group receivables 15,031 14,244 FEHBP 16,058 7,636 Accrued interest 4,654 4,880 Reinsurance recoverable on paid losses 20,029 17,552 Other 13,794 10,978 120,753 97,344 Less allowance for doubtful receivables: Premiums 4,152 3,604 Other 5,847 5,713 9,999 9,317 Total premiums and other receivables $ 110,754 88,027 (5)
CLAIM LIABILITIESClaim LiabilitiesThe activity in the total claim liabilities for the three months period ended
March 31,June 30, 2003 and 2002 is as follows:
(UNAUDITED) THREE MONTHS ENDED MARCH 31, 2003 2002 ---------- --------Claim liabilities at beginning of period $ 244,582 229,440 Reinsurance recoverable on claim liabilities (13,589) (10,062) ---------- -------- Net claim liabilities at beginning of period 230,993 219,378 ---------- -------- Incurred claims and loss-adjustment expenses: Current period insured events 282,180 278,016 Prior period insured events (11,349) (6,243) ---------- -------- Total 270,831 271,773 ---------- -------- Payments of losses and loss-adjustment expenses: Current period insured events 133,821 154,085 Prior period insured events 124,069 96,814 ---------- -------- Total 257,890 250,899 ---------- -------- Net claim liabilities at end of period 243,934 240,252 Reinsurance recoverable on claim liabilities 14,717 11,749 ---------- -------- Claim liabilities at end of period $ 258,651 252,001 ========== ========
(Unaudited) Three months ended June 30, 2003 2002 Claim liabilities at beginning of period $ 258,651 251,700 Reinsurance recoverable on claim liabilities (14,717 ) (11,749 ) Net claim liabilities at beginning of period 243,934 239,951 Incurred claims and loss-adjustment expenses: Current period insured events 264,153 258,309 Prior period insured events (4,981 ) 2,569 Total 259,172 260,878 Payments of losses and loss-adjustment expenses: Current period insured events 238,178 248,766 Prior period insured events 33,727 19,928 Total 271,905 268,694 Net claim liabilities at end of period 231,201 232,135 Reinsurance recoverable on claim liabilities 16,896 11,350 Claim liabilities at end of period $ 248,097 243,485 18
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Dollar amounts in thousands, except per share data)
(Unaudited)The activity in the total claim liabilities for the six months periods ended June 30, 2003 and 2002 is as follows:
(Unaudited) Six months ended June 30, 2003 2002 Claim liabilities at beginning of period $ 244,582 229,440 Reinsurance recoverable on claim liabilities (13,589 ) (10,062 ) Net claim liabilities at beginning of period 230,993 219,378 Incurred claims and loss-adjustment expenses: Current period insured events 546,333 536,325 Prior period insured events (16,330 ) (3,674 ) Total 530,003 532,651 Payments of losses and loss-adjustment expenses: Current period insured events 371,999 403,151 Prior period insured events 157,796 116,743 Total 529,795 519,894 Net claim liabilities at end of period 231,201 232,135 Reinsurance recoverable on claim liabilities 16,896 11,350 Claim liabilities at end of period $ 248,097 243,485 As a result of changes in estimates of insured events in prior years, the amounts included as incurred claims for prior period insured events in the claim liabilities activity for the three months and six months periods ended June 30, 2003 and 2002, differs from anticipated claims incurred.
16TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2003 (Dollar amounts in thousands, except per share data) (Unaudited)(6)
COMPREHENSIVE INCOMEComprehensive IncomeThe accumulated balances and net current period change for the three months and six months periods ended June 30, 2003 of each classification of comprehensive income are as follows:
(Unaudited) Accumulated Unrealized Minimum other gains on pension Cash flow comprehensive securities liability hedges income $ 26,970 (8,114 ) (470 ) 18,386 Net current period change (4,581 ) 2,715 (537 ) (2,403 ) $ 22,389 (5,399 ) (1,007 ) 15,983 19
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Dollar amounts in thousands, except per share data)
(Unaudited)(7) Income Taxes
Under Puerto Rico income tax law, the Corporation is not allowed to file consolidated tax returns with its subsidiaries. Triple-S, Inc. (TSI), a wholly owned subsidiary of TSM, was exempt from Puerto Rico income taxes under a ruling issued by the Puerto Rico Treasury Department (PRTD).
The Corporation was notified on June 18, 2003 by the PRTD that the ruling recognizing TSI’s tax exemption was terminated effective December 31, 2002. The termination of the ruling responds to a new policy set by the PRTD according to which tax exemptions under Section 1101(6) of the Puerto Rico Internal Revenue Code of 1994, as amended (the P.R. Code) will not apply to corporations organized as for-profit, which is TSI’s case.
On July 31, 2003, TSM and TSI executed a closing agreement with the PRTD. In general, the terms of the closing agreement establish the termination of TSI’s tax exemption effective December 31, 2002. Accordingly, since TSI’s tax status changed effective January 1, 2003, TSI is subject to Puerto Rico income taxes as an other than life insurance entity, as defined in the P.R. Code. As a result, TSI recorded during the second quarter of the year 2003, $11,480 and $(1,719) of current and deferred income tax expense (benefit), respectively, corresponding to the six months period ended June 30, 2003. In addition, TSI recorded a net deferred tax asset of $1,613.
The closing agreement also stipulates that TSM will pay taxes on TSI’s accumulated statutory net income, in accordance with the income recognition methodology applied by the Secretary of the Treasury in the closing agreement and the ruling mentioned above. This tax ruling established the following methodology for TSM to determine its tax liability:
(UNAUDITED) ACCUMULATED UNREALIZED MINIMUM OTHER GAINS ON PENSION CASH FLOW COMPREHENSIVE SECURITIES LIABILITY HEDGES INCOME ---------- --------- --------- -------------BALANCE AT JANUARY 1 $ 26,970 (8,114) (470) 18,386 Net• TSI’s accumulated statutory net income while operating under the tax exemption, amounting to $132,763, was deemed distributed to TSM. • For tax purposes TSM recognized the exempt accumulated statutory net income as gross income. On this amount, TSM recognized an income tax liability amounting to $51,774, which was determined by applying a tax rate of 39% to the exempt accumulated statutory net income deemed distributed to TSM. The income tax was recorded by TSM within the current period change 231 -- (160) 71 -------- ------- ----- ------- BALANCE AT MARCHincome tax expense presented in the consolidated statements of operations. Of this tax $37,000 were paid on July 31,$ 27,201 (8,114) (630) 18,457 ======== ======= ===== =======2003, the date of the closing agreement, and $14,774 is due on April 15, 2004.(7) NET INCOME AVAILABLE TO STOCKHOLDERS AND NET INCOME PER SHAREUnder a resolution prepared by the Puerto Rico House of Representatives (House of Representatives), the Banking and Insurance Committee conducted an investigation of TSI’s tax treatment under rulings issued by the PRTD that granted TSI’s tax exempt status. A similar investigation was approved by the Puerto Rico Senate. In addition, the PRTD was conducting an audit of TSI’s compliance with the requirements of the tax ruling. All three investigations on the tax exemption that had been conferred to TSI for over 20 years have been concluded. The House of Representatives and the Puerto Rico Senate concluded their investigations by recommending and providing for the termination of the tax exemption solely on account of TSI’s for-profit status and the fact that no other for-profit health insurer in Puerto Rico enjoys a tax exemption under section 1101(6) of the P.R. Code. The PRTD also concluded its investigation with no findings, and as mentioned above, changed its policy regarding tax exemptions under that particular section of the PR Code.
(8) Net Income Available to Stockholders and Net Income per Share
The Corporation presents only basic earnings per share, which amount consists of the net income that could be available to common stockholders divided by the weighted-average number of common shares outstanding for the period.
20
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Dollar amounts in thousands, except per share data)
(Unaudited)The Corporation
is a for-profit organization thathasoperated as a not-for-profit organizationnot distributed dividends by virtue of the affirmative vote of its stockholders.As a result the Corporation has not distributed dividends.However, a resolution was approved by theShareholdersStockholders at the Annual Meeting held on April 27, 2003, acknowledging that the Board of Directors (the Board) may declare dividends subject to theBoard'sBoard’s determination that in their best judgment the payment of dividends is financially and legallyfeasiblefeasible.In prior reported annual audited and
that in determininginterim financial statements, the amount presented as available for distribution to stockholders excluded TSI’s results of operations due to TSI’s prohibition to declare dividends, as required in its tax exemption ruling. Due to TSI’s change in tax status, as described in note 7 to these financial statements, TSI’s earnings are now available for distribution to shareholders.In prior reported annual audited and interim financial statements, the Corporation presented two proforma computations of basic earnings per share. The first computation presumed that TSI was a
dividend,taxable entity and therefore an estimate of theBoard shall only take into consideration TSM's profits andincome taxes that would otherwise have resulted had TSI operated without thedividends receivedtax exemption was made in order to estimate an amount of net income available to stockholders. Given the fact that this second computation is no longer valid it has been eliminated from thesubsidiaries except Triple-S, Inc. (TSI), and shall not take into consideration TSM's investment inconsolidated statements of operations. The second computation presumed that TSIand TSI's operating reserves. Thus,would retain its tax exemption thus excluding TSI’s net income from theamountnet income thatcouldwould be available for distributionwould exclude TSI's operating reserve and capital contributions made by TSItoits former subsidiaries beforestockholders. This computation presents thecorporate reorganization dueactual net income that was available for distribution toTSI's tax exemption. This fact was reaffirmed by a letter issued byshareholders in prior periods.Based on the
Department of the Treasury of Puerto Rico on July 3, 2001. Forabove, for purposes of computing the basic earnings per share corresponding to the three months and six months periods ended June 30, 2002 presented in the consolidated statement of operations, to determine the amount of net income available for distribution to shareholders the Corporationconsidersexcluded TSI’s results of operations.The following table sets forth the
operationscomputation ofTSI as if TSI operated withoutbasic earnings per share for the three months and six months periods ended June 30, 2003 and 2002 (in thousands, except for outstanding shares and net income per share).
(Unaudited) Three months ended June 30, 2003 2002 Numerator for basic earnings per share: Net income (loss) available to stockholders, the 2002 amount excludes TSI’s net income for the period, amounting to $6,343 $ (23,286 ) 2,924 Denominator for basic earnings per share: Weighted average of outstanding common shares 9,264 9,626 Basic net income (loss) per share $ (2,514 ) 304
(Unaudited) Six months ended June 30, 2003 2002 Numerator for basic earnings per share: Net income (loss) available to stockholders, the 2002 amount excludes TSI’s net income for the period, amounting to $10,018 $ (9,809 ) 5,700 Denominator for basic earnings per share: Weighted average of outstanding common shares 9,300 9,650 Basic net income (loss) per share $ (1,055 ) 591 Since TSI’s tax exemption was terminated and TSM paid a tax on TSI’ accumulated statutory net income, the Corporation presents this proforma earnings per share computation for the three months and six months periods ended June 30, 2002 considering the resulting tax effect upon the termination of the tax exemption.
Under this scenario, in orderThe tax expense determined for these periods was based on the tax rate and methodology used to determine the amount actually paid by TSM, or a 39% of TSI's statutory net income,that could be availablewhich was deemed distributed tostockholders,TSM. The estimated tax effect presented in prior reports differs from this presentation since in prior periods the Corporationestimatesestimated the Puerto Rico income taxesthat would have otherwise resulted and deducts it from the results of operations of each period. TSI's estimate of Puerto Rico income taxes, computedforsuch purposes, was determinedTSI asforan other than life insurance entity, as defined in the Puerto Rico Internal Revenue Code of 1994, asamended. The effective tax rate used was 39% for the three months ended March 31, 2003 and 2002.amended, considering deductible items.The following table sets forth the
resulting net income that could be available to stockholders if TSI operated without the tax exemption for the three months ended March 31, 2003 and 2002 (dollar amounts in thousands).
(UNAUDITED) THREE MONTHS ENDED MARCH 31, 2003 2002 --------- ------Net income for the period $ 13,477 6,451 Less tax effect on TSI operations 3,503 876 --------- ------ Net income available to stockholders $ 9,974 5,575 ========= ======17TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2003 (Dollar amounts in thousands, except per share data) (Unaudited) The following table sets forth theproforma computation of basic earnings per share described above for the three months and six months period endedMarch 31, 2003 andJune 30, 2002if TSI operated without the tax exemption(in thousands,exceptexpect for outstanding shares and net income per share).
(UNAUDITED) THREE MONTHS ENDED MARCH 31, 2003 2002 ------ ------Numerator for basic earnings per share: Net income available to stockholders $9,974 5,575 ====== ====== Denominator for basic earnings per share: Weighted average of outstanding common shares 9,337 9,671 ====== ====== Basic net income per share $1,068 576 ====== ======Should the Corporation decide to preserve the tax exemption 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 that would otherwise be available for distribution after excluding the net result of operations of TSI for the three months ended March 31, 2003 and 2002 (dollar amounts in thousands).
(UNAUDITED) THREE MONTHS ENDED MARCH 31, 2003 2002 -------- ------Net income for the period $ 13,477 6,451 Less TSI results of operations 9,269 3,675 -------- ------ Net income available to stockholders $ 4,208 2,776 ======== ======The following table sets forth the computation of basic net income per share for the three months ended March 31, 2003 and 2002 if the Corporation excludes TSI's results of operations (in thousands, except for outstanding shares and net income per share):
(UNAUDITED) THREE MONTHS ENDED MARCH 31, 2003 2002 ------ ------Numerator for basic earnings per share: Net income available to stockholders $4,208 2,776 ====== ====== Denominator for basic earnings per share: Weighted average of outstanding common shares 9,337 9,671 ====== ====== Basic net income per share after excluding the net results of operations of TSI $ 451 287 ====== ======(8) CONTINGENCIES 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 Treasury Department that grant TSI's tax exempt status. A similar resolution was approved by the Puerto Rico Senate and referred to the Health and Government Integrity Committees (the Senate Committees). TSI has 18
(Unaudited) Three months ended June 30, 2002 Numerator for basic earnings per share: Net income (loss) available to stockholders, excludes the tax effect described above, amounting to $4,193 $ 5,074 Denominator for basic earnings per share: Weighted average of outstanding common shares 9,626 Basic net income (loss) per share $ 527
(Unaudited) Six months ended June 30, 2002 Numerator for basic earnings per share: Net income (loss) available to stockholders, excludes the tax effect described above, amounting to $5,779 $ 9,939 Denominator for basic earnings per share: Weighted average of outstanding common shares 9,650 Basic net income (loss) per share $ 1,030 21
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial StatementsMarch 31,
June 30, 2003(Dollar
(Dollar amounts in thousands, except per share data)
(Unaudited)provided
(Unaudited) Three months ended June 30, 2003 2002 Numerator for basic earnings per share: Net income (loss) available to stockholders, the 2002 amount is net of the tax effect described above, amounting to $4,193 $ (23,286 ) 5,074 Denominator for basic earnings per share: Weighted average of outstanding common shares 9,264 9,626 Basic net income (loss) per share $ (2,514 ) 527
(Unaudited) Six months ended June 30, 2003 2002 Numerator for basic earnings per share: Net income (loss) available to stockholders, the 2002 amount is net of the tax effect described above, amounting to $5,779 $ (9,809 ) 9,939 Denominator for basic earnings per share: Weighted average of outstanding common shares 9,300 9,650 Basic net income (loss) per share $ (1,055 ) 1,030 22
TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes tothe Committee and the Senate Committees the information and documents as requested and will cooperate with all aspectsConsolidated Financial Statements
June 30, 2003
(Dollar amounts in thousands, except per share data)
(Unaudited)(9) Reconciliation of
the investigation. In addition, representatives of the Puerto Rico Treasury Department are currently conducting a compliance audit of the tax ruling requirements. The Corporation cannot predict when or on what basis the investigation will conclude or its effects, if any, on the Corporation. (9) RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIESNet Income (Loss) to Net Cash Provided by Operating ActivitiesA reconciliation of net income to net cash provided by operating activities is as follows:
(UNAUDITED) THREE MONTHS ENDED MARCH 31, 2003 2002 ---------- --------Net income $ 13,477 6,451 ---------- -------- Adjustments to reconcile net income to net cash provided by operating expenses: Depreciation and amortization 1,423 1,508 Amortization of investments discounts 229 29 Accretion in value of securities (365) (540) Loss on sale of securities 3,023 156 Unrealized gain of trading securities (2,092) (285) Proceeds from trading securities sold: Fixed maturities 10,908 6,000 Equity securities 6,363 64 Acquisition of securities in trading portfolio: Fixed maturities (13,501) (5,966) Equity securities (6,795) -- Increase in provision for doubtful receivables 1,952 509 Loss on sale of property and equipment (1) -- (Increase) decrease in assets: Premiums receivable (17,110) (18,860) Accrued interest receivable 816 931 Reinsurance receivable 151 (1,925) Other receivables (1,960) 508 Deferred policy acquisition costs (1,232) (300) Other assets 2,022 4,115 Increase (decrease) in liabilities: Claims processed and incomplete (10,189) 8,242 Unreported losses 23,540 13,769 Unpaid loss-adjustment expenses 718 550 Unearned premiums (642) 1,125 Individual retirement annuities 526 221 Liability to FEHBP (2,430) (2,291) Accounts payable and accrued liabilities 1,254 3,283 ---------- -------- Net cash provided by operating activities 10,085 17,294 ========== ========19ITEM
Six months ended June 30, 2003 2002 Net income (loss) $ (9,809 ) 15,718 Adjustments to reconcile net income (loss) to net cash provided by operating expenses: Depreciation and amortization 2,852 3,673 Amortization of investments discounts 692 55 Accretion in value of securities (741 ) (989 ) (Gain) loss on sale of securities (3,621 ) 150 Unrealized (gain) loss of trading securities (9,368 ) 5,377 Proceeds from trading securities sold: Fixed maturities 31,148 76,122 Equity securities 10,512 9,609 Acquisition of securities in trading portfolio: Fixed maturities (49,452 ) (74,557 ) Equity securities (11,217 ) (10,137 ) Increase in provision for doubtful receivables 682 910 (Gain) loss on sale of property and equipment (45 ) 1 (Increase) decrease in assets: Premiums receivable (18,342 ) (18,200 ) Accrued interest receivable 226 (79 ) Reinsurance receivable (2,477 ) (1,364 ) Other receivables (2,816 ) 375 Deferred policy acquisition costs (1,615 ) (1,930 ) Other assets (1,352 ) 2,936 Increase (decrease) in liabilities: Claims processed and incomplete (5,552 ) 8,477 Unreported losses 8,131 4,344 Unpaid loss-adjustment expenses 936 1,224 Unearned premiums 3,567 2,935 Individual retirement annuities 683 394 Liability to FEHBP 9,763 (4,349 ) Accounts payable and accrued liabilities 2,230 5,047 Income tax payable 62,953 (119 ) Net deferred tax liability (1,604 ) 683 Net cash provided by operating activities $ 16,364 26,306 23
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis of Financial Condition and Results of OperationsThe
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q is intended to update the reader on matters affecting the financial condition and results of operations of Triple-S Management Corporation (TSM) and its subsidiaries (the Corporation) for the period from January 1, 2003 toMarch 31,June 30, 2003. Therefore, the following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K filed with the United States Securities and Exchange Commission as of and for the year ended December 31, 2002.CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATIONCautionary Statement Regarding Forward-Looking Information
This form and other publicly available documents may include statements that may constitute
"forward-looking statements"“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, among other things: statements concerning the financial condition, results of operations and business of the Corporation. These statements are not historical, but instead represent theCorporation'sCorporation’s belief regarding future events, any of which, by their nature, are inherently uncertain and outside of theCorporation'sCorporation’s control. These statements may address, among other things, financial results, strategy for growth, and market position. It is possible that theCorporation'sCorporation’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. 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.STRUCTURE OF THE ORGANIZATIONStructure of the Organization
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'sTSM’s subsidiaries:- - 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.
• 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. In addition to the insurance subsidiaries mentioned above, TSM has the following subsidiaries: Interactive Systems, Inc. (ISI) and Triple-C, Inc. (TCI). ISI provides data processing services to the Corporation. TCI is currently engaged as the third-party administrator in the administration of the Healthcare Reform and also provides healthcare advisory services to TSI and other health-related services.
The
Corporation is a for-profit organization that has operated as a not-for-profit organization by virtue of the affirmative vote of its stockholders. As a result theCorporation has not distributeddividends.dividends by virtue of resolution of its shareholders. However, on April 27, 2003, at its Annual Meeting, a resolution was approved by the Shareholdersat the Annual Meeting held on April 27, 2003,acknowledging that the Board of Directors (the Board) may declare dividends subject to theBoard'sBoard’s determination that in their best judgment the payment of dividends is financially and legallyfeasible and that in determining the amount to declare asfeasible.Recent Developments
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Income taxes
TSI was exempt from Puerto Rico income taxes under a
dividend, the Board shall only take into consideration TSM's 20profits and the dividends received from the subsidiaries except TSI, and shall not take into consideration TSM's investment in TSI and TSI's operating reserves. Thus, the amount of net income that could be available for distribution would exclude TSI's net income due to TSI's tax exempt status obtained through an income taxruling issued by the Puerto Rico Treasury Department (PRTD). The Corporation was notified June 18, 2003 by the PRTD that the ruling recognizing TSI’s tax exemption was terminated effective December 31, 2002. The termination of the ruling responds to a new policy set by the PRTD according to which tax exemptions under Section 1101(6) of the PuertoRico.Rico Internal Revenue Code will not apply to corporations organized as for-profit, which is TSI’s case.On July 31, 2003, TSM and TSI executed a closing agreement with the PRTD. In general, the terms of the closing agreement establish the termination of TSI’s tax exemption effective December 31, 2002. Accordingly, since TSI’s tax status changed effective January 1, 2003, TSI is subject to Puerto Rico income taxes as an other than life insurance entity, as defined in the Puerto Rico Internal Revenue Code of 1994, as amended (the P.R. Code). As a result, TSI recorded during the second quarter of the year 2003, $11,480 and $(1,719) of current and deferred income tax expense (benefit), respectively, corresponding to the six months period ended June 30, 2003. In addition, TSI recorded a net deferred tax asset of $1,613.
The closing agreement also stipulates that TSM will pay taxes on TSI’s accumulated statutory net income, in accordance with the income recognition methodology applied by the Secretary of the Treasury in the closing agreement and the ruling mentioned above. The tax ruling established the following methodology for TSM to determine its tax liability:
• TSI’s accumulated statutory net income while operating under the tax exemption, amounting to $132,763, was deemed distributed to TSM. • For tax purposes TSM recognized the exempt accumulated statutory net income as gross income. On this amount, TSM recognized an income tax liability amounting to $51,774, which was determined by applying a tax rate of 39% to the exempt accumulated statutory net income deemed distributed to TSM. The income tax was recorded by TSM within the current income tax expense presented in the consolidated statements of operations. Of this tax $37,000 were paid on July 31, 2003, the date of the closing agreement, and $14,774 is due on April 15, 2004. Under a resolution prepared by the Puerto Rico House of Representatives (House of Representatives), the Banking and Insurance Committee conducted an investigation of TSI’s tax treatment under rulings issued by the PRTD that granted TSI’s tax exempt status. A similar investigation was approved by the Puerto Rico Senate. In addition, the PRTD was conducting an audit of TSI’s compliance with the requirements of the tax ruling. All three investigations on the tax exemption that had been conferred to TSI for over 20 years have been concluded. The House of Representatives and the Puerto Rico Senate concluded their investigations by recommending and providing for the termination of the tax exemption solely on account of TSI’s for-profit status and the fact that no other for-profit health insurer in Puerto Rico enjoys a tax exemption under section 1101(6) of the P.R. Code. The PRTD also concluded its investigation with no findings, and as mentioned above, changed its policy regarding tax exemptions under that particular section of the PR Code.
Healthcare Reform Segment
The premium rates of the Government Healthcare Reform contracts were renegotiated effective July 1, 2003 for a twelve-month period ending on June 30, 2004. As a result of this renegotiation, the
above conditions, the portionpremium rates ofthe consolidated net income disclosed in the consolidated financial statements and in this Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q, corresponding tothe Health Insurance- - Commercial and– Healthcare Reformsegments within TSI, is not available for distribution to shareholders. RECENT DEVELOPMENTSsegment were increased by approximately 4.5%.On March 1, 2003, the Government of Puerto Rico (the Government) announced that, effective July 1, 2003, it will begin a pilot project where it will be contracting healthcare services for the medically indigent population directly with some of the medical groups, instead of through the health insurance companies. This change
iswas expected to decrease the Healthcare Reformsegment'ssegment’s enrollment by approximately 46 thousand members and related annualized premiums by approximately $30.0 million.ADOPTION OF ACCOUNTING STANDARDHowever, during the month of June 2003 the Government announced that this pilot project will no longer25
be implemented in any of the areas serviced by TSI. This situation does not preclude the government from implementing in the future such pilot project in areas served by TSI.
Adoption of Accounting Standard
Effective January 1, 2003, the Financial Accounting Standards Board (the FASB) issued the Statement of Financial Accounting Standard (SFAS) No. 143,Accounting for Asset Retirement
Obligations.Obligations. SFAS No. 143 requires the Corporation 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 Corporation would also record a corresponding asset which is depreciated over the life of the asset. The adoption of this standard did not have an impact on theCorporation'sCorporation’s financial position or results of operations.Effective January 1, 2003, the FASB issued SFAS No. 145,Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections.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 effective for fiscal years beginning after May 15, 2002. The provisions of the statement related to SFAS No. 13 were effective for transactions occurring after May 15, 2002. The adoption of SFAS No. 145 did not have an impact on theCorporation'sCorporation’s financial statements.Effective January 1, 2003, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal
Activities.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 anActivity.Activity. The provisions of this statement were effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have an impact on theCorporation'sCorporation’s financial statements.Effective January 1, 2003, the FASB issued
FASBInterpretation No. 45,Guarantor'sGuarantor’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.34.34. 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 were applicable to guarantees issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements of interim and annual periods ending after December 31, 2002. The adoption of FASB Interpretation No. 45 did not have an impact on theCorporation'sCorporation’s financial statements.21Effective January 1, 2003, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation
-– Transition and Disclosure, an amendment of FASB Statement No.123.123. 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. This statement also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications were effective for fiscal years ending after December 15, 2002. The provisions of SFAS No. 148 do not apply to theCorporation'sCorporation’s financial statements.GENERAL INFORMATIONGeneral Information
Substantially all of the revenues of the Corporation are generated from premiums earned and investment income. Claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and other service providers, and to policyholders. A portion of the claims incurred for each period consists of a
26
management and actuarial estimate of claims incurred but not reported to the segment during the period. Each
segment'ssegment’s results of operations depend largely on their ability to accurately predict and effectively manage these claims. Administrative expenses comprise general, selling, commissions, depreciation and payroll and payroll related expenses.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 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. 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.
22CONSOLIDATED OPERATING RESULTSConsolidated Operating Results
The analysis in this section provides an overall view of the consolidated statements of operations and key financial information. Further details of the results of operations of each reportable segment are included in the analysis of operating results for the respective segments.
THREE MONTHS ENDED MARCH 31, (dollar amounts in thousands) 2003 2002 -------- -----CONSOLIDATED EARNED PREMIUMS, NET AND FEE REVENUE: Health Insurance - Commercial Program $178,149 167,874 Health Insurance - Healthcare Reform 115,795 124,447 Property and casualty 19,053 16,088 Life and disability 5,203 3,813 -------- ------- 318,200 312,222 ======== ======= CONSOLIDATED CLAIMS INCURRED $270,831 271,773 CONSOLIDATED OPERATING EXPENSES 38,490 38,711 -------- ------- CONSOLIDATED OPERATING COSTS $309,321 310,484 ======== ======= CONSOLIDATED LOSS RATIO 85.1% 87.0% CONSOLIDATED EXPENSE RATIO 12.1% 12.4% -------- ------- CONSOLIDATED COMBINED RATIO 97.2% 99.4% ======== ======= NET INVESTMENT INCOME $ 6,098 5,990 REALIZED LOSS ON SALE OF SECURITIES (3,023) (156) UNREALIZED GAIN ON TRADING SECURITIES 2,092 285 -------- ------- TOTAL CONSOLIDATED NET INVESTMENT INCOME $ 5,167 6,119 ======== ======= CONSOLIDATED INCOME TAX EXPENSE $ 716 500 ======== ======= CONSOLIDATED NET INCOME PER SEGMENT: Health Insurance - Commercial Program $ 4,854 3,527 Health Insurance - Healthcare Reform 4,415 148 Property and casualty 2,567 1,732 Life and disability 1,605 764 Other 36 280 -------- ------- CONSOLIDATED NET INCOME $ 13,477 6,451 ======== =======
Three months ended Six months ended June 30, June 30, (dollar amounts in thousands) 2003 2002 2003 2002 Health Insurance - Commercial Program $ 171,468 168,238 349,617 336,112 Health Insurance - Healthcare Reform 122,852 123,079 238,647 247,526 Property and casualty 18,254 14,364 37,307 30,452 Life and disability 4,205 3,845 9,408 7,658 316,779 309,526 634,979 621,748 $ 259,172 260,878 530,003 532,651 39,917 38,642 78,407 77,353 $ 299,089 299,520 608,410 610,004 81.8 % 84.3 % 83.5 % 85.7 % 12.6 % 12.5 % 12.3 % 12.4 % 94.4 % 96.8 % 95.8 % 98.1 % $ 6,286 6,359 12,384 12,349 6,644 6 3,621 (150 ) 7,276 (5,662 ) 9,368 (5,377 ) $ 20,206 703 25,373 6,822 $ 61,941 781 62,657 1,281 Health Insurance - Commercial Program $ 19,435 6,898 24,289 10,425 Health Insurance - Healthcare Reform 3,505 (555 ) 7,920 (407 ) Property and casualty 2,899 1,411 5,466 3,143 Life and disability 1,498 1,523 3,103 2,287 Other (50,623 ) (10 ) (50,587 ) 270 $ (23,286 ) 9,267 (9,809 ) 15,718 Three Months Period Ended
March 31,June 30, 2003 Compared to Three Months Period EndedMarch 31,June 30, 2002Consolidated earned premiums, net and fee revenue for the three months period ended
March 31,June 30, 2003 increased by$6.0 million$7.3million, or1.9%2.3%, when compared to the consolidated earned premiums, net and fee27
revenue for the same period of last year. This increase is mostly due to a combined increase of
$13.2$7.1 million in the earned premiums, net and fee revenue of the Health Insurance-Commercial–Commercial Program and the Property and Casualty Insurancesegments together with a decrease of $8.7 million in the earned premiums, net of the Health Insurance - Healthcare Reform segment. - The earned premiums, net and fee revenue corresponding to the Health Insurance - Commercial segment increased by $10.3 million or 6.1% during this period. Increases in premium rates account for the segment's total increase in earned premiums and fee revenue for the period. - The earned premiums, net of the Property and Casualty Insurance segment increased by $3.0 million or 18.4% during this period. This increase is mostly reflected in the premiums written for the commercial multiperil line, which experienced an increase in premiums of $1.6 million, or 13.2%, during this period and is due to the increase in volume of business. 23- The earned premiums, net corresponding to the Health Insurance - Healthcare Reform segment decreased by $8.7 million or 6.9% during this period. This decrease is the net result of a decrease in average membership and an increase in premium rates effective July 1, 2002. - The earned premiums, net of the Life and Disability Insurance segment increased by $1.4segments.
• The earned premiums, net of the Property and Casualty Insurance segment increased by $3.9 million or 27.1% during this period. This increase is due to the production of new business in the dwelling, commercial auto liability and commercial multiperil lines of business. Premium rates, particularly those of the commercial lines of business, have remained consistent with the premium rates for year 2002. • The earned premiums, net and fee revenue corresponding to the Health Insurance – Commercial segment increased by $3.2 million, or 1.9%, during this period. A change in the mix of the business subscribed and increases in premium rates account for the segment’s increase in earned premiums and fee revenue for the period. Consolidated claims incurred for the three months period ended
March 31,June 30, 2003 reflect a decrease of$942 thousand,$1.7 million, or0.4%0.7%, when compared to the claims incurred for the three months period endedMarch 31,June 30, 2002. The consolidated loss ratio reflects a decrease of1.92.5 percentage points during this period. The decrease in the loss ratio is the result ofmanagement'smanagement’s ability to adjust its pricing strategy to cope with the increase in claims costs and the implementation of several measures for cost containment. The consolidated expense ratio for the three months period endedMarch 31,June 30, 2003decreasedincreased by0.30.1 percentage points when compared to the consolidated expense ratio for the same period of the prior year.The consolidated realized
lossgain on sale of securities of$3.0$6.6 million and$156$6 thousand for the three months periods endedMarch 31,June 30, 2003 and 2002, respectively, is the result of the sound and timely management of the investment portfolio in accordance with corporate investment policies, and from the normal portfolio turnover of the trading and available-for-sale securities. The realized gain during the second quarter of the year 2003 is mostly due to the sale of common stocks of Popular Inc., which generated a realized gain of approximately $6.1 million.The consolidated unrealized gain (loss) on trading securities of
$2.1$7.3 million and$285 thousand$(5.7) million for the three months period endedMarch 31,June 30, 2003 and 2002, respectively, is related to investments held by the Health Insurance-– Commercial Program, Health Insurance-– Healthcare Reform, Property and Casualty Insurance and Life and Disability Insurance segments. This unrealized gain (loss) is mostly attributed to the performance of certain equity holdings in the portfolios of such segments that replicate the Standard & Poors 500 Index (the S&P Index). The S&P Index experienced an increase of 14.9% during the second quarter of the year 2003 while it experienced a decrease of 14.8% during the second quarter of the year 2002.The consolidated income tax expense for the three months period ended June 30, 2003 increased by $61.2 million when compared to the same period of the prior year. This increase is due to the effect of the following:
• On June 18, 2003, the Corporation was notified by the Puerto Rico Treasury Department (PRTD) that TSI’s tax exemption was terminated effective December 31, 2002. As a result, since effective January 1, 2003 TSI is subject to Puerto Rico income taxes, the Health Insurance - Commercial Program and Healthcare Reform segments recorded in the second quarter of the year 2003 $4.9 million each as income tax expense for the six months period ended June 30, 2003. • On July 31, 2003, the TSM and TSI executed a closing agreement with the PRTD that stipulated that the statutory net income accumulated while TSI operated under the tax ruling was deemed distributed to TSM. As a result, TSM recognized an income tax liability amounting to $51.8 million, which was recorded in the second quarter of the year 2003. Six Months Period Ended June 30, 2003 Compared to Six Months Period Ended June 30, 2002
Consolidated earned premiums, net and fee revenue for the six months period ended June 30, 2003 increased by $13.2 million or 2.1% when compared to the consolidated earned premiums, net and fee
28
revenue for the same period of last year. This increase is mostly due to the net of an increase of $20.4 million in the earned premiums, net and fee revenue of the Health Insurance –Commercial Program and the Property and Casualty Insurance segments and a decrease of $8.9 million in the earned premiums, net of the Health Insurance – Healthcare Reform segment.
• The earned premiums, net and fee revenue corresponding to the Health Insurance – Commercial segment increased by $13.5 million or 4.0% during this period. A change in the mix of business subscribed and increases in premium rates account for the segment’s increase in earned premiums and fee revenue for the period. • The earned premiums, net of the Property and Casualty Insurance segment increased by $6.9 million or 22.5% during this period. This increase is due to the production of new business in the dwelling and commercial multiperil lines of business during this period. Premium rates, particularly in the commercial lines of business, have remained consistent with the premium rates for year 2002. • The earned premiums, net corresponding to the Health Insurance – Healthcare Reform segment decreased by $8.9 million or 3.6% during this period. This decrease is the net result of a decrease in average membership and an increase in premium rates effective July 1, 2002. • The earned premiums, net of the Life and Disability Insurance segment increased by $1.8 million during this period. Consolidated claims incurred for the six months period ended June 30, 2003 reflect a decrease of $2.6 million, or 0.5%, when compared to the claims incurred for the six months period ended June 30, 2002. The consolidated loss ratio reflects a decrease of 2.2 percentage points during this period. The decrease in the loss ratio is the result of management’s ability to adjust its pricing strategy to cope with the increase in claims costs and the implementation of several measures for cost containment. The consolidated expense ratio for the six months period ended June 30, 2003 decreased by 0.1 percentage points when compared to the consolidated expense ratio for the same period of the prior year.
The consolidated realized gain (loss) on sale of securities of $3.6 million and $(150) thousand for the six months periods ended June 30, 2003 and 2002, respectively, is the result of the sound and timely management of the investment portfolio in accordance with corporate investment policies, and from the normal portfolio turnover of the trading and available-for-sale securities. During second quarter of the year 2003 the Corporation realized a gain of approximately $6.1 million as a result of the sale of common stocks of Popular Inc.
The consolidated unrealized gain (loss) on trading securities of $9.4 million and $(5.4) million for the six months periods ended June 30, 2003 and 2002, respectively, is related to investments held by the Health Insurance – Commercial Program, Health Insurance – Healthcare Reform, Property and Casualty Insurance and the Life and Disability Insurance segments. This unrealized gain is mostly attributed to the
fact that certain investments with unrealized losses within such portfolio were sold during this quarter. This caused mosteffect of theabove mentionedfollowing:
• This unrealized gain (loss) is mostly attributed to the performance of certain equity holdings in the portfolios of such segments that replicate the Standard & Poors 500 Index (the S&P Index). The S&P Index experienced an increase of 10.8% during the first half of the year 2003 while it experienced a decrease of 13.8% during same period of the year 2002. • In addition, during the first quarter of the year 2003 the Corporation sold certain investments with unrealized losses within such portfolios. This caused approximately $3.0 million in realized losses and had the effect of reducing the unrealized losses within the trading portfolio by the same amount. The consolidated income tax expense for the six months period ended June 30, 2003 increased by $61.4 million when compared to the same period of the prior year. This increase is due to the effect of
reducing securities with unrealized losses withinthetrading portfolio at March 31, 2003. 24HEALTH INSURANCE - COMMERCIAL PROGRAM OPERATING RESULTSfollowing:29
THREE MONTHS ENDED MARCH• On June 18, 2003, the Corporation was notified by the Puerto Rico Treasury Department (PRTD) that TSI’s tax exemption was terminated effective December 31, (dollar amounts2002. As a result, since effective January 1, 2003 TSI is subject to Puerto Rico income taxes, the Health Insurance - Commercial Program and Healthcare Reform segments recorded inthousands)the second quarter of the year 20032002 -------- -------AVERAGE ENROLLMENT: Corporate accounts 313,558 316,525 Self-funded employers 127,166 125,969 Individual accounts 83,604 81,386 Federal employees 54,321 56,114 Local government employees 43,559 43,597 -------- ------- TOTAL ENROLLMENT 622,208 623,591 ======== ======= Earned premiums $176,066 165,666 Amounts attributable$4.9 million each as income tax expense for the six months period ended June 30, 2003.• On July 31, 2003, the TSM and TSI executed a closing agreement with the PRTD that stipulated that the statutory net income accumulated while TSI operated under the tax ruling was deemed distributed to self-funded arrangements 40,137 35,334 Less: Amounts attributableTSM. As a result, TSM recognized an income tax liability amounting toclaims under self-funded arrangements (37,359) (32,458) -------- ------- EARNED PREMIUMS AND FEE REVENUE $178,844 168,542 ======== ======= CLAIMS INCURRED $154,557 145,804 OPERATING EXPENSES 21,159 21,803 -------- ------- TOTAL UNDERWRITING COSTS $175,716 167,607 ======== ======= UNDERWRITING INCOME $ 3,128 935 ======== ======= LOSS RATIO 86.4% 86.5% EXPENSE RATIO 11.8% 12.9% -------- ------- COMBINED RATIO 98.3% 99.4% ======== ======= NET INVESTMENT INCOME $ 2,619 2,558 REALIZED LOSS ON SALE OF SECURITIES (2,303) (174) UNREALIZED GAIN ON TRADING SECURITIES 1,550 386 -------- ------- TOTAL NET INVESTMENT INCOME $ 1,866 2,770 ======== ======= NET INCOME $ 4,854 3,527 ======== =======$51.8 million, which was recorded in the second quarter of the year 2003.Health Insurance – Commercial Program Operating Results
Three months ended Six months ended June 30, June 30, (dollar amounts in thousands) 2003 2002 2003 2002 Corporate accounts 300,649 313,945 307,103 315,235 Self-funded employers 129,538 124,984 128,352 125,476 Individual accounts 84,416 82,645 84,010 82,015 Federal employees 54,158 55,829 54,239 55,971 Local government employees 43,447 43,477 43,503 43,537 612,208 620,880 617,207 622,234 Earned premiums $ 169,010 167,980 345,076 333,646 Amounts attributable to self-funded arrangements 40,200 37,321 80,337 72,655 Less: Amounts attributable to claims under self-funded arrangements (37,191 ) (36,379 ) (74,550 ) (68,837 ) $ 172,019 168,922 350,863 337,464 $ 138,164 137,558 292,721 283,362 21,861 22,752 43,020 44,555 $ 160,025 160,310 335,741 327,917 $ 11,994 8,612 15,122 9,547 80.3 % 81.4 % 83.4 % 84.0 % 12.7 % 13.5 % 12.3 % 13.2 % 93.0 % 94.9 % 95.7 % 97.2 % $ 2,654 2,759 5,273 5,317 4,737 113 2,434 (61 ) 5,028 (4,442 ) 6,578 (4,056 ) $ 12,419 (1,570 ) 14,285 1,200 $ 19,435 6,898 24,289 10,425 Three Months Period Ended
March 31,June 30, 2003 Compared to Three Months Period EndedMarch 31,June 30, 2002Earned premiums, net and fee revenue for the three months period ended
March 31,June 30, 2003 reflect an increase of$10.3$3.1 million, or6.1%1.8%, when compared to the three months period endedMarch 31,June 30, 2002. 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 cover actual claims trends. Premium rates increased, in average, 3.3% during this period. Increases in premium rates and a change in the mix of the business subscribed account for thetotalincrease in earned premiums and fee revenue, net for the period.-30
Average enrollment as ofMarch 31,June 30, 2003 decreased by1,3838,672 members, or0.2%1.4%, when compared to the average enrollment as of the same date of last year. The decrease in average enrollment is mostly reflected in the Corporate Accounts groups and Federal Employees, which membership decreased by2,96713,296 members, or0.9%4.2%, and1,793,1,671, or3.2%3.0%, during this period respectively. The average enrollment of the Self-funded Employers and Individual Accountsand Self-funded Employersreflect an increase in membership by2,218,4,554, or2.7%3.6% and1,197,1,771, or1.0%2.1%, during this period, respectively.Claims incurred during the three months period ended
March 31,June 30, 2003 increased by$8.8 million$606 thousand or6.0%0.4% when compared to the same period in 2002. Thesegment'ssegment’s loss ratio for the three months period endedMarch 31,June 30, 2003 decreased byonly 0.11.1 percentage points when compared to the loss ratio for the three months period endedMarch 31,June 30, 2002. The segment has been able to control the increase in the loss ratio with its better premium pricing and claims costs containment measures established throughout the years. As a result of these cost containment initiatives, cost and utilization trends have remained at levels consistent with pricing and25margin objectives. The behavior ofconsistency in the loss ratio reflects that the segment has been able tomaintain the increasekeep increases in premium rates consistent withto the behavior ofclaims trends.The operating expenses for the three months period ended
March 31,June 30, 2003 reflect a decrease of$644$891 thousand, or3.0%3.9%, when compared to the three months period endedMarch 31,June 30, 2002. This decrease is due to non recurring expenses incurred in the second quarter of the year 2002. The expense ratio for the three months period ended June 30, 2003 decreased by 0.8 percentage points compared to the three months period ended June 30, 2002.Six Months Period Ended June 30, 2003 Compared to Six Months Period Ended June 30, 2002
Earned premiums and fee revenue, net for the six months period ended June 30, 2003 reflect an increase of $13.4 million, or 4.0%, when compared to the six months period ended June 30, 2002. 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 cover actual claims trends. Premium rates increased, in average, 5.6% during this period. Increases in premium rates and a change in the mix of the business subscribed account for the increase in earned premiums and fee revenue for the period. • Average enrollment as of June 30, 2003 decreased by 5,027 members, or 0.8%, when compared to the enrollment as of the same date of last year. The decrease in average enrollment is mostly reflected in the Corporate Accounts groups and Federal Employees, which membership decreased by 8,132 members, or 2.6%, and 1,732, or 3.1%, during this period respectively. The average enrollment of the Individual Accounts and Self-funded Employers reflect an increase in membership by 2,876, or 2.3% and 1,995, or 2.4%, during this period, respectively. Claims incurred during the six months period ended June 30, 2003 increased by $9.4 million or 3.3% when compared to the same period in 2002. The segment’s loss ratio for the six months period ended June 30, 2003 decreased by 0.6 percentage points when compared to the loss ratio for the six months period ended June 30, 2002. The segment has been able to control the increase in the loss ratio with its better premium pricing and claims costs containment measures established throughout the years. As a result of these cost containment initiatives, cost and utilization trends have remained at levels consistent with pricing and margin objectives. The consistency in the loss ratio reflects that the segment has been able to keep increases in premium rates consistent with claims trends.
The operating expenses for the six months period ended June 30, 2003 reflect a decrease of $1.5 million, or 3.4%, when compared to the six months period ended June 30, 2002. This decrease is due to cost control measures established since no enrollment increase was experienced during the period. The expense ratio for the
threesix months period endedMarch 31,June 30, 2003 decreased by1.10.9 percentage points compared to thethreesix months period endedMarchJune 30, 2002.31
2002. HEALTH INSURANCE - HEALTHCARE REFORM PROGRAM OPERATING RESULTS
THREE MONTHS ENDED MARCH 31, (dollar amounts in thousands) 2003 2002 -------- -------Average enrollment: North area 237,580 256,887 Metro-north area 226,050 169,387 Southwest area 170,368 151,316 Northwest area -- 156,625 -------- ------- 633,998 734,215 ======== ======= EARNED PREMIUMS $115,795 124,447 ======== ======= CLAIMS INCURRED $104,167 115,984 OPERATING EXPENSES 8,318 8,999 -------- ------- TOTAL UNDERWRITING COSTS $112,485 124,983 ======== ======= UNDERWRITING INCOME (LOSS) $ 3,310 (536) ======== ======= LOSS RATIO 90.0% 93.2% EXPENSE RATIO 7.2% 7.2% -------- ------- COMBINED RATIO 97.1% 100.4% ======== ======= NET INVESTMENT INCOME $ 1,274 1,188 REALIZED GAIN (LOSS) ON SALE OF SECURITIES (298) 3 UNREALIZED GAIN (LOSS) ON TRADING SECURITIES 237 (266) -------- ------- TOTAL NET INVESTMENT INCOME $ 1,213 925 ======== ======= NET INCOME $ 4,415 148 ======== =======Health Insurance – Healthcare Reform Program Operating Results
Three months ended Six months ended June 30, June 30, (dollar amounts in thousands) 2003 2002 2003 2002 North area 238,137 251,251 239,510 254,069 Metro-north area 225,727 167,529 227,083 168,458 Southwest area 169,460 150,355 170,207 150,836 Northwest area — 156,046 — 156,335 633,324 725,181 636,800 729,698 $ 122,852 123,079 238,647 247,526 $ 108,786 113,711 212,953 229,695 8,428 10,465 16,746 19,464 $ 117,214 124,176 229,699 249,159 $ 5,638 (1,097 ) 8,948 (1,633 ) 88.6 % 92.4 % 89.2 % 92.8 % 6.9 % 8.5 % 7.0 % 7.9 % 95.4 % 100.9 % 96.3 % 100.7 % $ 1,279 1,297 2,553 2,485 189 (170 ) (109 ) (167 ) 1,385 (387 ) 1,622 (653 ) $ 2,853 740 4,066 1,665 $ 3,505 (555 ) 7,920 (407 ) Three Months Period Ended
March 31,June 30, 2003 Compared to Three Months Period EndedMarch 31,June 30, 2002Earned premiums of the Healthcare Reform segment for the three months period ended
March 31,June 30, 2003decreased by $8.7 million,reflect a decrease of $227 thousand or6.9%0.2%, when compared to the same period oflastthe prior year. This decrease is the result of the following:- The average monthly enrollment for this segment decreased by 100,217 insureds when comparing the average enrollment for the three months ended March 31, 2003 to the three months ended March 31, 2002. This decrease is due to the net effect of the following: the loss of seven municipalities of the Northwest area, which were merged into the West area (served by another carrier) effective July 1, 2001, the award of the Southwest area effective October 1, 2001 and the fact that six new municipalities were assigned into areas serviced by the segment effective July 1, 2002. -
• The average monthly enrollment for this segment decreased by 91,857 insureds when comparing the average enrollment for the three months period ended June 30, 2003 to the three months period ended June 30, 2002. This decrease is due to the net effect of the following: the loss of seven municipalities of the Northwest area, which were merged into the West area (served by another carrier) effective July 1, 2002 and the fact that six new municipalities were assigned into areas serviced by the segment effective July 1, 2002. • Premium rates were increased by approximately 6.3% during the Healthcare Reform contract renegotiation processes. Premium rates were increased by approximately 13.2% during the Healthcare Reform contract renegotiation processes. New premiumrates 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. In addition, the premium rates for the Metro-north and Southwest areas (areas in which the segment has experienced an increase in average enrollment) are higher than the premium rate of the Northwest area.Claims incurred during the three months period ended
March 31,June 30, 2003 reflect a decrease of$11.8$4.9 million, or10.2%4.3%, when compared to the three months period endedMarch 31,June 30, 2002. This fluctuation is due to thedecrease 26insegment’s decreased volume of businessofduring theHealthcare Reform segment.period. Also, during the three months period endedMarch 31,June 30, 2003, the loss ratio experienced a decrease of3.23.8 percentage points. The decrease experienced in the loss ratio is the result of the effect of better premium pricing, a change in the mix of areas served and claims cost containment measures established throughout the years.32
Operating expenses for the three months period ended
March 31,June 30, 2003, decreased by$681 thousand,$2.0 million, or7.6%19.5%, when compared to the three months period endedMarch 31,June 30, 2002. This decrease is due to thesegment'ssegment’s decreased volume of business.PROPERTY AND CASUALTY INSURANCE OPERATING RESULTSThe decrease in the expense ratio of 1.6 percentage points during this period is due to the fact that during the three months period ended June 30, 2002 the segment began the enrollment process of the new municipalities acquired effective July 1, 2002, thus incurring in expenses while the earned premiums of the new business was not received until the third quarter of the year 2002. In addition, there was a reduction on the expenses related to the segment’s compliance with the HIPAA regulation.Six Months Period Ended June 30, 2003 Compared to Six Months Period Ended June 30, 2002
Earned premiums of the Healthcare Reform segment for the six months period ended June 30, 2003 decreased by $8.9 million, or 3.6%, when compared to the same period of last year. This decrease is the result of the following:
THREE MONTHS ENDED MARCH 31, (dollar amounts• The average monthly enrollment for this segment decreased by 92,898 insureds when comparing the average enrollment for the six months period ended June 30, 2003 to the six months period ended June 30, 2002. This decrease is due to the net effect of the following: the loss of seven municipalities of the Northwest area, which were merged into the West area (served by another carrier) effective July 1, 2002 and the fact that six new municipalities were assigned into areas serviced by the segment effective July 1, 2002. • Premium rates were increased by approximately 6.3% during the Healthcare Reform contract renegotiation processes. 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. In addition, the premium rates for the Metro-north and Southwest areas (areas in thousands) 2003 2002 ------- ------PREMIUMS WRITTEN: Commercial multiperil $14,043 12,409 Dwelling 4,753 3,956 Auto physical damage 3,494 4,241 Commercial auto liability 3,045 2,708 Medical malpractice 1,002 964 All other 3,038 2,346 ------- ------ Total premiums written 29,375 26,624 ------- ------ Premiums ceded (6,435) (4,959) Changewhich the segment has experienced an increase inunearned premiums (3,887) (5,577) ------- ------ NET PREMIUMS EARNED $19,053 16,088 ======= ====== CLAIMS INCURRED $ 9,810 7,801 OPERATING EXPENSES 8,519 8,126 ------- ------ TOTAL UNDERWRITING COSTS $18,329 15,927 ======= ====== UNDERWRITING INCOME $ 724 161 ======= ====== LOSS RATIO 51.5% 48.5% EXPENSE RATIO 44.7% 50.5% ------- ------ COMBINED RATIO 96.2% 99.0% ======= ====== NET INVESTMENT INCOME $ 1,644 1,578 REALIZED LOSS ON SALE OF SECURITIES (425) (55) UNREALIZED GAIN ON TRADING SECURITIES 305 165 ------- ------ TOTAL NET INVESTMENT INCOME $ 1,524 1,688 ======= ====== NET INCOME $ 2,567 1,732 ======= ======average enrollment) are higher than the premium rate of the Northwest area.Claims incurred during the six months period ended June 30, 2003 reflect a decrease of $16.7 million, or 7.3%, when compared to the six months period ended June 30, 2002. This fluctuation is due to the decrease in volume of business of the Healthcare Reform segment. Also, during the six months period ended June 30, 2003, the loss ratio experienced a decrease of 3.6 percentage points. The decrease experienced in the loss ratio is the result of the effect of better premium pricing, a change in the mix of areas served and claims cost containment measures established throughout the years.
Operating expenses for the six months period ended June 30, 2003, decreased by $2.7 million, or 14.0%, when compared to the six months period ended June 30, 2002. This decrease is due to the segment’s decreased volume of business. The decrease in the expense ratio of 0.9 percentage points during this period is due to the fact that during this period the segment began the enrollment process of the new municipalities acquired effective July 1, 2002, thus incurring in expenses while the earned premiums of the new business was not received until the third quarter of the year 2002. In addition, there was a reduction on the expenses related to the segment’s compliance with the HIPAA regulation.
33
Property and Casualty Insurance Operating Results
Three months ended Six months ended June 30, June 30, (dollar amounts in thousands) 2003 2002 2003 2002 Commercial multiperil $ 11,590 11,075 25,633 23,484 Dwelling 6,752 4,409 11,505 8,365 Auto physical damage 3,499 3,778 6,993 8,019 Commercial auto liability 2,879 2,253 5,924 4,961 Medical malpractice 1,331 1,123 2,333 2,087 All other 4,824 3,235 7,862 5,581 Total premiums written 30,875 25,873 60,250 52,497 Premiums ceded (13,750 ) (11,560 ) (20,185 ) (16,519 ) Change in unearned premiums 1,129 51 (2,758 ) (5,526 ) $ 18,254 14,364 37,307 30,452 $ 10,645 8,287 20,455 16,088 8,966 5,141 17,485 13,267 $ 19,611 13,428 37,940 29,355 $ (1,357 ) 936 (633 ) 1,097 58.3 % 57.7 % 54.8 % 52.8 % 49.1 % 35.8 % 46.9 % 43.6 % 107.4 % 93.5 % 101.7 % 96.4 % $ 1,700 1,656 3,344 3,234 620 71 195 16 956 (833 ) 1,261 (668 ) $ 3,276 894 4,800 2,582 $ 2,899 1,411 5,466 3,143 Three Months Period Ended
March 31,June 30, 2003 Compared to Three Months Period EndedMarch 31,June 30, 2002Total premiums written for the three months period ended
March 31,June 30, 2003 increased by$2.7$5.0 million, or10.3%19.3%, when compared to the three months period endedMarch 31,June 30, 2002. This increase is mostly reflected in the premiums written for the dwelling, commercial auto liability and commercial multiperilline,lines of business, which experienced an increase in premiums of$1.6$2.3 million, or13.2%53.1%, $626 thousand, or 27.8%, and $515, or 4.7%, during thisperiod.period, respectively. This increase is due to the production of newbusiness.business since premium rates, particularly those of the commercial lines of business, have remained consistent with the premium rates for the year 2002.Premiums ceded to reinsurers during the three months period ended
March 31,June 30, 2003 increased by$1.5$2.2 million, or29.8%18.9%, when compared to the same period for the prior year. The increase in the amount of premiums ceded in the property and casualty segment is directly related to its increased volume of business. The ratio of premiums ceded to premiums written reflects a decrease of 0.2 basis points, from 44.7% for the three months period ended June 30, 2002 to 44.5% for the same period of the year 2003.The increase in the claims incurred of $2.4 million, or 28.5%, is basically due to the segment’s increased volume of business. The property and casualty loss ratio experienced an increase of 0.6 percentage points during the three months period ended June 30, 2003 as compared to the same period of the prior year. The operating expenses for the three months period ended June 30, 2003 increased by $3.8 million when compared to the operating expenses for the three months period ended June 30, 2002. The expense ratio increased by 13.3 percentage points during this period. The increase in the expense ratio is basically the result of a decrease in reinsurance commission income from the proportional reinsurance treaties.
Six Months Period Ended June 30, 2003 Compared to Six Months Period Ended June 30, 2002
34
Total premiums written for the six months period ended June 30, 2003 increased by $7.8 million, or 14.8%, when compared to the six months period ended June 30, 2002. This increase is mostly reflected in the premiums written for the dwelling and commercial multiperil lines of business, which experienced an increase in premiums of $3.1 million, or 37.5%, and $2.1 million, or 9.2%, during this period, respectively. This increase is due to the production of new business since premium rates, particularly in the commercial lines of business, have remained consistent with the premium rates for year 2002.
Premiums ceded to reinsurers during the six months period ended June 30, 2003 increased by $3.7 million, or 22.2%, when compared to the same period for the prior year. The increase in the amount of premiums ceded in the property and casualty segment is directly related to its increased volume of business. The ratio of premiums ceded to premiums written reflects an increase of
3.32.0 basis points, from18.6%31.5% as ofMarch 31,June 30, 2002 to21.9%33.5% as ofMarch 31,June 30, 2003. The increase in the premiums ceded to premiums written ratio is due to the net effect of the following:27- The effect of the new property quota share treaty, which has a higher cession percentage, coupled with the increase in property business subscribed during this period. - Catastrophe reinsurance costs increased by over 10% during this period. This increase is due to recent worldwide catastrophes. - A decrease resulting from the cancellation of the property surplus treaty, which propitiated reinsurance portfolio transfer resulting in a net incoming business and a reduction in the amount of premiums ceded.
• The effect of a new property quota share treaty, which has a higher cession percentage, coupled with the increase in property business subscribed during this period. • Catastrophe reinsurance costs increased by over 10% during this period. This increase is due to recent worldwide catastrophes. • A decrease resulting from the cancellation of a property surplus treaty, which propitiated a reinsurance portfolio transfer resulting in a net incoming business and a reduction in the amount of premiums ceded. The increase in the claims incurred of
$2.0$4.4 million, or25.8%27.1%, is basically due to thesegment'ssegment’s increased volume of business. The property and casualty loss ratio experienced an increase of3.02.0 percentage points during thethreesix months period endedMarch 31,June 30, 2003 as compared to the same period of the prior year. This increase is mostly due to an increase in the frequency of the number of claims received in the auto liability line of business. The effect of this situation is offset by favorable underwriting results of the commercial multiperil line of business.The operating expenses for the
threesix months period endedMarch 31,June 30, 2003 increased by$393 thousand,$4.2 million, or4.8%31.8%, when compared to the operating expenses for thethreesix months period endedMarch 31,June 30, 2002. The expense ratiodecreasedincreased by9.23.3 percentage points during this period. Thedecreaseincrease in the expense ratio isdue to an increasebasically the result of a decrease in reinsurance commission income from theamountproportional reinsurance treaties and the effect ofexpenses included inthedeferred policy acquisition costs. LIFE AND DISABILITY INSURANCE OPERATING RESULTS
THREE MONTHS ENDED MARCH 31, (dollar amounts in thousands) 2003 2002 ------- ------NET EARNED PREMIUMS AND COMMISSION INCOME: Earned premiums $ 6,913 4,877 Earned premiums ceded (1,872) (1,235) ------- ------ Net earned premiums 5,041 3,642 ------- ------ Commission income on reinsurance 162 171 ------- ------ TOTAL $ 5,203 3,813 ======= ====== CLAIMS INCURRED $ 2,297 2,184 OPERATING EXPENSES 1,558 1,276 ------- ------ TOTAL UNDERWRITING COSTS $ 3,855 3,460 ======= ====== UNDERWRITING INCOME $ 1,348 353 ======= ====== LOSS RATIO 44.1% 57.3% EXPENSE RATIO 29.9% 33.5% ------- ------ COMBINED RATIO 74.1% 90.7% ======= ====== NET INVESTMENT INCOME $ 523 590 REALIZED GAIN ON SALE OF SECURITIES 3 70 ------- ------ TOTAL NET INVESTMENT INCOME $ 526 660 ======= ====== NET INCOME $ 1,605 764 ======= ======28reinsurance portfolio transfer. 35
Life and Disability Insurance Operating Results
Three months ended Six months ended June 30, June 30, (dollar amounts in thousands) 2003 2002 2003 2002 Earned premiums $ 6,044 5,366 12,957 10,243 Earned premiums ceded (1,959 ) (1,660 ) (3,831 ) (2,895 ) Net earned premiums 4,085 3,706 9,126 7,348 Commission income on reinsurance 120 139 282 310 $ 4,205 3,845 9,408 7,658 $ 1,577 1,322 3,874 3,506 1,608 1,274 3,166 2,550 $ 3,185 2,596 7,040 6,056 $ 1,020 1,249 2,368 1,602 37.5 % 34.4 % 41.2 % 45.8 % 38.2 % 33.1 % 33.7 % 33.3 % 75.7 % 67.5 % 74.8 % 79.1 % $ 557 571 1,080 1,161 448 (8 ) 451 62 (93 ) — (93 ) — $ 912 563 1,438 1,223 $ 1,498 1,523 3,103 2,287 Three Months Period Ended
March 31,June 30, 2003 Compared to Three Months Period EndedMarch 31,June 30, 2002Earned premiums for the three months period ended
March 31,June 30, 2003 increased by$2.0 million,$678 thousand, or41.8%12.6%, when compared to the three months period endedMarch 31,June 30, 2002. This increase ismostlydue to thefact that during this quarter, the segment revised its methodology for estimating the premiums of its short term disability business. This revision resulted in a non-recurring adjustment to earned premiums of $1.1 million during the three months period ended March 31, 2003. In addition, the segment experienced anincreased volume of business experienced by the segment during this period. Total average certificates in force in the group life and group disability business as ofMarch 31,June 30, 2003 increased by33,31028,215 certificates, or10.2%8.5%, when compared to the same period for last year.Premiums ceded to reinsurers during the three months period ended
March 31,June 30, 2003 reflect an increase of$637$299 thousand, or51.6%18.0%, when compared to the same period of the prior year. The ratio of premiums ceded to earned premiums increased from 30.9% for the three months period ended June 30, 2002 to 32.4% for the three months period ended June 30, 2003. The increase during this period in the amount of premiums ceded and in the ratio of premiums ceded to earned premiums is due to a change in the mix of business subscribed by the segment and each business reinsurance program. During this period in 2003, the segment subscribed more disability policies than in the same period of the prior year; this increasing trend of the disability business began during the year 2002. The disability insurance business has a higher cession percentage than the life insurance business, thus causing an increase in the amount of premiums ceded and an increase in the earned premiums ceded to earned premiums ratio.Claims incurred for the three months period ended June 30, 2003 increased by $255 thousand, or 19.3%, when compared to the three months period ended June 30, 2002. The segment’s loss ratio reflects an increase of 3.1 percentage points during the same period. This increase is due to the fact that the segment has subscribed more disability policies than during 2002. The disability insurance business has a higher loss ratio than the life insurance business, thus contributing to the segment’s increased loss ratio.
The life and disability segment’s operating expenses reflect an increase of $334 thousand, or 26.2%, when compared to the prior period. The increase in the operating expenses is mostly the result of an increase in
36
the commission expense, payroll and payroll related expenses and infrastructure projects, which are mostly attributed to the increase in the volume of business noted during this period.
Six Months Period Ended June 30, 2003 Compared to Six Months Period Ended June 30, 2002
Earned premiums for the six months period ended June 30, 2003 increased by $2.7 million, or 26.5%, when compared to the six months period ended June 30, 2002. This increase is mostly due to the following:
• During the first quarter of the year 2003, the segment revised its methodology for estimating the premiums of its short term disability business. This revision resulted in a non-recurring adjustment to earned premiums of $1.1 million during that period. • In addition, the segment has experienced an increased volume of business during the six months period ended June 30, 2003 when compared to the same period of the year 2002. Total average certificates in force in the group life and group disability business as of June 30, 2003 increased by 30,565 certificates, or 9.2%, when compared to the same period for last year. Premiums ceded to reinsurers during the six months period ended June 30, 2003 reflect an increase of $936 thousand, or 32.3%, when compared to the same period of the prior year. The ratio of premiums ceded to earned premiums increased was 29.6% and 28.3% for the six month period ended June 30, 2003 and 2002, respectively, an increase of 1.3 basis points. The increase in premiums ceded during this period is due to a change in the mix of business subscribed by the segment and each business reinsurance program. During this period in 2003, the segment subscribed more disability policies than in 2002; this increasing trend of the disability business began during the year 2002. The disability insurance business has a higher cession percentage than the life insurance business, thus causing an increase in the amount of premiums ceded and an increase in the earned premiums ceded to earned premiums ratio.
Claims incurred for the
threesix months period endedMarch 31,June 30, 2003 increased by$113$368 thousand, or5.2%10.5%, when compared to thethreesix months period endedMarch 31, 2002.June 30, 2002, which is attributed to the segment’s increased volume of business during this period. The segment’s loss ratio however, reflects a decrease of 4.6 percentage points during the same period. This decrease in the loss ratio is attributed to the fact that during the first quarter of the year 2003, the segment revised its methodology for estimating the premiums of its short term disability business. This revision resulted in a non-recurring adjustment to earned premiums of $1.1 million, which alters the loss ratio of the six months period ended June 30, 2003.The life and disability
segment'ssegment’s operating expenses reflect an increase of$282$616 thousand, or22.1%24.2%, when compared to the prior period. The increase in the operating expenses is mostly the result of an increase in the commission expense, payroll and payroll related expenses and infrastructureprojects. The increase of these expenses is dueprojects, which are mostly attributed to the increase in the volume of business noted during this period.LIQUIDITY AND CAPITAL RESOURCESLiquidity 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
March 31,June 30, 2003 and December 31, 2002, theCorporation'sCorporation’s cash and cash equivalents amounted to$64.5$80.4 million and $82.8 million, respectively. The sources of funds considered in meeting the objectives of theCorporation'sCorporation’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.Management believes that the
Corporation'sCorporation’s net cash flows from operations are expected to sustain the operations for the next year and thereafter, as long as the operations continue showing positive results. The Corporation is continually monitoring premium rates and claims incurred to ascertain the sustainability of37
its net cash flows from operations. In addition the Corporation has the ability to increase premium rates throughout the year in the
policies'policies’ renewal process that is performed on a monthly basis.29Cash 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
$10.1$16.4 million and$17.3$26.3 million for thethreesix months periods endedMarch 31,June 30, 2003 and 2002, respectively, a decrease of$7.2$9.9 million. This decrease in cash flows provided by operating activities is mainly attributed to the net effect of the following:- The amount of claims losses and benefits paid for the three months ended March 31, 2003 reflect an increase of $7.6 million when compared to the same amount of the prior year. The increase in the amount of claims losses and benefits paid is mostly the result of the segments' increased volume of business. - The amount of cash paid to suppliers and employees reflects an increase of $5.2 million when comparing the three months ended March 31, 2003 with the three months ended March 31, 2002. The amount of cash paid to suppliers and employees increased as a result of additional commission expense generated from the acquisition of new business. - The net acquisitions of investments in the trading portfolio increased by $3.1 million for the three months ended March 31, 2003, when compared to the three months ended March 31, 2002. - Premiums collected increased by $7.9 million when comparing collections during the three months ended March 31, 2003 with the three months ended March 31, 2002. This increase is mostly the result of the increased volume of business and increased premium rates of the operating segments.
• The amount of cash paid to suppliers and employees reflects an increase of $10.8 million when comparing the six months period ended June 30, 2003 with the six months period ended June 30, 2002. The amount of cash paid to suppliers and employees increased mostly as a result of additional commission expense generated from the acquisition of new business. • The amount of claims losses and benefits paid for the six months period ended June 30, 2003 reflect an increase of $7.9 million when compared to the same amount of the prior year. The increase in the amount of claims losses and benefits paid is mostly the result of the segments’ increased volume of business and an increase in the cost of claims. • The net acquisitions of investments in the trading portfolio increased by $20.0 million for the six months period ended June 30, 2003, when compared to the six months period ended June 30, 2002. • During the six months period ended June 30, 2003 the Corporation collected approximately $13.0 million from the contingency reserve funds of the Federal Employees Health Benefit Plan (FEHBP). The contingency reserve funds payment corresponding to the year 2002 had not been received as of June 30, 2002. • Premiums collected increased by $13.7 million when comparing collections during the six months period ended June 30, 2003 with the six months period ended June 30, 2002. This increase is mostly the result of the increased volume of business and increased premium rates of the operating segments. 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 are 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 the 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
$34.0$23.3 million and$14.7$21.5 million for thethreesix months periods endedMarch 31,June 30, 2003 and 2002, respectively. The cash flows used in investing activities during these periods are attributed to the investment of the excess cash generated from the operations. Total acquisition of investments exceeded the proceeds from investments sold or matured by$32.7$20.8 million and$13.7$19.2 million during thethreesix months periods endedMarch 31,June 30, 2003 and 2002, respectively.Cash Flows from Financing Activities
Net cash flows provided by (used in) financing activities amounted to
$5.6$4.6 million and ($6.8)5.7) million for thethreesix months periods endedMarch 31,June 30, 2003 and 2002, respectively. The increase of$12.4$10.3 million when compared to the same period of the prior year is mainly due to the combined effect of the following:- The change in outstanding checks in excess of bank balances reflects an increase of $11.7 million during the three months ended March 31, 2003 compared to the three months ended March 31, 2002. The amount of checks in excess of bank balances 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 decreased from $1.3 million for the three months ended March 31, 2002 to $410 thousand for the three months ended March 31, 2003, a decrease of $863 30thousand. This decrease is due to additional payments made during the 2002 period over the scheduled principal payments of the credit agreements.38
• The proceeds from individual retirement annuities increased by $4.9 million when comparing the proceeds during the six months period ended June 30, 2003 with those for the six months period ended June 30, 2002. In addition, the surrenders of individual retirement annuities decreased by $3.3 million during the six months period ended June 30, 2003. • The payments of long-term debt decreased from $1.9 million for the six months period ended June 30, 2002 to $683 thousand for the six months period ended June 30, 2003, a decrease of $1.2 million. This decrease is due to additional payments made during the 2002 period over the scheduled principal payments of the credit agreements. • The change in outstanding checks in excess of bank balances reflects an increase of $817 thousand during the six months period ended June 30, 2003 compared to the six months period ended June 30, 2002. The amount of checks in excess of bank balances represents a timing difference between the issuance of checks and the cash balance in the bank account at one point in time. 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
March 31,June 30, 2003, the Corporation had$81.0$121.0 million in available credit under these agreements, although there is no balance due as of that date.In addition, the Corporation has 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
March 31,June 30, 2003, the two credit agreements have an outstanding balance of$33.6$33.3 million and $16.0 million and an average annual interest rate of4.0%3.2% and2.7%2.6%, respectively. These credit agreements contain several restrictive covenants, including, but not limited to, restrictions to incur additional indebtedness and the granting of certain liens, limitations on acquisitions and limitations on changes in control. As ofMarch 31,June 30, 2003, management believes the Corporation is in compliance with these covenants. Further details regarding these credit agreements are incorporated by reference to Item 2.Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations of theCorporation'sCorporation’s December 31, 2002 Form 10-K.ITEMThe Corporation was notified on June 18, 2003, by the PRTD that the ruling recognizing TSI’s tax exemption was terminated effective December 31, 2002, thus making TSI a taxable entity. In addition on July 31, 2003 the TSM and TSI executed a closing agreement with the PRTD that stipulated that TSM will pay taxes on TSI’s accumulated statutory net income. As a result, TSM recognized an income tax liability amounting to $51,774. The termination of TSI’s tax exemption and the assessment made in the closing agreement requires of the Corporation the following payments:
• Of the income tax liability amounting recognized by TSM, $37,000 were paid on July 31, 2003, the date of the closing agreement, and $14,774 are due on April 15, 2004. To pay for the first installment of this assessment the Corporation used its available short-term borrowings facilities. The amount borrowed is expected to be paid from cash flows generated from operations as well as from the maturity of investments. The remaining balance is also expected to be paid from the operating cash flows of the Corporation and the maturity of investments. • Effective January 1, 2003, TSI is subject to Puerto Rico income taxes as an other than life insurance entity, as defined in the Puerto Rico Internal Revenue Code of 1994, as amended. As of June 30, 2003, TSI’s current income tax expense amounted to $11,480. The Corporation expects to pay for the amount of current income taxes owed by TSI to the PRTD out of the cash flows from operations. This payment is expected to be made during the second quarter of the year 2004, when the 2003 tax returns are due for filing. 39
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures about Market RiskThe Corporation is exposed to certain market risks that are inherent in the
Corporation'sCorporation’s financial instruments, which arise from transactions entered into in the normal course of business. The Corporation has exposure to market risk mostly in its investment activities. For purposes of this disclosure,"market risk"“market risk” is defined as the risk of loss resulting from changes in interest rates and equity prices. No material changes have occurred in theCorporation'sCorporation’s exposure to financial market risks since December 31, 2002. A discussion of theCorporation'sCorporation’s market risk as of December 31, 2002 is incorporated by reference to Item 7a of theCorporation'sCorporation’s Form 10-K.ITEMItem 4.
CONTROLS AND PROCEDURES WithinControls and ProceduresDisclosure Controls and Procedures. The Corporation’s management, with the
90 days prior toparticipation of thedate of this quarterly report, TSM management, including theCorporation’s Chief Executive Officer and Chief Financial Officer, hasconducted an evaluationevaluated the effectiveness of theeffectiveness ofCorporation’s disclosure controls and procedurespursuant to(as such term is defined in Rules 13a-15(c) and 15d-15(e) under the Securities Exchange ActRule 13a-14.of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based onthatsuch evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective inensuring that all materialrecording, processing, summarizing and reporting, on a timely basis, information required to befileddisclosed by the Corporation intheir quarterly report has been made known to them in a timely fashion.the reports that it files or submits under the Exchange Act.Internal Control Over Financial Reporting. There have not been
no significantany changes in the Corporation’s internalcontrols,control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, orin factors that could significantlyare reasonably likely to materially affect, the Corporation’s internalcontrols, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. PARTcontrol over financial reporting.Part II
-– OTHER INFORMATIONITEMItem 1.
LEGAL PROCEEDINGS The Corporation is a defendant in various lawsuits arising out of the ordinary course of business. Management believes, based on the opinion of legal counsel, that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the Corporation's consolidated financial position and results of operations. 31ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERSLegal Proceedings
(a) As of June 30, 2003, the Corporation is a defendant in various lawsuits arising out of the ordinary course of business. Management believes, based on the opinion of legal counsel, that the aggregate liabilities, if any, arising from such actions would 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 that TSI repurchased from the estate of deceased stockholders. TSI contested such order through an administrative and judicial review processes. Consequently, the sale of 1,582 stocks was cancelled and the amount paid was returned to each former stockholder. During the year 2000, the Commissioner of Insurance issued a pronouncement providing further clarification of the content and effect of the order. This 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 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 at the meeting was below such amount (total shares present and represented in the stockholders’ meeting was 64%). As stipulated in the order, TSM began the process to conduct a referendum among its stockholders in order 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 which indicated that the ratification of the corporate reorganization was not required. In another 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 of TSM’s stockholders filed a petition for review of the Commissioner’s determination before the Puerto Rico Circuit Court of Appeals, such petition was opposed by TSI and by the Commissioner of Insurance. 40
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, 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. TSM and TSI 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. On May 18, 2003, the Circuit Court of Appeals granted TSI’s and TSM’s Motion to Reconsider. The Circuit Court held that the Commissioner of Insurance had the authority to waive the celebration of a referendum to ratify TSI’s reorganization and that therefore the reorganization of TSI was approved by the stockholders, inasmuch as the 1,582 shares annulled were not decisive. On June 26, 2003, the two shareholders presented a writ of certiotari before Puerto Rico’s Supreme Court. TSI and TSM filed a Motion opposing the issuance of the writ. The matter is currently pending. (c) On May 22, 2003 a class action suit was filed by Kenneth A. Thomas, M.D. and Michael Kutell, M.D., on behalf of themselves and all other similarly situated and the Connecticut State Medical Society against the Blue Cross and Blue Shield Association and multiple other insurance companies including TSI. The individual Plaintiffs bring this action on behalf of themselves and a class of similarly situated physicians seeking redress for alleged illegal acts of the defendants which they allege have resulted in a loss of their property and a detriment to their business, and for declaratory and injunctive relief to end those practices and prevent further losses. Plaintiffs alleged that the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish the payments due to doctors so that they are not paid in a timely manner for the covered, medically necessary services they render. The class action complaint alleges that TSI’s health care plans are the agents of Blue Cross and Blue Shield licensed entities, and as such has committed the acts alleged above and acted within the scope of their agency, with the consent, permission, authorization and knowledge of the others, and in furtherance of both their interest and the interests of other defendants. Management believes that TSI was brought to this litigation for the sole reason of being associated with the Blued Cross and Blue Shield Association and that none of the allegations made by the Plaintiffs are applicable to TSI. Therefore, TSI pursuant to the advice of legal counsel will move for the dismissal of the complaint against TSI. Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
Special Meeting
The Corporation held a Special Meeting of Shareholders on October 13, 2002 (the
"Special Meeting"“Special Meeting”) to vote on a series of amendments toTSM'sits Articles of Incorporation andBy-Laws,By-laws, relating to changes to its capital structure in order to allowTSM to expandan expansion of its base of shareholders. At the Special Meeting, only 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 amendTSM'sthe Corporation’s capital structure. Therefore, a resolution to41
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 ofcontinued the Special Meeting commenced on 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 amendTSM'sTSM’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.On April 26, 2003, the Corporation continued the Special Meeting commenced on October 13, 2002. In this Special Meeting the following two resolutions were considered:
Resolution Number 1: was presented by the Board of Directors in order to approve the amendments to the Articles of Incorporation of TSM, attached as Appendix A to the Definitive Proxy Statement, which were required in order to implement the Proposal approved by the Shareholders in the Annual Shareholders Meeting held on April 29, 2001 to increase the shareholders base and to enable the spouse or the heirs of a Shareholder to be shareholders of TSM. The
continuationfinal approval of this Resolution Number 1 was subject to the approval by the Shareholders of Resolution Number 2.In order to approve this Resolution, it was required the affirmative vote of three fourths of the voting shares issued and outstanding as required, that is 75%. This resolution was not approved, since of the 9,337 voting shares issued and outstanding, it received 71.3% (6,660) votes in favor, 3.3% (310) votes against and 0.5% (39) abstentions.
Resolution Number 2: was presented by the Board of Directors in order to approve the amendments to the By-laws of TSM, attached as Appendix B to the Proxy Statement, which were required in order to implement the Proposal approved by the Shareholders in the Annual Shareholders Meeting held on April 29, 2001 to increase the shareholders base and to enable the spouse or the heirs of a Shareholder to be shareholders of TSM. The final approval of this Resolution Number 2 was subject to the approval by the Shareholders of Resolution Number 1.
This Resolution was not approved since it was subject to the approval of Resolution Number 1, which was not approved. Of the 9,337 voting shares issued and outstanding, it received 71.3% (6,660) votes in favor, 3.3% (311) votes against and 0.5% (38) abstentions.
Annual Meeting
The Corporation held its 2003 annual meeting of shareholders on April 27, 2003. The Shareholders considered and voted upon the election of six directors and six resolutions. Summaries of said proposals and voting results were as follows:
Proposals of the Board of Directors:
Election of Directors: The election of six (6) directors who will serve for a term of three (3) years. The directors had to be elected by a majority of the affirmative votes of the issued and outstanding shares with the right to vote in the elections for directors that are present or represented by proxy at the Annual Meeting, pursuant to Section A of Article 7-1 of the By-laws of TSM and Article 7.06(C) of the General Corporations Law of 1995, as amended. At the Annual Meeting, six directors were elected by ballot, each serving a term of three years; therefore, until April 2006. At the moment of voting, 4,361 shares were present or represented.
All candidates recommended by the Board of Directors were elected. Two directors were required to be representatives of the community: (1) Mr. José Arturo Álvarez-Gallardo, who received 4,176 votes in favor, and (2) CPA Vicente J. León-Irizarry, who received 4,176 votes in favor. Four directors were required to be physicians or dentists: (1) Dr. Valeriano Alicea-Cruz, who received 4,128 votes in favor, (2)
42
Dr. Porfirio E. Díaz-Torres, who received 4,140 votes in favor, (3) Dr. Fernando L. Longo, who received 4,107 votes in favor, and (4) Dr. Jesús R. Sánchez-Colón, who received 4,109 votes in favor.
Resolution Number 1: was presented by the Board of Directors of TSM to acknowledge that the Board of Directors may declare dividends subject to the determination of the Board of Directors that in their best judgment the payment of such dividends is financially and legally feasible and that in determining the amount to declare as a dividend, the Board of Directors shall only take in consideration TSM’s profits and the dividends received from the Subsidiaries that operate as for profit corporations, and shall not take into consideration the investment of TSM in TSI and TSI’s operating reserves.
In order for this Resolution to be approved it had to receive the affirmative vote of a majority of the shares issued and outstanding with the right to vote that are present or represented at the Annual Meeting. Of 4,398 shares present or represented at the moment of voting, this Resolution received 4,034 votes in favor, 207 votes against and 89 abstentions. Therefore, this resolution received the required votes in favor and it was approved.
Resolution Number 2: was presented by the Board of Directors of TSM in order for its Shareholders to ratify their interest that TSI continues with its tax treatment as a non-profit organization and with the corresponding conditions imposed by the Treasury Department in the Tax Exemption Ruling.
In order for this Resolution to be approved, it had to receive the affirmative vote of a majority of the shares issued and outstanding with the right to vote that are present or represented at the Annual Meeting. Of 4,398 shares present or represented at the moment of voting, this Resolution received 3,884 votes in favor, 438 votes against and 70 abstentions. Therefore, this Resolution received the required votes in favor and it was approved.
Resolution Number 3: was presented by the Board of Directors of TSM in order to amend Article 8-5 and Section C of Article 8-11 of the By-laws of TSM to state that the Board of Directors will name the Chair of the Audit Committee and the rest of the directors that form part of said Committee.
In order for this Resolution to be approved, it had to receive the affirmative vote of the majority of the shares issued and outstanding with the right to vote at the Annual Meeting since it is an amendment to the By-laws of TSM, pursuant to Section A of Article 9-1 (Chapter 9 – Amendments). Of 4,398 shares present or represented at the moment of voting, this Resolution received 4,010 votes in favor, 126 votes against and 118 abstentions. Therefore, this Resolution received the required votes in favor and it was approved.
Resolution Number 4: was presented by the Board of Directors of TSM to amend Article Eighth of the Articles of Incorporation and Article 4-2 of the By-laws of TSM to allow the voting shares of a Shareholder to be registered in the books of TSM under the name of the spouse or heirs of such Shareholder, if they are physicians or dentists, without exceeding the 21 share limit. This Resolution was considered in the Annual Meeting since the Resolutions Number 1 and 2 presented at the Continuation of the Special Meeting
was scheduledwere not approved.In order for this Resolution to be
held on April 26, 2003. ITEM 5. OTHER INFORMATION Nothingapproved, it had toreport. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 11 Statement re computationreceive the affirmative vote ofper share earnings; an exhibit describing the computationno less than two thirds of theearnings per share forshares issued and outstanding with thethree months ended March 31, 2003 has been omitted asright to vote since it is an amendment to thedetail necessaryArticles of Incorporation, pursuant todetermine the computationSection A ofearnings per share can be clearly determined from the material contained in Part I of this Form 10-Q. Exhibit 12 Statements re computation of ratios; an exhibit describing the computationArticle Thirteenth of theloss ratio, expense ratio and combined ratio for the three months ended March 31, 2003 has been omitted as the detail necessary to determine the computationArticles of Incorporation. This Resolution was not approved, since, of theloss ratio, expense ratio9,337 voting shares issued andcombined ratio can be clearly determined from the material containedoutstanding, it received 43.03% (4,018) votes inPart I of this Form 10-Q. All other exhibits for which provision is made in the applicable accounting regulationfavor, 3.50% (327) votes against and 0.50% (47) abstentions.Proposals of the
United States Securities and Exchange Commission are not required underShareholders:Resolution Number 5: was presented by Francisco J. Echegaray-Espada, MD, shareholder of TSM, to encourage the
related instructions or are inapplicable, and therefore have been omitted. Exhibit 99.1 CertificationBoard ofthe Chief Executive Officer Required Pursuant to 18 U.S.C. Section 1350 Exhibit 99.2 CertificationDirectors ofthe Chief Financial Officer Required Pursuant to 18 U.S.C. Section 1350 32(b) Reports on Form 8-K: Two reports on Form 8-K were filed for the quarter ended March 31, 2003: Dated: January 10, 2003 Items reported: Item 5 - Other Events (Announcement that the continuation of the Special Meeting was scheduled to be held on February 28, 2003) Dated: March 3, 2003 Items reported: Item 5 - Other Events (Press Release announcingTSM update the results of thecontinuationStudy about the Development of theSpecial MeetingCorporation and present the same to the Shareholders, since from the date the Study was prepared up to the present, various positive changes have occurred in the development and financial results of the43
Corporation.
In order for this Resolution to be approved, it had to receive the affirmative vote of the majority of the shares issued and outstanding with the right to vote that are present or represented at the Annual Meeting. Of 4,398 shares present or represented at the moment of voting, this Resolution received 4,072 votes in favor, 197 votes against and 111 abstentions. Therefore, this Resolution received the required votes in favor and it was approved.
Resolution Number 6: was presented by Eliseo Roques, MD, and Leslie H. López-Vélez, DDS, shareholders of TSM, to encourage the Board of Directors evaluate the benefits of TSI continuing its operations as a non-profit organization and the desirability of TSM operating as a for-profit organization in order to be able to pay dividends. The Shareholders should be notified of the results of this evaluation no later than two (2) months prior to the next TSM’s Regular Annual Shareholders Meeting.
In order for this Resolution to be approved, it had to receive the affirmative vote of the majority of the shares issued and outstanding with the right to vote that were present or represented at the Annual Meeting. Of 4,398 shares present or represented at the moment of voting, this Resolution received 4,223 votes in favor, 84 votes against and 63 abstentions. Therefore, this Resolution received the required votes in favor and it was approved.
Item 5. Other Information
(a) On April 28, 2003, the Board of Directors of TSM held a special meeting where it appointed the officers of the Board of Directors, which were effective immediately. The members of the Board of Directors are as follows: Dr. Fernando J. Ysern-Borrás, Chairman of the Board of Directors
Dr. Wilmer Rodríguez-Silva, Vice-Chairman of the Board of Directors
Dr. Jesús R. Sánchez-Colón, Secretary of the Board of Directors
Dr. Arturo R. Córdova-López, Assistant Secretary of the Board of Directors
CPA Vicente J. León-Irizarry, Treasurer of the Board of Directors
CPA Sonia Gómez de Torres, Assistant Treasurer of the Board of Directors
CPA Ramón Ruiz-Comas, CPA, President and Chief Executive Officer
Dr. Fernando L. Longo
Dr. Wilfredo López-Hernández
Dr. Valeriano Alicea-Cruz
Dr. Porfirio E. Díaz-Torres
Mr. José Arturo Álvarez-Gallardo
Mr. José Davison-Lampón, Esq.
Mr. Juan José León-Soto, Esq.
Mr. Mario S Belaval
Mr. Héctor Ledesma
Mr. Manuel Suárez-Méndez, P.E.
Dr. Manuel A. Marcial-Seoane
CPA Adamina Soto-Martínez44
Item 6. Exhibits and Reports on
February 23, 2003) 33Form 8-K
(a) Exhibits:
Exhibit 3(ii) By-Laws of Triple-S Management Corporation as amended (English Translation) Exhibit 11 Statement recomputation of per share earnings; an exhibit describing the computation of the earnings per share for the three months and six months periods ended June 30, 2003 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 I of this Form 10-Q. Exhibit 12 Statements re computation of ratios; an exhibit describing the computation of the loss ratio, expense ratio and combined ratio for the three months and six months periods ended June 30, 2003 has been omitted as the detail necessary to determine the computation of the loss ratio, expense ratio and combined ratio can be clearly determined from the material contained in Part I of this Form 10-Q. Exhibit 31.1 Certification of the President and Chief Executive Officer required by Rule 13a-14(a)/15d-14(a). Exhibit 31.2 Certification of the Vice President of Finance and Chief Financial Officer required by Rule 13a-14(a)/15d-14(a). Exhibit 32.1 Certification of the President and Chief Executive Officer required pursuant to 18 U.S.C Section 1350. Exhibit 32.2 Certification of the Vice President of Finance and Chief Financial Officer required pursuant to 18 U.S.C Section 1350.
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. (b) Reports on Form 8-K: Two reports on Form 8-K was filed for the quarter ended June 30, 2003:
Dated: April 4, 2003 Items reported: Item 5 – Other Events (Announcement that the continuation of the Special Meeting was scheduled to be held on April 26, 2003) 45
SIGNATURES
Pursuant to the requirements of the United States Securities and 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 Date: May 13, 2003 By: /s/ Ramon M. Ruiz --------------------------------------- Ramon M. Ruiz-Comas, CPA President and Chief Executive Officer Date: May 13, 2003 By: /s/ Juan J. Roman --------------------------------------- Juan J. Roman, CPA Vice President of Finance and Chief Financial Officer 34CERTIFICATION I, Ramon M. Ruiz-Comas, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Triple-S Management Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) presented in this quarterly 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 quarterly 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: May 13, 2003 By: /s/ Ramon M. Ruiz-Comas ----------------------------------- Ramon M. Ruiz-Comas, CPA President and Chief Executive Officer 35CERTIFICATION I, Juan J. Roman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Triple-S Management Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) presented in this quarterly 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 quarterly 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: May 13, 2003 By: /s/ Juan J. Roman ------------------------------------- Juan J. Roman, CPA Vice President of Finance and Chief Financial Officer 36
| Triple-S Management Corporation | ||||
| Registrant | ||||
| Date: August 15, 2003 | By: | ��/s/ Ramón M. Ruiz-Comas | ||
| Ramón M. Ruiz-Comas, CPA | ||||
| President and | ||||
| Chief Executive Officer | ||||
| Date: August 15, 2003 | By: | /s/ Juan J. Román | ||
| Juan J. Román, CPA | ||||
| Vice President of Finance and | ||||
| Chief Financial Officer | ||||
46